Silicon Valley’s Audacious Plan to Create a New Stock Exchange

Ries wants to encourage companies to adopt stock packages that continue vesting even after executives have left the company, which will push them to make healthy long-term moves.

The LTSE also wants to nudge companies and investors to share more information, such as detail on R&D spending. To get investors to participate, the exchange has to tempt them with a reward, so LTSE plans to use voting rights as a carrot. If investors divulge the real name of the beneficial owner to management (as opposed to hiding behind a "street name") they'll start to gain more voting rights the longer they've held their shares.

LTSE hopes to make money mostly by selling software tools to companies and collecting listing fees, which could be a tough business, given most companies list on either NYSE or Nasdaq in the U.S. and often choose based on a trusted reputation. As Ries sees it, an LTSE-listed company will have an extra stamp of approval. "You're advertising to the markets that you're willing to be held to a higher standard," Ries says. "This is the gold standard, the most long-term, the most hardcore version of going public."

Ries's reforms may not have the intended effects. For example, granting stronger voting rights to long-term shareholders would make takeovers harder, and that could end up protecting complacent managers, says Larry Harris, a professor of finance and business economics at the University of Southern California business school.

"The threat of takeover has done far more to get good behavior out of corporations than perhaps anything else," he says. "I suspect a sophisticated investor may shun" an exchange that creates obstacles to investors who want to shake things up.

Getting SEC approval can also be a painful process, especially when trying to change the status quo. Like Ries, Brad Katsuyama, a hero of Michael Lewis's 2014 book, "Flash Boys," is trying to address what he sees as the shortcomings of existing markets. Katsuyama has spent the better part of a year trying to get SEC approval for the Investors Exchange, which he says neutralizes high-frequency traders' unfair advantage. Incumbents aren't happy.

NYSE slammed the proposal as "unfair" and "opaque" in a November letter to regulators. Nasdaq last month warned the SEC that if it approved IEX's application, a lawsuit challenging the decision would likely succeed. "Any time an exchange wants to do something significantly different, it's likely to come under a lot of scrutiny and take a long time," said Tyler Gellasch, executive director of investor trade group Healthy Markets.

And while Silicon Valley has successfully overturned many major industries, it hasn't had any luck with entrenched Wall Street traditions. Google's 2004 attempt during its IPO to distribute its shares more equitably via a "Dutch" auction led to a disappointing first day of trading and never caught on. Marc Andreessen sees Google's unorthodox IPO as "a great case study and a cautionary tale," he said. "A big part of what Eric's trying to do is make sure that obviously doesn't happen."

If Ries gets the go-ahead from the SEC, he will face what may turn out to be his biggest challenge: persuading a company to be first to list on LTSE. Since it could be years before the LTSE gets SEC approval, Ries isn't courting Uber, Airbnb or its peers. Instead he's connecting with mid-size startup founders, some of whom have invested in the LTSE. In the next few years, Ries hopes a handful of these companies will emerge as strong IPO candidates. If he's lucky, one will be confident enough to be a pioneer.

"There's a real collective action problem here," he said. "As an industry, we all want to see these changes happen, but there's always a little bit of an incentive for any individual actor to say, this isn't my fight – I'll wait and let somebody else take it on. I don't begrudge those people. But if everyone does that, change doesn't happen."