THE LONG VIEW

The company aiming to create a long term-focused stock exchange has applied to handle IPOs

Obsession
Future of Finance
Obsession
Future of Finance

The founders of the Long-Term Stock Exchange (LTSE) want to operate a full-fledged US stock exchange, with a twist: The exchange aims to combat short-term thinking by introducing extra rules designed to reward long-term shareholding and long-term business strategies. The LTSE and Investor’s Exchange (IEX) disclosed today that IEX, an upstart exchange already operating under US Securities and Exchange Commission approval, last week formally filed with the SEC for the LTSE to handle initial public offerings via special securities listings on IEX.

By piggybacking on IEX, the LTSE hopes to accelerate the ability of companies to go public with the LTSE’s rules binding them and their investors. The LTSE plans to submit an application to become a full-fledged stock exchange, a significantly tougher proposition, after the SEC has ruled on its arrangement with IEX.

The LTSE, founded by San Francisco entrepreneur and The Lean Startup author Eric Ries, is an ambitious project to overhaul how companies raise money, allow employees to sell shares, and practice good corporate governance. It comes amid challenges to Wall Street’s traditional approach to financing businesses, with many companies shunning public markets altogether, while others turn to newfangled fundraising methods like cryptocurrency initial coin offerings instead of stock offerings.

In the more-than-200-page filing with the SEC, the LTSE details the rationale behind its founding as well as the rules its companies and investors must agree to abide by. There is expected to be a public comment period, where the LTSE’s critics can attempt to challenge the request with the SEC.

The rules for companies listing via the LTSE include:

  • Increased voting rights for shareholders who hold company stock for long periods of time
  • Restrictions on offering short-term incentives to executives
  • Additional disclosures, such as clearly showing the impact of any stock buybacks
  • A board-level long-term product and strategy committee, to focus on issues of governance and sustainability

Ries believes more startups could decide to sell shares to the public using the LTSE because the rules help shield their businesses from short-term market distractions and pressure from activist investors. The partnership with IEX, announced in December, aligns the LTSE with an exchange created to address another issue with modern stock markets: IEX uses techniques specifically designed to thwart manipulative strategies used by high-frequency traders.

The LTSE acknowledges in the SEC filing that companies could voluntarily adopt the rules it has drawn up without listing through the LTSE. But it contends that the structure it has created allows for regulatory enforcement of the rules, giving them more impact.

Critics say that the LTSE’s rules would overly insulate company executives from shareholders, reducing the accountability that can help boost performance over the long term.

“I have been working towards this for more than five years and the number-one obstacle to doing this reform is convincing people this is really possible,” said Ries. “Especially in Silicon Valley, people have an extreme level of skepticism and resignation about this.”

Now, with the SEC filing, “whether this is a good idea or not, this is happening,” Ries said. “This is now a real option for people to consider.”

This story was updated to reflect that the LTSE and IEX disclosed IEX’s filing with the SEC.

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