America's newest exchange hopeful wants to be the Branch Rickey of the public markets.
In the 1940s, Rickey, the Brooklyn Dodgers' president and general manager, helped usher in a new era of baseball by signing Jackie Robinson and finally opening Major League Baseball's doors to Black players.
Now, with race, social justice and wealth inequality front and center in many Americans' minds, Dream Exchange LLC is working to create a stock exchange dedicated to helping small companies — especially those owned by minorities — enter the public markets just as Rickey set the stage for Robinson's historic MLB debut.
"We felt we can help small business people come to the fulfillment of their goals," said Bill Ellison, chairman and CEO of the Dream Exchange's lead investor, Cadiz Capital LLC, in an interview. "There are a lot of Jackie Robinsons out there that know very little about the stock exchanges."
The Dream Exchange is aiming to launch what would be the first U.S. minority-owned national securities exchange in late 2021, pending regulatory approval from the Securities and Exchange Commission. Ellison, who is Black, took on a majority ownership stake in the Dream Exchange earlier this year through Cadiz Capital, his private equity firm. The exchange declined to specify terms of the investment.
Founded and led by Joe Cecala, an attorney by trade who represented the founders of the company that became one of the first U.S. electronic stock exchanges, Archipelago Holdings Inc., in the 1990s, the Dream Exchange wants to become a stock exchange in the same field as the likes of the Intercontinental Exchange, Inc.-owned New York Stock Exchange and Nasdaq Inc. But it will be dedicated to listing smaller companies.
In doing so, Dream Exchange is targeting a problem that has vexed lawmakers, regulators and Wall Street executives alike for years: The death of the small-cap IPO.
"I'm not trying to overtake the New York Stock Exchange or Nasdaq with a fancy new technique," said Cecala, who is white, in an interview. "We're a niche exchange that is looking to address a very specific problem."
With a flood of capital sloshing around the private markets today, many companies fund their businesses without having to tap the public markets until much later in their growth cycles.
Between 1997 and 2019, the number of publicly traded operating companies plunged 46%, according to data from University of Florida finance professor Jay Ritter. The drop for smaller companies is even more stark. According to Ritter, 2,599 companies with trailing 12-month sales of less than $50 million went public from 1980 to 1998. Only 630 companies of that size, adjusted for inflation, went public from 2001 to 2018.
Data on minority-owned or -founded publicly traded companies is sparse. But BankBlackUSA, a group focused on sharing information about Black-owned banks and companies, has tallied at least 13 Black-owned publicly traded entities in the U.S., including Broadway Financial Corp., American Shared Hospital Services and Urban One Inc.
Access to capital has been a long-standing issue for minority-owned businesses in the U.S.
Black-owned businesses tend to start with almost three times less capital than white-owned businesses, according to a report from the SEC's Office of the Advocate for Small Business Capital Formation. And minorities as a whole only accounted for about 10.7% of entrepreneurs seeking capital in 2018, even though their investment yield rates closely tracked with the baseline, the report said.
The Dream Exchange, as a result, wants to position itself as an inroad to the public markets explicitly designed to help minority-owned businesses along the way, Cecala said.
"There isn't a lot of people trying to rush into that market," Cecala said. "If there's a good yield, good product and good money, we want to be the only guy standing in the pit."
The Dream Exchange faces a competitive arena of U.S. equity trading venues that is growing more crowded, though.
In addition to dozens of off-exchange trading platforms, there are already 13 existing U.S. stock exchanges that are run by NYSE, Nasdaq, Cboe Global Markets Inc. and IEX Group Inc. Then there are the three other new entrants in the space — the Members Exchange, the Long-Term Stock Exchange and Miami International Holdings Inc., all of which have said they plan to launch national securities exchanges in 2020, making the Dream Exchange potentially the 17th bourse. It could also end up competing with OTC Markets Group Inc., currently the usual destination for small-cap listings.
"Stock exchanges these days are kind of like bicycle shops," said Jim Angel, a finance professor at Georgetown University, in an interview. "Everyone wants to start one, so the real question is: What's the business model?"
Cecala recognizes that the Dream Exchange will be a far cry from the most heavily traded venues in the U.S. stock market. But the attorney-turned-CEO says the Dream Exchange has been fielding "numerous" inquiries from broker/dealers in recent weeks looking to provide order flow to the venue once it is live.
It also has at least one solid lead in its listings business. Lewis Borsellino, an executive at cybersecurity company DefendEdge, has been discussing the Dream Exchange with Cecala for the last year and half. The two first met when Cecala helped form Chicago Trading & Arbitrage, the brokerage firm that evolved into Archipelago. DefendEdge is considering becoming one of the first listed companies on the Dream Exchange next year once the venue is live, Borsellino said in an interview.
"It's going to be a tremendous outlet," Borsellino said of the Dream Exchange. "This is really an untapped market. It'll give the little guy a chance to get out from under venture capitalists."