Hey everyone, Eric Ries here, founder and CEO of LTSE (and also you may remember me from such roles as the Lean Startup guy). Day one of approval has been kind of exhausting with all the attention but I wanted to stop by this thread and say hello.
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,
I like this plan a lot. One criticism that seems valid is that giving more voting power to people who've held stock longer gives a large advantage to founders. It also doesn't directly accomplish the goal of giving more power to people who intend to hold stock longer (though at least it tends 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?
Yes, that’s feasible and even today a company could adopt a system like that (instead of one where certain insiders automatically have complete voting control for life).
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.
Thank you for driving innovation in equity markets! We need more focus on long-term capital allocation, and less on the casino aspect of stock prices.
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.)
Eric, congrats on the SEC approval. I really love this idea. I'm an SEC RIA, developing a mobile app called Gainvest for investors to access private opportunity zone funds and I view it as evolving into a similar marketplace but for private funds. I have two questions if you have time :) 1. How do you see this ecosystem evolving over time re: mobile platform, global outreach/expansion, and access to foreign direct investment? 2) Do you anticipate private funds or investment banks themselves being able to list on the LTSE?
Eric, great job on the SEC. Regarding large, long-term investors, ILPA might be a place of interest. I've gone to some of their conferences in New York. Good luck.
Yes. (Technically “delisting” is not the right verb to describe this, but you’re on the right track.) The rules also will allow companies to dual list across LTSE and other exchanges.
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 :)
Great idea, congrats on the approval. I have a few questions after reading the article.
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.
Our application was just the first step. This is the base layer of rules and standards, very much akin to NASDAQ or NYSE. That’s not a change per se, it’s just where you have to start. We will make additional filings soon.
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.
Does this exchange have any plans in place to avoid front-running high frequency trading? Similar to IEX.
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.
Our current filing is silent about these features and I can’t be specific with our future plans until we file with regulators. With this approval, we can now work with participants in the market and learn how we can best serve all stakeholders.
Can you explain why another exchange is needed for this? A company is free to issue a special share class and list it on one of existing exchanges, no problem. There is nothing stopping companies from doing this long term incentive thing now. If they aren't doing it on existing exchanges, why would they do it on your exchange?
An analogy: any software company is free to build their own custom protocol, no problem. Nothing stops them from doing their own hyperlinking thing now. If they aren’t building it on existing applications, why do we need the WWW?
1) What are some of things you did to validate this idea in accordance with the Lean Startup Methodology?
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.
We are the only stock exchange that was built from the ground up to serve companies and their long-term investors primarily. We have a different philosophy, business model, and eventually will have different market rules than the legacy exchanges.
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.
Engineers, product focused entrepreneurs and innovators would like a Long-Term Stock Exchange (LSTE) quite a bit if it works out.
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.
Anybody have a good, technical/professional doc on how the LTSE mechanisms work? Some of this seems crazy, but smart people have looked at it.
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?
Here's the exchange rulebook.[1] This is rather long. I haven't found the "long term" part yet. It appears to function as an ordinary short-term exchange. It's not like stocks trade once a minute or once an hour to eliminate high-speed trading. They allow day trading and margin.
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.
Fta:”The new exchange would have extra rules designed to encourage companies to focus on long-term innovation rather than the grind of quarterly earnings reports by asking companies to limit executive bonuses that award short-term accomplishments.
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.”
Thanks and wow... It's a lot. Looks like they have a set of commitments about owners declaring change of control, and some investigative powers to figure out if someone is circumventing rules. It's a really interesting idea but feels like it will need a decade of experiments to see what works.
Maybe they're looking for companies to list there who are trying to build value in the long term instead of the norm, which is short term vesting cashouts.
Excited to see this. I hope it leads to a trend to listing sooner and giving access to retail investors much earlier. Buying Uber at a few dollars instead of $42 for example. The markets will operate like they want to unless there are explicit rules to stop it. Right now it's wait to IPO as long as possible, and HFT only accessible to huge companies. Retail is left with the scraps.
Retail is left with "the scraps" because it is much riskier to invest early on. Companies that fail early aren't heard about as much, because Joe Average's pension plan hasn't invested in them, but are still plentiful. And maybe Joe Average's pension plan shouldn't be investing in what are effectively PE-stage firms.
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.
> 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?
2008 wasn't about the common man making poor investment choices. It was about banks extending credit to people who weren't credit worthy, but pretending to their investment customers that they were.
If by "crowdfunding" you mean Kickstarter, then no, that's not like investing at all. Putting money into a Kickstarter project doesn't entitle you to any future profits.
However, equity crowdfunding platforms do exist. One example is CrowdCube.
To be a company that's operationally mature enough to list on an exchange they're likely of the size of a company that could IPO on NYSE or Nasdaq. I don't think this will suddenly allow a flurry of startups to suddenly become public on a different exchange.
What is a flurry startup and what is a mature company is relative.
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."
> For example, Amazon originally IPO'ed in 1999 after raising only 10M USD.
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.
I meant operationally mature as in they have the financial controls, auditing and reporting to be public. That's not trivial for a company to do, especially a startup.
There were times in India and Pakistan when every major city had a stock exchange. Pakistan held to tradition longer than India, and owners of 3 largest stock exchanges merged them into Karachi stock exchange, and later PSX only in 2016.
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.
> And the Council of Institutional Investors has argued (pdf) that LTSE’s voting mechanism could hurt shareholders by giving too much power to founders.
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.
The new exchange would have extra rules designed to encourage companies to focus on long-term innovation rather than the grind of quarterly earnings reports by asking companies to limit executive bonuses that award short-term accomplishments.
And what are those rules? Nowhere in the article does it actually say what this actually is.
Stay tuned. This initial approval is for the base set of listing standards that are similar to other exchanges (that’s just how the process works). Over time we will add more, but we can’t share the details until we get further in the regulatory process.
The title of the story is “U.S. regulators approve new Silicon Valley stock exchange”
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.
Readit News
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
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.
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.)
Again, congrats, best wishes.
Nashid
Deleted Comment
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 :)
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.
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.
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.
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.
But we would like to.
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.”
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.
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.
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?
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."
http://europa.eu/rapid/press-release_IP-19-1568_en.htm
https://www.eubusiness.com/news-eu/sme-financing.24fl/
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...
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 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.
Deleted Comment
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.