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Governance concerns still in focus as Long-Term Stock Exchange plans launch

A Silicon Valley-backed exchange venture wants to reinvent the role listing platforms play in the U.S. stock market.

With support from the likes of Marc Andreessen and Peter Thiel, Long-Term Stock Exchange Inc., or LTSE, has its eyes set on becoming the 14th national securities exchange in the U.S., a process that started in November 2018 when it applied with the SEC.

But the exchange has no interest in resembling traditional Wall Street bourses such as the Intercontinental Exchange Inc.-owned New York Stock Exchange, Nasdaq Inc. and Cboe Global Markets Inc. While trading is the linchpin to most exchanges' business models, LTSE does not plan to compete on trading market share. Instead, the California-based venture hopes to become a stock exchange to bridge the growing divide between companies and their investors that it says has been caused by an increased focus on quarterly earnings guidance, intraday stock movements and analyst expectations, among other near-sighted factors.

"It's like a disease that is infecting modern capitalism," LTSE founder and CEO Eric Ries said of short-term pressures in an interview. "Our goal is to not build the best stock exchange in the world. Our goal is to fix this problem."

Across corporate America, executives and founders have increasingly complained that investors have grown fixated on short-term gains rather than their companies' long-term growth prospects.

Many executives, such as JPMorgan Chase & Co. Chairman and CEO Jamie Dimon and Berkshire Hathaway Inc. Chairman, President and CEO Warren Buffett have advocated that companies move away from practices such as quarterly earnings guidance, which they say can unnecessarily increase investor focus on upcoming earnings reports. Executives say the increased focus on a company's near-term results or daily stock movements limits their ability to work on parts of their business with longer growth horizons, such as product development and new market entries.

LTSE hopes it can provide issuers with a listing home designed to incentivize long-term thinking among shareholders. How exactly it will do that remains unclear, though.

Within its SEC application, LTSE did not include any specific long-term-focused proposals, a decision management made to ensure the exchange receives SEC approval before pursuing any novel listing or voting structures, Ries said. No final decisions have been made about what models it will end up using, an LTSE spokesperson said.

The relatively straightforward exchange application could put LTSE on a fast track for SEC approval, as the agency is not in the business of determining "winners and losers," Security Traders Association President and CEO Jim Toes said in an interview. The SEC has until late July to issue a ruling on the application. But the boilerplate filing has still sparked questions up and down Wall Street about what exactly the exchange's platform could look like.

"There's a big distinction between saying you want to help long-term investors and implementing policies and rules that would actually do that," Ty Gellasch, executive director of the Healthy Markets Association, said in an interview.

LTSE had previously floated several ideas for its platform to market participants, including a voting structure crafted to reward shareholders with more voting rights the longer they held onto their shares.

But that model, which was at the heart of the exchange's now-terminated listings partnership with IEX Group Inc., stuck out "like a sore thumb to investors," who argued it would end up only entrenching management teams even further, Patrick McGurn, Institutional Shareholder Services Inc.'s special counsel and head of strategic research and analysis, said in an interview.

The Council of Institutional Investors, a corporate governance-focused group, wrote in a Jan. 22 comment letter that time-based voting structures can "disproportionately empower" executives, institutional investors or even governments that control a sizable stake of the company's shares. Many market participants are also concerned that the administrative responsibilities that would come with long-term voting structures may be too complicated, as institutional investors that typically hold massive portions of companies' stocks would need to track each share's voting rights.

LTSE plans to continue meeting with market participants about potential models it could explore, if its application is approved. But Ries said the concerns about its previously proposed voting structure are not germane to its pursuit of an exchange license because it was not part of its application.

Now, LTSE is discussing potential listings with companies as it gets closer to the SEC's deadline, Ries said.

The exchange's business model largely hinges on breaking into the highly competitive corporate listings market, a space long dominated by the New York Stock Exchange and Nasdaq. The company also hopes to eventually expand its free-technology platforms, known as LTSE Tools, which provide clients insights into everything from a company's diversity-and-inclusion efforts to capitalization tables, all of which the exchange believes will help create a better relationship between investors and issuers on its venue.

"There should be differentiation by the company between the citizens of the republic versus the tourists," Ries said. "The company should have the option of rewarding those investors appropriately, and that's the heart of our model."