Words of Wisdom about Local Stock Exchanges from John Katovich

Words of Wisdom about Local Stock Exchanges from John Katovich

I was with the Pacific Stock Exchange as a trader, regulator and General Counsel for 15 years, then assisted several national and international exchanges as clients of my law practice.  More recently I was the General Counsel at the Boston Exchange and an EVP with NASDAQ.  While working within the exchange industry, I realized that there was a significant void now in terms of providing funding alternatives for small to medium sized companies that were left out of the major market system.  Starting in 2004, I began working on developing the concept of a local stock exchange that might hopefully fill that void. Based on years of research on the topic, I believe there are three possible routes available to create local stock exchanges.

1) File a Form 1 with the SEC.  This is basically filing an application to become a “Self Regulatory Organization” or “SRO” – which would mean that the organization would be asking permission from the SEC to become a new stock exchange – and further asking that the SEC grant special permission to allow it to list small companies using a lower listing standard (small capitalization) thas is not normally allowed today.  This would require some very compelling arguments to convince both the SEC and any state regulator (if such a state allowed for a blue sky exemption) to allow for such a lower listing standard, including justifications as to how the exchange would prevent fraud and abuse (SEC and state regulation staff have a bias that smaller securities offerings are likely to involve fraud).

One central and very important aspect of filing to become an exchange with the SEC will be to show them that you have a robust and well conceived regulatory group in place that has state-of-the-art surveillance and compliance tools at the ready.  The SEC does not easily grant new SRO licenses – they can take up to 3-6 years before they approve applications – but they will NEVER approve one unless you show that you have the regulatory people and systems in place to detect trading abuses and fraud.

And, even if you can convince the SEC to grant this special permission, you then need to consider working with each of the states where a company seeks investors.  Many if not all states have their own minimum listing standard bars that they are not very flexible about.  In the case of a local stock exchange, this might be easier in that you are only proposing that local (i.e. within one state) companies list and trade.  And in that case, you only have to convince one state to go along with the same lower listing standards and fraud prevention ideas.

2)  Partner with an existing SRO and apply for a lower listing standard from the SEC and the relevant states.  The reasons this is the better approach than the first one is that a) you already have the SRO license in place, b) you have the regulatory group in place, and c) the only thing you would then need to focus on is convincing the SEC (and state(s)) that you have a well thought out proposal for preventing abuses while allowing small companies to list.  You would also likely be showing that you only intend to MARKET to a particular regional geographic location (and therefore keeping the trading as “local” as possible.

3) Work with a Broker Dealer (perhaps one set up by the government) to file with the SEC to get an ATS designation (alternative trading system) – then have the companies that want to list do Direct Public Offerings.  Once approved, get the companies listed on the ATS – which will allow secondary trading.