The Real Reason They Rigged the Biggest IPO in History — Transcript

Some of the biggest IPOs in history are about to hit the stock market this year from companies like SpaceX, OpenAI, and Anthropic. And many retail investors are unaware that they've changed the rules this time. This ain't your grandma's IPO. They've changed the rules on how much money is going to be flowing into these IPOs from passive index funds, which means many retail investors may be left holding a bag they didn't even know they bought to begin with. So, I'm going to show you what the risks are and what things you definitely want to avoid if you don't want to get screwed by these upcoming IPOs. So, first let's take a look at a few charts. The source for these is Bloomberg to show the monster size of these IPOs. So far to date, the largest IPO has been from Saudi Aramco, which raised $38 billion when it IPOed.

Now, that is in today's dollars. It was $29 billion at the time. And at the time that meant that its market cap was valued at $2.4 trillion. Just a quick note to explain how that works if you're not familiar with the IPO process. A company is going to be owned by many different investors and the company itself will own many of its own shares.

During an IPO process, which stands for initial public offering, it's going to take a chunk of those shares and sell them to the public. Instead of only through private offerings to individual investors or high-net-worth investors or hedge funds or private equity, they're going to go to exchanges, list those shares on exchanges, allow anybody in the public to buy their shares. But they're not selling every single share.

They're not selling ownership of their entire company. It's usually only a small slice. And so a company like Saudi Aramco sold enough shares to raise $38 billion. And based on the price per share and the number of those shares that it sold, it gave them a market cap of $2.4 trillion. This would be like if your kid was running a lemonade stand and this lemonade stand was able to pull in a hundred bucks on a weekend. And so

you wanted to invest so that you could partake in some of those profits. You go to your kid and you say, "Hey, I want to own half of this lemonade stand." So your kid says, "Okay, I'll sell you one

share right now. The lemonade stand has two shares. I'll sell you one share so that you can have 50% ownership of my lemonade stand, and you can pay me 5,000 bucks for it." And so you say, "Sure.

Okay, here's $5,000." And because of the price per share being $5,000 and two total shares, that puts the market cap, the total valuation of that lemonade stand at $10,000. Now, your kid takes the 5,000 he raised from that IPO by

selling you half of his company, and he invests in more tables, more signs, more markers, more lemons, more cups, and he goes and sets up multiple lemonade stands. And he's able to take that money that he raised by selling half the company to you and expand operations, and they're able to pull in way more than $100 a week going forward and start that growth trajectory. Now, if we take a look at the potential size of the upcoming SpaceX IPO, we can see that

they're trying to raise around $75 billion, which is basically double what Saudi Aramco raised when they IPOed, even though the market cap will be only around $2 trillion, which is smaller than what Saudi Aramco was at the time. The

actual amount of money raised will be about double, which means that this SpaceX IPO will be the biggest IPO in history to date. However, even at a $2 trillion market cap, you can see that it will still lag behind some of the

largest companies in the stock market. Companies like Nvidia are well over $5 trillion. Apple's over $4 trillion.

Google's over $4 trillion. Microsoft is over $3 trillion. Amazon's almost $3 trillion. Tesla's like $1.5 trillion. And so is Meta. So, even though the IPO itself will have the most number of dollars raised in the IPO, that doesn't

mean that the company itself is going to be the largest company ever. $2 trillion is not the biggest company. And we also have companies like OpenAI and Anthropic, two other competing AI companies with SpaceX, which owns XAI.

They are currently valued in private markets somewhere around the $900 billion mark, and they are also seeking to IPO at some point, probably later this year. Now, I mentioned a moment ago that the rules have changed for IPOs,

and they're probably going to stick this way going forward, which number one is going to make more money flow from the indexes into these IPOs, like SpaceX, which could artificially inflate the shares. But at the same time, the rules

for the lockup periods are changing, which means early investors are going to be able to dump their shares much faster and sooner than normal, which could artificially suppress the shares. This is leaving many retail investors wondering, should I buy into the hype?

Should I get in on this thing and ride this wave up because it's just going to explode from all this retail hype? Or should I wait on the sidelines? Or maybe should I even be selling or shorting other stocks in the index that might

have selling pressure as that money gets diverted into stocks like SpaceX? Well, on the first note of just trying to buy in to take advantage of the pop before any potential drop, I would say be very, very careful because this is what

typically happens to IPOs. This is a chart of Robinhood. You can see that right after the IPO, the price exploded going from about $35 per share all the way up to a high of around $84 per share. And then it tanked. It settled

out around its IPO price of around $40. But once early investors were allowed to start dumping their shares, you started seeing some big selling pressure and the price per share started to plummet. Once retail realized they were holding the

bags, they were licking their wounds and they started to get out and the stock just moved sideways for quite some time.

And from top to bottom, Robinhood actually fell 92%, which meant there were some people that potentially bought at $84 per share and then ended up selling down under $7 per share. This is a very typical pattern that you see with IPOs, especially

companies that get tons of retail hype. Something that SpaceX has a ton of. Another example of this exact same pattern was Coinbase where it IPOed, had a brief pop, it sold off, and then people thought it was going to recover,

but the lockup period ended. Insiders and early investors started to dump and the share price collapsed. And this one fell also just over 92% from top to bottom. Just a staggering collapse. This is a very typical pattern that you see

across many IPOs. Now, what usually ends up happening is if the company is actually a good company and they're going to take that money that they raised and hire people and invest in actual production and increase their profits. Eventually, a base gets built

and the stock price starts to recover once all of the people who are going to sell have sold, early investors have taken their paychecks, their paydays, they've gotten out, retail has capitulated, and the stock starts to recover from there. You can see this is

what happened with Coinbase and it's currently trading well above its bottom but still not quite where it was when it IPOed. Robinhood has fared much better.

It recovered fully and went past its IPO price even though recently it has fallen back down. It is trading right now at the peak of where it traded right after its IPO. But some companies you'll see might actually never recover. This is

Rivian which IPOed, had a big pop and then started to drop. Early investors started to get out. Same sort of pattern emerged and at least to date the stock price still has not recovered. Stock dropped a staggering 95% from top to

bottom and even today it's still down a total of 91% from its high. And so if your only plan is to try and time this, buy as soon as you can and then sell at the top, your likelihood of getting

burned on this is pretty high. I will

across many IPOs. Now, what usually ends up happening is if the company is actually a good company and they're going to take that money that they raised and hire people and invest in actual production and increase their profits. Eventually, a base gets built

and the stock price starts to recover once all of the people who are going to sell have sold, early investors have taken their paychecks, their paydays, they've gotten out, retail has capitulated, and the stock starts to recover from there. You can see this is

what happened with Coinbase and it's currently trading well above its bottom but still not quite where it was when it IPOed. Robin Hood has fared much better.

It recovered fully and went past its IPO price even though recently it has fallen back down. It is trading right now at the peak of where it traded right after its IPO. But some companies you'll see might actually never recover. This is

Rivian which IPOed had a big pop and then started to drop. Early investors started to get out. same sort of pattern emerged and at least to date the stock price still has not recovered. Stock dropped a staggering 95% from top to

bottom and even today it's still down a total of 91% from its high. And so if your only plan is to try and time this, buy as soon as you can and then sell at the top. Your likelihood of getting

burned on this is pretty high. I will not be participating in the IPO, but just for full disclosure, I was an early investor in XAI, which was purchased by SpaceX, which means that I'm an early investor. I'm probably going to be

looking for a way out. I don't have any plans on when I'm going to sell at this point. But just for full disclosure, so you know where I am, I'm not participating in the trading of these IPOs, but technically on this one, I am

going to be an early shareholder. And normally somebody like me or institutions or funds that got in early would have to wait before they could sell. There's usually a long lockup period because it could be considered immoral for a company to IPO, have a

bunch of retail investors rush in at the exact same time as all the early investors are getting out. But that lockup period is different with SpaceX.

So let me explain how that works. In Space X's IPO prospectus, it shows that investors will be able to sell up to 20% of their stock starting on the second full day of trading after the company releases its full first earnings report

at the end of Q2. Datewise, this would be at the end of June, which means it's literally just weeks after the IPO is going to take place. In addition to that, there is a performance-based trigger, which means that investors can

sell an additional 10% if the stock trades 30% above its IPO price for at least five of the 10 trading days after earnings are released. Which means if the stock price goes up more, that means early investors and insiders can

actually sell more into that buying frenzy. There's also a layered lockup structure in place where investors can sell in increments of 7% after 70 90 1051 120 and 135 days following the IPO.

An additional 28% unlocks after SpaceX reports Q3 earnings and then the rest of it unlocks at 180 days post IPO. So the actual schedule is not really what's important here. What's important is that this is fairly unprecedented that early

investors are going to be able to sell more and more of their shares early on right after the IPO happens. Normally, all of that is locked up. The question is why? Well, normally, like I showed you, the pattern is retail jumps in, the

stock price goes up, and once the lockup period ends and insiders start all dumping at once, the stock price falls off of a cliff. So, it seems like at least in theory, this rule change is designed to prevent that thing from

happening. If retail piles in and starts driving the price up, it allows more and more insiders to sell into that, keeping the price suppressed, which means you wouldn't have a cliff where everybody on the inside starts selling at once. you

get all of that selling pressure distributed as retail piles in, which means that theoretically this could mitigate some of the pump and dump dynamics that you usually see with IPOs because you don't have everybody pumping the price up and then once that cliff

hits, all the early investors start to sell and push that price down. The selling and the buying happens at the same time, which means maybe the stock price just kind of drifts sideways with less volatility and less of an upcoming

cliff ahead. This is another reason to be cautious because if you're planning on trying to buy SpaceX because you want to ride this big wave up and try and sell at the top, you might not get that big wave up because the more people come

in and buy, the more early investors are able to sell into that, keeping the price from going up. But there is a third thing at play here, which is the index rule changes. And you might be wondering at this point, well, if

everybody knows this is going to be happening, then who's going to be buying this thing? Well, the reality is pretty much everybody is going to be buying SpaceX. Everybody and your mom and your aunt and your uncle and their 401ks and

their pensions are all going to be buying the SpaceX IPO because it's going to be included in the NASDAQ way earlier than IPOs normally are. Typically, a stock will not be added to an index like NASDAQ until it's been at least three,

sometimes up to 12 months to allow some seasoning. They want to make sure that the market can absorb it. They want to see what happens. A lot of times they're going to wait for profitability. There are a bunch of rules that these indexes

have in place before allowing a company to join their index just strictly based off of market cap. But like I said earlier, SpaceX is different. It's going to be included basically immediately in the NASDAQ. In fact, this new fast entry

rule will allow SpaceX to join the NASDAQ 100 within the first 15 trading days. which means right off the bat you are going to have a bunch of money that is going to be diverted from all of the

other companies in the index to start buying SpaceX shares. So this means that the SpaceX IPO is not going to be completely reliant on active fund managers or active investors or active retail traders to come in and choose to

buy these shares. A lot of purchasing of these shares is going to be done from selling companies like Amazon and Apple and Meta and Microsoft and all the other companies in the NASDAQ and diverting that cash into SpaceX. Now, at this

point, there are a lot of traders who are thinking, man, that means that I should short those stocks because the price of those stocks must fall to make room for this massive IPO. But not really. You're looking at companies like

Nvidia Apple Microsoft Amazon Micron Google AMD Tesla Broadcom Meta, Intel, Walmart, Cisco. You're looking at a ton of very, very, very large companies that all have massive market caps. And so, the reality is there won't really be a material amount

of selling across those companies to significantly move the share price. Also, because this is happening inside the index, you are not going to actually see this impact the price of the index funds themselves. This is a reweing inside the index fund. So, you're going

to have some individual selling across the board in order to make room for the shares coming in from SpaceX. But because it's so spread out and it's only $75 billion in terms of the value of the shares that will actually be available

to the public, it's not something that is going to be tradable. And so, that's not where the risk is. The risk is with another rule change for this index inclusion which is about waiting. Waiting as in WEIG ght the

weight of SpaceX shares in the portfolio compared to its market cap. Because SpaceX is going to be targeting a $2 trillion market cap, but it's only releasing about $75 billion worth of its shares. And pretty much every company is

like this. They have a total market cap size, but their float, which means the percentage of their company that's actually available to be publicly traded and publicly owned, is a smaller percentage of the company. And so the waiting inside the index has to account

for that. You see, a company like Nvidia is trading at $214 per share. They have a market cap of 5.18 trillion. So, if we take their market cap of 5.18 trillion and we divide it by their current price per

share of $21,425, the total share count for Nvidia is a little over 24 billion shares. We can also look up the amount of shares that are available to the public, which is a little over 23 billion. So, the vast

majority of this stock of Nvidia is owned by other people other than the company itself. It's got a large float as a percentage of its market cap. And so that will be reflected in how much the index owns of those shares. But as

we saw, SpaceX is going to have a $2 trillion market cap and it's only releasing about $75 billion worth of shares to the public, which means it's only going to have a public float of probably under 3%. And so if indexes

like the NASDAQ were to go and purchase up a bunch of these shares as if there were $2 trillion worth of these shares available, it would drive the price sky high because there's only going to be about $75 billion worth of these shares

available. Because of this, there have always been minimums in place for index rules. They've said, "Hey, if you're going to go public and you want to be included in our index, you've got to have at least, let's say, 10% of your

shares available for float." Now, not only is NASDAQ waving that requirement for SpaceX, but they're applying a new rule called a float multiplier. And so, if SpaceX comes out and they have a 3% public float, NASDAQ will look at that

and say, "Well, we're just going to pretend you have a 9% or 10% public float. We don't know exactly what the multiplier is going to be. It might be 2x, might be 3x, might be 5x, but they're going to apply a multiplier to

it so that there's enough of the shares in the index for most index funds to be able to participate in it. Or at least that's the reasoning they're stating.

But that means that there's artificially going to be two to three to 5x the amount of purchasing from these passive index funds into these shares than there should be. All else being equal, that would have the effect of artificially

driving the share price higher or at least creating additional demand for those shares. But remember the other side of this equation, which is that insiders will be able to sell into all this buying if this buying does push the

price up. And it's not just the NASDAQ. It's probably going to have early inclusion to Russell indexes as well as the S&P 500. I don't know if the same waiting multipliers will go with those indexes. But what this all looks like is

very clearly a way to raise additional money for an unprofitable company as a Hail Mary to try and make sure that they're the first ones out the gate to raise a ton of money from public markets and not even have to rely on investor

hype with a couple of rule changes. This allows early investors to have their payday. It allows them to raise a boatload of cash and give them a very long runway to eventually hopefully reach profitability and maybe even avoid

the giant pump and dump pattern that most of these retail hyped IPOs get along the way. Now, it is worth noting that none of this selling is going to be happening from Elon Musk himself. In fact, he is excluded from every early

release provision and he remains locked up to a 366-day restriction and other large significant investors have also agreed to the 366-day restriction as well. So, this isn't actually a payday for Elon Musk himself, but he does have a very long history of making sure that

early investors who trust him with their money do not lose. and he will do whatever it takes, even if it is IPOing with unprecedented rule changes in order to allow a bunch of public money to come in and rescue his early investors and

give them an exit. And don't get me wrong, I am not saying that I don't think that SpaceX could become profitable with this down the road. But I am saying that if you are not an early investor, then you should be very

careful about getting in after the IPO, at least in the beginning, because you are actually literally the exit strategy. And if history is any guide, there is a likelihood that you will be able to buy in at a better price when

there's a more reasonable chance of success for the company in the future. Especially considering the history of IPOs. Typically, when you see multiple years in a row where the number of IPOs grows, that does precede hard economic times. We saw IPOs increase leading up

into the great financial crisis. And we also saw record numbers of IPOs in 2020 and 2021, chasing all of the easy money.

2025 also saw 347 IPOs, which excluding 2020 and 2021 was the most number of IPOs in a single year going back all the way to 2000. And we are on track again this year for having a very large IPO

year. This doesn't mean a recession is imminent. It doesn't mean an economic collapse is right around the corner. But booms precede busts. And when you see people cashing out, early investors taking exits, getting large paydays, it's a sign that it might be important

to be at least a little bit cautious. As always, thank you so much for watching.

Have a great day.