Many have recently lamented the decline in the number of IPOs and public companies generally (from about 8,000 in 1996 to about 4,000 now, according to EY), and numerous reasons have been offered in explanation, from regulatory burden to hedge-fund activism. (See this PubCo post and this PubCo post.) In response, some companies are exploring different approaches to going public, leading to a recent resurgence in SPACs (see, e.g., this WSJ article), while others are flirting with the possibility of “direct listings,” which avoid the underwritten IPO process altogether (see, e.g., this article discussing the pending NYSE rule change to facilitate direct listings). At the same time, companies are seeking ways to address some of the perceived afflictions associated with being public companies—including the pressures of short-termism, the risks of activist attacks and potential loss of control of companies’ fundamental mission—through dual-class structures and other approaches. Changing dynamics are not, however, limited to companies. And one of the most interesting proposals designed to address these issues is being introduced on completely different turf—a novel concept for a stock exchange, the Long-Term Stock Exchange. According to the LTSE blog, “[w]hile other proposed solutions target the IPO process, the LTSE’s mission is to transform the public company experience by relieving the short-term pressures that plague today’s businesses and laying the foundation for a healthier public market ecosystem.”
What started as a more of a pipedream—and one designed to entice someone else to take up the challenge—is apparently now a project in discussions with the SEC and backed by some heavy-hitting investors. The concept is to offer, through listing standards and other tools, a “new approach to governance designed for the mutual benefit of companies and investors.” In particular, the exchange’s founder and CEO discovered in his conversations with entrepreneurs that many were reluctant to go public. Why? Always for the same reasons: “managers are concerned. Concerned about losing control of their company. Concerned about having to manage to the quarter. Concerned about compromising the company mission. Concerned about the distractions that take energy away from serving customers and creating value. Concerned about being punished by the markets for investing in anything other than driving short-term metrics.” What was needed, he decided, was “a new public securities exchange designed to promote long-term value creation.” The new exchange would “craft a new bargain between great companies and long-term-oriented investors that share the collective goal of innovation and value creation.”
- Additional disclosure policies, such as a moratorium on “guidance,” and disclosure requirements that allow investors to know what investments the company is making, such as such as more detail on R&D spending.
- Tenure voting, meaning that long-term holders (which the exchange’s founder refers to as “citizens of the republic,” according to the NYT) have incrementally more voting power than short-term holders (termed “tourists”), so long as the investor discloses the real name of the beneficial owner.
- Selection from “a menu of LTSE-approved compensation plans designed to make sure executive pay is not tied to short-term stock performance,” with vesting required for at least five years and recommended for as long as 10 years, even after the executive may have left the company. Reportedly, these plans would avoid bonuses tied to metrics such as EPS, which, the exchange’s founder believes, “pushes [executives] to goose the numbers.”
Apparently, the LTSE is currently in discussions with the SEC for approval to become a new national securities exchange. That will certainly not happen overnight. Bloomberg reports that, if the new exchange is approved, the exchange’s founder “will face what may turn out to be his biggest challenge: persuading a company to be first to list on LTSE.” But, interestingly, he isn’t courting the current crop of unicorns. Rather, “he’s connecting with mid-size startup founders [and] hopes a handful of these companies will emerge as strong IPO candidates. If he’s lucky, one will be confident enough to be a pioneer.” According to Quartz, “[o]ne 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.” But will competitive exchanges such as the NYSE or Nasdaq help the LTSE along by permitting interpretations of their voting rights policies to permit listings of companies with tenure voting? Although there certainly are valid arguments suggesting that tenure voting is, or should be, permitted, it’s hardly a slam-dunk.