U.S. regulators approve the Long-Term Stock Exchange
reuters.com
reuters.com
Have questions? Happy to answer as best I can. Keep in mind that this is a highly-regulated startup so we are sometimes limited in what we can say publicly. I’ll do my best to give you a straight answer if I can.
Thanks for all the support over the years, this project has been a true community effort,
Eric
Edit: If so, I'm pretty sure Tesla Inc. would be happy to participate in your beta program.
Some of the standards we hope to file in the future could affect the volume of shares available for short activity, but that would be an indirect consequence of encouraging longer holding periods.
Edit: indeed. But we don’t do anything to help with CEO tweeting :)
We have nothing against those older institutions or against traders for that matter. We simply think the next generation of companies is looking for something different. It’s a strength of the American system that it supports competition and allows us to give people a choice.
We will publish additional details as we are able to.
A more direct idea proposed by Vitalik Buterin: give people a vote in proportion to how long they're willing to commit to keeping their stock. Optionally, only enforce the commitment when the vote goes their way (though this probably only works for major decisions).
Would something like this be feasible for stocks? Would it be compatible with LTSE?
We are considering a range of proposals for future listing standards and I won’t be able to comment on those until we file them publicly.
But suffice to say we are thinking along these lines. To me, one key principle is that in order for companies to make long-term decisions, they have to know who their long-term investors are, and find ways to be aligned with them, including via rewards like you propose.
2) Do you think any approval of this by the regulators was an attempt to stay competitive to the rise of crypto crowdfunding / instant liquidity via crypto markets (ICOs, STOs, IEOs, etc)?
I’d say two notable examples are building our tools platform (http://LTSE.com/tools) for early stage companies which has allowed us to do exchange-like things long before being operational as a national securities exchange and our earlier attempt to build the exchange with a legacy partner. That partnership ultimately failed but in the process we learned a lot of essential lessons that set us up for success. Classic MVP.
2. Not really. They are obviously aware of those things and I have found them knowledgeable and conscientious in wanting to protect and serve the public. But the process to create a stock exchange is defined by law and they followed that to reach their decision. If you read their almost 50 page approval order, you’ll see how detailed their analysis is.
Again, congrats, best wishes.
Nashid
It seems the focus of this initiative is aimed at aligning long term voter control, but these front-running techniques don't really care about control.
Have you considered incorporating some form of low-frequency trading? With an auction for shares held once a day, once a month, or even once a year?
(I have heard Warren Buffett say that, if it were possible, he would prefer if investors could buy or sell Berkshire Hathaway shares only once annually at a price close to intrinsic value. The low frequency would encourage investors to focus on understanding businesses instead of short-term price movements.)
But we would like to.
Broadly, what did you have to change to get SEC approval?
Have you considered supporting some sort of crowdfunding private model as well - like angel investing for the masses, before a company goes public?
Will you be available in all the big trading brokers for retail investors? I use freetrade (uk broker) and would love to see your stocks there.
Have you considered listings being asked to reward investors with long term dividends or bonds? I know this is usually up to the company, but the exchange could perhaps encourage it. Tech stocks often focus on growth but it’d be nice if there were more emphasis on sustainable long term growth. For most investors voting rights are pretty academic and a very blunt instrument.
Crowdfunding and private markets. We have some ideas on how this could be done in an ethical and transparent way, but we would proceed cautiously if we go that way. Too much activity these days is quite dubious and we don’t want to profit from that.
Yes, all of our listing stocks will reads as part of the National Market System, which means you’ll be able to access them everywhere including at retail. It’s very important to use that everyday people are able to access the same features and benefits as larger holders.
On rewards for long-term holders, yes we have considered that and I think you’ll be pleased by what we eventually roll out.
Friday’s decision followed an uncertain fate for LTSE, which had faced SEC opposition before revising parts of its proposal.
Usually to list on public markets the whole bizdev/marketing/operations/VC/board/lawyer/executive machines end up taking most companies away from innovation and the founders, as well as taking large chunks of the company and the rewards, where the efforts become clouded in power struggles.
If the LTSE market helps stop short and distort, pump and dump schemes, it could be very attractive to long term investors and innovative/engineering focused companies. A company like TSLA or a company rebuilding like AAPL in the 90s would probably love to be in a longer term, less short term focused exchange. The new market may encourage deeper dives for innovation and protect the companies on the exchange from the eviscerating games of the public markets where long term investors get skimmed and are 'suckers' to the big fish.
LTSE is a very welcome direction and attempt to clean up the public markets problems including the short term quarterly focus, high bar for entry, constant attacks after going public and loss of power/percentages by founders and innovators/engineers/product once the company goes public.
Example: It seems like stock transfer would reset voting rights, which should depress prices and (intentionally, I think?) discourage sale. But what keeps a fund that owns vested shares from effectively selling their economics and voting rights through a secondary contract?
There have been proposals for exchanges designed to discourage short term churn, but this doesn't seem to be one of them.
The web site seems unhelpful. Not much solid info.
[1] https://longtermstockexchange.com/regulation/docs/LTSE%20Rul...
It would also require more disclosure to investors about meeting key milestones and plans, and reward long-term shareholders by giving them more voting power the longer they hold the stock.”
Even in the parts you've quoted, the language seems very careful.
They'll "ask" businesses not to give huge executive bonuses, but asking is free and non-binding. A large portion of the American public has been "asking" for this for a long time. Is the problem really that no one has asked?
They'll require "more information" about key milestones and plans for investors, which sure, that's nice for investors, or will be if it's more information than is usually given by CEOs to a board, which I doubt. (Investors already demand to know what the plan is, and even startups usually have plans for several years out even if they're goals more than plans.)
But is that actually the problem that causes short term ism? Are we insinuating that investors love long term investments and the only reason they don't make them is because CEOs don't tell them enough?
Etc. Now, maybe these worries are invalid, and the actual charter does actually prescribe effective regulations to solicit the desired behavior.
But to confirm that, we will need more information than the vague assertions provided in the article. Which is why our OP was trying to investigate the source documents.
(Also, doesn't it seem odd that a medium length article about an exchange's sole reason for existence contains almost no information about how that exchange intends to achieve the reasons for which if exists? Just assertions that it will do so with all language carefully qualified?)
Rather, I tend to view issues as having a certain amount of public mindshare, and the success or failure of initial attempts at a solution tend to have an outsized influence on public willingness to assign resources to a problem.
So I think that if this is a poorly implemented solution, and fails, we may not try again for some time, even if the actual idea is perfectly workable. Since I also agree that this short term...uh...ism...is a genuine problem, I would very much like to see a successful solution to the trouble.
And I do mean the traditional public: this problem of poor implementation scuttling perfectly good ideas also afflicts the efforts of for profit corporations as much as it does democratically controlled public servants or charitably beholden non-profits.
Well, Eric literally wrote the book on that approach, so I guess that's not a problem. Sure, $19MM seems like a lot to raise before your MVP.
I don't know if I'm right about this, but it seems such an exchange might contribute to something like 2008. Then, it was the common man investing in over-heated real estate; now, it could become the common man investing in over-heated tech.
I feel like those who work in tech often forget that it can fail, have cycles of boom and bust, etc. like any other industry.
Of course, I do think it can serve a useful purpose, but there is reason early-stage, private investment is restricted to qualified investors.
The expected value of early stage investing is certainly higher than lotteries in the US. Every poor Joe can spend thousands on lottery tickets that expire worthless, but cannot invest thousands in real companies that Joe believes will do very well in the future. Shouldn't Joe have access to companies earlier, if he currently can access lottery games?
Two equally skilled investors each looking to invest $10,000 in the same company. Investor A is worth $10,000,000 while Investor B is worth $100,000.
Those two investments look the same on paper but the risk for each investor is wildly different. A test won’t solve for that.
It would be easy to regulate for anyone that makes, or is worth, less than "accredited" levels can only put in X% of their net worth. Doesn't need to have this arbitrary cutoff. I'd wager there are quite a few dumb people making over 200k.
An aside: Income as a method of determining "accredited"-ness is quite arbitrary. Many SWE in the valley easily qualify, where an equivalent SWE in Midwest US would not qualify, just because cost of living/wages are lower.
That’s arguable.
State lotteries are highly regulated and transparent and typically return 50% of their capital to participants.
In principle it’s more about why a poor person can access lotteries but not private investments, not the exact math on E[X]
A Joe Average is legally allowed to play all kinds of lotteries, pretty much guaranteed loss over long term.
A Joe Average is legally allowed to invest his 401k in the riskiest penny stock one can find.
This has nothing to do with risk, it's 100% gate keeping.
Every single time I see democratized access to riskier financial markets actually make it to the public, I can hold my breath and wait for the news reports to come out about the scams and grifters that come out of the woodwork to take advantage of little old grandmas, who wouldn't ever think of pulling the cash out from under the mattress that she's saving for little Penny's college fund and going to Vegas, but can easily be talked into "investing" it in the brand new wave of "tech" sweeping the nation.
It's not Joe Average these laws protect. It's Joe Average's less cognitively-blessed parents. It's so easy to fool old people that if we don't take positive steps to stop it from happening, it becomes an industry.
You can't get rid of all of it, but you can at least push the wolves out to the periphery.
Most 401ks do not allow individual stocks. Some do, but often with only a small % of total account value.
IRAs typically act more like a general equity account, but by that point I would argue a person is already a bit more financially savvy. If they have taken the time to either open an additional retirement account or roll a 401k over from a prior job, then they have some idea about penny stock risk.
However, equity crowdfunding platforms do exist. One example is CrowdCube.
For example, Amazon originally IPO'ed in 1999 after raising only 10M USD.
Especially since the last financial crisis over regulation has hindered SMEs access to the public markets. Being a public company means that you can often raise money on better terms. If only large enterprises can access good money, then SMEs and indirectly innovation is hurt.
EU has realized this and is now trying to make SME listing easier (mostly through de-regulation).
> Currently, out of the 20 million SMEs in Europe, only 3,000 are listed on stock-exchanges. "We want to change this," said Valdis Dombrovskis, EC vice-president responsible for financial services: "We propose rules that will make it easier for SMEs to access to a wide range of funding at all stages of their development and to raise capital on public markets."
* Quality information is available for investors to make rational investment decisions
* Information is available fairly - no insider trading
Existing reporting requirements does not ensure markets' integrity and fairness in much of the world, US included.
I think, to some extend, the presumption of truthfulness in financial reporting is even giving edge to bad players, and penalises "boring" businesses that have nothing to show but dividends, and a track record paying them.
It is much easier to "pool the wool" with some fancy paid off analyst reporting for a tech business with dubious repute than say a concrete factory.
In Pakistan, most listed businesses are much more "boring" than ones in US. Concrete factories, brick makers, seedling producers, farms. Regulations on disclosure are near nil, but locals care not for that as few buy shares for anything but dividends and a good track record paying them.
I myself vehemently oppose the idea of collective ownership of means of production, which public companies embody, but I do think that there is a visible "skew" in US with regards to business liquidity: all kinds of pets.com have a go, while clearly not bad businesses reliably making money have to be sold at discounts that will be considered big even by developing countries standards.
I wouldn't call this "public" ownership, as the "public" does not own a company. Investors own a company, the pool of investors is simply enlarged such that the public may invest.
This in contrast to privately-held companies, which can and do have many owners, but whose owners are acquired through partnership, investment, key employees within the company, and M&A - but not through the sale of securities.
Small correction, Amazon's IPO was in May 1997. The $10m in venture capital is correct though ($2m common, $8.2m preferred).
They of course had a relatively small business, which matches with the $10m in VC and times. $15.7m in sales for fiscal 1996. Their sales ramp is impressive considering the Web at the time: $875k in 1Q96, $2.2m in 2Q96, $4.1m in 3Q96, $8.5m in 4Q96, $16m in 1Q97.
They raised $50x million in the IPO, and had a $560 million valuation at the end of the first day of trading.
Their S1:
https://www.nasdaq.com/markets/ipos/filing.ashx?filingid=124...
I mean, the most high-profile tech stocks to hit the market as of late already give all the power to founders via voting class stock, so I don't think it's a big change other than truly standardizing it.
And what are those rules? Nowhere in the article does it actually say what this actually is.
Despite the actual name of the exchange, the title of the article seems much closer to how the exchange is described:
> The LTSE is a bid to build a stock exchange in the country’s tech capital that appeals to hot startups, particularly those that are money-losing and want the luxury of focusing on long-term innovation even while trading in the glare of the public markets.
From the HN guidelines:
> Otherwise please use the original title, unless it is misleading or linkbait; don't editorialize.
Unfortunately, this exchange doesn't seem to be aimed at that:
> The LTSE is a bid to build a stock exchange... that appeals to hot startups, particularly those that are money-losing...
> ... giving retail investors a chance to cash in on high-growth startups.
That sounds like a private lottery at best, and a scam at worst. Maybe it wouldn't seem so bad if I read through the full SEC document, but I'll steer clear of this until plenty of other people have tried it out.
On the other hand, day traders provide valuable liquidity to the markets, making them more efficient and better for everyone. They ability to operate would be severely harmed with even a 1% fee on every trade. And more fees also harm normal people like me, who conduct trades that generally last from a few days to a few weeks each. For the most part, we're not harming other people, and we make the markets more efficient and legitimate.
The weird market effects are enabled by what is basically corruption by large entities involved with the markets, and by the ineffectiveness of the SEC at fighting a wide range of anticompetitive practices. They are caused by people who are making a small amount on every trade, but not all of the people making a small amount on every trade are bad.
I am not sure you've done the math on this when it comes to your basic person socking away $5000/year in index funds in a simple Roth IRA trying to save for retirement, and what signal it sends towards saving money / planning for the future, which is already at its lowest point in this country.
What would a company gain by choosing to list on here (over other far more established options) while having to commit to these additional rules? Access to a group of investors who don't complain too much about quarterly profit objectives?
The article doesn't explains what makes LTSE different than NYSE? How will it actually encourage looking beyond the next quarter? Where can one learn about that?
""But unlike those exchanges, ultimately our intention is that when companies list shares on LTSE for sale to the public, they will adopt a set of governing practices that are designed to help them build lasting businesses and empower long term-focused shareholders.""
Utterly indistinguishable from the Wooden Language heard from every such grandee.
I am not one to indulge the sort of naivety that might allow me to pretend that powerful investors are going to tolerate any more impediments to their desires than legally required, or at least enforceable, so unless there are concrete differences imposed by SEC et al. I expect this is -- or eventually will be -- simply Wall Street West.
Getting rid of HFT wouldn't get rid of that kind of corruption, and getting rid of that corruption wouldn't get rid of HFT.
The only time any limit order gets executed is when it is the best price available. From the other perspective, the price a market order is matched at is the price of the best limit order available.
In the absence of high-frequency traders, the best price available will be worse, not better.
HFTs will see the first order executing on one exchange, and will then jump in front of the rest on the other exchanges. For the trader it looks like large orders don't work; he can't buy every offer that's on his screen. Only part of his order works, and a price rise prevents the rest from executing.
Nowadays this may be less of a problem, because large traders now probably all use software that tunes injected latency to make all related orders arrive simultaneously at their different destinations. But I would still be careful about assuming that HFTs can't do any damage anymore.
The only way that could work is if the lowest price you can buy on exchange A is $100, and the HFT knows that you're about to submit a market order, so he buys up the $100 orders until the best price is $101, and then he lists what he bought for sale at $100.99, which your market order matches against. OK, in theory this works.
To avoid this, you can just submit a limit order at $100 instead of a market order. You should always use limit orders for exactly this reason, anyway: even in the absence of foul play, the order you're trying to match against might get matched by someone else in the mean time and you could get a worse price than you expect.
> ...and reward long-term shareholders by giving them more voting power the longer they hold the stock.
I'm not sure how that would affect the behavior of traders in any particular stock. Seems like it would allow a "committed minority" of shareholders the ability to control the company, without having different classes of stock determined upfront?
In any case, Matt Levine's article on it is a good read: https://www.bloomberg.com/opinion/articles/2017-10-16/the-lo...
I think that tenure voting is the next step forward and it is a good way to attract an alignment between investors and founders as well as employees since they get incentivized with more votes for holding a stock long term. We've seen this work really well in France especially with companies like LVMH that investors are patient towards due to this tenure voting incentive.
But like how dual class stock caught on with startups starting with Google and Facebook, can we see the same for tenure voting if there are hot startups in the future with this structure?
Will LTSE allow dual class or multi class share structures or only tenure voting among companies wanting to list on the exchange?
Also will all sorts of companies be able to do this or will LTSE only be open to tech companies?
> asking companies to limit executive bonuses that award short-term accomplishments.
Why would I care as an investor? I still want the stock to go up quickly. Executives own stock and without a cash bonus wouldn't this incentive trying to get quick increases in stock value.
> more disclosure to investors about meeting key milestones and plans, and reward long-term shareholders by giving them more voting power the longer they hold the stock
Seems relatively minor vs the benefits of a stock jumping significantly in a short time. As a minor stock holder I have no interest in voting power. There still isn't a downside to short term deals.
I do feel like that make a good point about voting power. If I own a stock, and it can go up 5% now, is the promise of additional voting power later on a valuable enough thing to make me not care about that 5%? It's possible I'm in it for the long term growth, so maybe I don't care about the 5%, but the voting power isn't the reason.
I'm hopeful this is a happy balance, cause I find the shares without voting rights to be almost scams.
What you want to do is reinvest profit from short term gains into long term securities that beat inflation to leverage risk.
>Executives own stock and without a cash bonus wouldn't this incentive trying to get quick increases in stock value.
Equity is worthless without liquidity, and that's more important than massive growth down the road for the rank-and-file that hold options. Frankly equity isn't the motivator it used to be. If you don't plan on staying in one gig for more than 18-24 months, there is very little reason to sacrifice time and money for equity.
That said, executives' focus on short term growth to cash out is a problem in and of itself - notice how companies like Disney and Apple have skyrocketed under CEOs focused on long term stability and growth over cashing out 18-24 months after their hiring. And everyone made way more money because of it.
>As a minor stock holder I have no interest in voting power
And minor stockholders don't make a difference in the day-to-day operation of a business. The activist investors that hold board seats do, however, and their focus on short term growth has caused many mid sized shops to collapse under pressure to grow, sacrificing long term stability for their employees for the profits of vultures.
Making the company look good on paper (short term stock gains) but actually worse (perform worse in the long term as those lines don't translate to profit). But when these hidden faults are discovered the execs are long gone and their bonus checks already cashed.
That is not what investors want; that’s what speculators want. I am saving for retirement in about 15-20 years; I want my investments to appreciate a reasonable amount over that period and show a stable pattern of generating good returns - I don’t really care what their prices are like in the next few months, except for that if they’re down in price for a while, I can buy more to enjoy later.
doesn't seem super strong.
If this is actually executed properly, I think this could be a good exchange for more than just tech start ups.
Note that this particular system does not have either of the problems you raise as questions
If you have to comply with SEC and the CEO can't post jokes on twitter, I dont really see what advantage there is over NYSE or NASDAQ.
And SarbOx has nothing to do with CEO tweets... a CEO can’t provide materially misleading information to shareholders or potential shareholders. Period. Not on twitter, not on TV. Not in the rain, not on a train.
What does the ideal LTSE "customer" look like? IOW, what are the signals or attributes of a company that would be a great fit for considering an LTSE listing?
Some of us still remember what happened with LTCM — “Long-Term Capital Management” hedge fund, who was heralded back then as the pinnacle of innovation. It was back in 1998, which looks like eternity for Silicon Valley types... but some remember.
Naming a financial entity “LTSE” is inviting trouble.
Just kidding. We will make extensive filings on this subject, coming up soon.
Until then the best way to think about this is as a set of principles.
This next generation of companies believes in - defining success in generational terms, not beating the quarter or some transient competitor - considering their impact on multiple stakeholders: shareholders, yes, but also employees, partners, customers, communities - building products that are fundamentally healthy for humans and the societies they inhabit
If this is a national stock exchange, then that would be fitting for silicon valley and California. If bankers here would like to take other parts of the transaction for IPOs and direct listings it could really be a boon for the state and remove a lot of the pressure from New York investment banks, as California is economically larger than other most countries with relevant financial centers. On many lists, California is only in 5th place GDP worldwide because the United States as a whole is above it and double counts California.
I'm not persuaded by some of the ideas they have (like adding diversity to their governing board, seems designed to be exclusive to tech-startups that already have a bias toward that "value"). But if only by competition they make listing cheaper and easier it could have a big impact.
I do not think the bias which you think exists is reflected by the actual makeup of the boards of these tech companies, i.e., who is actually on them.
Also in the end when you mention diversity you end up talking about quotas, because that's the most visible application of it. California already has already set board quotas for women, thus showing you that california companies are by law already "diverse".
What on Earth does this mean?
Most speeches about "diversity" are mostly quota-related and, as another comment said, imply is a good on its own: thus not a value.
I have plenty of other opinions about using diversity as a value, but what you can see objectively is that if you grabbed 100 companies that are sensitive to that language, most will be tech. Thus, the selection is gravitating.
[1] https://www.ft.com/content/cdb790f8-c33d-11e4-ac3d-00144feab...
Also there is a body of research that says open offices suck: doesn't mean it has to be a company governing concept.
https://www.sec.gov/rules/other/2019/34-85828.pdf?mod=articl...
question to LTSE employees: do you plan to host your matching engine in California?
The slow vesting shedule makes a lot of sense though.
The interview with Eric Ries is a bit clearer than the article, but it still misses a lot of details.
The central thesis is somewhere between "controversial" and "improbable".
To wit: current markets being too focussed on the short term does not align too well with Uber, a company bound to lose money for at least another three to five years under the best assumptions, being valued as it is.
There is absolutely zero evidence that current stock prices don't price in the long-term. Indeed, if there were, savvy investors would arbitrage for that... and then it would no longer be the case. This is pretty much by definition, just Econ 101. (Also, somebody who thinks stocks are biased to the short-term... please explain AMZN's valuations over the past two decades.)
The only people calling for limiting investor ability to sell are executives of companies themselves, who are afraid of accountability from investors. Because sometimes CEO's would rather be lazy or work on their fun (yet unjustifiable) pet projects, than actually build a profitable, sustainable business like investors want. (It's just human nature.)
A "long-term stock exchange" is one of the greatest cons ever played by execs. It is good only for management, at the expense of investors, customers, and everyone else generally. It is simply the removal of accountability, which can never be a good thing.
Solutions to that generally involve long-term vesting periods for executive shares, e.g. executives can't sell their shares for some extended period of time that is sufficiently "long-term". If the board really made sure incentives were aligned, ideally it would be some period of years after they left the company, so they could never sell while they were in a position to influence the value of shares.
But again, there is absolutely zero reason that should ever apply to someone without insider information, i.e. investors generally.