Michigan has become the first state in the country to enact a law allowing the modern equivalent of a local stock market. The Michigan Investment Markets bill went little noticed. But it revives a forgotten American tradition that once fueled economic growth — and perhaps could again.
The United States was once teeming with local stock markets. Boston, Baltimore, Milwaukee and San Francisco were among the earliest to establish exchanges. From 1863 to 1930, as America expanded, at least 24 stock exchanges debuted, from Richmond, Va., to Salt Lake City to Honolulu.
The exchanges were important institutions in their communities, both socially and economically. Their member-brokers were often prominent citizens, and they offered shares of native businesses to local investors. The Seattle Exchange listed Olympia Brewing Company and the Alaska Pacific Salmon Company, while the Cincinnati Stock Exchange nurtured growing Midwestern businesses, including Kroger, a local grocer with 40 stores that went public in 1902, and a soap maker called Procter & Gamble that listed on the exchange a few years later.
In Michigan, the Detroit Stock Exchange helped rev up the infant auto industry in the early 1900s, providing growth capital to innovative start-ups like General Motors and the Maxwell Motor Company (now Chrysler).
Then came the Securities Acts of 1933 and 1934, landmark legislation that, in the wake of the 1929 stock market crash, imposed stringent registration and reporting requirements on publicly traded companies. That hurt the local exchanges. As a Time magazine article from 1936 explained: “Because a listing on a small exchange requires the same painful revelations as on the New York Stock Exchange, corporations tended to seek listing there in addition to a listing on a local market. When that happens local trading generally begins to dry up.”
Advances in communications technology only hastened the shift, until one by one, the local markets merged or closed. The Standard Stock Exchange of Spokane, a mining-heavy market, was among the last of its kind to close, in 1991.
Today, the local exchanges are long forgotten. The modern financial markets that replaced them are global and efficient, but they no longer serve the growing regional companies that they once did.
The costs of going public have risen. While $10 million initial public offerings were commonplace 25 years ago, the median initial stock offering soared to around $140 million in recent years. David Weild IV, chief executive of IssuWorks and a former vice chairman of Nasdaq who has researched the decline in small-company capital formation, has argued that the public markets are effectively closed to 80 percent of the companies that need them.
As for investors, they’re left to choose between putting their money in a market that is subject to the whims of high-frequency traders and short-term speculators, or under the mattress. Many would like to be able to invest in local and regional growth companies that benefit their local economies.
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Which brings us back to Michigan. The Michigan Investment Markets bill does not create a new stock market. It modifies existing law to provide a regulatory framework that an intrastate market can operate within. The markets would be regulated at the state level as broker-dealers, and would deal solely with Michigan-based investors and securities.
The law follows on the heels of the Michigan Invests Locally Exemption (MILE), which went into effect earlier this year. It allows any Michigan-based company to raise up to $2 million in a 12 month period, with a financial audit or review (or $1 million without such disclosure), from any resident of the state through crowdfunding.
Source: Funding Roots