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Y'all Street Law Podcast is your home of everything Texas Business Law!
Chuck Kraus: It's always a great thing to have competition. Right? Competition makes you makes you stronger.
Speaker 1: The Scale LLP Yall Street Law podcast is intended to be your go to podcast for legal and business developments in the state of Texas. This episode of Y'all Street Law podcast is brought to you by Scale LLP, the agile law firm built for modern clients and entrepreneurial attorneys. Learn more at scalefirm.com.
Brian Elliot: Welcome back to the All Street Law podcast. I'm Brian. And joining me as always is Chuck Krause, partner at Scale LLP and our resident capital markets guru. Today, Chuck, we're going to be unpacking, I understand, the newly released Form one for the Texas Stock Exchange. The proposed listing standards.
Are you ready to dive into that?
Chuck Kraus: I'm ready. There aren't many form ones filed, Brian. It's been a few years, maybe decades, since someone applied, for a new stock exchange. So I actually pulled up this form one. I think they probably had to fill it out in paper.
I don't think this was, this was an electronic only form. But the form one is basically the listing application that the Texas Stock Exchange made to the SEC. And what was interesting about it, what people were looking for is their proposed listing standards and comparing those to the incumbent exchanges in the New York Stock Exchange and Nasdaq. There were lots of statements made early on about the launch on how the Texas Stock Exchange was going to have a higher standard, how some percentage of the companies that are currently public on the incumbent exchanges wouldn't even qualify. And, obviously, this goes to, the competition, for listings and the statements by the Texas Stock Exchange that there's this untapped market for listings in the Southeast quadrant that they were going to capitalize on.
So, interesting to see how they're positioning themselves relative to their incumbent peers.
Brian Elliot: Well, the suspense is killing me. What are the requirements?
Chuck Kraus: Yeah so three big buckets. Market value of publicly held shares, 40,000,000 if you're coming in on an IPO, spin off or other transaction. Otherwise, the headline is 200,000,000 for everyone else. Share price minimum bid of $4 per share at listing, and then public float of at least 1,100,000.0 and 400 what they call round lot holders. So that is 400 holders of at least a hundred shares or more.
If you're familiar with that, you're familiar with NIZI, you're going to say, that's basically the same as New York Stock Exchange. Yep, it really is. So they've kind of matched, NIZI without getting into the weeds on it. They they they also have added an earnings test of either, 10,000,000 aggregate pretax earnings over the last three years and at least 2,000,000 in each of the last two years or 12,000,000, with 5,000,000 in the last two and 2,000,000 in the proceeding. And then they've got special rules for emerging growth companies.
So they they have put forward an earnings, test. What's what's interesting, though, is they've also made provision for what we'd call a, a profitless unicorn. So very large company, very big market cap, but maybe they don't have earnings yet because they're in in buildup mode, or developing new technology where the r and d expense is just huge. Lots of companies we can we can name, that are like that. They have made a way for a company to list with at least a $200,000,000 market cap and the $4 share price.
And if they meet that, then that earnings test that I mentioned with pretax earnings, requirement no longer applies. So I think that's a nod to positioning for some of these larger companies that are still in scale up mode, which is interesting.
Brian Elliot: So thinking about that, how does that compare with the other exchanges, NASDAQ? And how should companies think about the various listing requirements and why is it that the Texas Stock Exchange may be attractive?
Chuck Kraus: Yeah, it is on its face. These listing standards appear to be higher, particularly the NASDAQ, which only requires a $50,000,000 market cap. As I said, they seem to be a little bit more similar to NIZI than maybe some were thinking, but they're definitely being competitive, with Nasdaq. I think, at the end of the day, they they remain focused on this this perception that they want to attract quality, that they wanna reduce volatility. They want high investor confidence and sort of mid cap issuers.
One of the requirements is that is that the companies have at least four market makers, which isn't something that necessarily is required on all the other tiered exchanges. So they really want, you know, big companies with a market cap, with earnings that have real market makers, not companies that that are there without a following, without without someone making a market in the stock. So I think that that's a good signal for, for potential companies looking for, you know, a real following. But, look, remains to be seen how it's gonna shake out. We still we talk about the timing a little bit, you know, but we're still in in application mode.
And, I think, initially, what we're looking for is trading to start in 2026, but probably it's gonna be secondary listings first rather than straight IPOs. So I think the first companies you're gonna see list are gonna be companies that are already listed somewhere else on IZ, perhaps foreign listed companies in the Toronto Stock Exchange that wanna get that US listing. And, they may choose because of the energy following in Texas, to list on the Toronto on the on the Texas Stock Exchange in addition to the Toronto Stock Exchange. They're looking to eye IPO windows, opening up in 2027. So we still have some time to see how it all develops.
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Brian Elliot: Do you think, Chuck, the philosophy is behind the approach here? Is this trying to address the perception of fly by night companies and lower quality companies and they want to maintain this high standard to be at or above the other exchanges?
Chuck Kraus: Yeah. I think it is more the identification of there's real plethora of companies in what they've identified as the Southeast Quadrant. I don't think this is about necessarily taking business from New York. I think this is providing an avenue for very large private companies that are in proximity to Dallas who can now have a listing sort of in their backyard. You know?
And there's so many companies redomiciling into Texas, and, I think this provides those companies, sort of a made in Texas solution for capital markets. And they're clearly gaining traction because the other big announcement that we saw a few weeks ago is the Chicago Stock Exchange announced that it was officially, after a hundred and forty three years of being in tech in in Chicago, was moving to Texas and rebranding as NYSE Texas. So I think that is a really interesting move, because it shows that there's real traction and real interest in providing an alternative trading platform in Texas for these companies in the Southeast quadrant of The United States.
Brian Elliot: Well, see corporate relocations all the time. It's interesting to see an exchange relocation at the same time. What do you think it's going to do for sort of local competition for exchanges?
Chuck Kraus: Yeah, I think it's a great thing. It's always a great thing to have competition. Competition makes you stronger. So I actually I love the fact that NYSE's made this move to move the Chicago Exchange to Texas. I think it just it puts more of focus on, you know, if you're looking at a listing, you need to you need to legitimately consider, a listing with one of the Texas exchanges.
It'll be really interesting to see as companies, you know, pursue those dual listings. You also want to be where your peers are. So I've had these conversations with boards of directors about where to where to list. And, you know, you want to be in markets where you will be followed by those who are following your peers, where you could differentiate yourself from your peers, where if you're gonna own, you know, a certain segment, you own all the companies. So I think it's it's gonna be very interesting to see how this becomes really contagious, to use that term, and more and more companies will follow suit.
Brian Elliot: That's great. These are wonderful updates. What should CEOs and GCs be thinking about when they're like, what are the takeaways at this point?
Chuck Kraus: Yeah, I think a couple of things. I think, you know, the first thing you're going see from the Texas Stock Exchange, as I mentioned, is this opening of dual listings. So I think look for if you're a company with a listing on on one exchange, you know, consider the benefit of potential dual listing on that other other exchange. I think also watch capital flows and where equity is being raised, where potential acquisition targets are being listed, and and just what kind of capital they're attracting. I think the other thing we'll wanna watch is the governance signals, as the as these listing standards continue to be refined and compared, if if the the other exchanges make, make amendments to their standards, to move towards what the Texas Stock Exchange has put out.
I think, again, creating that competition and watching your competition respond to your moves is an interesting thing. So I think continue to monitor it, continue to follow y'all street for updates, and we'll we'll keep you updated.
Brian Elliot: Thanks so much for the updates, Chuck. That's great.
Chuck Kraus: Great. Thanks. Always nice, speaking with you. We'll talk to you again soon.
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