    [House Hearing, 106 Congress]
    [From the U.S. Government Publishing Office]

           GOING PUBLIC--THE END OF THE RAINBOW FOR A SMALL BUSINESS?

    =======================================================================

                                    HEARING

                                   before the

                                SUBCOMMITTEE ON
                       GOVERNMENT PROGRAMS AND OVERSIGHT

                                     of the

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                   __________

                        WASHINGTON, DC, OCTOBER 14, 1999

                                   __________

                               Serial No. 106-35

                                   __________

             Printed for the use of the Committee on Small Business

                        U.S. GOVERNMENT PRINTING OFFICE
    60-694                      WASHINGTON : 1999

                          COMMITTEE ON SMALL BUSINESS

                      JAMES M. TALENT, Missouri, Chairman
    LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
    JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD,
    DONALD A. MANZULLO, Illinois             California
    ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
    FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
    SUE W. KELLY, New York               BILL PASCRELL, New Jersey
    STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
    PHIL ENGLISH, Pennsylvania           DONNA MC CHRISTENSEN, Virgin
    DAVID M. McINTOSH, Indiana               Islands
    RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
    JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
    JOHN E. SWEENEY, New York            DENNIS MOORE, Kansas
    PATRICK J. TOOMEY, Pennsylvania      STEPHANIE TUBBS JONES, Ohio
    JIM DeMINT, South Carolina           CHARLES A. GONZALEZ, Texas
    EDWARD PEASE, Indiana                DAVID D. PHELPS, Illinois
    JOHN THUNE, South Dakota             GRACE F. NAPOLITANO, California
    MARY BONO, California                BRIAN BAIRD, Washington
                                         MARK UDALL, Colorado
                                         SHELLEY BERKLEY, Nevada
                         Harry Katrichis, Chief Counsel
                      Michael Day, Minority Staff Director

               Subcommittee on Government Programs and Oversight

                     ROSCOE G. BARTLETT, Maryland, Chairman
    MARY BONO, California                DANNY K. DAVIS, Illinois
    PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
    RICK HILL, Montana                   CHARLES A. GONZALEZ, Texas
                            Nelson Crowther, Counsel

                                C O N T E N T S

                                  ----------
    Hearing held on October 14, 1999

                                   WITNESSES

                                                                       Page
    Lane, Brian, Director, U.S. Securities & Exchange Commission.....     4
    Wall, John, President & CEO, National Association of Securities
      Dealers, Inc...................................................     7
    Moe, Michael, Director, Merrill Lynch & Company..................    10
    Ellison, Keith, Interim Director, The Wharton School, University
      of Pennsylvania................................................    12
    Dankberg, Mark, President and CEO, ViaSat, Inc...................    14

                                    APPENDIX

    Opening statements:
        Bartlett, Hon. Roscoe........................................    33
    Prepared statements:
        Lane, Brian..................................................    35
        Wall, John...................................................    50
        Moe, Michael.................................................   187
        Ellison, Keith...............................................   194
        Dankberg, Mark...............................................   201
    Additional material:
        Written statement of the North American Securities
          Administrators' Association................................   209

           GOING PUBLIC--THE END OF THE RAINBOW FOR A SMALL BUSINESS?

                                  ----------

                           THURSDAY, OCTOBER 14, 1999

                      House of Representatives,
                           Committee on Small Business,
             Subcommittee on Government Programs and Oversight,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:00 a.m., in
    room 2361, Rayburn House Office Building, Hon. Roscoe Bartlett
    [chairman of the subcommittee] presiding.
        Chairman Bartlett. Let me call to order the Subcommittee
    for Government Programs and Oversight of the Small Business
    Committee.
        I'm sorry that I was a few minutes late. C-SPAN just spent
    a half hour with us talking about this subject. That was much
    appreciated because the goal of our hearing today, the purpose
    is simply to provide information to small businesses concerning
    the process of going public.
        And now, in addition to the information made available
    through this subcommittee hearing, we have the audience of C-
    SPAN who knows that we're holding the committee hearing and who
    now knows something about how to go about getting information
    for going public.
        It's a pleasure to welcome you to this hearing of the
    Subcommittee on Government Programs and Oversight of the House
    Small Business Committee. I would especially like to thank
    those of you that have traveled some distance to participate in
    this hearing.
        For many small businesses or a company that has begun as a
    small business, going public can be the end of the rainbow, the
    culmination of years of hard work and substantial monetary
    reward for the owners of the business.
        Few entrepreneurs going into business have not dreamed of
    going public and being a company listed on a stock exchange.
    This incentive may well be a major factor in the formation of
    business enterprises and contribute to continued economic
    growth.
        As a nation of opportunity, innovation and invention,
    business formation should be encouraged. A number of factors
    need to be considered by businesses considering whether to go
    public. It is anticipated that this hearing will provide some
    of the answers to these questions.
        The panel of witnesses that are invited to this hearing
    were carefully selected for their recognized expertise in the
    process of listing and selling securities on a public exchange.
    Your testimony and the testimony of the other panel members is
    a vital public service to businesses, both large and small,
    throughout this country.
        The committee is hoping to have as broad a distribution of
    the testimony in electronic and hard copy form as is possible.
    Both public and private assistance is available to businesses
    considering going public. And it is hoped that the hearing will
    provide a public forum for communicating those sources of
    information to businesses.
        The committee is always open to suggestions of ways how to
    improve or expand, where needed, federally funded information
    sources and assistance. The committee would also appreciate new
    legislative proposals.
        The creation and expansion of small businesses are the fuel
    which has generated and is sustaining our current economic
    growth. America is the most prosperous nation in the world
    because our stock market encourages the creation of wealth by
    efficiently directing capital from individual investors to
    reward both the investors as well as the entrepreneurs,
    inventors and innovators who produce and distribute new and
    better products and services to meet people's needs.
        Again, welcome to our participants and guests. I look
    forward to hearing your testimony on this most important
    subject.
        And I'd like also to welcome here on the dias my good
    friend Duke Cunningham from California. And one of our
    witnesses is in his district and we'd like to give him the
    opportunity now of introducing this witness.
        Mr. Cunningham. Thank you, Chairman Bartlett and Ranking
    Member Davis. I want to thank you for the opportunity to
    introduce Mark Dankberg.
        Mark is the Chief Executive Officer of ViaSat headquartered
    in Carlsbad, which is right in the heart of my district, the
    North County of San Diego. ViaSat's is a high tech company
    specializing in ultra high frequency communications for
    satellite.
        Before this hearing I was talking to Mark. He went to Rice
    University and graduated in electrical engineering. But even
    more important, he started ViaSat in 1986 in a spare bedroom in
    his house. The number of his employees quickly rose. Ten years
    later, he took it public, which this hearing is about.
        But by then, he had created almost 400 jobs and ViaSat had
    annual sales of more than $70 million. Today ViaSat continues
    to be one of our community's leading companies and annually
    generates more than $72 million dollars in revenue and has a
    strong workforce.
        Besides his work at ViaSat, Mark is an active member of our
    San Diego community. He serves on the Board of Directors for
    San Diego Telecom Council and is a member of the San Diego
    County Council Regional Economic Task Force. He also is on the
    Board of Directors at REMEC, a publicly traded manufacturer of
    microwave products in San Diego, and Connected Systems, a
    privately held high tech firm in Santa Barbara.
        Mark's a winner, a successful businessman. And I'm excited
    to meet John Wall, who I just met here this morning, of NASDAQ.
        But I thank you for the opportunity to introduce Mark
    Dankberg and listen to his testimony, Mr. Chairman.
        Chairman Bartlett. Thank you very much. Let me now
    recognize Congressman Davis for his comments.
        Mr. Davis. Thank you very much, Mr. Chairman. And let me,
    first of all, commend you for calling this hearing.
        I also want to commend you for the outstanding job that you
    just did on C-SPAN not only in terms of answering questions
    related to the subject matter, but also I appreciated the deft
    way that you handled those that were unrelated.
        I really think that you did an outstanding job and wanted
    to say that to you.
        It's also a pleasure to note the presence of our
    distinguished colleague, Mr. Cunningham, who is an outstanding
    leader and member of the Congress. And, you know, there are a
    lot of folks who wish they had the high tech valleys and
    communities to represent.
        I always say that San Diego has to be the most beautiful
    city in this country, with due respect to all of the other
    places, including where I live.
        But Mr. Chairman, as you know, I'm very concerned about
    small and very small businesses and the critical role they play
    in the nation's economy. The country's 22 million small
    businesses employ more than half the nation's work force and
    produce more than half of its gross domestic product.
        Small businesses are the source of most new jobs and most
    of the innovation in our economy. On the back of the dollar
    bill, there is an unfinished pyramid with a brilliant, glowing
    eye at the top. It comes from the back of the great seal of the
    United States and it was placed on the dollar bill by President
    Roosevelt in 1935.
        In the middle of the Great Depression, when the growth of
    America was in sharp decline, the pyramid was meant to
    represent economic strength and durability. The pyramid is
    unfinished to symbolize the constant struggle to keep our
    economy strong.
        But I think that's what the exploration of small businesses
    going public actually is a part of, and that is a part of the
    continuing effort to find new ways, new approaches, new
    opportunities, new possibilities for the American people to
    become an integral part of the ownership of the greatness of
    our nation.
        When the concept first sort of began to emerge, I had some
    thoughts and reservations about it. But then, the more deeply
    that I thought about it, it occurred to me that what we're
    really talking about are ways for individuals to become a part
    of the ownership of something that, in all likelihood, they may
    never do individually.
        And that's why I'm such a great proponent of ESOPs; that
    is, the employee owned businesses. And I guess that's why I
    ride the airlines sometimes that I do. But it's really a great
    concept. You're to be commended for giving us the opportunity
    to look at it.
        I certainly want to add my welcome to the distinguished
    panel of witnesses and look forward to a great hearing.
        Thank you very much.
        Chairman Bartlett. Thank you very much.
        I'd just like to comment on one of the observations you
    made, and that was that small businesses and very small
    businesses provide most of the new jobs. I mentioned this on C-
    SPAN a few moments ago. I'd like to repeat it here for the
    record.
        And I couldn't believe these data until they were confirmed
    to me. When we came out of the last recession, if you divide
    our companies into categories relative to size from the largest
    down to the smallest, companies of 5,000 and more employees
    produced a few new jobs to bring us out of the recession.
        No other group of companies, until you got down to the
    smallest, produced any new jobs. And 90-some percent of all the
    new jobs produced when we came out of the recession were
    produced by companies with zero to four employees.
        Now that's small companies. And you know, Microsoft started
    just that way, in a garage in New Mexico, I think, and they
    went public and look where they are today. And so small
    business is not only the energy that drives our society, it's
    the engine that produces most of the new jobs when we need new
    jobs.
        And the focus of our hearing today is simply to make public
    the requirements, the benefits, the rewards, the challenges of
    going public.
        Let me welcome our witnesses: Mr. Brian Lane, Securities
    and Exchange Commission from here in Washington; Mr. John Wall,
    National Association of Securities Dealers, Washington; Mr.
    Michael Moe, Merrill Lynch & Co.; Mr. Keith Ellison, the
    Wharton School, University of Pennsylvania; and Mr. Mark
    Dankberg, who has already been introduced to us.
        I want to thank you all very much for joining us, and we'll
    start now with Mr. Brian Lane.
        Let me say that your testimony will be made a part of the
    record and you can feel free to summarize. And then when you
    have all finished, we will have an opportunity for questions
    and answers and we'll invite participation of the panel in
    addressing the concerns and the testimony of other panel
    members.
        We'll begin now with Mr. Brian Lane.

       STATEMENT OF BRIAN LANE, DIRECTOR, DIVISION OF CORPORATE
            FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION

        Mr. Lane. Thank you, Mr. Chairman, members of the
    subcommittee.
        My name is Brian Lane. I am the Director of the Division of
    Corporation Finance at Securities and Exchange Commission. And
    the Division of Corporation Finance, through its Small Business
    Office, is at the forefront of the Commission's efforts to help
    small businesses and deal with the regulation on going public.
        What I thought I would do in my oral remarks is summarize
    very briefly the mechanisms that exist for small business, the
    regulatory mechanisms for going public, and take a few moments
    to mention some of the special programs that we have at the SEC
    and outreach that we've done for small business.
        As you noted, small businesses need to raise capital, but
    the capital raising process is a difficult one, as you'll hear
    from other members of the panel here. Initially, small
    businesses are going to be raising capital from friends and
    family and from personal savings.
        Then the entrepreneur may seek loans from others. If funds
    are sort of sought through the sale of securities to the
    public, the SEC has what's called a Seed Capital Rule, Rule
    504, which allows an entrepreneur to raise up to one million
    dollars free from federal registration.
        They would still have to satisfy state registration
    requirements. And they're permitted to raise up to one million
    dollars in a 12 month period without having to worry about
    registering with us. Obviously they would be still subject to
    the anti-fraud rules though, the federal anti-fraud rules.
        If a company wants to sell stock in a non-public manner--
    for example, to a so-called angel investor or someone like a
    venture capitalist or something like this--they're permitted to
    raise unlimited amount of money without registering with the
    SEC.
        This is the so-called Private Placement Exemption. In the
    federal securities laws, the investors receive restricted
    securities. It is the difference that entrepreneurs find with
    the private placement route.
        If a company decides that it wants to raise money by
    selling securities to its employees, you heard about ESOPs in
    the opening program, note that the Commission adopted a rule,
    Rule 701, which allows companies to sell--non-public, private
    companies to sell securities to their employees with no cap.
        It used to be up to a five million dollar cap. But they can
    sell at a minimum of one million, regardless of their size, to
    their own employees. If they sell over five million in the year
    to their employees, they have to provide some minimum
    disclosure documents.
        So again, we give significant breaks to small companies
    selling to their own employees who already have some knowledge,
    working knowledge, of the company and, therefore, are in a
    better position than just strangers to know about the company.
        The next step in the company's growth process is to sell
    securities to the public. If a company wants to raise more than
    one million dollars a year beyond the seed capital exemption
    but less than five million dollars, they can use what we call
    Regulation A, which is an exemption from the registration
    requirements and it has many advantages.
        It has reduced reporting requirements. It permits unaudited
    financial statements, no ongoing reporting obligations, and it
    permits what we call a ``testing the waters'' provision.
        Because the federal securities laws regulate offers rather
    than sales, people are generally prohibited from just walking
    up without a registration statement to say ``if we wanted to
    sell securities, might you be interested in investing in our
    company.''
        You can't do that unless you have a registration statement
    on file with the SEC. But under Regulation A, you are permitted
    to test the waters in advance; to go, before you spend money on
    hiring accountants and lawyers and all of that, that you could
    walk around to your suppliers, your customers, whatever and say
    ``might you be interested'' and give some the details on that.
        So that's been a very popular program as well, and it's a
    very streamlined form to raise up to five million dollars. If
    you want to go over five million dollars, this is sort of the
    next step of the evolution, we have what we call Regulation SB,
    the initials for obvious reasons.
        And that system is available for any U.S. or Canadian
    companies that have less than $25 million in revenues and less
    than $25 million dollars in public float, sort of the market
    capitalization that's held by the public out there. That's what
    we consider at the SEC a small business to be eligible to use
    this sort of streamlined disclosure regime.
        And they can continue to use it repeatedly as long as they
    stay under the $25 million dollar thresholds. If they exceed
    the $25 million thresholds, then they have to go and file like
    other public companies, the more complete form.
        In the past fiscal year, just in the past fiscal year,
    almost five billion dollars has been raised on Form SB2, which
    allows raising up to an unlimited amount of dollars under
    Regulation SB. It has some streamlining, but it's very close to
    typical prospectus that you would see in a public offering.
        So this is just an indication of how popular the program
    has been for small businesses to actually raise money.
        That's kind of the--sort of the graduation from a small
    business into a regular public company. Let me just take the
    last few moments to tell you about some of our special programs
    that we do for small business because we do reach out to the
    small business community to better tailor our regulatory
    system.
        We host the only annual Federal Government sort of national
    small business gathering. We do once a year and we've had it
    since 1982 where small businesses can come and tell federal and
    state regulators how they need to change the rules and
    regulations and how they impact them.
        So we have been doing this now for 17 years. And many of
    these recommendations that we have gotten from these annual
    forums have led to SEC action in changing rules and making them
    easier, things like Rule 701, to sell to your employees, and
    other sorts of rules.
        Since 1996, when I became director, we have significantly
    expanded our Office of Small Business. And they review all the
    small business filings, so we now have a special unit that does
    nothing but review small business filings.
        I have some of the staff behind me that work in that
    office. They do nothing but spend that time. And it is really a
    group that takes the extra time because small businesses
    sometimes have more questions about how the regulatory
    structure works than General Electric, for example.
        So we have that. They also direct all the small business
    rule making, interpretations, and answer all the phone call
    questions. We also host town hall meetings across the country.
    This has been a recent development. We have had 13 town hall--
    small business town hall meetings in the last three years where
    we go around to Kansas City, Austin, St. Louis and basically
    just do what we are doing here today: tell people how the
    regulatory system works.
        We usually invite the state regulator, the state securities
    commissioner, and we invite the SBA representative to come to
    talk about their loan program. And small businesses have to
    know about state registration because they do have to register
    with the states if they are really small.
        And so we have found that to be really useful. And last I
    will mention that we have a web site with special small
    business information and we put out a pamphlet that we put out
    here on the table that is called ``Q&A: Small Business in the
    SEC,'' which we wrote in plain English, which is something that
    we're pushing for in prospectuses.
        Everything you need to know about what regulations--I just
    talked about today, Regulation SB, what is Regulation A, what
    are my requirements if I go public, what do I have to do, what
    are the considerations. And then phone numbers. You want to
    find out, talk to the state regulators and such, then this is a
    very helpful guide.
        The small business program, ACENet and what have you--and I
    noticed the NASD has a guide here, too, that was on the table
    that looked good about what you need to know.
        So I'm happy to be here today to tell you about these kinds
    of programs and I look forward to your questions.
        [Mr. Lane's statement may be found in the appendix.]
        Chairman Bartlett. Thank you very much.
        Mr. Wall.

       STATEMENT OF JOHN T. WALL, PRESIDENT AND CHIEF OPERATING
      OFFICER, NASDAQ-AMEX INTERNATIONAL, NATIONAL ASSOCIATION OF
                        SECURITIES DEALERS, INC.

        Mr. Wall. Thank you, Mr. Chairman.
        We are delighted to have the opportunity to be here and
    talk to your Committee on Small Business about the very
    important thing of being able to bring companies public and
    seeking public funding for the continued growth of these
    companies.
        Often our citizens don't get a chance to focus on the
    importance of the fact that this country is blessed with strong
    financial markets, actually financial markets that are the envy
    of world financial markets, because our markets have been able
    to produce more what we call IPOs, new companies into the
    public market, than any other market in the world.
        The U.S. dominates this. In Nasdaq alone, since 1989, we
    have brought over 4,200 new companies into the public markets.
    That equals raising over $154 billion dollars in new capital to
    support new businesses.
        This would not be possible, however, without a strong
    infrastructure of the financial services industry, coupled with
    a very strong regulatory structure. The partnership that we
    have in this country between our industry, in terms of self
    regulation, and the Government, in terms of SEC regulation, is
    a very important function because it gives confidence to the
    investors whose money we're seeking to bring into these small
    businesses.
        The customer protection, we believe, is a very, very
    important factor and one that cannot be overlooked when we talk
    about public monies because it is the investor's money that we
    are reaching out to use. We owe the investor information, we
    owe him strong financial information as well as disclosure in
    terms of how companies are doing.
        There are many benefits of going public. Obviously for the
    company, the growth aspects are the most important, the ability
    to go from stage to stage in terms of its own growth, the
    providing of ownership to their own employees and also the
    ability to then use that stock as an asset to acquire other
    companies and to merge with other companies.
        However, if you really look at the true macro benefits,
    there are two that come immediately to our minds and two that
    we have supported since we began Nasdaq. The first is obviously
    job creation. Job creation in the United States, as we heard
    earlier, is something that small businesses do regularly and is
    overlooked.
        There was a study done between 1990 and 1995 that showed
    one out of every six new jobs in the United States was created
    by a Nasdaq company. Nasdaq companies only account for less
    than one percent of all companies in the United States, but
    that job growth and that job creation came from these new
    companies coming into the public markets. If you look at the
    Fortune 500 companies, you will find that they lost over
    200,000 jobs during that same period. So this supports what you
    were saying in your introductory remarks, Mr. Chairman, as a
    very important factor.
        When we created and started Nasdaq, our primary mission was
    capital formation. And coupled with the SEC disclosure rules,
    we opened our market to companies that didn't have profits,
    companies that were just starting.
        But as long as they disclosed to the investing public
    exactly where they stood and how they were functioning, we felt
    that they should have an opportunity to come into the public
    markets.
        I can state that there are full industries that would not
    have been built if it weren't for this willingness to open the
    public markets to companies that did not have profits,
    industries such as the biotech industry, industries such as the
    internet industry.
        And much of our technology industry that has been created
    in the last ten years would not have been founded if we did not
    open our public markets this way. So Nasdaq has been at the
    forefront of this in terms of the IPOs since 1989.
        Over 82% of them came out of the Nasdaq marketplace, and if
    you look at those 4,000 companies, it might be interesting to
    look to see how they were segmented in size. Over 25% of those
    4,000 companies raised only between four and ten million
    dollars. The next 50% raised between $10 and $40 million
    dollars. And then the balance of the remaining 25% raised
    anywhere between $40 million and $4 billion dollars. But the
    preponderance is really in the small area and, as a result, we
    found it was an opportunity to tier our market into two groups.
        We have a small cap marketplace and we have a national
    marketplace. And we do that to bring in small companies to let
    them grow from one tier to the next and also to alert the
    investor that they're dealing either with a small cap company
    or a national market company. The investor should know that
    because obviously there has been, and will be, greater risk in
    some of the smaller companies and they should know that at the
    time they are investing.
        The criteria, or rather the model, of these IPOs is
    interesting. If you look at 1997, we found most of the IPOs
    coming in with an average of about ten dollars in terms of
    public offering price. They raised about $40 million dollars on
    average. They had assets of about $125 million dollars,
    revenues of about $50 million dollars, and overall market cap
    after the offering of about $166 million dollars. So that gives
    you a profile of what we see coming in as IPOs into the
    Nasdaqmarketplace. When you look at this, however, you cannot just look
    at the benefits. You also have to look at the quid pro quos, and it is
    not a one way street. Because when companies reach the public markets,
    they have a responsibility. They are reaching out to individual
    citizens' pockets and they have to give something back. We look at that
    as information.
        They must be willing to not only share the benefits of
    their company, share with the investors that they have brought
    in, but they also have to share immediate information so I, as
    the investor, know exactly what's happening in that company
    that I have put my money in. And obviously that is a change of
    mind set for many managers when they go from a private company
    into a public company.
        Looking at this and looking at the beginning of IPOs in the
    beginning stage of public companies, we also have to take a
    look at the fact that we have a very strong venture capital
    market in this country. Venture capital provides more than just
    money to young companies. It provides mentoring. It provides
    managers who are experienced, who then go on the boards of
    these companies, and who help direct them to the next stage of
    growth, that being an IPO in the public markets.
        Last year, 52% of Nasdaq IPOs came with venture capital
    backing. At that same time, 98% of all of the venture backed
    companies came into the NASDAQ stock market. We find this is a
    very important factor in the growth of the United States in its
    ability to raise capital for young companies.
        As a matter of fact, again, if you look worldwide, that is
    one of the major assets that we have and that is why we see so
    many companies, foreign companies, coming into the United
    States and doing distributions of shares here because in the
    United States our markets are open to this and we are open to
    providing capital.
        Other forms of capital would be angel financing where you
    have individual investors. But one of the biggest changes, and
    growth areas, happens to be corporate ventures where you find
    major corporations now investing in individual companies
    normally along the same segment lines that that company is in,
    whether it be technology, biotechnology, computer peripherals
    or whatever the product is.
        So we are finding new pockets and new avenues for companies
    to raise capital. And again, what we call the beginning stage
    of capital we feel is very important not only because it
    provides the company money, but it also provides them
    tremendous guidance that they need at that stage of their
    growth.
        So we think that the market here in the United States is
    strong, will continue to be strong, and the focus that you're
    putting on this is very beneficial. And it will not only be
    beneficial to new companies, but it will also be beneficial to
    the investors here in the United States.
        Thank you.
        [Mr. Wall's statement may be found in the appendix.]
        Chairman Bartlett. Thank you very much.
        Mr. Moe.

      STATEMENT OF MICHAEL T. MOE, CFA, DIRECTOR OF GLOBAL GROWTH
                     STOCK RESEARCH, MERRILL LYNCH

        Mr. Moe. Thank you, Mr. Chairman.
        I'm delighted to be here this morning to talk about what we
    think is a critical area, and that's a company's ability to,
    and the issues surrounding going public.
        During the 1990s, the U.S. economy in general, and the U.S.
    capital markets in particular, have experienced dramatic
    growth. U.S. equity capital markets have gone from $3.1
    trillion dollars in 1990 to nearly $13 trillion dollars today.
        Technology has been the driver of the new economy, but IPOs
    have really been its fuel. If you look since 1990, there have
    been over 5,000 IPOs in the United States for companies,
    raising $327 billion dollars.
        Since 1990, 15 million jobs have been created, many of
    which were from companies that didn't even exist in the decade
    prior. If you look at the fundamental demand imbalance that's
    been created in the equity markets from the cash in Flows to
    equity mutual funds as well as corporate stock buy backs and
    cash M&A transactions, this has created a significant fuel, if
    you will, to support raising capital for new companies in the
    IPO market.
        With the aging baby boomers saving for retirement, we see a
    net demand imbalance for equities for the foreseeable future.
        The new economy really is a knowledge economy, and
    knowledge economy is all about human capital. A fundamental
    tenet of the new economy is that stock ownership throughout an
    organization is absolutely fundamental and essential.
        Where I live in San Francisco, it is expected that
    everybody from the CEO to an entry level person owns stock in
    the company. And there is an expectation that the stock of
    one's own company will ultimately be a publicly traded company
    and that an IPO is absolutely critical not only for the
    modernization of the success of an enterprise, but as a way to
    attract and retain key talent, which again is absolutely
    fundamental to what's going on in the knowledge economy that we
    are now in.
        Statistically, companies are going public earlier--earlier
    in terms of profitability than we have seen from our records.
    In fact, since 1998, 57% of the companies that went public were
    not making a profit at the time.
        While some of this has to do with the internet, we believe
    some of this has to do just with the realities of how important
    it is to be a public company in the new economy. We also think
    with being a public company there comes a level of expectation
    from public investors which requires two things.
        One is both constant and accurate information to investors,
    but also a performance against expectations that is consistent
    with how investors would expect a public company to perform.
        Just some examples of two key drivers for performance in
    the public markets and what investors look for. One is earnings
    growth, but then the second is earnings growth against
    expectations. Three examples I would like to point out, three
    companies that have been very, very successful in this under
    promising, but over delivering high earnings growth.
        One is a company called Starbucks Coffee, which is now the
    largest coffee provider in the world. They went public in 1992,
    and the expectations for Starbucks were that they were going to
    grow their earnings at 27% per year. Point of fact, they grew
    their earnings at 37% per year and Starbucks stock appreciated
    45% per year since 1992, or a dollar invested in Starbucks is
    worth $16 today.
        Equally impressive, Starbucks' stock ownership goes all the
    way down to even part time employees, through what they call
    their Bean Stock Program, truly a new economy type of company.
        Second example, Apollo Group, which is now the largest
    private university in the country focused on working adults,
    with over 6,000 students on line. Expectations for Apollo Group were
    that they were going to grow their earnings at 25%. They performed at
    50% earnings growth and the stock was actually up 89% per year, or a
    dollar invested in Apollo Group's IPO was worth $22 today.
        The last example, which is an internet example, is with
    Amazon.com, which doesn't make money, so they perform against
    earnings growth isn't relevant. But expectations were that
    Amazon was going to grow their revenues at 69%.
        Point of fact, they delivered 350% revenue growth, and a
    dollar invested in Amazon at its IPO are worth $60 today.
        How do you identify what are key, crucial issues and
    characteristics that investors are looking for in companies
    that are going public and what really makes a great public
    company? One is high earnings growth and the other is
    performance against expectations.
        This idea boils down to four characteristics which we think
    are absolutely crucial that investors are looking for; what I
    call the four Ps for a public company.
        The first P stands for people. There is no shortage of
    interesting business plans or ideas out there, but execution is
    the key. Many of these companies that are going public do not
    have long corporate histories, but the people at these
    companies all do.
        Investors are looking for a management team, first and
    foremost, that they feel can execute and perform to a level of
    the opportunity.
        The second P stands for product. And here what we are
    really talking about is a company that leads an industry, has a
    dominant position within a marketplace, a one of a kind type of
    company, some type of claim to fame. ``Me too'' companies are
    of very little interest to public investors.
        The third P stands for potential. Here, investors are
    looking for smaller companies that can be big companies, open
    ended growth stories, something that is going on that creates a
    tail wind at the back of these companies.
        In this, and through the written testimony, we show a chart
    how investors think about these megatrends that are going on in
    the new economy: globalization, outsourcing, demographics,
    branding, consolidation. And the megatrend of all megatrends,
    the internet.
        And how those cut across the growth sectors of the economy
    we think are very important for how investors look at the
    companies they invest in and really create this tail wind that
    I alluded to.
        And the last P stands for predictability. This is the
    performance against expectations. This is having a business
    model that will allow a company, as a public company, to
    perform as public investors would expect.
        So just in summary, an IPO and being a public company can
    have tremendous benefits for the issuing business. Moreover, in
    the new economy, broad employee ownership and stock options are
    a competitive necessity. We think that the U.S. capital markets
    have provided and will likely continue to provide funding
    liquidity for promising enterprises.
        But critical to that is to be able to have markets that are
    open and equitable. And companies need to have appreciation and
    understanding of what the responsibilities of being a public
    company are.
        Thank you.
        [Mr. Moe's statement may be found in the appendix.]
        Chairman Bartlett. Thank you very much.
        Mr. Ellison.

    STATEMENT OF KEITH D. ELLISON, INTERIM DIRECTOR, WHARTON SMALL
                      BUSINESS DEVELOPMENT CENTER

        Mr. Ellison. Good morning, Chairman Bartlett, Congressman
    Davis, and other members of the subcommittee.
        My name is Keith Ellison and I am the Interim Director of
    the Wharton SBDC, a unit of the Sol C. Snider Entrepreneur
    Research Center at the Wharton School.
        I also represent today the Association of Small Business
    Development Centers, which comprises over 1,000 SBDCs across
    the country, each of which are parts of higher educational
    institutions.
        I would like to thank you for inviting me here today to
    discuss the process of going public and selling securities on
    the stock exchange. The focus I would like to cover today are
    the barriers. But before we go into the barriers, I would like
    to step back and discuss the successes that we have had
    throughout the SBDCs.
        We work with companies like ViaSat in getting them to the
    point where they are ready to go public. In Philadelphia, one
    of our most--one of our high profile clients has been CDNOW. I
    am sure a lot of you are familiar with it.
        CDNOW is the leading player in e-commerce in the music
    industry. Another player is a company that took advantage of an
    exemption through the SEC under Regulation D504. It is called
    Next Step Magazine, which talks about cultural diversity.
        Before we can really go into the barriers of success or the
    barriers of an IPO, and before we can talk about solutions,
    let's talk about what the common definition is of success.
    Let's establish what a definition of a successful IPO is.
        Because a successful IPO means different things to
    different people. To an investment banker or to the
    underwriter, it means buying a block of stock and selling all
    of them to the public for a premium. To a day trader, it means
    taking advantage of the IPO and taking advantage of the hype
    surrounding the IPO and buying it at its low point and selling
    it at its peak.
        To all the other players in the IPO process, the
    accountants, the attorneys, the underwriters, the transfer
    agents, success means different things to different people. My
    point here is that there is divergent interest among all the
    players, among all the parties when you are involved in an IPO,
    which leads to the barriers.
        Barrier one is assembling the IPO team. It is very
    difficult for a small business to find people with the right
    context who can navigate themselves through Wall Street, who
    can speak the language of the SEC to make the process extremely
    efficient.
        And just to add a bit of humor here, finding the right IPO
    team is analogous to a story. It is a story of a fifth grade
    class where the teacher--it was a history class and the teacher
    was talking about how the country was founded and who were the
    players and what were some of the significant dates.
        And so finally, she came to little Johnny. And she says,
    ``Johnny, tell me, who signed the Declaration of
    Independence?''
        And Johnny looks at her and he says, ``I don't know and I
    don't give a heck.''
        And he says, ``Look, young man, you go home right now and
    do not come back to schoolwithout your father.''
        So Johnny goes home. He's trying to explain to his dad why
    he is home so soon. So his dad says, ``Johnny, slow down. Tell
    me what really happened.''
        And he says, ``Well, Dad, she asked me who signed the
    Declaration of Independence. I said I don't know. And she says,
    `Well, do not come back to school without your father.' ''
        So his father looks at him and he says, ``Well, look. I am
    going to go down here and straighten this out. But if I find
    out that you signed that darn thing, you are going to be in
    serious trouble.'' [Laughter.]
        That is analogous to what an entrepreneur faces when they
    are trying to find the right accountant, the right attorney,
    the right printer, the right board members, the right advisors
    who can guide them down the path to meeting the right
    investors.
        And therein lies the problem or part of the problem. But it
    is not just the players. It is also the experience of the
    entrepreneur. Because to go public, as my distinguished
    panelist said, you look at the people, the people who are going
    to take the company to the next level.
        And that is where the role of the SBDCs across the country
    play. We educate and we train entrepreneurs to get to that
    point where they can matriculate through the early stages where
    someone is using their own money or the money of a rich uncle,
    to the point where they can get an SBA backed loan or an angel
    investor, to the point from there to a venture capitalist, and
    then to go public.
        It is that point--that process where SBDCs have the
    greatest impact. To underscore my point about having context,
    one of the greatest examples was Joe Segel, founder of QVC and
    also founder of Franklin Mint. Joe Segel, in 1986, took the
    company public, took QVC public based on a business plan and,
    of course, his reputation in the context that he has--or he
    had.
        There are few Joe Segels of the world. And so again, that
    is just one example of the importance of where the emphasis of
    the person and how much credence that person brings to taking a
    company public.
        Barrier number two, which is most likely the biggest
    deterrent, is the cost. It is very common, during the IPO
    process, for a business to spend half a million dollars from
    the time that they are planning--from the point that they say
    let's go public until it is wrapped up.
        And that is an extreme deterrent. Not everyone can raise
    that kind of capital.
        Barrier number three is continuous distractions. An
    entrepreneur should be doing what an entrepreneur should be
    doing. That is running a business. And unfortunately, because
    of all the right reasons, sticking to the strict rules of the
    SEC--and when I say all the right reasons, I mean proper
    disclosure, public protection.
        Because of those reasons, it is an emotional drain, it is
    an energy drain, and it distracts an entrepreneur from running
    his or her business when they are coordinating with all the
    other IPO team members and when they are communicating with the
    SEC.
        So, in summary, barrier one is assembling the IPO team.
    Barrier two are the cost barriers. And barrier three, again,
    are the continual distractions. And I must repeat those are the
    areas that the SBDCs of the world play the biggest--have the
    biggest benefit for entrepreneurs.
        Again, I would like to thank you for allowing me to present
    today, and I look forward to being a part of the process moving
    forward.
        Thank you.
        [Mr. Ellison's statement may be found in the appendix.]
        Chairman Bartlett. Thank you very much.
        Mr. Dankberg.

       STATEMENT OF MARK DANKBERG, PRESIDENT AND CHIEF EXECUTIVE
                         OFFICER, VIASAT, INC.

        Mr. Dankberg. Good morning. Thank you very much, Mr.
    Chairman, ladies and gentlemen. And thank you very much for the
    opportunity to tell ViaSat's story. It is really an honor for
    us to be here at all.
        I have submitted a written statement for the record and
    would like to summarize some key points here.
        We think we are a prototype of the American success story.
    Steve Hart, Mark Miller and I started the company in 1986
    working out of a spare room in my house. We have grown in sales
    every year and we have been profitable every year after the
    very first year.
        ViaSat's now headquartered in Carlsbad, California, near
    San Diego, and employs about 400 people with sales over $70
    million dollars for the fiscal year that ended March 31st of
    this year. We are a high tech company specializing in advanced
    digital communications products and systems.
        Generally we compete with and work with companies like
    Motorola. Most of our products involve satellite communications
    networks, and ViaSat serves customers around the world
    including the U.S., Europe, Asia, Australia and Africa.
        And we even have satellite communications equipment on Air
    Force One. Most of our business is in defense, but our fastest
    growing segment is commercial satellite networking. We started
    as a self funded start up with about $25,000 from the three of
    us.
        We later raised about $300,000 in venture seed funding, and
    then, a few years later, got a commercial bank line of credit.
    We ended up doing about a $20 million dollar public offering in
    December of '96 and are listed on NASDAQ.
        We believe the American entrepreneurial environment is the
    best in the world. We think we are a good example that our
    system works; that public and private resources available to
    entrepreneurs, combined with hard work, dedication and at least
    a little bit of luck, offers real opportunities to live the
    American dream, starting a company and taking it public.
        The Government Small Business Innovation Research Program,
    known as SBIR, was a big enabler for growing our company to the
    point it could go public. We think we have been one of the most
    successful companies at converting SBIR seed R&D funds into
    commercially viable phase three business.
        We think the SBIR program is probably the single most
    effective Government program for fostering both the growth of
    small business and for innovation. Our first direct Government
    program was actually a $50,000 SBIR phase one contract for a
    communications environment simulator for the Naval Air Warfare
    Center at Patuxent River Naval Air Station in Maryland back in
    1987.
        That $50,000 phase one earned us an additional $500,000
    phase two contract. But since then, we have received over $40
    million dollars in phase three contracts from the Navy, Air
    Force and prime contractors like Lockheed Martin for products
    we developed directly from that initial award and we still do
    work for the same customers.
        Plus, we estimate that the DOD saved about $40 million
    dollars because of the technology thatwe developed under that
    SBIR program. And we have been able to repeat that success in a couple
    other business areas generating over $100 million in contracts with
    similar savings to taxpayers.
        Building on that foundation, ViaSat reached about $20
    million per year in sales and close to about $2 million in
    pretax profits in our fiscal '96, the year we went public. We
    had also earned a small foothold in commercial satellite
    networks.
        We found the process of going public to be straightforward,
    but very time consuming. Probably the single biggest factors
    though in dealing with that are the volatility of the stock
    markets and the global high tech product markets, which greatly
    influenced the timing and reception for an IPO.
        We found the SEC, in particular, to be positive and
    constructive to work with in assembling our offering documents,
    with the big issue really being to present a fair and balanced
    view of both the opportunities and risks of investing in our
    company.
        We have been public for about three years. We felt like we
    had a good understanding of the changes that would be involved
    in being a public company. But I would say that the reality has
    probably been a little ``more''--with ``more'' of almost
    everything in terms of time consuming than we anticipated.
        Not that that is due to anything necessarily bad or
    bureaucratic. It is just something that every company ought to
    be aware of.
        Overall, I would say that the company and its investors
    have had a positive experience. Well, the company has, and I
    hope our investors have. And I believe access to the public
    markets is a big advantage to American entrepreneurs.
        Thank you once again for providing an opportunity to tell
    our story here.
        [Mr. Dankberg's statement may be found in the appendix.]
        Chairman Bartlett. Thank you very much.
        Washington is full of acronyms and you all have used some
    acronyms in your presentations. I would just like to get on the
    record what some of these acronyms stand for.
        IPO? Just about every one of you used IPO and I do not
    think any one of you defined it for the readers. IPO is what?
        Mr. Wall. Initial public offering.
        Chairman Bartlett. Okay, initial public offering. That is
    when you go public, okay?
        SBDC? I am really pleased that two of our witnesses
    referenced the good help that the Small Business Administration
    had been to them. SBDC is what?
        Mr. Ellison. Small Business Development Center.
        Chairman Bartlett. Okay, and they are located where?
        Mr. Ellison. There are a little over a thousand across the
    country. Most of them are parts of universities. In fact, I
    believe close to 99% of them are parts of universities. The
    Association of Small Business Development Centers is sponsored
    by the SBA, and they are headquartered in Virginia.
        Chairman Bartlett. And their function is what?
        Mr. Ellison. The function is to assist emerging businesses
    with management consulting, which means assisting with business
    plans, overall operational issues, helping them grow the
    business, helping them reach their milestones, as well as
    training.
        Chairman Bartlett. One of the resources that you have
    available are the SCORE people?
        Mr. Ellison. Yes, we do.
        Chairman Bartlett. And can you tell us what----
        Mr. Ellison. We are in partnership----
        Chairman Bartlett. Can you tell us what SCORE stands for?
        Mr. Ellison. That is a very good question. Forgive me, I
    always do not remember that acronym, but it is--I know the last
    two is retired executives.
        Chairman Bartlett. Okay, it is Service Corps of Retired
    Executives.
        Mr. Ellison. Yes.
        Chairman Bartlett. And I am particularly fond of this part
    of the Small Business Administration because I think we get the
    most bang for the buck there. They do not get paid anything. We
    pay their travel expenses and these are retired executives who
    just have fun helping other people do what they did.
        And then the last one is SBIR?
        Mr. Dankberg. SBIR is Small Business Innovation Research
    Program, and that is administered by various defense or non-
    defense research agencies and the Small Business
    Administration. And it is a way to provide relatively small
    amounts of seed funding for R&D to small businesses with under
    500 people, and we think it is a great program.
        Chairman Bartlett. Well, thank you. We are very pleased
    with the reception that the Small Business Administration
    programs have across the country. Not all of taxpayers' dollars
    are spent as well as these dollars are spent. They plant the
    seed that yields big rewards for our American economy.
        Let me turn now to my colleague, Mr. Davis, for his
    questions and comments.
        Mr. Davis. Thank you very much, Mr. Chairman.
        As a matter of fact, as I was listening to the testimony, I
    was tempted to run out and give Aida Alvarez a call and say run
    over here quick. I mean, there is some people saying some good
    things about the Small Business Administration and so you
    better hurry up.
        And I also was wishing that some of the appropriators would
    have been here also and some of those who have put together our
    budget who think that some of the resources we have been asking
    for the Small Business Administration is not quite needed.
        We are afraid that we may not end up with what we need to
    carry on all of these interesting and exciting programs. But
    that is simply a way of saying----
        Chairman Bartlett. If the gentleman would yield for a
    moment.
        There is a joke that always gets a laugh from an audience.
    The fellah comes up and says, ``I am from the Government and I
    am here to help you.'' You know, that does not get a laugh when
    they are from the Small Business Administration because these
    are Government people that are there to help and it is
    generally recognized and I thank you all for your input.
        Mr. Davis. Absolutely.
        I have one question, Mr. Lane. I was trying to determine,
    are there any type businesses that we are seeing making more of
    a move towards going public than perhaps others are? Are there
    any businesses that are prime possibilities or in better
    position in terms of public perception at the moment than
    others perhaps to pursue public movement?
        Mr. Lane. The short answer is yes. And there are several
    people at this table and you heard from some of the panelists
    that obviously the technology sector has been the number one. A
    lot of this is really driven by what investors want.
        And as you heard from my colleague on the panel here,
    investors are very interested in internet companies. That is
    why you are seeing them have such an easy time. You are really
    seeingcompanies that have a life--a corporate life of less than
    a year starting the public offering process, which is unheard of.
        And there is a great appetite by investors for anything
    with a .com, as you have read in the paper. I think some of
    that enthusiasm is quietening a little bit, but we are seeing
    it in telecom. It is very hot right now.
        Biotech fluctuates. It sort of goes out for a while, comes
    back in. But it is really driven by market taste more and maybe
    other panelists would have something to say. And you will find
    that, for now, if you want to put together a real estate
    investment trust, the market is not as excited today, and so
    people are going for the technology as a result.
        But it is really driven, I think, in short by investor
    appetite. That is what we are seeing at the SEC.
        Mr. Davis. Anyone else want to----
        Mr. Moe. Just to kind of elaborate or reiterate, I mean
    clearly when you look at companies that have gone public over
    the last two years in particular, the lion's share have a
    technology orientation, many of which are internet or .com type
    of names.
        And, you know, there are different seasons where investors
    have different appetites, but clearly the wave of technology is
    such that it almost seems to be an insatiable appetite for
    investors to find innovative, growing technology companies.
        Mr. Wall. And I think this is being driven by the new
    economy that you talked about. It used to take years to create
    a product. What we are seeing now is compounded innovation. You
    start a company and it branches out into three or four new
    products.
        Those products create companies themselves. If you look at
    Microsoft, for instance, the number of companies Microsoft has
    spun off in new products is tremendous. And so what you are
    seeing is the compounded innovation of ideas in the information
    technology area. And you are seeing them come to market much,
    much earlier because they need capital to go through the
    various stages.
        Mr. Ellison. I would like to add a comment also. At the
    Wharton SBDC, just our client base--the composition of it took
    a transition from a year ago. About a year ago, about 40% of
    the new cases that came our way were internet-based. Now it is
    closer to 75%.
        As a matter of fact, part of the Sol C. Snider Entrepreneur
    Research Center, we host a business plan competition among
    students throughout the university. And I do not remember the
    figures, but there were at least 200 submittals and there were
    six finalists.
        All six were .com companies. My prediction, which will
    hopefully lend to the discussions and lend to our solutions to
    this, is that there is going to be a backlog for the SEC
    because of this .com fever.
        Mr. Davis. I think all of your comments actually not only
    point out what is happening then in this arena, but it further
    raises the issue and the question of the digital divide and how
    important it is to make sure that our educational systems
    contain the kind of technology opportunities for youngsters and
    young people so that they will be in a position to take
    advantage or to compete.
        Mr. Lane, also I wanted to ask you what has been the
    response to the town hall meetings that you have held?
        Mr. Lane. Well, so far we have had great response. We
    started out our first few getting like 75 people and such. We
    now--in Kansas City, we had over 200. In Seattle, it was
    standing room only when we went there.
        And as I said, we typically have the Small Business
    Administration representative there, as well as the state
    securities commissioner. And to my knowledge, it is the only
    place where we put together all three pieces.
        Sometimes small businesses that come to these--these are
    really small businesses sometimes--they are not ready to go
    public, but they want to hear what they need to know, and they
    would rather talk to the SBA people about their 8(a) program
    or, you know, something like that.
        But they still want to hear about what they need to be
    thinking about going down the road. And for a lot of people,
    the thing they forget most is that the states also register. If
    you are a small business and you do not list on the NASDAQ
    National Market System and the New York Stock Exchange, if you
    do not list on one of the national markets, you have to be
    reviewed in each state in which you want to sell.
        And small businesses need to be aware. That is why we make
    sure to work closely with our state regulators and the SEC does
    that. So I think it has been very successful because many
    states also have some pro small business programs. They want to
    get out there and say here is what we are doing as well to try
    and facilitate.
        So, so far I have been very pleased.
        Mr. Davis. Well, you have got me thinking that I probably
    want to look at putting one of those together in Chicago.
        Mr. Lane. We had one in Chicago actually----
        Mr. Davis. Really?
        Mr. Lane [continuing]. In '97 I think.
        Mr. Davis. Oh, okay.
        Mr. Lane. I'm looking back at Richard and Barbara here who
    help coordinate these programs. But Chicago is, I think, the
    second one. We started in Los Angeles, then Chicago. And we
    have been looking now for some of the smaller communities that
    never see an SEC person.
        You know, in New York we do not have a Small Business town
    meeting in New York even though they have Silicon Alley that is
    growing there. They see a lot of SEC people. There are
    conferences and whatever.
        And I am thinking places like Kansas City and, you know,
    Birmingham or, you know, Pittsburgh, places that have a lot of
    companies, San Diego, that do not normally get Government
    people all together to talk to them and answer their questions
    is sort of where we have been focusing lately.
        We actually have one--we are going to do one in Anchorage
    because there was a great deal of interest in a Chamber of
    Commerce up in Anchorage, and others have been very supportive
    of putting this program together. And it looks like we are
    going to get a big turn out, so that is the next program.
        Mr. Davis. I think my last question here is have any of you
    heard any reservations from people who are afraid that as most
    small businesses look at going public, or as we move to the
    point of small businesses seeking to grow and develop, that
    somehow or another that will take away the small business aura
    and that everything is just moving towards becoming, you know,
    a Microsoft or whatever?
        Mr. Ellison. Well, I will take a swing at that one first,
    and this is just my opinion. I think, based on the number of
    small businesses that are actually public and the number that
    are going public compared to those that are not, I personally
    have not heard a fear.
        And the rate that companies are going public is so small
    that I do not see it instilling a fear. But I want to get back
    to your previous question about town hall meetings. There is a
    veryimportant element with doing business in general that
    everyone should look at, and that is the diversity element of doing
    business.
        And I say that to say that the IPO process and thinking
    about IPOs can be intimidating to individuals depending on
    their educational level, depending on their geographic area,
    depending on their cultural make up.
        And as we look at ways of tweaking the process, of rolling
    out more forums, more town hall meetings or whatever is
    appropriate, I think that is something that should be looked at
    closely because someone in Boise, Idaho--let's just say a white
    male in Boise, Idaho versus a Latino in Houston, Texas, there
    are various ways that you should communicate, and those are the
    things that you should look at.
        Because everyone in those communities--each person in those
    communities can bring something to the table and bring
    something to the economy. And again, like I said, I am more
    than willing to assist the subcommittee in those efforts as
    well.
        Mr. Davis. Thank you.
        Thank you very much, Mr. Chairman.
        Chairman Bartlett. Thank you very much.
        Mr. Lane, you mentioned testing the waters. Did I
    understand correctly that while you are doing that, you could
    sell up to $5,000 worth of stock?
        Mr. Lane. No, you cannot. What testing the waters does is
    not permit you to sell, you just inquire.
        Chairman Bartlett. If I wanted to sell, will you be
    interested in buying?
        Mr. Lane. That is right.
        Chairman Bartlett. Okay.
        Mr. Lane. Then you have to grow quiet for a while. After
    you have tested the waters and people said yes--you know, you
    run a bakery or something, people come in and they say we love
    your pastries. Boy, if you sold stock, count us in, you know,
    sort of thing or whatever it might be.
        Then you would say fine, I am going to the expense, I am
    going to hire a lawyer, I am going to get my financials in
    order and all this sort of thing. And there is a period of time
    that elapses. Then you can file this Regulation A. It is a Form
    1A that you can do in Q&A format. It is a very easy form.
        Then you can sell. Once you go through the SEC, up to five
    million dollars in one year.
        Chairman Bartlett. And it is only recently that they have
    been permitted to test the waters?
        Mr. Lane. Yes.
        Chairman Bartlett. Well, how did they ever make a decision
    to go public if they couldn't ask somebody if I was selling
    stock, would you be interested in buying it? It would seem to
    me that that is a necessary step in making the decision to go
    public.
        Mr. Lane. I think the commission recognized that, what was
    it, in the early '90s--in '92 when we adopted that provision. I
    think what happens is that the SEC just kind of knew that
    people were talking and you tried to chill it as much as
    possible, but they would actually talk about precise aspects of
    what the offering would be.
        The idea is because when you are regulating offers, the
    investors need to know at the time I show up at your doorstep
    and say I have got this great idea and I would like to know if
    you would be interested in it, that you say who are you, you
    know, what is your background, you know, these kinds of
    questions that you need to ask.
        And you need to know that before you write your check
    rather than after you write your check. So that is why. And you
    are right, small business people in particular were saying hey,
    you know, this is coming out of some of the forums we had
    earlier last decade about we would like to be able to talk to
    people.
        We would like to be able to ask people if they would want
    to invest. And before you would have to kind of go to an
    investment banker. How they used to do it is they would go to
    the--if you are a real small company, you go--maybe you would
    go to an SBDC.
        You would go to a little regional investment bank, a
    regional--you know, not Merrill Lynch right off the bat if you
    are a little company, and you say here is my idea, do you think
    anybody would be interested in it. And the SBDC would say yeah,
    this is an interesting idea or that is not going anywhere.
        And the same with the regional investment bankers. You
    would use them as your agents to try and find out. When we
    allowed testing the waters, you could do it direct,
    disintermediate. You can go direct. And that is going to be
    actually even more interesting in the age of the internet.
        Mr. Dankberg. We found we use medium size investment banks.
    And one of the things that was important to us is even though
    the company itself has to invest a lot of money in the IPO
    process, so do the investment bankers. I mean, they also spend
    a lot of money in the anticipation of the IPO.
        And one of the things we rely on is the investment bankers'
    opinion about the viability of being able to sell stock. If the
    investment bankers think there is a market for it and they are
    willing to risk their money, that makes it--generally it is a
    good sign for the company.
        Chairman Bartlett. Thank you.
        You mentioned town hall meetings. I was wondering if you
    ever held those in conjunction with the representative in that
    district?
        Mr. Lane. We have. Now, Chairman Levitt does investor town
    hall meetings, too. We have investor town hall meetings and we
    have small business town meetings. And the chairman has done
    some of each. The investor town hall meetings oftentimes are
    done with members of Congress that are invited too to just kind
    of hear what investors and their districts have said. Small
    business--we had one in Las Vegas that had a senator present.
    We usually invite members, especially if we know there is
    someone that is on the Small Business Committee or something
    like that that might be interested. Like at Kansas City we
    invited Congressman Bond because he is on the Small Business
    Committee.
        And you know, sometimes they show. A lot of times they do
    not. It is really the Chamber of Commerce that tells us who is
    interesting in the local community that is pro small business
    that might like to attend.
        And so we work with the Chamber of Commerce to do that. But
    we are happy to, you know, work with members of Congress. And
    anybody who is interested in small business that would like to
    be a part of that we reach out to.
        Chairman Bartlett. I would think members of Congress would
    be very interested. Our district, for instance, we have only
    one company in our whole district that is not small business.
    So small business is certainly the engine that drives the
    economy in our district.
        We have been joined by Ms. Millender-McDonald, and I
    wondered if she had any observations or comments?
        Ms. Millender-McDonald. Now, Mr. Chairman, thank you so
    much, and indeed I have as the ranking member of empowerment.
    And certainly I agree with you. And let me first thankyou and
    the ranking member, Mr. Davis, for holding this hearing.
        I was in the aviation subcommittee and talking about delays
    and bad weather and all of that, so I had to really get my two
    cents in there before coming here. So I am sorry for this
    delay.
        But you are absolutely right, Mr. Chairman. The small
    businesses will be the engine that drives, especially in the
    21st Century. And we also recognize that women-owned businesses
    are really the largest business growth now in that whole
    spectrum.
        But given that, a couple of weeks ago I had a hearing on
    going public and we found that, in talking with those who were
    at this hearing, that most of the businesses would like to go
    public because they want to either grow their business or want
    to expand the business, but they had a difficult time with
    access to capital, especially African-American businesses.
        So I would like to ask each of you what are you doing to
    ensure, if at all you are, that type of--those types of
    barriers--to eliminate those barriers; and, if at all, the
    percentages of small and minority businesses, specifically
    women and African-American businesses, that you are reaching
    out to and helping them for that access to capital?
        Mr. Lane. Well, maybe I will start as representing the SEC.
    We do have a special small business program that reaches out to
    all small businesses in the sense of not only the exemptions
    that are available for raising up to one million dollars.
        We do not have a targeted program for--as the Small
    Business Administration has for like 8(a) programs for women
    and minority-owned businesses. What we do is we just help
    anyone who calls. You know, we have the brochures and we go out
    and do our town hall meetings around the country and not
    necessarily in the biggest of cities and invite everybody and
    work with the Chamber of Commerce and people that know the
    areas to hope to get any kind of small businesses that normally
    never get to see a Federal Government----
        Ms. Millender-McDonald. Mr. Lane, given the fact that those
    have been barriers, would there be some interest in your
    extending beyond the stretch of what you are doing now to
    extend to those areas that have been most, you know, impeded by
    the growth with the inability to have access to capital?
        Mr. Lane. Yes, absolutely. And if there was a district or
    some area or some kind of program----
        Ms. Millender-McDonald. Thirty-seventh congressional
    district in California will be the first step.
        Mr. Lane. Okay, just let me know and we will work with you
    to--if we can get--all we ask is that we get a sufficient turn
    out. You know, if we can get the----
        Ms. Millender-McDonald. Oh, absolutely.
        Mr. Lane. If we can get the interest, then we will come.
        Ms. Millender-McDonald. Okay, fine.
        Mr. Lane. That is all we care about.
        Ms. Millender-McDonald. Very well.
        Mr. Wall.
        Mr. Wall. We do not have specific programs either. What we
    have is criteria for listing, and that is how we judge a
    company whether it can come into our market as being a public
    company. Those rules obviously are filed with the SEC and
    approved.
        But we do segment our market between national market
    companies and small companies, small cap market companies. And
    the net tangible asset requirement for a small cap company is
    only four million dollars. So we have tried to provide an
    opening for small businesses to come in to Nasdaq through the
    public markets.
        We do not distinguish, however, in terms of minority
    ownership. And quite frankly, that is in the prospectuses, that
    is open and on our web site so you can go in and look to see
    who the management is and that information is available.
        Ms. Millender-McDonald. Sir, again, given the fact that the
    majority of business growth, especially small business, is that
    of women, and women tend to have the least amount of capital to
    try and expand, is there a program within your four million
    dollar range that you can help them in finding those connects
    to, you know, help in this access to capital?
        And is that something that I can interest you in?
        Mr. Wall. You certainly can. At this stage, we do not have
    that. And yet, maybe there is a step before the public process
    whereby you could find a way to do that in the venture capital
    area, in the angel capital area, in the area that we were
    talking about before in terms of small business. I think that
    may be the first step. Because a problem that we find for new
    companies coming into the market if you look at Nasdaq last
    year, is that we had to delist over 10% of the companies on
    Nasdaq for not meeting continued requirements.
        Part of the reason for that is the fact that managers
    coming into the marketplace do not have the experience, do not
    have the education, do not have the background, and that has to
    start before the IPO process. That really has to start on the
    educational basis, it has to start in with the venture
    capitalist where you have mentoring to those smaller companies,
    and in other ways of finding capital.
        Ms. Millender-McDonald. And I certainly do agree with you
    on that a lot of times this technical experience and skills
    that are missing. But you know, there is a need also for some
    of you to help in that area as well because, again, we are
    looking at the majority of the work force in the year 2000 and
    beyond will be women, minorities, and there has to be some kind
    of program that you put in place to help your future workers
    and future persons that will be involved in what you do.
        And I think it is important that we look at helping you to
    help us to grow this country through its small businesses
    through the technical assistance, as well as the education, and
    the other outreach programs that I am here to call upon each of
    you to look at and work with me on, as I am hell bent to
    empower small businesses during my course as ranking member.
        Mr. Moe, is it? Okay.
        Mr. Moe. First of all, I am in research at Merrill Lynch. I
    am not an investment banker or involved with policy. In any
    event, the key responsibility that we have in research is to be
    looking at identifying attractive companies for our clients
    that will do well for them from investing capital in those
    enterprises.
        From that, just an observation. What matters for how well
    these organizations do, going back to my original testimony, it
    is the earnings growth and success of a company which leads to
    the performance of the stock.
        And so first and foremost, it is completely indifferent. It
    is the success of the company which matters. An observation I
    would have would be that, from a female standpoint, female CEO,
    female run business, back when I started in this business, that
    was sort of a noteworthy, unique situation.
        Today it is so common for many of the companies that we see
    that we think are extremely attractive companies. You just do
    not think twice about it, or at least we do not because we see
    it so often.
        So anyway, just the punch line----
        Ms. Millender-McDonald. Well, let me ask you, what is your
    definition of ``attractive business'' or ``attractive
    company?''
        Mr. Moe. Attractive company is one that can grow their
    revenue and earnings at a very high rate for a very long time,
    has a sustainable and competitive advantage, has a claim to
    fame to their business, and something that ultimately will
    continue to be successful for the foreseeable future.
        Ms. Millender-McDonald. And do you see a lot of female
    businesses in this attractive business mode?
        Mr. Moe. Yes, we have significant involvement with a
    number--as I just think about it off the top of my head, a
    number of companies are led by female CEO executives.
        Ms. Millender-McDonald. I would like to have you do a
    report back to me, if you will, on those companies that are
    female and minorities who fit your mode of attractive
    businesses.
        Mr. Moe. Okay.
        Ms. Millender-McDonald. Thank you.
        Mr. Ellison.
        Mr. Ellison. Yes, good morning, Congresswoman McDonald.
        I think that your question is a very good question. At the
    same time, I think the right--first question would be what has
    your--or what is your entity doing to look at itself internally
    in order to roll out any successful programs.
        Because before we can begin to talk about programs, before
    we can begin to do town hall meetings, we have to do self
    examinations. And in those examinations, that is where we begin
    to come up with the right solutions. Again, I think that that
    is a very good question.
        You were not here when I talked about the importance of
    rolling out diversity as far as town hall meetings and as far
    as outreach. Before I get into what we do at the Wharton SBDC,
    I had mentioned that one of our clients, Next Step Magazine,
    talks specifically about diversity.
        In my opinion, I think that every Merrill Lynch office,
    every SEC office, every NASDAQ office, every SBA office should
    have a copy of this magazine. And I will leave this here for
    you.
        Ms. Millender-McDonald. Give them each one.
        Mr. Ellison. Okay, sure.
        Ms. Millender-McDonald. And give me one.
        Mr. Ellison. I will leave that for you.
        Now, back to answering your question specifically. The
    Wharton Small Business Development Center is located in west
    Philadelphia. And west Philadelphia's population is primarily--
    it is about 90%, 95% African-American. Temple, which is also in
    Philadelphia, is located in north Philadelphia, and the
    population there is--well, that is close to almost 100%
    African-American.
        Also there is a large Hispanic community in north
    Philadelphia. Both Temple and Wharton's SBDCs, we have
    outreaches specifically to those groups. There is an incubator
    in west Philadelphia. It is titled ``The Enterprise Center.''
        It is named after the late Secretary of Commerce, Ronald H.
    Brown. That was a birth of the Wharton SBDC back in 1990 and it
    grows minority businesses. And in fact, it has several
    successes. It is also located at the same building that the
    American Bandstand Theater was back in the 1950s, and I am sure
    no one here remembers that because of----
        [Laughter.]
        Ms. Millender-McDonald. I take the fifth on that one.
        I would be interested in that model that you have just
    mentioned to try to make it a prototype or even go to the SBA
    to look at that, becoming a prototype for those companies that
    are trying to get up from the foot range to get to expansion
    and growth.
        Because we do recognize that the majority of the workers
    that are hired by business people are that of--are women and
    minority-owned businesses. And I should say most of the
    minority workers are hired by women-owned businesses and
    minority-owned businesses.
        And so we have got to grow those because that is your--
    those are the future workers of tomorrow in this country. And
    if you do not grow them and if you do not have technical
    assistance programs, then you are going to lose out a lot, all
    of you, if you do not have that in place.
        Mr. Dankberg.
        Mr. Ellison. I would like to add to your comment.
    Traditionally, society and large corporations, as well as small
    corporations, have ignored the various diverse markets. And not
    just ethnic diversity, but also women----
        Ms. Millender-McDonald. Gender, yes.
        Mr. Ellison [continuing]. That dimension. Let's take the
    African-American community. The spending power is between $400
    and $500 billion dollars. Hispanic Americans spend between $200
    and $300 and close to $400 billion dollars. People with
    disabilities spend over $100 million dollars.
        Another community that is, you know, not part of our--not
    part of your question is the gay and lesbian community, and
    they spend about $600 billion dollars a year. I say that to
    underscore the point that there is a business reason for
    corporations, small entities as well as the SEC, to develop
    programs for those various groups.
        Ms. Millender-McDonald. I think it is imperative that they
    do that because the future dictates that those will be the
    majority of persons in this nation and globally as well.
        Mr. Dankberg, is it?
        Mr. Dankberg. Dankberg, yes.
        Well, we are a consumer of capital as opposed to a source
    of capital, so I'm going to get off a little bit easy here.
        Ms. Millender-McDonald. I looked down at your name and saw
    what you represent. Yeah, that is right.
        Mr. Dankberg. But I would like to give just one
    perspective, just from the point of view of someone that
    started with a very, very small company, three people, and grew
    it up to one that became public.
        And that is when you are a public company, you have two
    different problems. They are related, but they are definitely
    different. One is growing your business just from a perspective
    of sales and revenue. The other one is making your stock price
    go up to make it be a good investment.
        And when you are a private company, it is pretty obvious
    how those things are related. You negotiate with private
    investors. And if your company is bigger and growing faster, it
    is pretty clear why you are worth more.
        As a public company, there is a lot of effort involved in
    communication with potential investors about why your company
    is worth more even if it is growing at a high rate because
    public investors--and the whole objective is to have a very
    liquid capital market which lets capital flow very quickly from
    companies that may be doing well to companies that might be
    doing better.
        And so for us, being private for quite a while is kind of
    like being in the minor leagues. And we got a chance to get
    better at the part about growing the company and just focus on
    how do we make this company work. And then, at the time we went
    public, we had kind of a machine that knew how to do that.
        And the entrepreneur in myself could spend a lot more time
    on the fact of educating investors about--even though we had
    done well in the past, why--you know, why will we do well in
    the future and why we are a good investment.
        And I would not minimize how much time is involved--and
    effort is involved, in that. And I think that really the kinds
    of SBDC programs that Mr. Ellison is talking about are a really
    good incubation stage for any company, whether it is minority-
    owned, women-owned or has all the advantages in the world just
    to get to develop that type of infrastructure before going
    public.
        That is just kind of a--you know, kind of a battle tested
    version of that.
        Ms. Millender-McDonald. Well, we recognize incubation
    concepts are really great concepts and programs and projects to
    help small businesses.
        Mr. Ellison, you remind me of my nephew who finished the
    Wharton School of Business MBA, so we are proud to see you and
    all of you here today.
        Thank you, Mr. Chairman.
        Mr. Ellison. Excuse me. I would just like to add one more
    point to your question. Next month, November, the dates between
    the 7th and the 13th, is National Diversity Week and I think it
    is something that it is not too late for members of the
    distinguished panel here, as well as the subcommittee, to get
    involved in.
        Ms. Millender-McDonald. I think that is a great idea and I
    would like to have Mr. Lane, Mr. Wall, Mr. Moe and the Chairman
    to talk with us about that.
        Thank you so much, Mr. Chairman.
        Chairman Bartlett. Thank you very much.
        I would just like to reemphasize the increasing role of
    women-owned small businesses. They are growing at twice the
    rate of the general business community. Women-owned small
    businesses have a lower bankruptcy failure rate than male-owned
    small businesses. Bankers haven't figured that out yet because
    access to capital is still a major problem for women-owned
    businesses.
        Women-owned small businesses are better employers. And I
    would expect that. Women are different than men. We are having
    trouble getting the military to understand that, but women are
    different than men. And those differences, I think, make them
    better employers.
        And they are better corporate citizens for exactly the same
    reasons. They are more compassionate, they are more caring, and
    that makes them better employers and it makes them better
    corporate citizens.
        Mr. Wall has to leave us shortly and I just had one quick
    question to ask him.
        There are many of our companies now that--whose stocks are
    growing most rapidly in value who are making no profits. At
    what point does the investor--you know, this growth versus
    profits thing, at some point an investor is going to have to
    say some time there has to be a profit.
        When does that happen? This is quite a new phenomenon, is
    it not, in the marketplace that you can have a rapidly growing
    business with the stocks increasing in value and you are not
    making any money?
        Mr. Wall. Right. Well, Chairman Bartlett, the purchasing
    and demand of stocks based on future earnings is what we have
    been seeing, and that is being driven by this new economy that
    we heard about. And quite frankly, we build the markets. I am
    going to yield to my distinguished panelist on my left here to
    answer that question because this is what he does as a
    researcher.
        Chairman Bartlett. Okay.
        Mr. Moe. Well, and what investors are paying for is the
    expectation of future earnings. I mean, profitless prosperity
    cannot go on forever. But what investors are doing is
    extrapolating this growth against a market opportunity and
    making interpretation analysis what a likely margin potential
    would be out into the future and discount that back to today,
    and that is where the stock prices come from.
        Realistically, if you do that math, and it is always
    difficult to be making analysis about futures, but typically
    even with the stock prices doing what they have done without
    companies that are making money today, if in fact you are right
    about those future numbers, typically it would even support
    higher prices.
        Where that argument falls short is there are so many
    variables in terms of making that future analysis that you are
    going to be wrong a fair amount. And in those cases, there will
    be significant corrections in the stocks in which they can
    afford those benefits of being paid for futures.
        Mr. Wall. And we are already seeing that in the internet
    industry. There are many stocks that are well, well below what
    their original pricing was because now it appears that those
    anticipated earnings that we all paid for that stock price
    aren't going to be there. And as a result, they are coming
    back.
        Chairman Bartlett. So we are already seeing investors
    making that choice?
        Mr. Wall. That is correct.
        Chairman Bartlett. Okay.
        Mr. Moe, you mentioned stock ownership in companies
    attracting employees. Do you have any evidence that companies
    that offer meaningful stock shares to their employees do better
    in the market? I would think the employees would be better
    motivated if they are part owners and that we might see these
    companies performing better.
        Mr. Moe. I mean, capitalism works. Point of fact, we do not
    have that data. I think that would be a great study to conduct.
    I think also, and this is more anecdotal, but in San Francisco
    where I live, it is hard to imagine a new company that did not
    offer stock ownership to virtually all of their employees
    because otherwise you would never be able to get the best and
    the most talented people which are truly the drivers of these
    new businesses.
        Chairman Bartlett. And keep them.
        Mr. Moe. So it is all about attracting and retaining
    people.
        Chairman Bartlett. Mr. Ellison, you mentioned the role that
    SBDC centers play in helping the business assemble the IPO
    team, and you also mentioned the cost as one of the barriers. I
    notice that cost runs somewhere eight, nine percent for
    smaller, $25 to $50 million dollar offerings.
        When you look at the elements of that cost, I do not see
    any meaningful way to decrease that cost. And I wonder if you
    have any thoughts. And it appears to me that that is a barrier
    that is just going to be there.
        Mr. Ellison. That is a very good question. In my opinion,
    there is a solution to that. Part of that cost is in the
    corporate clean up phase.
        And what that means is most private companies just have to
    admit there are certain thingsabout how they run their
    operations that is embarrassing if they are trying to go public, or it
    does not really maintain high confidence among the public investor
    community.
        Now what typically happens is they will work with their IPO
    team that comprises the attorneys, the accountants, advisors,
    and that is part of where the cost comes in.
        The SBDC's role is to prevent those companies from really
    getting to the point or to start early so that they can start
    the thinking process of okay, let me establish my business and
    let me set up my structure, let me establish my systems so that
    if and when I want to go public, everything will be in place.
        It is not going to eliminate it, but it can reduce it. And
    it also can reduce the continual distractions.
        Chairman Bartlett. I have the Nasdaq information booklet
    here and they estimate the cost of going public for a $25
    million and $50 million dollar offering, and about three-
    fourths of all of those costs are in underwriting discounts and
    commissions.
        Is that soft? Can we reduce that any?
        Mr. Wall. Well, actually--no, those are good numbers.
        Chairman Bartlett. Those are good numbers?
        Mr. Wall. Yes, they are.
        Chairman Bartlett. That is about three-fourths of the total
    cost.
        Mr. Wall. That is correct. And yet there is a change. And
    technology is bringing that change. As we have seen a change in
    the commission structure and the execution costs for regular
    transactions being decreased, we are starting to see the same
    thing happen in the underwriting distribution.
        There are underwritings now being distributed through the
    World Wide Web where traditional cost to the underwriter has
    come down almost by 50%. We suspect as this part of the market
    also grows, that will come down even further.
        So it will open, we hope, more opportunity for smaller
    businesses to come in and participate in the IPO process.
        Mr. Ellison. I would like to add something. That half
    million dollar figure excludes the commissions. Yes,
    commissions are expensive; but if you really look at it, it is
    not up front costs or up front money that an entrepreneur has
    to bear in the process.
        Chairman Bartlett. So your half million dollars--as a
    matter of fact, it is about $2.3 million for $25 million and
    about $4.1 million total start up cost for $50 million?
        Mr. Ellison. Correct.
        Chairman Bartlett. So your half million was----
        Mr. Ellison. Half million is something that you are going
    to incur if you sell one share or if you sell all your shares.
        Chairman Bartlett. Okay.
        Mr. Dankberg. Or no shares.
        Mr. Ellison. Or no shares.
        Mr. Lane. And Mr. Chairman, if I could add to----
        Chairman Bartlett. Yes.
        Mr. Lane. The advent of the internet has also created a
    real opportunity for what are called direct public offerings.
    And this is something that small businesses are trying to do.
    And they try and sell without an underwriter.
        They sell their securities directly on the internet. There
    have been some that have been in the newspaper. It is not a
    hugely growing phenomena, but it is something that many
    companies are exploring. They have their own newsletters and
    such on how to do direct public offerings.
        On the one hand, it cuts costs considerably. On the other
    hand, you lose the benefit of having an underwriter who can go
    find investors for you rather than just posting notices on the
    internet. And underwriters also add to the process of doing due
    diligence on a company and kicking the tires and looking under
    the hood.
        And so there is the question of will the cost of capital
    really be lower? Yes, you cut out the underwriter discount. On
    the other hand, are investors as willing to invest in your
    company? And are they willing to pay the same price they would
    have paid if you had an underwriter?
        And so that is--the story has not been written yet. We have
    to watch and see how this unfolds.
        Chairman Bartlett. Thank you.
        Mr. Dankberg, I think you mentioned that--if I remember the
    numbers, you mentioned what your sales were and--you have a
    roughly 10% profit?
        Mr. Dankberg. Roughly, right, yes.
        Chairman Bartlett. That is pretty good.
        Mr. Dankberg. We are happy with it.
        Chairman Bartlett. Your stock ought to be doing very well.
    Congratulations.
        Mr. Dankberg. Thank you.
        Chairman Bartlett. Mr. Davis.
        Mr. Davis. Well, the only thing I will say is that the
    purpose of selling money, of course, is to make money. I mean,
    most people who sell it, they sell it for the purpose of making
    additional money. But it seems to me that what we are really
    saying is that knowledge is a tremendous factor in terms of the
    ability for companies to move to another level.
        And that is why I really appreciate the efforts of the SEC,
    the whole concept of town hall providing information, the work
    that the Small Business Development Centers do. I mean all of
    this, I think, really becomes very key in helping people reach
    the point where they can make that critical determination.
        And my last word really was is there a critical moment in
    the life of a small business where one might begin to seriously
    look at whether or not they ought to go public? Is there a
    critical time in the position of a company when you make that
    determination?
        Mr. Moe. Well, I will make just a comment. I mean, with the
    Dow over 10,000 and significant demand imbalance for equities
    and continued investor interest in IPOs and new offerings, it
    is often not the case that a company go public.
        Many can, however the question is, should you go public?
    The issue that I think we see and I think is fundamental; being
    public is a long time. You know, the IPO's exciting but then
    you have to live with the consequences of being a public
    company and being able to respond accordingly.
        The reality is, if a company does not have the proper
    management team to be able to execute as a public company must,
    it does not have the type of predictability to its business to
    be able to execute as a public company, it does not have its
    business opportunity crystallized, it really is a mistake to go
    public.
        Having said that, you could see a company that has those--
    has clarity and should go public, you know, that is not making
    money. It is not necessarily making money, it is not
    necessarily the critical determining factor. And there could be
    a company that is a billion dollars in revenue that should
    never go public for a zillion different reasons.
        To answer your question, there is a magic moment, I think
    the moment is when you are ready to perform as a public
    company, and being a public company is a smart, strategic thing
    both to attract and retain key people in your marketplace and
    how you continue to build your brand, etc.
        Mr. Wall. It may be interesting to note that this year 20%
    of the applications that we received to list on the national
    market system were withdrawn or denied. And over 60% of those
    for small cap were either withdrawn or denied.
        I think the managers going through that process come to a
    realization of what going public truly means and what they will
    need to do to have a successful public company. Because
    obviously, if they are not going to meet those expectations of
    me, the investor who is giving my money, I am going to take
    that money back. Sometimes that just does not happen until you
    go through this type of process. I think the statistics are
    quite devastating when you think of it, 60% withdrawing from
    the public process in small cap.
        Mr. Dankberg. I can tell you from a small businessman's
    perspective even though going public is difficult, it is
    actually easier to go public than to undo it afterwards. And so
    you have to keep that in mind. I mean, and we are a company
    that has tripled in three years since we have gone public, so
    it is not as if we regret what we have done.
        But you have to think about it carefully. And then the
    phrasing of going public as being the end of the rainbow is a
    little bit misleading. If you have a company and you want the
    end of the rainbow, you are better off selling the company.
        Because going public is really the start of a road that is
    actually, in a lot of ways, much more difficult than being
    private. And if you look at it that way, it is a new path with
    a lot more opportunity, that is the right mind set. But it is a
    long term commitment.
        Ms. Millender-McDonald. And I think this is why a lot of
    minority businesses are very reluctant to going public because
    of the risk factors that you have just outlined. It is so
    critical to them.
        Mr. Davis. Seems to me you are saying it is kind of like
    getting married.
        [Laughter.]
        Ms. Millender-McDonald. With that, Mr. Chairman, I guess I
    will excuse myself.
        [Laughter.]
        I am glad he is cleaning this one up.
        Mr. Ellison. That is a good analogy.
        Mr. Davis. If not, then you have got a problem.
        Ms. Millender-McDonald. Mr. Chairman, may I just make one
    statement though. I would like to seriously get, if I may, to
    have a hearing in my district on this very topic and would like
    to invite Mr. Lane--in fact, all of those folks who are out
    here now.
        I think you had a great panel and they have really had very
    provocative information to us. And thank you again so much. I
    would like to have that hearing, and I am going public with
    that request.
        [Laughter.]
        Chairman Bartlett. Well, our district too would like to
    have that hearing, so you have got two offers. And I suspect
    that Chicago is big enough to welcome you a second time.
        I want to thank my colleagues for joining us for this
    hearing.
        And my very special thanks to the members of the panel. You
    have done a great job. I believe that the small business
    community will be better advised as a result of this hearing as
    to what their opportunities are for going public.
        Thank you all very much, and the meeting stands in
    adjournment.
        [Whereupon, the proceedings were adjourned at 11:49 a.m.]

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