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TEXAS STOCK EXCHANGE: WHAT ARE THE BUSINESS IMPLICATIONS OF “Y’ALL STREET”
COMING TO DALLAS?

By Chris Williams, Chair – Corporate Transactional Group, Matt Loeffelholz,
Attorney; and Ekaterina Long, Attorney

TXSE Group Inc., a Delaware corporation based in Dallas, has announced it
intends to launch the Texas Stock Exchange (TXSE) in late 2025 or early 2026
after filing for registration with the US Securities and Exchange Commission
later this year. This endeavor is supported by $120 million in funding from
major Wall Street institutions like BlackRock and Citadel Securities, along with
more than two dozen other investors.

Even with its strong investor backing and the most capital of any exchange
entrant to file with the SEC in recent memory, this new proposed exchange will
likely encounter significant challenges carving out a space among the current
competition. The existing competitors include the two major exchanges, the New
York Stock Exchange (NYSE) and the National Association of Securities Dealers
Automated Quotation System (Nasdaq) which dominate the market. In addition,
there are approximately a dozen other stock exchanges available in the United
States, including the Boston Stock Exchange, Chicago Stock Exchange, Miami Stock
Exchange and Philadelphia Stock Exchange.

The point? With NYSE and Nasdaq having established dominance in the U.S.
listings market, and other regional markets filling their particular niches,
questions arise as to what market the TXSE intends to serve, how it will
differentiate itself from the current exchanges and whether it can successfully
carve out its own niche.



MARKET FOR A NEW EXCHANGE

Declining Number of Public Companies

Because a stock exchange’s customer base is publicly listed companies, one
challenge the TXSE will face is the declining number of public companies in the
U.S. The number of public companies peaked in 1996 and has steadily declined
since that year. Data from the Center for Research in Security Prices has shown
there were more than 8,000 public companies in 1996 and only approximately 3,700
in 2023. Major factors behind this decline include the increased cost and
regulatory burden of being a public company and the shift to more private
financing from private equity and venture capital. Because of the expanded
availability of private capital, many companies who might have gone public in
the past now choose to stay private and avoid the scrutiny of the public eye and
markets.

In the eyes of private companies, the current stock exchanges have bent to
market demand by imposing restrictions and requirements on its listing
companies, which led to intense reporting requirements, higher litigation
expenses, costly regulations, overbearing board governance, shareholder
activism, and the pressure of quarterly earnings. TXSE Group noted in a press
release that it “hopes to help relieve some of that burden”, which may
facilitate more private companies going public with TXSE.

Competition

With its potential customer base of public companies essentially in decline for
years, the TXSE will have to compete with more established exchanges for
listings. While companies may be able to “dual list” on more than one exchange,
currently listed companies will need to examine whether the increased compliance
requirements and additional cost will be justified. If TXSE’s listing standards
are lower than those of other exchanges, it could provide an attractive
alternative. However, this new exchange may have to utilize an untapped market
of private companies to obtain primary listings that will be required to compete
with NYSE and Nasdaq and TXSE has stated it plans to use its differentiating
factors to entice privately held companies to enter the public market with
initial public offerings. Whether or not this strategy proves successful will
largely depend on the state of the U.S. capital markets when TXSE begins
operations.



DIFFERENTIATORS

Geographical Focus

TXSE Group founder and CEO James Lee provided a statement that, “Texas and the
other states in the southeast quadrant have become economic powerhouses.
Combined with the demand we are seeing from investors and corporations for
expanded alternatives to trade and list equities, this is an opportune time to
build a major, national stock exchange in Texas.” The group added it was hoping
to benefit from the more than 5,200 private equity-sponsored companies in the
region that may want to go public, as well as more than 1,500 publicly traded
companies throughout the region.

TXSE is focused on a geographic region that may provide “local” support from
businesses located in Texas and the southeast quadrant of the United States,
however, the days of the physical trading floor are a thing of the past. Stock
trading has become a digital industry where traders around the world are
digitally connected to every exchange, not grounded to a physical location or
bound to a single exchange at one time.

TXSE will be entirely electronic, but it plans to have a physical presence in
downtown Dallas, said Lee. The question remains whether the geographic center of
Texas brings any competitive advantage to this new exchange.

Listing Requirements

In its press release, TXSE wrote, “corporate issuers and exchange-traded product
sponsors are demanding more stability and predictability around listing
standards and associated costs.” As all current exchanges do, TXSE will have its
own unique listing requirements for companies that wish to join. If TXSE removes
the burdens of some market-demanded requirements and streamlines the cost
structure to list, it may be a competitive advantage that draws more listings.

However, even if the listing requirements are reduced, there are still those
overarching SEC rules and regulations that apply to all publicly traded
companies. TXSE and its listed companies will still need to comply with all of
these SEC rules and regulations, so it will not necessarily be a “wild west”
situation where listed companies will be free of most regulations.

Potential Securities Law Disputes

If the TXSE chooses to implement more reduced or relaxed listing requirements,
this could result in increased private securities litigation or SEC enforcement
actions. If TXSE-listed companies are viewed as being subject to more relaxed
compliance policies, investors or regulators may subject those companies to even
greater scrutiny for potential securities law violations.

If a company is suspected of violating securities law, it may trigger the SEC
investigation. Depending on a violation, the SEC can involve the Department of
Justice and FBI in the investigation. The companies may thus face civil and
criminal liability under several federal statutes, including, among others, the
Securities Act of 1933, the Exchange Act of 1934, the Investment Company Act of
1940, Sarbanes Oxley Act of 2002, the Foreign Corrupt Practices Act, Dodd-Frank
Wall Street Reform & Consumer Protection Act, and the Racketeer Influenced &
Corrupt Organizations Act.



IMPACTS: DUAL LISTINGS, IPOS AND LAX LISTING STANDARDS

This new stock exchange provides plenty of opportunities for all parties
involved, but various parties will be impacted in different ways.

Existing public companies can dually list on this new exchange to dip into a new
pool of public investors. It is rare for a public company to change its primary
listing to a different exchange without being asked to leave its current
exchange, however some companies may explore the transition to an exchange with
less requirements.

Private companies that are looking to go public may benefit from the less
onerous regulation from less stringent listing requirements, shareholder
scrutiny, and other standards set by the current exchanges. The SEC rules and
regulations will still apply, but listing can be a way to expand with public
money while maintaining some semblance of private control.

It will be interesting to see how institutional investors and the investing
public react to potentially more lax listing standards. Institutional investors,
as more risk adverse investors who wish to maintain control over their
investments, may shy away from these opportunities because of the reduced
scrutiny. As for the investing public, the idea of taking the politics out of
the listing requirements may be enticing.

James Lee addressed these impacts by stating that, “TXSE will ultimately create
more competition around quote activity, liquidity and transparency, resulting in
more consistent and reliable markets that benefit investors, global issuers and
liquidity providers alike.”



FINAL THOUGHTS

TXSE appears to have its sights set on a clear goal of creating more competition
for the U.S. capital markets and has identified what it feels to be competitive
advantages to establish itself as a contender among the other U.S. stock
exchanges. There are challenges ahead, including overcoming the decline of
public companies, expanding past a regional focus, and balancing listing
requirements with pressures from investors. To overcome these challenges, TXSE
will need to rely on the strong backing of its investors and lean into what
makes it different from the established stock exchanges.




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