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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Edwin Hu is associate professor of law at the University of Virginia and served as commissioner’s counsel at the SEC.
SpaceX has filed for what would be the largest IPO in history. The filing is still confidential, but expect the usual: a dual-class structure, a sky-high valuation, breathless coverage of the deal size. None of that will surprise anyone.
However, at the bottom of the FT’s report on the IPO is a detail that has received far less attention, and it matters more than the rest:
SpaceX was toying with the idea of allowing some existing shareholders to sell down their stakes in the company on its first day of trading, according to people close to the deal. This would do away with guidelines that typically prevent insiders cashing out of their positions for 180 days after a company’s market debut.
The lock-up waiver isn’t a quirk. It’s the most consequential structural decision SpaceX could make for retail investors, and doing away with it is a big deal. It would some insiders to dump their shares on ordinary investors as soon as it begins trading.
Yet SpaceX would only be the most visible example of an insidious trend that has been quietly eroding investor protections for over a decade.
In a rulemaking petition that I and some co-authors filed with the SEC in March 2023, we documented the acceleration of this shift. Underwriter discretion to waive the traditional lock-up was practically nonexistent before 2010, but by 2022 it appeared in the vast majority of S-1 filings.
Moreover, underwriters have not just reserved the right. They have frequently exercised it, allowing insiders to sell well before the stated lock-up expires. This isn’t an unintended consequence. Issuer counsel have recognised the strategic value.
As Boris Feldman, a prominent Wilson Sonsini partner, wrote in the Harvard Law School Forum on Corporate Governance:
[U]nderwriters would be well-advised to think about easing lock-up requirements in order to enhance the potency of the standing defense to Section 11 claims.
In other words, weaken the lock-up, and you weaken investors’ ability to sue. That’s because Section 11 of the Securities Act of 1933 imposes strict liability on issuers for material misstatements in a registration statement.
William O. Douglas, the third SEC chair and longest-serving Supreme Court justice, called it the statute’s “in terrorem” provision. There’s no need to prove the company intended to deceive. It’s the strongest legal protection available to investors at the moment they need it most: when the informational gap between issuers and the public is at its widest.
However, after the Supreme Court’s unanimous decision in Slack Technologies vs. Pirani in 2023, investors must prove they bought shares “traceable” to the registration statement to bring a Section 11 claim.
When a lock-up is in place, only registered shares trade in the months after the IPO, and tracing is straightforward. When there is no lock-up, registered and unregistered shares mix in the market from day one. Tracing becomes impossible. And with it, Section 11 liability in effect disappears — even if the registration statement was misleading.
The SEC has known about this problem for years. It has been told how to fix it. It has done nothing.
The 2023 petition asked the Commission to amend Rule 144 so that, upon the effectiveness of a registration statement, holding periods for unregistered shares would reset to the later of 90 days or the next quarterly filing. Three months later, the Supreme Court’s decision in Slack made the problem worse by confirming the tracing requirement.
In September 2024, the SEC’s own Investor Advisory Committee held a panel on the issue, at which former Commissioner Robert Jackson argued it was exactly the kind of problem the SEC should address. And in March 2025, the Investor Advisory Committee formally recommended that the Commission act:
We propose the SEC implement a short lock-up period following an initial public offering, during which only registered shares would be permitted to trade. This temporary lock-up would allow investors who acquire securities during this period to preserve their ability to demonstrate tracing, thereby ensuring their standing under Section 11.
Meanwhile, retail investors are lining up. These are not sophisticated investors pricing in a known risk. They are retail buyers who have no idea that a lock-up waiver strips away their strongest legal recourse. They will flood into the after-market on the first day of trading. If there is no lock-up, they are the ones whose Section 11 protection evaporates. They are paying the highest premium with the weakest legal safety net.
There is a straightforward fix. The petition’s proposed 90-day holding period is modest: half the traditional lock-up.
It is also not new. When the SEC adopted Rule 144 in 1972, it interpreted the rule to be unavailable to holders of restricted stock “until at least 90 days after the effective date of [the issuer’s] 1933 Act registration statement.” The proposed fix would therefore simply restore what Rule 144 originally did, before the SEC amended it away.
Issuers can shorten the period further by releasing post-offering financial statements. The marginal cost of registering additional shares is trivial. Former SEC chairs, former commissioners, and the Commission’s own advisory committee all agree the SEC has the authority to act.
Until then, the largest IPO in history may be the one that launches without the most important investor protection in securities law.
