Silicon Valley’s stock exchange hits a roadblock
Tech stars want long-term exchange, but some regulators worry it’s too founder-friendly
Silicon Valley’s plan to build a better stock exchange for the nation’s hottest startups hit a snag earlier this year when a member of the Securities and Exchange Commission opposed it, people familiar with the matter said. The Long-Term Stock Exchange — a proposed new market backed by venture capitalist Marc Andreessen, LinkedIn cofounder Reid Hoffman and other tech luminaries — was criticized by SEC Commissioner Robert Jackson Jr. He questioned whether the exchange’s model could entrench the power of founders and early investors in startup companies while hurting other shareholders, the people said.
The agency’s approval is needed to approve major changes to how exchanges work, and any member of the SEC can slow the process by calling for a full commission vote. Mr. Jackson’s move, which hasn’t been previously reported, overrode a decision by SEC staff to approve LTSE’s rules for listing companies, the people said.
The exchange that joined with LTSE to advance its listing rules, IEX Group Inc., withdrew its proposal in August, after Mr. Jackson voiced his concerns but before the full commission could vote on it. LTSE had struck a partnership with IEX so it could launch its business more quickly and because it doesn’t yet have a license to run a stock exchange.
An IEX spokesman said the firm withdrew the plan to give institutional investors more time to study LTSE’s tailored rules. “While we have decided to end our work together, IEX continues to support LTSE’s mission and focus on long-termism in the market,” spokes- man Gerald Lam said.
LTSE aims to be the only stock exchange to require “long-term voting,” a system in which shareholders accrue more voting power the longer they own stock. Its backers say the model will allow companies to focus on strategic goals, limit pressure from investors demanding short-term results and encourage more startups to raise capital in public markets.
The plan has run into opposition from at least one regulator and investor group who think the structure looks too similar to dual-class stock arrangements, which allow founders to keep control of a company while diluting the power of regular shareholders.
LTSE founder and chief executive Eric Ries, an author and startup guru, declined to comment on Mr. Jackson’s criticism. He said LTSE’s applica- tion to launch its own exchange will be filed with the SEC before the end of the year, despite the demise of the partnership with IEX. After that, the SEC would have a maximum of 240 days to approve or deny the plan.
It’s not clear how the five commissioners, including Mr. Jackson, would vote on LTSE’s exchange application, which would include many elements in addition to rules for listed companies.
LTSE’s backers say its proposal is different from dual-class stock structures, which the New York Stock Exchange and Nasdaq Inc. allow for newly public companies.
Mr. Jackson, a former law professor whose research examined corporate governance, in an interview last month declined to talk about LTSE’s listing standards. But he expressed concern about “any voting structure that, over time, entrenches corporate insiders at the expense of ordinary investors.”
“Research has made clear that loyalty share structures often make it virtually impossible for investors to hold executives accountable,” he added.
A 2018 research paper by professors at Vanderbilt and Columbia universities found longterm voting could shield founders and managers against shareholder pressure when they retain at least 20% of all shares.
It also said investors such as pension funds and endowments could benefit from the arrangement as they tend to hold shares for longer periods.
LTSE is funded by a range of Silicon Valley’s best-known venture-capital firms, including Peter Thiel’s Founders Fund, Andreessen Horowitz, SV Angel and Greylock Partners.
It could benefit from a renewed interest in Washington to nurture public markets. President Trump in August asked the SEC to consider allowing public companies to report earnings every six months, instead of quarterly. Mr. Trump said the change would promote growth. “We are not thinking far enough out,” he said.
LTSE’s unique strategy presents other challenges regulators would have to examine. For instance, companies that go public on the exchange would need to accurately track names and stakes of all of their shareholders. Today, most public companies don’t keep a list of stockholders; those records are maintained by brokers who deal directly with investors.
The Council of Institutional Investors, a group representing public and corporate pension funds, has told LTSE it fears that giving long-term shareholders more voting power could give too much control to managers and founders, a person familiar with the matter said. Separately, the council has asked the NYSE and Nasdaq Inc. — the primary exchanges where companies list their shares today — to curb the spread of dual-class shares.
Other institutional investors, including BlackRock Inc. and State Street Global Advisors, have pushed back against the spread of voting structures that hand certain investors more influence than others. The listing rules LTSE previously filed would have given shareholders additional voting power for every month they own stock.
Mr. Ries said every large asset manager LTSE has met with considers time-based voting an improvement over dual-class stock. “We would not do it otherwise,” he said.