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.