Nasdaq Rule Changes Open Doors for Canadian Participation in SpaceX IPO
Many Canadians will get their hands on SpaceX in the next few weeks, whether they planned to or not, because of changes to entry rules at Nasdaq and other index providers ahead of a projected wave of megacap IPOs. But the changes could leave investors who hold major benchmark ETFs on an uneven playing field after dominant player S&P opted not to fast-track the stock into its main index.
SpaceX shares are set to begin trading on Friday after the company announced Thursday that it completed the sale of 555.6 million shares at US$135 each, raising a record US$75-billion. In anticipation of the IPO, and with Anthropic and OpenAI expected to be following suit, Nasdaq, S&P Dow Jones Indices and other index providers consulted with the investor community earlier this year regarding proposed changes to their index methodology.
Newly listed public companies typically aren’t eligible for inclusion in an index until after what’s known as a “seasoning period.” For the Nasdaq 100, that is typically three months, while the S&P 500 maintains a one-year delay.
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Even after that period – which exists to allow the stock price to stabilize after its IPO – companies must meet other requirements in order to be considered.
In a move believed to be aimed at courting the company to list on its stock exchange, Nasdaq announced in February that it will shorten its seasoning period for megacaps – companies worth at least US$200-billion – to just 15 trading days “to ensure that the Nasdaq 100 Index remains timely and representative of the market it measures.”
Conversely, S&P Global said last week it would not allow megacaps fast entry to its benchmark S&P 500, barring SpaceX from swiftly entering what is considered to be Wall Street’s pre-eminent benchmark.
However, S&P will allow megacaps a fast entry into their broader market indexes “intended to represent the investment universe” such as the S&P Total Market Index.
The S&P 500 and Nasdaq 100 are among the most widely tracked U.S. indexes by Canadian investors, accessible through dozens of Canadian-based exchange-traded funds.
Canadian investors collectively hold over $110-billion in ETFs that track the broader-based S&P 500 and over $19-billion in ETFs that track the tech-heavy Nasdaq 100, according to research from TD Securities.
Funds that track the Nasdaq 100 will be forced to buy a portion of SpaceX’s shares upon index entry, while those tracking the S&P 500, won’t.
“Every fund that is in some form or another connected to the Nasdaq [100] index will have to buy SpaceX – and it will therefore end up in a very large number of people’s portfolios,” said University of Toronto finance professor Andreas Park.
SpaceX will be added almost immediately into the Vanguard U.S. Total Market Index ETF, thanks to its provider’s fast-entry rule allowing megacaps to be added five trading days after their debut. The ETF is one of the top 10 held in Canada measured by assets under management.
SpaceX – which will trade on the Nasdaq under the ticker SPCX – will offer 4.3 per cent of its shares to the public.
While the float – or number of publicly tradeable shares – is a thin slice of its target US$1.75-trillion valuation, the IPO will launch SpaceX into the upper echelons of the largest companies in the world.
For inclusion into their indexes, Nasdaq and other indexers previously required new companies to offer at least 10 per cent of their shares to the public, but that is one of the many rules being waived for megacap IPOs.
While the small offering will create demand pressure that could inflate the initial share price according to Prof. Park, the IPO won’t offer insiders, such as employees and early investors, the opportunity to cash out yet as rules prohibit them from selling shares right away.
Unlike a typical IPO, where insider shares are locked up for six months, SpaceX will be allowing the sale of those shares in tranches over the period, contingent on performance and time-based triggers.
As its float increases, so will its weight in the indexes and thus the funds that track them.
Shares held by chief executive officer Elon Musk and other certain major investors will be locked up for 366 days.
Peter Haynes, managing director at TD Securities, said the S&P’s decision to maintain their index eligibility criteria runs contrary to what the industry expected.
“If we start making judgment calls on what belongs [in the index] and what doesn’t, then we are making active bets,” he said.
SpaceX could be excluded from S&P 500 for long over a year as the company currently operates at a loss and the index has certain profitability requirements. Those requirements were the reason why Mr. Musk’s Tesla was excluded from the index for more than 10 years.
In a note to clients, TD Securities analysts and Mr. Haynes said that by the time SpaceX will be eligible to be added to the benchmark, it could be at its full float, causing the index to face a sharp rebalance rather than a gradual one, creating “significant future pain” for the index and its users.
S&P’s methodology will also keep unicorns Anthropic and Open AI out of its indexes for at least a year after they have their IPOs. They are each targeting a $1-trillion-dollar valuation and expected to be trading publicly as early as this fall.
According to Mr. Haynes, “S&P has put themselves on an island with this decision.”
This article was first reported by The Globe and Mail
