The Wall Street Journal reported exclusively on plans by the London Stock Exchange to create a special market for the shares of private companies for limited public trading. The plan itself is not yet public, so the Journal was only able to report on limited aspects of what is contemplated. In the same way that U.S. private companies have increasingly been able to access public-like markets with new exemptions like Regulation CF, Rule 506(c) and Regulation A+ and the development of secondary trading markets for large private companies, this is an effort across the pond to provide some of the benefits of public market access to small and fast-growing companies.
One unusual aspect of the proposal, at least as compared to what’s been done in the U.S., is the plan to have only limited trading windows during which these companies’ shares can be available for trading. (In the U.S., public company insiders are subject to trading windows from time to time to protect against insider trading, but what the LSE is apparently proposing relates to all trading in the stock, not just by insiders.) The article suggests that the windows would be from one to five days once every month, quarter or six-month period. As the LSE hasn’t yet formally made any rule proposals, we don’t have the benefit of their thinking on the reasons for such a limitation, but I can think of a few:
- The shares of smaller companies are usually thinly traded, leading to wide bid-ask spreads, so by artificially limiting time available for trading, there will be a more liquid market when trading does occur.
- Being a public company means constantly having to think about public disclosure. In the U.S., various important events trigger a requirement to file a Form 8-K within a few business days, as opposed to being able to wait until the next quarterly filing. For the new LSE market, however, the companies will presumably need to focus on public disclosure only in the lead-up to each new trading window, so the small company isn’t forced to have a staff constantly focused on disclosure matters.
- Limiting the ability to sell will condition investors to think of these shares as a long-term investment, as opposed to something you hold for a week or less to make a quick profit.
It will be interesting to read about the LSE’s thinking if it moves forward with this. The notion of limiting trading windows is an interesting thought, which U.S. regulators may want to consider even with already-public companies that are thinly traded.