Jay Clayton, Chairman of the SEC, is, I’ve heard, holding the line that no new alternative trading system (“ATS”, aka “exchange”) will be approved on his watch if it intends to trade tokens.
Welcome to 1917 and the 18th Amendment. Except instead of alcohol, people can’t buy or sell securities of real estate and private companies other than in an original issuance.
How did we get here?
50 years ago, just about any company could have their stocks (and bonds) traded. Anyone could invest in them. The process was easy, inexpensive and light touch, even though highly manual as all stock/bond certificates were printed, physical documents. Small and medium-sized businesses (“SMEs”) traded in the pink sheets, perhaps on the Pacific Stock Exchange if they were active enough. Men like Ben Graham and Warren Buffet made fortunes by scouring Moody’s and newspapers to find undervalued small companies to invest their customers’ money in.
And then Congress, as well as states, became obsessed with “protecting” investors, and so passed a series of Acts and rules in the 90s and 2000s that effectively crushed our public markets; losing 50% of all publicly listed companies and making it practically impossible for SMEs – private companies – to create liquidity for their shareholders and bondholders. The JOBS Act was an attempt to roll some of this back, but it was no 20th Amendment (which repealed the 18th, thus ending Prohibition).
The 18th didn’t stop market demand. It didn’t stop other countries from producing and selling alcohol. It just made it harder to get a drink if you were physically located in the United States. In 1920, you could enjoy a glass of wine while on vacation in Paris – totally legal – but not at home.
Today, in 2019, you can list your company’s securities on the Singapore stock exchange, and someone in Kansas can buy them – totally legal. But impractical as foreign listing requirements, currency conversion, and securities delivery are problematic, to put it mildly.
Tokenized delivery of securities. Blockchain. Custodians that specialize in digital assets. SME-focused research & financial data providers. And a new generation of Warren Buffets finding value for investors.
Critical to this is an exchange, located outside of the US (since the SEC won’t approve one inside the US), that makes it ridiculously easy for owners of private securities to list them for sale, and for buyers to connect with them. One that caters to trading equity and debt securities of real estate and private companies. Someone, somewhere, in a regulatory-friendly country will step up and open their doors to this business. Frictionlessly. And people in the US will gladly (and electronically) go there to quench their thirst.
- Can a US company that has properly and compliantly sold securities to investors (original issuance) pursuant to US securities regulations (D, S, A, CF, etc) permit or even encourage a non-US exchange to enable secondary trading and liquidity? Yes.
- Can a US investor purchase stocks/bonds on a non-US exchange? Yes.
- Is that exchange required to register as a broker-dealer/ATS in the US? Heck no, it’s under the jurisdiction of the country it’s in, not the US. It could even be a DEX.
- Can a US custodian like Prime Trust hold securities for customers who’ve bought/sold on an international exchange? Yes.
Capital markets, and the investing world as you know it, is about to change on a tectonic scale. The market demands it.