SEC approves ‘long-term’ stock exchange

The Long-Term Stock Exchange (LTSE), was approved on May 10 by the SEC for registration as a national securities exchange, making it one of only a handful of U.S. exchanges qualified to conduct listings and authorizing the company to operate a platform for buying and selling shares. It could be operational and trading by the end of the year.

The exchange’s Website touts the following:

“Companies that operate with a long-term mindset tend to outperform their peers over time. But going public can pressure even the most visionary founder into a short-term mindset. The Long-Term Stock Exchange is more than a platform for trading shares. It’s a chance to build a new relationship between companies that are built to last and the stakeholders who believe in them.

“A market that reduces short-term pressures and encourages a steady cycle of innovation and investment in long-term value creation would benefit companies and their investors alike.”

Eric Ries, CEO and founder of LTSE, elaborated on the approval process in a blog post that called the endeavor, “a stock exchange for a new generation of public companies” and “a movement” more so than just a market.

“The approval furthers a journey LTSE began three years ago, when we set out to help companies build lasting businesses and empower long term-focused investors by creating an ecosystem in which businesses are built to last,” he wrote. “That ecosystem includes our software platform, LTSE Tools, which nearly 50,000 business builders use for everything from cap table management to runway planning to diversity and inclusion in hiring. It also encompasses our Long-Term Investor Coalition, which comprises institutional investors that share a commitment to creating value over time.”

“In short, we are building a market where companies are rewarded for choosing to innovate, to invest in their employees, and to seed future growth. And where companies can run their businesses with the stewardship that similarly aligned shareholders, stakeholders and society demand,” he added.

The Commission received one comment letter on the application, from the Council of Institutional Investors.

CII supports the LTSE’s goal to “reorient companies and investors around long-term thinking,” wrote General Counsel Jeffrey Mahoney. “However, we do not support the LTSE Application at this time.”

“The application’s proposed ‘Corporate Governance Requirements’ permit newly public companies to have multiclass share structures with unequal voting rights in conflict with our membership approved policies supporting a one share, one vote structure,” he wrote. “LTSE proposes no sunsets on such structures, as we have requested at New York Stock Exchange and the Nasdaq Stock Market. Also, the LTSE Application does not include any information about the LTSE’s reported plans to update its application to include time-phased voting rights as a core element of its proposed corporate governance listing standards.”

Time-phased voting (TPV, also known as tenure voting or loyalty shares) was a core element of the proposal for the LTSE listing. CII generally opposes TPV rights.

“In theory there could be modifications that would limit tenure voting in a manner that would cause us to reconsider our view,” Mahoney added. “We do not know the specifics of what LTSE may propose with reference to TPV rights. If LTSE were to provide a reasonable time-based sunset requirement on its various permitted unequal voting rights structures (seven years or less), with an accountability moment for shareholders to vote on a one-share/one-vote basis on whether to extend for the same term or less, we might not object to that element of the LTSE rules.”

Mahoney wrote that, with TPV in place, ideas for long-term value creation “no longer must necessarily have the confidence of the company’s broad ownership base” and “this can be problematic.” Other points raised in the letter:

• The structure is likely to disproportionately empower founders/managers who have substantial stakes from IPOs, and who sometimes fall victim to myopia or conflicted behavior that can destroy value.
• The structure may disproportionately empower particular long-term institutional investors, who even when independent of management are not always right and may champion bad/idiosyncratic ideas.
• The structure may disproportionately empower governments with an equity stake, including governments that place long-term value lower on the list of priorities (as CII has experienced with the mechanism in France).

Companies with TPV do not necessarily have more long-term owners, but they always have a disconnect between ownership and control, Mahoney argued. “This can result in unintended side-effects. For example, TPV company shares may be discounted by prospective entities that a company may seek to acquire, making it expensive to do acquisitions through use of stock, which can be harmful to a company’s growth, depending on the nature of the company and its industry. Rewarding historical holders does not equate to empowering holders with a long-term investment horizon.”

“TPV is intended to promote decision making that focuses on long-term outcomes,” he added. “But the structure penalizes all new investors, including those with a long-term investment horizon, while transferring power to long-term holders of any kind, including those who plan to exit their position in the near-term.”