What Local Stock Exchanges Might Look Like

Last month I mentioned that one big idea I expect to see take shape in 2010 is local investing: a way for ordinary investors to direct part of their savings to local businesses that need capital, the same way retail investors can now buy shares in global corporations.

John Katovich, an attorney in Boston, is working on ways to make local investing a reality. Katovich is a veteran securities lawyer and entrepreneur with years of experience working with stock exchanges, starting at the Pacific Stock Exchange in San Francisco in 1983. At the time that market still traded stock issues of local companies that were not listed on national exchanges. (The Pacific Exchange has since been absorbed into the New York Stock Exchange Group.)

Katovich sees reviving local exchanges in some form as a way to connect business owners with their communities and provide capital to companies that reach a certain size and hit funding constraints. At a certain point, firms that need capital to expand but don’t have the growth potential needed for an initial public offering hit a wall. The the only equity financing available may be from private equity groups that don’t align with the company’s long-term goals. Some of these are family-owned firms or partnerships where some of the owners are ready to get out of the business. “A company like that gets to a point where they end up either selling it, or the founder’s children have disagreements, or they want to grow and they really hit their limit in terms of debt,” Katovich told me. Local exchanges, he says, could provide a way for members of a community to help capitalize a business in this situation.

Katovich thinks local stock markets will provide patient capital for businesses. Because they’re market caps would be tiny by Wall Street standards, the companies wouldn’t be attractive to speculators, high-frequency trading, and the like. “We’re talking about little companies that will never be listed on major national exchanges,” he says. Investors could park some small piece of their savings in local stocks for long periods, enjoying the returns both in their portfolios and the economic benefits to their communities.

There are real hurdles to making this happen. Securities laws dating back to the 1930s designed to protect investors make it expensive and difficult for companies to issue shares to the public. Any system where investors trade shares of local companies on the secondary market would likely have to be a licensed exchange.

But if local exchanges became commonplace, they could bolster certain types of businesses that have limited options to raise capital today. Katovich’s idea is similar to Woody Tasch’s Slow Money initiative, which is focused right now on financing local food ventures. A crucial aspect of both is connecting local businesses with communities in a new way — not just as consumers or employees, but as small partners who have a vested interest in seeing local companies succeed.