The SpaceX IPO has dominated the financial press for the past few weeks, and there is already a bit of handwringing over it.  Some of the concerns focus on how companies going public are supposed to, in exchange for the general public’s money, make themselves accountable to the shareholders who have invested in it.  Many believe SpaceX founder Elon Musk slammed the door on accountability.  Even though he holds just over 40% of the company’s post-IPO equity, he maintains roughly 85% voting control, which means no mere shareholder will be permitted to challenge his decisions.  

The prospectus also mandates that investors cannot initiate a class-action lawsuit.  If Chairperson Musk decides to put all of the company’s profits into his own pocket, there is no mechanism to challenge the decision.  It is functionally impossible to be fired as CEO, unless he agrees.  

Other areas of concern focus on the fact that the company went public at a valuation that is more than 100 times revenues—for a company that happens to have been unprofitable since inception.  (By comparison, the average multiple of stocks in the S&P 500—most of which tend to generate actual profits—is roughly 20.)

But a more interesting concern is how the stock elbowed its way into the Nasdaq 100 index at what most would say is a high valuation. Musk or the brokerage team selling SpaceX shares in the IPO market convinced Nasdaq to change its inclusion rules for “mega-cap” companies—from needing at least 3 consecutive months of trading on an established American exchange after the IPO (to prove its price stability) to a new ‘fast entry’ rule that allows the new mega-cap publicly-traded stock into the Nasdaq club after just 15 trading days.

Nasdaq also waived a less well-known rule that required at least 10% of a company to be sold to public investors before it can be listed.  The SpaceX IPO sold around five percent of its total shares; in fact, one could argue that, even after it raised $75 billion from the general public, SpaceX won’t be a “true” public company for the reasons listed above.

SpaceX will soon become one of the larger components of the tech-related index.  That means other stocks will have to ‘move over’ to make room for it.  In practical terms, an index fund that tracks the Nasdaq 100 would have to sell proportionate shares of the other stocks to buy SpaceX shares at the current price.  All the other companies in the Nasdaq index will experience some amount of stock dump, which could depress share prices of other tech firms.

One index that has held its ground on its rules of inclusion is the S&P 500.  The widely covered index requires that companies show a profit before they can join their club.  Whether that happens is anyone’s guess.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.