[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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