Earlier this year, the leaders of the world’s largest stock indexes found themselves in a pickle.
SpaceX, Elon Musk’s rocket maker, had told them that it planned an initial public offering in the summer. The company said it wanted to be included in the top indexes — which are composed of a variety of public companies and act as a barometer of the broader stock market — shortly after going public, two people familiar with the process said.
It was a big ask. Most indexes, like the Nasdaq-100, do not add companies until at least a year after they go public to protect index funds — the widely used investment vehicles that track the indexes — from trading volatility. If SpaceX was included faster than normal, it would compel large index funds run by giants like Fidelity and Vanguard to buy millions of SpaceX shares practically overnight. While that could boost SpaceX’s share price, it could expose index fund investors to more risk.
But missing out on what could be the biggest I.P.O. in history, in a year when other sizable offerings are also expected, was too much for Wall Street to bear, the two people said. Nasdaq, the exchange where SpaceX plans to list its stock, announced a rule change in May to allow “fast entry” into the Nasdaq-100 index by large private companies like SpaceX that go public.
Others followed. FTSE Russell recently altered its methodology, which will result in listing SpaceX in its indexes within a week of its going public.
The changes mean a large swath of index funds — which millions of Americans own in their retirement funds, pension plans and personal portfolios — are poised to hold SpaceX shares soon after the company goes public. Anthropic and OpenAI, the artificial intelligence start-ups that are planning to go public this year, would also land in index funds quickly, potentially exposing everyday investors to more financial risk whether they like it or not.
“It’s historically unprecedented,” said John Polonis, a former Wall Street lawyer who worked at J.P. Morgan and now offers financial analysis on social media. “You can try to reorient your retirement accounts to avoid funds invested in A.I. companies, but most people aren’t going to be doing that. They’re kind of left out in the dust here.”
The changes by the indexes are just one way that Mr. Musk, 54, has upended I.P.O. norms. The tech mogul has bet that investors cannot resist a deal as enticing as SpaceX, the juggernaut behind the Starlink satellite internet service, private rocket launches and, most recently, artificial general intelligence research. The sheer size of his company — it is set to be valued at $1.77 trillion upon its I.P.O., larger than Meta — has given Mr. Musk the power to demand onerous terms from those who seek a windfall from its stock market debut.
Among them: Mr. Musk has required Wall Street banks, law firms, auditors and other advisers working on the I.P.O. to buy subscriptions to Grok, his A.I. chatbot, which is part of SpaceX. And on Wednesday, he did not set a price range for the offering, as most companies going public would, providing just one share price — $135 — for buyers to take or leave.
Neither SpaceX nor Mr. Musk responded to requests for comment.
Nasdaq executives have denied that they altered their rule for SpaceX. Nasdaq’s president, Nelson Griggs, said in a Bloomberg interview in May that the exchange had begun discussing index rule changes more than a year ago. Since SpaceX, Anthropic and OpenAI were so big, he said, it was important that index fund investors not have to wait for access to them.
Emily Spurling, who leads Nasdaq’s global indexes, said in a statement, “Our responsibility is straightforward: to ensure the Nasdaq-100 continues to meet its stated objective of representing 100 of the largest Nasdaq-listed nonfinancial companies.”
One index provider has declined to budge. On Thursday, Standard & Poor’s said it would not change its criteria for inclusion in the S&P 500, one of the most-followed indexes, meaning SpaceX will not be eligible for inclusion until at least mid-2027. Standard & Poor’s said it had determined that exceptions to its rules “should not be granted solely based on market capitalization.”
In the past, newly public companies could not immediately join most indexes because their stocks could be volatile and the companies generally had a limited history of reporting their finances.
With few exceptions, companies needed to be publicly traded for a year, known as a “seasoning” period, before being considered for inclusion in an index. They also had to have made enough shares available to the public, called a “float,” to justify their inclusion. In the case of the S&P 500, a company also had to show profits in its most recent fiscal quarter and the prior full financial year.
Those restrictions have come under pressure as the characteristics of companies going public have changed. Over the past decade and more, many tech start-ups tapped investments from venture capital and private equity funds so they could stay private for longer. When they filed for an I.P.O., they were typically larger and more mature.
Given that, index officials theorized that these companies were likely to have outsize trading importance in the overall market. Those who manage which companies join an index said they had become concerned that investors could miss out if major companies were not included sooner.
“In defense of these indices, if an index wants a broader view of the market, including these companies sooner is one way to get there,” Mr. Polonis said.
SpaceX fits many of those characteristics. Founded in 2002 by Mr. Musk, the company has raised billions of dollars from venture capital firms like Founders Fund. It has become a major global business, landing numerous government contracts and providing satellite internet service in markets from Brazil to Australia.
Many index officials said they had conducted market consultations and received feedback stressing the importance of “faster index representation” for large I.P.O.s
“FTSE Russell indexes exist to represent the market,” Karen Lee, a spokeswoman for the index, said in a statement. “A fast-entry I.P.O. process directly supports that mission.”
SpaceX also pushed to find ways to increase demand for its shares after its I.P.O., telling the indexes that it wanted to be included in them soon, the people familiar with the process said.
The rule changes by indexes may warp “passive investing” — a “set-it-and-forget-it” way for amateur investors to accumulate wealth — into something riskier, some analysts said. Index funds are a popular form of passive investing, since the funds simply track the market.
“The whole point of passive investing is that you can close your eyes and expect the market will do the work for you,” said Ed Elson, host of the “Prof G Markets” podcast. “If you trust Elon Musk, be my guest and invest directly in the I.P.O. But you cannot just stuff these genuinely terrible companies into people’s 401(k)s and retirement accounts.”
With SpaceX’s I.P.O. looming next week, some retail investors said they felt trapped into owning the stock even though they did not want to.
Ian Yarbrough, 46, who works on utilities at Indiana University in Bloomington, has a retirement fund and has also put money into index funds. He has long been wary of Mr. Musk’s businesses and has avoided what he sees as hype around A.I. So when he heard SpaceX might quickly be included in index funds he holds, he tried to make changes.
But after finding his brokerage firm made it difficult to avoid funds invested in A.I. companies like SpaceX, he gave up.
“It doesn’t feel like anybody is watching out for retail investors or the common person anymore,” he said. “It feels like the system is rigged against us.”
