Hyperliquid Urges SEC to Regulate Pre-IPO Perpetuals

Hyperliquid Policy Center and trade[XYZ], a deployer of perpetual markets on Hyperliquid, are calling on U.S. regulators to establish a clear framework for a new type of derivatives product that could give investors exposure to companies before they officially go public.

The two organizations submitted a joint comment letter to the U.S. Securities and Exchange Commission proposing rules for pre-IPO perpetual contracts, referred to as IPOPs.

The proposal was highlighted by @WuBlockchain, which reported on the push for clearer U.S. regulations surrounding pre-listing perpetual contracts and equity-linked derivatives.

The proposed products would not represent actual company shares. Instead, they would allow traders to speculate on the potential market value of a company before its shares begin trading publicly.

The proposal could open a new area of regulated derivatives markets while also creating fresh questions for U.S. regulators about investor protection, leverage and market manipulation.

Source: Xpost

What Are Pre-IPO Perpetuals?

Pre-IPO perpetuals would be designed to provide price exposure to a private company before its shares are listed on a public stock exchange.

Unlike traditional stock ownership, holding one of these contracts would not give investors equity in the company.

Traders would not receive voting rights, shareholder rights or guaranteed access to an eventual initial public offering.

Instead, the contracts would function primarily as instruments for price exposure and discovery.

That distinction is central to the proposal from Hyperliquid Policy Center and trade[XYZ].

The organizations argue that pre-IPO perpetuals could allow markets to establish an indicative price for private companies before an official public listing.

Such pricing could provide information to investors and market participants about how the market views a company's potential valuation.

A New Approach to Price Discovery

Price discovery is one of the most important functions of financial markets.

Before a company becomes publicly traded, determining its market value can be difficult because transactions in private shares are generally limited to specific investors.

Private companies can raise capital at valuations determined through funding rounds, but those valuations do not necessarily reflect what a broader market would pay.

Pre-IPO perpetuals could introduce another mechanism.

If sufficient buyers and sellers participate, the contracts could create a continuously updated market price based on expectations about the company's future value.

That could potentially give investors more information before an IPO.

However, it could also introduce new risks if trading activity is thin or if market participants attempt to manipulate prices.

Retail Investors Could Eventually Participate

Hyperliquid Policy Center and trade[XYZ] are also proposing that U.S. investors, including retail traders, should eventually be allowed to access these products.

That would represent a significant expansion of access compared with traditional private-market investing.

Historically, exposure to private companies before an IPO has often been concentrated among venture capital firms, institutional investors and wealthy individuals who meet specific eligibility requirements.

A regulated pre-IPO perpetual market could potentially give a broader group of investors access to price exposure.

But wider access would also raise questions about risk.

Perpetual contracts can involve leverage, meaning traders can gain exposure to positions larger than the capital they deposit.

If prices move sharply, leveraged traders can experience substantial losses.

IPOPs Would Not Be Company Shares

The proposed framework makes an important distinction between an IPOP and an actual equity security.

An IPOP would not provide ownership of the underlying company.

It would not provide voting rights, dividends or other shareholder benefits.

It also would not guarantee a trader any allocation in the company's eventual IPO.

This distinction could become important from a regulatory perspective.

A derivative contract linked to a private company's expected valuation could be subject to different rules from the company's actual shares.

The challenge for regulators will be determining how these products should be classified and which agency should have primary oversight.

SEC and CFTC Classification Questions

The proposal calls on both the SEC and the Commodity Futures Trading Commission to clarify the regulatory treatment of equity-linked perpetual contracts.

One of the central questions is whether these products should be treated as security futures or security-based swaps.

The classification matters because different financial products can fall under different regulatory regimes.

The SEC and CFTC have overlapping responsibilities in certain areas of the derivatives market.

Without clear rules, platforms and market participants may face uncertainty about which requirements apply.

Hyperliquid Policy Center and trade[XYZ] are therefore asking regulators to establish a framework that clearly defines the legal status of these contracts.

Disclosure Requirements Would Be Critical

The organizations also proposed rules covering disclosures.

Because private companies are not subject to the same public reporting requirements as listed companies, information available to traders could be limited.

That creates a potential information imbalance.

A trader attempting to price a pre-IPO perpetual could face uncertainty about a company's financial performance, liabilities, revenue or future plans.

Clear disclosure standards could help investors understand what information is available and what risks they face.

Regulators would need to determine what information should be provided before a contract can be listed.

Listing Standards Could Shape the Market

Another area highlighted in the proposal is listing standards.

Not every private company would necessarily be suitable for a pre-IPO perpetual market.

Regulators and exchanges could potentially establish requirements related to company size, available financial information, institutional interest or the likelihood of an eventual public listing.

Listing standards could help prevent low-quality or highly speculative contracts from overwhelming the market.

They could also provide greater confidence to investors that products listed on regulated platforms meet minimum requirements.

Leverage and Position Limits

The proposal also calls for rules covering leverage and position limits.

These measures could become particularly important if retail investors are eventually permitted to participate.

Perpetual contracts can experience rapid price movements, and excessive leverage can amplify both gains and losses.

Position limits could also reduce the ability of individual traders or groups of traders to dominate a relatively small market.

For pre-IPO products, liquidity could initially be limited because the underlying company does not yet have a public stock market.

That could make risk management especially important.

Market Manipulation Is a Major Concern

Price manipulation could become one of the biggest challenges facing pre-IPO perpetuals.

Private companies do not have the same level of market transparency as publicly listed corporations.

A small amount of trading activity could potentially move prices significantly.

There could also be incentives for traders to spread rumors about a company's valuation, upcoming IPO or financial performance.

For that reason, any regulatory framework would likely need strong surveillance and enforcement mechanisms.

The SEC and CFTC would need to determine how existing market manipulation rules could apply to these emerging instruments.

Hyperliquid Pushes Toward U.S. Regulatory Clarity

The proposal comes as cryptocurrency trading platforms increasingly explore financial products that resemble traditional derivatives.

Hyperliquid has become one of the most prominent venues for perpetual contracts in the crypto market.

Its Policy Center's involvement in the regulatory discussion indicates an effort to engage directly with U.S. policymakers over how new derivatives products could fit into the existing financial system.

For trade[XYZ], the proposal also reflects the potential expansion of perpetual markets beyond cryptocurrencies.

Equity-linked derivatives could become another major category if regulators establish a legal path for them.

Potential Benefits for Financial Markets

Supporters of the proposal could argue that pre-IPO perpetuals would provide several potential benefits.

They could improve price discovery, provide additional liquidity and allow investors to express views about private companies before their public listings.

The contracts could also give companies and investors another source of information about market expectations.

If properly regulated, these markets could become an additional layer between private financing rounds and public stock markets.

However, those potential benefits would depend heavily on market structure and regulatory oversight.

A Regulatory Test for the Next Generation of Markets

The proposal puts U.S. regulators in a difficult position.

The SEC and CFTC must balance innovation with investor protection while determining how financial products that combine elements of private markets, derivatives and cryptocurrency infrastructure should be regulated.

A clear framework could encourage responsible development.

Unclear rules, on the other hand, could push innovative financial products toward less regulated jurisdictions.

The debate is likely to become more important as private companies remain private for longer and investors seek greater access to pre-IPO opportunities.

For now, Hyperliquid Policy Center and trade[XYZ] are asking regulators to establish the rules before the market expands significantly.

Their proposal would eventually allow U.S. investors, including retail participants, to access pre-IPO perpetuals while establishing requirements for disclosures, leverage, position limits, listing standards and market integrity.

Whether the SEC and CFTC embrace that approach remains uncertain.

But the proposal highlights a broader transformation underway in financial markets: the boundaries between traditional securities, derivatives and blockchain-based trading platforms are becoming increasingly difficult to separate.

If regulators create a legal framework for IPOPs, investors could eventually gain access to a new form of pre-listing price exposure without actually owning shares in the companies involved.

That could make pre-IPO price discovery more transparent, but it would also require strong safeguards to prevent excessive speculation and manipulation.