Venture Exchange Debated in House

Bill Huizenga, Republican from the State of Michigan
Bill Huizenga, Republican from the State of Michigan

If a new bill currently being debated by the House Financial Services Committee passes, a venture exchange may be a reality.

The House Financial Services Committee sub-committee on Capital Markets, Securities, and Investments held a hearing entitled: “Legislative Proposals to Help Fuel Capital and Growth on Main Street.”

The hearing looked at eleven proposed bills, all of which attempt to make it easier for emerging companies to raise capital, including becoming and making it easier to stay publicly traded.

One of those bills was the Main Street Growth Act, which is being sponsored by Tom Emmer, a Republican from the State of Minnesota.

The Main Street Growth Act would “amend the Securities Exchange Act of 1934 to allow for the registration of venture exchanges, and for other purposes.” According to the website,

America’s neighbor to the north, Canada, currently has a venture exchange, the TSX Venture Exchange.

A venture exchange brings together start-up and so-called emerging growth companies which are too small to trade on a regular exchange.

According to the bill, once the market-cap of these companies exceeds $2 billion, the company must exit the venture exchange.

The hearing comes as the chair of the sub-committee, Bill Huizenga a Republican from the State of Michigan, noted that there are about half as many publicly traded companies as there were two decades ago.

Carolyn Maloney
Carolyn Maloney

While everyone agrees there are far less publicly traded companies then there used to be, there is little agreement beyond that, including about venture exchanges.

Carolyn Maloney is a Democrat from the State of New York and the ranking member- head of the minority- on the sub-committee.

Maloney was concerned that these new exchanges did not require their companies to also be subject to state regulations.

Of the bill, she noted, “I am certainly not opposed to the concept of a venture exchange, but I think it’s important to get the details right. In particular, the bill would exempt any stocks traded on a venture exchange from state securities laws, which has historically only been allowed for larger more mature companies that trade on full, national securities exchange.”

Maloney then concluded by asking rhetorically if it was possible to have a successful venture without exempting state securities law.

During her question and answer session, she put that question to one of the panelists, Professor John C. Coffee Jr., the Adolf A. Berle Professor of Law, at the Columbia University Law School, who had called the idea of venture exchanges “promising” during his opening statement.

But Professor Coffee agreed with Maloney, referring to ATS, alternative trading system, where stocks are traded in the US over the counter.

“I think it will work without pre-empting. Frankly, the alternative to a venture exchange is the alternative trader- ats system- which has a number of companies trading over the market. Venture exchanges may prove to be a more interesting, more novel more, creative alternative, we don’t know until we try, but we have seen that under regulation ATS, we have small companies trading in the over the counter market without a pre-emption of state blue sky. So, it is possible to have entrepreneurs trade over the counter small companies, even though they’re subject to state blue sky regulations.”

He further noted that venture exchanges are “thinly traded” which invites “pump and dump schemes” which he felt state regulators were better equipped to deal with because the Securities and Exchange Commission (SEC) would view them as too small and the players are often known locally.

Pump and dump schemes involve boiler rooms where brokers use high pressure sales tactics to sell stocks which have no value but the one created by the boiler room.

The scheme was made famous by the 1998 film Boiler Room; with the proliferation of the internet and the do not call list, these same schemes have evolved on the internet.

Coffee was not done criticizing the bill, noting that the bill also allowed any new venture exchange to start trading until and unless the SEC shut it down, as opposed to going through an approval process first.

Professor John C. Coffee Jr.
Professor John C. Coffee Jr.

This, Coffee argued, would create a wild, wild, west mentality and the SEC would play whack-a-mole, chasing after fly by night venture exchanges as they popped up all over the place.

“I think that puts the SEC under undue pressure; they have to run like a fireman, from fire to fire, and I think you will get fly by night operators under that kind of structure,” Coffee noted, “But the idea I still think is promising.”

Whereas Maloney and Coffee attacked the bill by attacking the details, Emmer, during his question and answer period, made a larger ideological argument.

He referred to an October 2017 US Department of Treasury report on the US capital markets which found, “to the extent that companies decide not to go public due to anticipated regulatory burdens; regulatory policy may be unintentionally exacerbating income inequality.”

He noted that the regulatory policy was making it so that capital markets were “too big to play” shutting out smaller investors from many investment opportunities, namely venture capital.

The first outside investor into Facebook was Peter Thiel, who famously invested $500,000, now exponentially more, at the venture capital stage.

Emmer argued that all the bills, his included, helped smaller investors also participate.