What it means to be a Venture Market

Public venture markets play a vital role in fostering capital formation and driving growth for early stage companies.  Just look at the London Stock Exchange’s AIM market, which since its launch has served over 3,600 venture stage companies, or the Toronto Stock Exchange’s TSX Venture Exchange that supports growing companies from the mining and energy sectors. Most recently, the OTCQB Venture Market in the U.S. currently provides over 850 entrepreneurial companies a gateway to public markets and an opportunity to electronically connect with investors.

Not all public markets are created equal, and that diversity is a good thing.  Venture markets need to be different from traditional stock exchanges.

A venture market should provide a platform for enhancing the capital formation process of growing companies.

It needs to be less burdensome than expensive national stock exchange listings, while also helping investors identify and price risk.  With transparent public trading, venture companies with strong business models have the opportunity to grow, while others will wither on the vine.  For some, venture markets offer a path to an exchange listing, while for others, venture markets serve as a cost efficient long-term home.

A true venture market should be able to adapt to the needs of today’s venture company investors while anticipating the needs of the next generation.

There are different views being espoused in the current discourse around what it means to be a venture market.  Does promoting the concept of venture markets = creating a venture exchange?  Should market models other than “exchanges” be considered and analyzed?  Should the legislation choose one side’s solution or remove regulatory barriers so market forces can decide the winners?

Unfortunately, recent legislative proposals have focused solely on the centralized venture “exchange” model.  This overly prescriptive outlook excludes Alternative Trading Systems (ATS) and other broker trading venues.

The narrow focus seems like a peculiar step for a market that is intended to promote competition and innovation.  Rather than mandate a single, centralized exchange model –other successful venture market models must be considered.

In the 1990’s, when NASDAQ was a successful small company market, it was an automated quotation system, not a national securities exchange.  Today, the AIM market in London operates as an MTF, Europe’s version of ATS.  These less complex regulatory structures allow venture markets to be nimble, innovative and efficient.

In our comments to legislators and regulators on this issue, we consistently reinforce the need to promote both choice and competition.  Let the market decide the validity of exchanges, ATSs and other market structures by examining the types of venture markets, such as our OTCQB Venture Market, that have been successful to date.

We have identified several key points that drive the success of any venture market:

  1. Dealer driven markets promote liquidity in smaller company stocks. While, exchange matching engines work well for large cap stocks with deep order books, less frequently traded securities benefit from giving market makers the opportunity to interact with their counter-parties and provide liquidity to the market.
  2. Successful Venture Markets have come from organizing and improving lower markets. The TSX Venture came from the much maligned Vancouver market.
  3. As academics in the space have cited, public markets operate at their best when there is competition between exchange and non-exchange market models. In fact, this concept is so fundamental that it is mandated in the Securities Exchange Act.[1]
  4. ATS platforms and other non-exchange market structures have the ability to offer a more efficient, cost effective system – which ultimately benefits both companies and investors. For many venture stage companies, the complexity associated with a full exchange listing simply doesn’t make economic sense.

The only way we can create an efficient venture market for smaller public companies is to reduce the legions of expensive experts that drive national exchange listing costs to over a million dollars a year.  We must embrace the efficiencies of online information distribution and the advantage of market feedback that created web giants such as eBay and Wikipedia.  The future of finance will be online, data-driven and social.  Putting information first with easily available disclosure gives market participants real time access to make their own decisions on the value of an investment.

At the end of the day, we want to give venture companies the opportunity to reach their full potential – not force them into a cost prohibitive, exchange-only model.   By removing cost and complexity and allowing for healthy market competition, everyone wins.  It is time we made being public less painful.

[1] Securities Exchange Act of 1934, Section 11A(C)

Daniel (Dan) Zinn is OTC Markets Group’s General Counsel, Chief of Staff and Corporate Secretary. He leads the Company’s regulatory and policy making efforts and is often a speaker on over-the-counter equity markets. As Chief of Staff, Dan also oversees the company’s Human Resources and Administrative functions. Prior to joining OTC Markets Group in 2010, he served as outside counsel to OTC Markets Group beginning in 2007, as a partner at The Nelson Law Firm LLC. Previously, Mr. Zinn worked in the corporate office of AIG. He received his JD from the Benjamin N. Cardozo School of Law, where he served as Associate Editor of the Cardozo Law Review and received his BS from Pennsylvania State University. He is a member of the American Bar Association.

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