US Government Shutdown Reveals IPO Loophole

Since the United States government shutdown on 1 October 2025, 90% of the US Securities and Exchange Commission (SEC) staff have been furloughed, meaning that the government agency has had to scale back on the majority of its usual operations. One such operation is the review and approval of IPO registrations.

With plenty of companies concerned about how long they’d have to wait for IPO registrations to be reviewed and approved, the SEC shared an interesting update: companies can actually move ahead with IPOs by means of an alternative method that essentially provides automatic approval. Not only that, but applicants can skip the pricing information part of the review.

The idea is that this will avoid a bottleneck of IPO registrations that will need to be dealt with when the government shutdown ends and the SEC is back up and running and full capacity. However, these applications will still be reviewed, just retroactively. In theory, that is.

 

The 20-Day “Automatic Effectiveness” Loophole

 

Under normal SEC rules, when a company files a registration statement for an IPO, the SEC reviews it, issues comment letters and only when all matters have been resolved does it declare the registration “effective.” The kind of process you’d expect for something as significant as an IPO registration, I’d say.

But, much to the surprise of many (both in and outside the US), there exists a lesser-used procedural mechanism under which a registration can become automatically effective after 20 days, unless the SEC objects (retroactively). Essentially, during the shutdown, the SEC has signalled that companies may invoke this 20-day automatic effectiveness route, and that enforcement of pricing or price-dependent disclosures will be relaxed for the interim. Basically they’re saying, just go ahead, we’ll have a look later.

What changes under the shutdown is that the SEC appears willing to allow issuers to omit pricing information or other price-dependent sections entirely at the time of filing, without facing immediate penalty. That means a company could list shares even before the full regulatory vetting has taken place, with retrospective review to follow. In effect, investors may buy in before some of the disclosures are fully scrutinised, raising some questions about fact-checking.

In normal times, few issuers use the automatic 20-day route, because they prefer the comfort of having SEC staff validate their filings and flag any issues before listing. But, in the current environment, with minimal SEC staff, the option becomes more attractive. Indeed, the alternative is to wait until the SEC is back up and running, and who knows when that will be?

 

Why Companies Are Turning to the Loophole Now 

 

Well, the long and short of itm in the US right now, it’s not “business as usual”. So, businesses are having to be smart and find alternative ways to get things done.

Avoiding a Backlog

 

With the SEC’s Division of Corporation Finance operating with only a skeleton crew, new IPO reviews and comment cycles are mostly frozen. According to CFO Dive, though EDGAR (the filing portal) is still open for submissions, the SEC has warned the public that it won’t be able to issue “effectiveness” notices or respond to most review comments during the shutdown.

That means companies whose IPO timing is critical, especially in fast-burn sectors like biotech or high-growth technology, face a potentially multi-week or multi-month delay if they wait for full SEC processing.

By using the 20-day effectiveness route, issuers may keep momentum, maintain investor interest and preserve valuation windows rather than risk missing their market moment. Finimize notes that firms like MapLight are already attempting this workaround to push ahead with IPOs during the shutdown.

 

Risks and Investor Doubts

 

But bypassing upfront SEC checks definitely isn’t without risk – quite the opposite, in fact. Understandably, many people are sceptical about whether or not it’s actually a good idea.

Companies remain legally liable for any disclosure errors or omissions. This means that the SEC can demand amendments, impose penalties later or pursue enforcement actions. Sure, retrospective review still applies, and issuers must ensure their disclosures are sound even if initial scrutiny is postponed. But, who knows how long that’ll take? Will they be able to get through all applicants?

Investors may express more scepticism toward IPOs that lack the conventional “stamp of approval” from the SEC prior to trading. Without that vetting, markets may discount the offering or treat it as higher risk. Reuters also notes that some analysts warn the lack of regulatory oversight could lead to weaker valuations or legal exposure for issuers.

In short, this route trades certainty for speed. If a company is confident in its disclosures and balance sheet, it may take the risk. For more marginal cases, the retrospective burden and reputational exposure could prove painful.

 

Historical Precedent and Market Implications

 

This isn’t entirely novel. During past government shutdowns, companies have used similar tactics. Reuters mentions that in the 2018 shutdown, some issuers leveraged past provisions to keep IPOs alive.

What’s different now, however, is the scale and stakes. The IPO market in 2025 had been seen as reviving. So, if many companies adopt the loophole, the post-shutdown backlog could still be heavy, but the damage from delay might be alleviated. But, again, the longer the shutdown persists, the more pressure builds for enforcement, regulation and investor pushback.

So, is the 20-day automatic effectiveness loophole worth pursuing or should companies wait for business to resume as normal? It’s tough to say, so we’ll just have to wait and see.