David N. Feldman

SEC Approves New Venture Exchange

Last Friday, the Securities and Exchange Commission approved a new Silicon Valley-based national securities exchange, the Long Term Stock Exchange (LTSE), with a unique twist – a focus on earlier stage companies and long term investing. The idea of “venture exchanges” has been around for decades. Canada has long touted the TSX Venture Exchange, effectively launched in 2001, as performing a similar purpose. In 2011, the SEC approved Nasdaq’s BX Venture Market, but that exchange was never ultimately launched. The general idea: a national exchange with lower quantitative listing standards than the larger exchanges, but with more benefits than trading in the over-the-counter markets.

Back in 2015, the head of the SEC’s trading and markets division touted the potential benefits in Congressional testimony thusly: “Venture exchanges potentially could.. [provide] investors a transparent and well-regulated environment for trading the stocks of smaller companies that offers both enhanced liquidity and strong investor protections. As such, they could strengthen capital formation and secondary market liquidity for smaller companies and expand the ability of all investors to participate through well-regulated platforms in the potential growth opportunities offered by such companies.” Current SEC Chairman Jay Clayton also has bemoaned the trend towards fewer and fewer companies going and remaining public.

The LTSE, the brainchild of entrepreneur Eric Ries, will operate without a trading floor, only electronic trading will take place. The SEC noted in its approval release that the LTSE’s listing standards are similar to the Investors Exchange (IEX), another exchange approved by the SEC last year. IEX is focused more on lower listing fees and increased transparency of its processes and trading as opposed to listing earlier stage companies. LTSE governance requirements are similar to the big exchanges, including a majority independent board and fully independent audit committee. But the LTSE will encourage longer-term investing by, among other things, allowing companies to offer greater voting rights to stockholders holding their shares for longer periods, and limiting executive bonuses that are tied to shorter-term goals. The goal of the exchange, according to its website, is that when companies list they “will adopt a set of governing practices that mirror their long-term horizon.”