To cash in on the IPO boom for SpaceX, OpenAI, and Anthropic, Nasdaq and S&P ease standards

The Wall Street Journal reports that major Wall Street indexes are quietly changing the rules of the game in anticipation of the first public offerings (IPOs) of highly watched targets, including SpaceX, OpenAI, and Anthropic. In the future, the waiting period for these new stars to be added into large indexes will be significantly shortened, but the move that effectively gives these unicorns a green light also raises market concerns about whether stock prices’ true value will be excessively distorted.

To compete for mega IPOs, S&P and the Dow Jones Indexes significantly loosen inclusion standards

To ensure indexes reflect market dynamics in real time and capture hot new stars, S&P Dow Jones Indices and Nasdaq have both unveiled new measures. S&P recently proposed shortening the observation period for newly listed stocks from the original 12 months to 6 months, and even considering exemptions from profit-making threshold requirements directly for super-large, heavily weighted stocks.

As of May 1, the Nasdaq 100 index constituents will introduce a newly added “fast entry” mechanism. Going forward, any super-large IPOs or spin-offs that rank within the top 40 by market capitalization among existing constituents will no longer be subject to the previously strict time and liquidity restrictions. This means these heavyweight new stars can enter the Nasdaq 100 as constituents as early as the 15th trading day after listing.

Selection criteria changed to “total market capitalization,” abolishing free-float requirements

Nasdaq adjusted the criteria for constituent selection, switching from the original “free-float market capitalization” to “total market capitalization,” and fully removing the hard minimum threshold of 10% free-float shares. Nasdaq stated that when calculating market-cap rankings, it must take into account both “publicly traded” and “not publicly traded” shares together to ensure that true market-cap giants are not pushed out of the index threshold.

To prevent index weights from diverging from the market’s actual tradable float, Nasdaq simultaneously introduced a “dynamic weighting mechanism.” The logic is as follows: if the company’s free-float shares as a proportion of total shares are higher than 33.3%, the index calculation will weight it by 100% total market capitalization; if the proportion is lower than 33.3%, then the weighting basis will be calculated as “free-float ratio times 3, then multiplied by total market capitalization.” Through this mechanism, even companies with low liquidity can receive a reasonable weight in the index without exceeding a size the market can realistically absorb.

Controversies over hot-stock privileges coexist with overvaluation risks

Despite proactive changes by index compilers, the approach has also drawn criticism from many in the market. Detractors argue that loosening standards is tantamount to granting special privileges to attention-grabbing focus stocks. Before the market has undergone sufficient price-discovery processes, a large wave of passive index fund buying will be forced in, which could very likely lead to severe distortions in share prices and put retail investors who hold index-linked stocks at risk.

This article, “To get in ahead of the IPO frenzy of SpaceX, OpenAI, and Anthropic, Nasdaq and S&P loosen standards,” first appeared on Chain News ABMedia.