[cujic9]

Interesting idea, but seems impractical because it causes very weird incentives:

* Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? If so, can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time?

* Many (most?) consumer-facing brokerages make a significant portion of their revenue by lending out their customers' securities. Voting rights transfer to the borrower of the security. Would this be the same in a long-term exchange? If yes, then this will break the existing revenue model. Online brokerages will need to make the money elsewhere (likely by charging higher trading fees), and this will push consumers back into existing exchanges with low cost trades.

* How long until there is a secondary market for buying and selling voting rights?

[jessriedel]

> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time?

The fact that a company is listed on multiple exchanges doesn't mean it has different sorts of stock for each exchange. This real subject of this article is tenure voting, which is an aspect of the stock (not the exchange). The reason exchanges are mentioned is that exchanges have rules about the sorts of stock they will list. But to have tenure voting, you only need one exchange to allow out (like the proposed long-term exchange). And most stocks aren't cross-listed to multiple exchanges anyways.

> How long until there is a secondary market for buying and selling voting rights?

Yes, this strikes me as the obvious problem. The equilibrium is for third party to buy and hold all the tenure-voting stock and then sell stakes in the dividends of the company plus allowing voting by proxy. Basically, the third party becomes an exchange, and all stock effectively has maximal tenure.

This problem is so obvious that it must have been addressed by the people proposing this.

[hobbyjogger]

>Yes, this strikes me as the obvious problem. The equilibrium is for third party to buy and hold all the tenure-voting stock and then sell stakes in the dividends of the company plus allowing voting by proxy. Basically, the third party becomes an exchange, and all stock effectively has maximal tenure.

You've essentially just described the current system. Most shares on NASDAQ and NYSE etc. are technically held by Depository Trust Company via its nominee, Cede & Co. [1]. Through a complicated set of regulatory and contractual arrangements, public companies, the beneficial owners of their stock (i.e. the investor at the end of the chain) and each intermediary (banks and brokers, etc.) all maintain a sort of legal fiction that the shares are "owned" by Joe Schmoe, even though all he really has is an attenuated set of contractual rights that flow through the various intermediaries between him and "his" shares held by Cede.

Joe Schmoe does not technically or legally own those shares. Cede does. Believe it or not, you were spot on in predicting that the third party would allow "voting by proxy." That's exactly how Joe Schmoe (i.e. all of us) must vote our shares if we want to participate in a stockholder vote. We can't just show up at the meeting (or fill out the company's proxy card). You send a "voting instruction form" telling your broker how you'd like to vote, and your broker then tells Cede & Co. how to vote your shares at the stockholder meeting.[2]

To address your specific point, tenure voting would surely be based on the tenure of the beneficial owner (i.e. the person at the end of the chain who gets to vote) not the nominee holding the shares in "street name" on the beneficial owner's behalf. This might take some reworking of the arrangements between the brokers, DTC, clearinghouses, etc. (likely needing to be be built into the financial systems that log transfers and ownership, if not already provided for) but would not really pose a significant barrier.

[1] https://www.bloomberg.com/view/articles/2015-07-14/banks-for... [2] https://www.sec.gov/spotlight/proxymatters/proxy_materials.s...

[jessriedel]

> tenure voting would surely be based on the tenure of the beneficial owner

This only works if the intermediate holder of the stocks is coordinating with the exchange and/or company. The problem is that there is a financial incentive for someone else who is not working with them to buy up the stock, immediately resell it with the normal guarantees (that they will pass on dividends, allow voting by proxy etc.), but not pass on such re-sell information to the exchange/company.

Does the exchange/company have some sort of a right to prevent resale unless tenure information is tracked? Naively Id guess that they can't, or otherwise they's try to prevent stuff like short-selling too.

[hobbyjogger]

> The problem is that there is a financial incentive for someone else who is not working with them to buy up the stock, immediately resell it with the normal guarantees (that they will pass on dividends, allow voting by proxy etc.), but not pass on such re-sell information to the exchange/company. Does the exchange/company have some sort of a right to prevent resale unless tenure information is tracked?

Yes, absolutely. That same financial incentive already exists in all sorts of variations. As a result, brokers (i.e. your hypothetical entity that gobbles up all the shares and then loans them or sells economic/voting rights) must be registered with FINRA and are subject to very extensive regulations, including rules from FINRA, the SEC and the public exchanges.

For an example, look at how long and complicated the NYSE rules are, mostly involving member organizations like brokers (click on "Operation of Member Organizations" or any of the other subheadings at the link below and then see, for example, rule 402):

> .30 Securities Callable in Part.—Member organizations which have in their possession or under their control bonds or preferred stocks of issues which are callable in part, whether specifically set aside or otherwise, shall identify each such bond or preferred stock so that their records shall clearly show for whose account it is held, except in the case of [two limited exceptions]

http://wallstreet.cch.com/NYSE/Rules/

[jessriedel]

> As a result, brokers (i.e. your hypothetical entity that gobbles up all the shares and then loans them or sells economic/voting rights) must be registered with FINRA and are subject to very extensive regulations, including rules from FINRA, the SEC and the public exchanges.

I still don't get it, length and complicatedness of rules notwithstanding. Why can't a holding company not subject to these regulations simply buy from the broker and then resell? Why can't I personally buy and hold a bunch of shares and then sell stakes to people in my office completely off the books? What if I only sell a partial stake (e.g, 90% of dividends and 40% of voting rights)? Repackaging/Securitization happens all the time and in a million forms; is every allowed form simply listed exhaustively in a broker contract somewhere?

[hobbyjogger]

Not your fault--I didn't make this clear enough: there is absolutely no way to legally engage in what you proposed without being a qualified securities professional who is very much "subject to these regulations" from, e.g., NYSE, NASDAQ, FINRA and the SEC.

You can't just buy shares from a registered securities professional (e.g. broker, dealer or underwriter) and then start engaging in "off the books" securities transactions. That is, unless you don't mind a lengthy prison sentence.

The activities you are describing (buy securities and then sell "stakes" and/or profits interests and/or voting rights) fall very squarely within many of the various definitions of securities professional required to register and comply with these extensive regulations. For example, see definitions 11 and 12 here [1]. Also note that the definition of "sell" includes selling any interest in a security--not just selling an entire security outright.

> (11) The term “underwriter” means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission. As used in this paragraph the term “issuer” shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

> (12) The term “dealer” means any person who engages either for all or part of his time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.

Here's just a random example from Google of the penalties your hypothetical "off the books" broker could face [2].

[1] https://www.law.cornell.edu/uscode/text/15/77b

[2] http://companycounsel.net/2010/01/21/you-dont-have-to-know-t...

[iofiiiiiiiii]

That's very interesting! Is it possible to buy some stock "for real" and actually own it alongside others who use the DTC system? What are the reasons for this strange system existing?

[HolyLampshade]

Since most stock ownership has become a digital ledger, there are incentives for consolidation toward central custodianship for clearing and settling of trades.

The DTC is part of the subsidiary family of the DTCC, which also operates the NSCC. The NSCC handles security clearing for almost all equities trading in the US (all transaction systems basically report here at the end of their reporting chain).

This basically allows the NSCC to simply update the ownership accounting of a number of shares, as opposed to hunting down the physical stock certificates, validating their authenticity, and then handling the transfer.

This has ultimately greatly reduced the settlement window (from Trade date + however long it takes to find the certificates, to, as of a month or two ago T + 2 days), which allows firms to free up capital (the cash doesn't exist until the trade settles) to commit to other endeavors.

A shorter settlement window (and the consolidation down to a single system), also reduce overall counterparty risk, as once the trade is settled you don't necessarily have to be concerned with the financial well being of the firm you did the trade with.

[jopsen]

> legal fiction that the shares are "owned" by Joe Schmoe, even though all he really has is an attenuated set of contractual rights

What is a stock really, if not "a set of contractual rights"?

[hobbyjogger]

To oversimplify, property rights are often said to be good against the world, while contract rights are good against specific others.

A share of stock is itself a set of contractual rights, but the record owner has a property right in the share (and often a physical certificate). It doesn't matter if someone takes your share or inadvertently/accidentally sells it to an innocent buyer. It's still yours and you have a better claim to it than any buyer or later holder.

But a beneficial owner of a share held in "street name" has only a contractual right to his shares--essentially a promise from his broker that the broker will have at least [x] shares for him (note this means he does not have a claim to any specific or identifiable shares and his broker surely holds many times more since they'll have many other clients). And on top of that, his broker has an account with DTC that involves a second layer of contractual rights to the stock--essentially a promise from DTC to the broker that DTC will have at least [x] shares for the broker (again not specific or identifiable shares and DTC certainly has many times more shares since DTC holds nearly all shares held in "street name")

If your broker or DTC accidentally or inadvertently disposes of too many shares (and this can happen surprisingly often) you only have recourse against your broker or DTC. The agreements between [you and your broker] and [your broker and DTC] do not bind the new owner of the shares, who has no obligation under those agreements and, as a bona fide buyer + current holder, also has a better claim to the shares than you do.

If that wasn't specific enough, here's a very detailed summary and analysis of the current stock ownership structure and mechanics:

http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article...

[kgwgk]

The key word is "attenuated". When you have in a drawer the stock certificate issued by the company the situation is much simpler.

[lostboys67]

Interesting in the UK you can directly own the shares slightly more expensive though when held by a third party (Td direct) I had no problem in getting a voting card from them (at no cost)

[conistonwater]

> This problem is so obvious that it must have been addressed by the people proposing this.

I think this is just optimism, it would be nice to have an actual reason to think this is the case.

[hkmurakami]

I looked at the people backing the exchange and as far as I can tell, no one actually has a proper finance background, let alone a background in exchanges (which is, from what I've read, a pretty esoteric and specialized area within finance).

The idea of Eric Reis running a stock exchange is... strange to me.

[eries]

Me too!

Luckily the rest of the team is way more qualified

[hkmurakami]

Hi Eric. I recall the times when making long term equity holdings tax advantaged (ex: 0% cap gains after holding for 10 years) as a path to achieve similar goals to what LTSE is trying to achieve.

Details (and general HN cynicism) aside, we hope your venture is a success.

As a greater man than I once said, your success is our success. We'll be rooting for you.

[Fomite]

> This problem is so obvious that it must have been addressed by the people proposing this.

I feel like this sentence could be found on the graves of many a failed startup.

[eries]

And also on many IPO tombstones :)

[JumpCrisscross]

> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time?

Strictly speaking, nobody needs an exchange to implement a corporate voting regime where one's vote per share increases as a function of holding time. You just amend your certificate of incorporation and/or bylaws and, assuming the state in which you're incorporate allows it, it happens.

The trouble is most stock exchanges have rules about voting rights. If you aren't compliant, you can't list with them. A big-ticket IPO, e.g. Uber, Airbnb or Saudi Aramco, might be able to convince an exchange to change its rules. This is an exchange pre-empting that negotiation.

If a quality company listed with these voting rights, there would be nowhere you could buy its shares where voting rights would be different because they'd all trace to the same corporate charter. There might just, at least for some time, fewer places where one could buy them.

(Stock lending would have to be dealt with. It doesn't strike me as a particularly challenging issue to solve, and not everyone has to solve it the same way. The bigger issue is where to sever legal and beneficial ownership. If I have a bunch of LLCs who have held a company's stock since IPO, it might make more sense to sell the LLCs with their voting rights intact than sell out of them. This torpedoes most of the benefits of public over private markets.)

[taurath]

That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares. If you have “high priority” voting shares worth $100, they could be worth $90 or less to the investor that is buying them because they decrease in value on every trade.

[JumpCrisscross]

> That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares

Which is why you see private companies experimenting with all manner of super-voting classes of stock (usually for founders) but never with this idea. New money would be reticent to invest.

Devil's advocate: investors didn't seem to care about Snaps' zero-vote stock.

[eries]

We believe our proposal is way more investor favorable than zero-vote shares. But it’s also way more company-favorable than standard governance

[ThrustVectoring]

Even if there isn't a normal exchange, there's usually a market in options and futures. And if it isn't a full market, there are players who can make bespoke deals. Someone who holds on the "long term" exchange along with a costless collar (long OTM put / short OTM call) has much less economic exposure to the stock but has "held" it for the same amount of time.

[adventured]

> can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time?

Buying voting power on the long-term exchange isn't free, your capital is allocated. You have finite capital. Your cost for each unit of voting power declines perpetually so long as you hold it, it never goes to zero (free).

You can view the shorting as paying for your purchase in the long-term position, however you could view it that way for shorting any other company just as well. It's meaningless as a premise or issue.

[cujic9]

Contrived? Yes. Meaningless? No.

Voting rights are powerful. That's the point of the long-term exchange.

In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out.

But in a "long-term exchange", taking this same position (or lack thereof) gives me a valuable asset: voting power that grows over time.

[dmurray]

> Voting rights are powerful. That's the point of the long-term exchange.

> In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out.

Not really, for voting purposes. You can buy the stock, borrow the stock, sell the borrowed shares and end up with "free" voting rights and no economic exposure to the stock. I say "free" because you may have to pay someone a few percent to lend you the stock.

You might say centralised clearing prevents this from happening - that my account will always just show a position of zero shares so I have no votes. But even in that case, I can open two accounts, one long and one short, with the same effect.

[eries]

Actually our mechanism prevents this. It’s pretty clever if I do say so myself, but until we go public with the details you’ll have to take my word for it

[valuearb]

it’s a dumb idea solving an imaginary problem. Better to spend your energies on something more productive.

The governance problem is that public companies are allowed to restrict shareholder rights to the point they have no say over board composition. Boards are incestous collaborations between insiders and friendly outsiders, whose purpose is to maximize their compensation at the expense of shareholders.

That’s the problem to solve and your idea only makes it worse.

[cma]

We'll see more strategies like voting against the company's interest in order to benefit one's other portfolio holdings. You just need enough to tip a split vote (which at least means a large number probably don't believe it is against the company's interest; but if the voter has inside info there wouldn't be much stopping them as it isn't an inside trade..).

[stale2002]

Sure, but the price of the stock probably reflects that voting power.

For example, right now there are different share types that you can buy from the same company that have different voting rights.

[cujic9]

Yes, but... the article suggests that in the long-term exchange, the voting power resets with a change in ownership.

So while a share that has accumulated a lot of voting power is valuable to me, you wouldn't necessarily pay any more for it, since the power doesn't transfer to you.

[hkmurakami]

this is reminding me of LLCs holding real estate in California, where the LLC and bought and sold but not the real estate, thereby preserving the low tax basis for prop13 purposes.

[njarboe]

Does this really hold up? I don't think so. I remember reading that under the law that an LLC that just holds property for the purpose of subverting re-assessment upon transfer, is not legal (or the reassessment happens when the LLC is sold, no free ride under prop 13). I would also think this doesn't work or every piece of property in California would just be owned by a separate company. If it does work, I'd like to know so I can set up my LLC for my house when I want to sell it. Reducing the property tax by $1000 a month should be worth quite a bit in this low interest environment.

[stale2002]

Well, but the original owner loses the power. So if you want to convince an owner to throw away their voting power, you'd have to pay them a higher price.

[eries]

How bout that...