MARKET MAKERS

A group from Silicon Valley has a serious plan for creating a totally new US stock exchange

Obsession
Future of Finance
Obsession
Future of Finance

A startup backed by prominent Silicon Valley names is moving toward creating a new US stock exchange, one with additional rules for companies and investors designed to reward long-term shareholding and business strategies to generate long-term results.

Eric Ries, a San Francisco entrepreneur and author of The Lean Startup, said his team working on the Long-Term Stock Exchange (LTSE) intends to apply to the US Securities and Exchange Commission (SEC) for approval to operate a new exchange, though declined to specify the timing. The for-profit company behind the LTSE has raised money from investors including venture capitalist Marc Andreessen, tech publisher Tim O’Reilly, and Aneesh Chopra, who served as the United States’ first chief technology officer. Former New York Stock Exchange CFO Amy Butte is an advisor to the project, and its staff includes veterans of the NYSE and US Treasury Department.

US tech startups have long wanted to overhaul the process for firms to list their shares and to find ways to minimize pressures on public companies from high-frequency trading, cynical activism, and any distorting incentives of quarterly results. Google tried an unusual Dutch auction for allocating some shares in its 2004 initial public offering. Facebook tried to reduce the control of investment bankers in its 2012 IPO. Silicon Valley founders have used separate share classes to retain control of their companies once listed, which they argue is critical for piloting a business amid harmful short-term pressures.

The LTSE is a more radical approach in some ways, as it proposes to build and operate an entirely new stock exchange. The exchange and listed companies would have to satisfy all of the normal SEC requirements that would allow shares to trade on other regulated US stock markets. On top of those, companies that list on the LTSE would agree to additional requirements that the SEC would enforce.

“We’ll use the exchange’s regulatory powers to try and create incentives for long-term thinking by both managers and investors,” says Ries. “So it’s a two-way street, a two-sided bargain, where everybody agrees to these new rules with the idea that the companies are managed in a more long-term way.”

Ries said the LTSE would have a number of differences from a traditional stock exchange. Key ones include:

  • Tenured shareholder voting power, meaning that a shareholder’s votes would be proportionately weighted by the length of time the shares have been held
  • Mandated ties at listed companies between executive pay and long-term business performance
  • Additional disclosure requirements that allow companies to know who their long-term shareholders are and investors to know what investments the company is making

Ries contends that the LTSE would address the concerns that have led many private companies in the US to avoid going public. With the LTSE, “they spend more of their energy focusing on serving customers, less on the kind of distractions that cause a lot of value to be destroyed in today’s markets,” he says. “And therefore everybody makes more money.”

One potential obstacle to starting a new stock exchange is the challenge of getting the first companies to list on it, given uncertainty about whether there will be adequate investor activity to provide liquidity and fair prices. To solve this, the LTSE aims to allow companies to have dual listings, with their shares also trading on any other US regulated market, such as the NYSE or Nasdaq. Ries declined to say how the LTSE would make money, but companies would presumably have to pay to list, which could be an obstacle to getting them to sign on.

Some will surely see the LTSE as just the latest example of Silicon Valley hubris, in line with other tech startups’ efforts to “disrupt” education, health, transportation, and other sectors. Ries says he’s sympathetic to that view, but says it doesn’t apply to the LTSE, which isn’t focused on corralling industry outsiders to come up with the next big idea in finance. Rather, he says, the LTSE has cultivated deep ties to finance and regulatory players in New York and Washington who also have been looking to reform the markets.

The LTSE news comes as a startup exchange project from IEX Group awaits approval from the SEC, which is expected to issue its ruling by June 18. The IEX proposal includes a so-called speed bump designed to thwart some high-frequency trading tactics and level the playing field for other investors. IEX has focused on the trading side of an exchange to help fix the system, whereas the LTSE aims to use listing requirements to bring about change. Ries declined to discuss how his group would approach the trading infrastructure for the exchange, which could be very expensive to build.

He proposed the creation of the LTSE in his 2011 Lean Startup book, and says he hoped that it was an idea that someone else would run with. But no one did, and about three or four years ago Ries started doing initial work to understand what it would take. He’s working full time as its CEO now, joined by roughly 20 other full-time and part-time staff and advisors. The group earlier released a service called Captable.io for private companies to track who owns their shares and stock options.

“We’re talking about a tectonic shift in the way markets work, so it’s definitely going to be a heavy lift,” says Ries. But “market conditions have become more ripe for this, and there’s simply a recognition practically every day that this is a huge problem that needs solving and that, especially as it manifests itself in Silicon Valley where I’m based, problems here are getting worse and worse.”

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