[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




                  THE SECs ROLE IN CAPITAL FORMATION:
                           HELP OR HINDRANCE?

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 26, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-29






                    U.S. GOVERNMENT PRINTING OFFICE
73-742 PS                   WASHINGTON : 2001

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001




                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Texas                 JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
                                 ------                                

              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Ohio, Vice Chairman        LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              JAY INSLEE, Washington
ROBERT W. NEY, Texas                 JANICE D. SCHAKOWSKY, Illinois
CHRISTOPHER COX, California          DENNIS MOORE, Kansas
DAVE WELDON, Florida                 STEPHANIE TUBBS JONES, Ohio
WALTER B. JONES, North Carolina      MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia                WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 26, 2001................................................     1
Appendix:
    June 26, 2001................................................    27

                               WITNESSES
                         Tuesday, June 26, 2001

Devine, Hon. Donald J., Vice Chairman, American Conservative 
  Union..........................................................     8
Halpern, Gregory, Chairman and CEO, Circle Group Internet, Inc., 
  Mundelein, IL..................................................     6
Steinkirchner, James A., Co-Chairman, National Small Public 
  Company Leadership Council, Washington, DC.....................    10
Sweeney, Joan, Chief Operating Officer, Allied Capital 
  Corporation, 
  Washington, DC.................................................     5

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    28
    Oxley, Hon. Michael G........................................    30
    Gutierrez, Hon. Luis V.......................................    32
    Devine, Hon. Donald J........................................    55
    Halpern, Gregory.............................................    52
    Steinkirchner, James A.......................................    69
    Sweeney, Joan M..............................................    40

              Additional Material Submitted for the Record

Kelly, Hon. Sue W.:
    ``SEC Sleuths Beyond the Law?'', Washington Times, June 26, 
      2001.......................................................    29
Gutierrez, Hon. Luis V.:
    Executive Summary of ``Modernizing the Regulation of Business 
      Development Companies''....................................    34
Devine, Hon. Donald J.:
    Written responses to questions from Hon. Sue W. Kelly........    67
Sweeney, Joan M.:
    Written responses to questions from Hon. Sue W. Kelly........    49

 
                  THE SEC'S ROLE IN CAPITAL FORMATION:
                           HELP OR HINDRANCE?

                              ----------                              


                         TUESDAY, JUNE 26, 2001

             U.S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:35 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sue W. Kelly, 
[chairwoman of the subcommittee], presiding.
    Present: Chairwoman Kelly; Representatives Cantor, Tiberi, 
Gutierrez, Inslee, Moore, S. Jones of Ohio, and Shows.
    Chairwoman Kelly. This hearing of the Subcommittee on 
Oversight and Investigations will come to order. Without 
objection, all Members' opening statements will be made part of 
the record.
    This morning, we are holding this subcommittee's first 
hearings on the issue of capital formation. Capital formation 
has been an implicit responsibility of the Securities and 
Exchange Commission since it was first created. In 1996, 
securities laws were amended by the National Securities Market 
Improvement Act to explicitly state that capital formation is 
an important responsibility of the Securities and Exchange 
Commission. In 1995, in testimony before the former 
Subcommittee on Finance and Hazardous Materials, former 
Securities and Exchange Commission Chairman Arthur Levitt 
stated, and I quote: ``Existing law already requires the agency 
to give consideration to efficiency, competition and capital 
formation concerns whenever the Commission is required to make 
a public interest determination.''
    Securities markets are the critical force behind our 
Nation's economy. It has been one of my long-standing goals in 
Congress to eliminate obstacles to capital formation in those 
markets, especially for small businesses.
    I am greatly distressed by the concerns that fundamental 
regulatory obstacles are inhibiting the flow of capital to and 
investor participation in the small and middle market business 
sector. This hearing is the subcommittee's first step in 
determining how we in Congress and the Commission can 
effectively eliminate those obstacles for all participants in 
our Nation's capital markets.
    Capital is the life blood of business, and efficient access 
to capital is a crucial ingredient to a strong, growing 
economy. We have the responsibility to closely examine the 
different structures the Securities and Exchange Commission has 
crafted for businesses to access the markets and to determine 
if these are practical and effective.
    Businesses should be able to devote their energies toward 
their customers and not be delayed by unnecessary requirements 
that no longer reflect the realities of our new economy. In the 
Securities and Exchange Commission's work to ensure investor 
protection and efficient capital formation, I believe the best 
service they can provide is to ensure transparency in 
disclosures and ensure fair play through their enforcement 
division.
    A September 2000 General Accounting Office report found 
that the estimated average total cost needed to conduct a small 
business IPO during 1994 to 1999 was about 10 percent of the 
total offering proceeds, while the average total cost for a 
large business IPO was about 8 percent. The Securities and 
Exchange Commission has a few different processes for smaller 
businesses and smaller offerings which were designed to reduce 
the regulatory burden for these issuers. We will examine the 
effectiveness of some of these processes here today.
    In addition, in 1996, the Securities and Exchange 
Commission was given general exemptive authority to allow them 
to waive specific requirements on a case-by-case basis in order 
to give the Securities and Exchange Commission additional 
flexibility in assisting businesses' access to the capital 
markets. I intend for this subcommittee to take a close look at 
how that authority is being used.
    Before us today, we are honored to have a distinguished 
panel of witnesses to share their thoughts and observations 
with us on these issues. I thank all of you for taking the time 
out of your busy schedules to spend some time discussing these 
issues with us today, and I would let Members of the 
subcommittee and staff know that it is my intention to enforce 
the 5-minute rule, and I would appreciate their cooperation in 
this.
    I am now going to recognize my friend from Chicago, Mr. 
Gutierrez, distinguished Ranking Member for this subcommittee, 
for his opening statement.
    Mr. Gutierrez.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 28 in the appendix.]
    Mr. Gutierrez. Well, good morning, Chairwoman Kelly, and 
thank you for holding this hearing. I would like to welcome all 
of the panelists who have come here today to share their views 
on the important issue of capital formation.
    The mission of the U.S. Securities and Exchange Commission 
is to protect investors and promote efficient capital 
formation. Challenges facing the Commission in accomplishing 
its mission are no different today than the challenges that 
existed in 1933 when the U.S. Federal Government first began 
regulating the issuance of securities. The premise of the 1933 
Act is that full and fair disclosure would most effectively 
promote efficient and fair functioning in the process of 
capital formation.
    We are here today to study and discuss possible changes to 
the existing regulatory structure to facilitate capital 
formation for small businesses and all market participants. 
Small businesses are an important source of economic growth and 
creation; they account for 50 percent of the gross domestic 
product and the majority of new jobs.
    Access to capital is a critical issue for small businesses. 
Without sufficient capital, small businesses are unable to 
develop new products and services or grow to meet new demands. 
Insufficient liquidity is frequently cited as a cause of small 
business failure. Small firms are heavily dependent on bank 
float, trade credit and informal sources of financing such as 
personal savings, credit cards, home equity loans and loans 
from family and friends.
    Steps have been taken by both the Federal securities 
regulators and State governments in an attempt to reduce some 
of the regulatory burden and costs for small businesses seeking 
equity capital financing in the regulated securities market. 
One of the steps taken by the Federal securities regulators has 
been simplifying Federal registration of securities offerings 
and exempting certain small businesses' securities offerings 
from several requirements, Regulation D, in an attempt to 
reduce the regulatory burden and the cost for small businesses 
in equity capital formation.
    One of these exceptions, Rule 504 under Regulation D, is 
intended to allow companies to raise seed capital. A company 
may privately sell up to $1 million in securities in a 12-month 
period to any investor without registration as long as there is 
no public solicitation or advertising or resale of the share; 
and resale of the share is restricted. A company may sell the 
same amount of securities using public solicitation if it has 
registered the securities in a State that requires: one, public 
filing of a registration statement with the State and; two, the 
delivery of disclosure documents to investors.
    From 1992 to 1999, the Securities and Exchange Commission 
dropped the State registration requirement from Rule 504. They 
then experienced a substantial increase in the number of 
complaints they received from investors who have been defrauded 
by operations selling shares under Rule 504. The Securities and 
Exchange Commission found that fraudulent operations had 
developed that would go to States that had no substantive 
registration requirements and sell securities to residents in 
those States. This resulted in substantial incidence of 
fraudulent sales to the general public of securities for which 
no information was publicly available.
    Another step taken by the Securities and Exchange 
Commission to minimize the regulatory costs of raising equity 
capital has been permitting small businesses' issuers to use 
simplified, small business forms, so-called SB-1 and SB-2, in 
filing registration. Small business issuers are those with less 
than $25 million in revenue in the last fiscal year and 
outstanding stock of $25 million or less. Even though these 
forms save an issuer up to approximately $125,000 an average 
offering, small business issues are viewed unfavorably by many 
investment bankers because they are too small in size to be 
profitable. Also, small offerings are commonly distributed by 
small investment banks that lack the market recognition which 
can be an impediment to attracting investors.
    These problems show that even though many positive steps 
have been taken to help small businesses gain access to equity 
capital, more needs to be done. By passing the capital 
promotion tools in the National Securities Market Improvement 
Act in 1996, we sought to enhance the Commission's role in 
promoting capital formation and efficiency with the appropriate 
investor protections. It is crucial then that the Securities 
and Exchange Commission balance the burden placed on small 
businesses against the purposes of investor protections under 
the securities law.
    I look forward to hearing all of the testimonies and thank 
you, Madam Chairwoman, once again.
    [The prepared statement of Hon. Luis V. Gutierrez can be 
found on page 32 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Gutierrez.
    Mr. Cantor, have you an opening statement?
    Mr. Cantor. No, Madam Chairwoman.
    Chairwoman Kelly. Mr. Tiberi.
    Mr. Tiberi. No.
    Chairwoman Kelly. Thank you.
    Well, then, if there are no more opening statements, we 
will begin with our first panel. Before us today we have Ms. 
Joan M. Sweeney, the Managing Director and Chief Operating 
Officer for Allied Capital. Before her work with Allied 
Capital, Ms. Sweeney was an accountant with the Securities and 
Exchange Commission's Enforcement Division.
    Next, we have Gregory Halpern, the Chairman and CEO for 
Circle Group Internet Incorporated. In 1998, Mr. Halpern 
distinguished Circle Group Internet by raising $2.5 million as 
the first and only company to orchestrate a complete end-to-end 
Regulation A offering over the internet without the assistance 
of outside brokerage.
    In addition, we have Mr. Donald J. Devine, the Vice 
Chairman of the American Conservative Union, who is the former 
Director of the U.S. Office of Personnel Management, Grewcock 
Professor of American Values at Bellevue University, a 
Washington Times columnist, a writer, and an Adjunct Scholar at 
the Heritage Foundation. And if you don't mind, Mr. Devine, we 
are all enjoying this column of yours that appeared in the 
newspaper today. And I am going to, with your permission, sir, 
and the permission of the subcommittee, I am going to include 
this in the record. If anybody hasn't read this, you should get 
the Washington Times, take a look at it.
    Mr. Devine. Well, thank you.
    Chairwoman Kelly. If you don't have enough time today, at 
least this clarifies your position, along with a very good 
cartoon.
    [The article referred to can be found on page 29 in the 
appendix.]
    Finally, we have Mr. James A. Steinkirchner, the Co-
Chairman of the National Small Public Company Leadership 
Council. Mr. Steinkirchner is listed as an NSAD trader since 
1996 and is currently the Vice President of McGinn, Smith & 
Company of Atlanta, Georgia.
    We thank you all for joining us here today to share your 
thoughts on these issues. Without objection, your written 
statements will be made part of the record, and you will each 
be recognized now for a 5-minute summary of your testimony, and 
I would like to begin with you, Ms. Sweeney.

 STATEMENT OF JOAN M. SWEENEY, CHIEF OPERATING OFFICER, ALLIED 
                      CAPITAL CORPORATION

    Ms. Sweeney. Thank you, Madam Chairwoman. Members of the 
subcommittee, my name is Joan Sweeney, and I am the Chief 
Operating Officer of Allied Capital, a public business 
development company. Today, I am pleased to share our thoughts 
about improvements to the Federal securities regulatory 
framework as it impacts capital formation.
    Allied Capital has invested in growing businesses for over 
40 years. We operate the oldest SBIC license and we have 
financed thousands of small businesses. We provide mezzanine 
debt and equity capital, and our portfolio today is just shy of 
$2 billion.
    We constantly see challenges faced by companies seeking 
capital. As a business development company, we are a successful 
conduit for bringing public investment dollars to small 
businesses, but we too are burdened with a cumbersome 
regulatory regime. I was a member of the Securities and 
Exchange Commission's Division of Enforcement, and I fully 
support the Securities and Exchange Commission's role as ``cop 
on the street.'' However, the authority and activities of the 
Securities and Exchange Commission staff need a fresh look if 
the goal is to encourage capital formation as well.
    There are three areas I would like to discuss related to 
improving capital access. First, it is time to embrace the 
internet. Financial markets are moving at the speed of light 
and financial information is only a click away. The fact that 
the Securities and Exchange Commission does not consider 
information to be publicly disclosed when it is presented on a 
company's website seems out of touch with the realities of the 
millennium. This is especially true when online disclosure is 
required through EDGAR filings. We need to think outside the 
box and outside the four corners of the prospectus to come to a 
virtual prospectus that incorporates a company's website.
    Second, the Securities and Exchange Commission needs to 
challenge low value-add activity. Under a 70-year-old system, 
too much of the Securities and Exchange Commission's activity 
centers around the review of registration statements. This is 
cumbersome and low value-added. The law is the law, and the 
registrant and their lawyers and the registrant's underwriters 
and their lawyers all know the law, are responsible for it and 
are liable with respect to compliance with the law. Why, then, 
is a 30-day review period, often undertaken by an unseasoned 
examiner, necessary? Legal fees mount, often in response to 
questions raised only from a lack of experience. More 
seriously, the delay of this process can result in a missed 
market window.
    The reality is, public offerings are not sold off 
registration statements. Plain English improves disclosure, but 
prospectuses are still not read. The majority of public 
securities are sold to mutual funds, and fund managers research 
far beyond the registration statement, ironically, using the 
registrant's website and the internet. To further the irony, 
individual investors use websites and internet chat boards to 
get the real plain-English scoop. Why not focus staff time on 
regulating information in channels that investors really use, 
rather than allocating limited resources to the review of 
outdated registration forms?
    Third, there needs to be more staff time allocated to 
exemptive orders and new rulemaking. There are many 
inefficiencies in the system that could be readily fixed if the 
staff had the time and authority.
    For instance, you may not be familiar with BDCs, such as 
Allied Capital, and our role in capital formation. BDCs were 
created by Congress 20 years ago to encourage the flow of 
public capital to small, private companies. Yet today, the BDC 
industry is still barely visible. I believe this is largely 
because operating within the cumbersome yoke of the 1940 Act 
discourages new entrants.
    For example, efficient access to the public markets through 
integrated disclosure is not available to BDCs. Unlike other 
public companies, we cannot use our Forms 10-K and 10-Q to 
update our shelf registration statements. This situation is 
time consuming and costly and, we believe, results from a mere 
oversight in the law that could be easily remedied.
    We submitted a letter to the staff in July of 1998 to 
address our integrated disclosure issue by requesting a no-
action position. After 3 years of waiting for their answer, 
last week we were told that under the current regulatory 
framework, the staff could not grant the relief we were 
seeking. Instead, we were told to pursue rulemaking, with no 
guarantee of immediate attention. We essentially waited 3 years 
to learn we must pursue a different bureaucratic process. This 
is clearly inefficient.
    The staff needs to allocate its resources to foster capital 
formation through interpretive positions, exemptive orders and 
rulemaking. I am certain that if they had the time and 
authority to act, we would not have waited 3 years to find 
ourselves back at square one.
    I believe the changes that I have suggested would improve 
capital formation as well as enhance investor protection.
    Thank you.
    [The prepared statement of Joan M. Sweeney can be found on 
page 40 in the appendix.]
    Chairwoman Kelly. I thank you very much Ms. Sweeney. I 
really appreciated reading your testimony last night as well. 
So we will get into that more.
    Now we move on to Mr. Halpern.

 STATEMENT OF GREGORY HALPERN, CHAIRMAN AND CEO, CIRCLE GROUP 
                         INTERNET, INC.

    Mr. Halpern. Madam Chairwoman, Members of the subcommittee, 
thank you for inviting me to this hearing. I am Greg Halpern, 
founder and CEO of Circle Group Internet. We are a funding and 
consulting source for emerging technology companies, based in 
Mundelein, Illinois.
    Now, I represent 21 million small business professionals 
who create half the jobs in America who are not here today, 
because today is a work day and for them, every day is a work 
day. My written testimony is going to address most of my issues 
in detail, but let me summarize.
    Small businesses like ours produce more than half of 
America's private gross domestic product. As you know, by 2005, 
we will create 60 percent of the new jobs in this country, and 
these figures are provided by the United States Government so 
they are not rhetoric, they are reality.
    Small businesses struggle to succeed despite often 
unreasonable and misguided regulations, taxes and very little 
representation. We face regulations that make raising capital 
difficult, if not impossible. At today's hearing our concern is 
with the Securities and Exchange Commission.
    Now, the Great Depression, as we know, created the need for 
the Securities and Exchange Commission, and it has served its 
purpose. Nearly a century later, however, the Securities and 
Exchange Commission has failed to keep pace as markets and the 
global economy have evolved. Now, I am not here to propose 
increased limitations on the Securities and Exchange 
Commission's power. Let's help the Securities and Exchange 
Commission continue its mission and at the same time assist 
small business.
    Today, the process to register with the Securities and 
Exchange Commission is so time consuming, expensive and 
subjective that many small businesses either drop out during 
registration or avoid it altogether. The Securities and 
Exchange Commission regularly fails to comply with the Act of 
the Congress, which we have talked about, known as the National 
Securities Market Improvement Act of 1996, which concerns 
competition, efficiency and capital formation in the Securities 
and Exchange Commission's rulemaking activities.
    Hundreds of companies retired from the Securities and 
Exchange Commission's registration process in 2000. The 
opportunities missed by just these companies represented 
billions and billions of dollars that could have gone toward 
jobs, the economy and tax dollars to the Treasury. Was the next 
Home Depot, Dell, or Yahoo among them? We will never know.
    Small businesses register their securities under Regulation 
SB. The SB, as you know, stands for ``small business,'' and it 
is supposed to mean a much simpler and friendlier way to enter 
the capital market based on objective criteria. In reality, 
though, SB often predisposes the staff against the very 
companies it is supposed to be serving.
    The Securities and Exchange Commission often mistakenly 
loses sight of its simple, objective mission, which is to 
ensure full disclosure and then send the companies off to 
market. Instead, many companies are drained needlessly of time, 
money and resources, answering endless rounds of questions and 
waiting for the slow process to resolve itself.
    Another issue that affects many small businesses is the 
Investment Act of 1940, which requires public companies to hold 
no more than 40 percent of their value in securities of other 
companies. This hurts firms like ours, because as we fund other 
emerging companies and their securities increase in value, we 
find ourselves out of compliance. This means we are becoming 
victims of our own success.
    At the end of the day, this is not about the 1940 Act or 
Regulation SB, though; it is quite simply about the larger 
issues of the Securities and Exchange Commission's role in 
capital formation. The Securities and Exchange Commission was 
told in the last century to support capital formation, and it 
really needs to learn how to work with small businesses in this 
new century.
    Small businesses need relief now. The processes are 
actually in place; the Securities and Exchange Commission just 
needs to let them work.
    Additionally, I am proposing the creation of a department 
in the Securities and Exchange Commission to be known as the 
Small Business Advocacy and Liaison Office. This office should 
serve small business ventures that require special assistance 
in reaching the capital markets. It would fall under the 
Division of Corporate Finance and represent the nineteenth 
office in the Commission.
    The office would advise small businesses how to meet the 
regulations and requirements of the Securities and Exchange 
Commission. It would monitor processing of applications and 
provide quick, reasonable responses. The office would establish 
a schedule to better prepare businesses for their Securities 
and Exchange Commission experience, and it would also respond 
with clear and concise information regarding any difficulties 
or irregularities with its constituent applicant companies.
    And finally, the Small Business Advocacy and Liaison Office 
would provide an annual review of the Securities and Exchange 
Commission rules and regulations related to all small business 
entities and make recommendations to Congress for changes in 
those policies that may unfairly encumber small businesses.
    I thank you, Madam Chairwoman and the rest of the 
subcommittee, for the opportunity to take a day off and come to 
Washington to discuss the concerns of 21 million of my fellow 
small business professionals. I know there is a genuine 
willingness on your part to help and together we can solve 
these problems and get on with the task of building our 
businesses, and the Nation as well.
    Thank you.
    [The prepared statement of Gregory Halpern can be found on 
page 52 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Halpern.
    I am very sorry, having read your testimony, that your 
company has had such a problem in dealing with simple things 
like phone calls not even being returned by any kind of a 
Federal Government agency.
    Now, we turn to you, Mr. Devine.

  STATEMENT OF HON. DONALD J. DEVINE, VICE CHAIRMAN, AMERICAN 
                       CONSERVATIVE UNION

    Mr. Devine. Thank you very much, and I would like to thank 
you very much for holding this hearing.
    I think it is a critical question as to whether the 
agencies and the bureaucracy--and I used to be the chief 
bureaucrat for 4 years as Director of the Office of Personnel 
Management--that they actually follow the law. This 
subcommittee and its predecessor have gone through an enormous 
amount of activity to try to get the Securities and Exchange 
Commission to follow the law.
    I think when the former Chairman and Mr. Oxley wrote the 
Securities and Exchange Commission and got its reply, the reply 
clearly showed that the Securities and Exchange Commission did 
not understand what it was supposed to do under the law--in 
order to take into account its other obligations, other than 
fighting fraud, which is certainly a very important obligation. 
But that is not the only obligation under the very law under 
which they operate.
    I think we saw this very clearly when they amended Rule 
504, under which small companies secured small amounts of 
capital. It was a critical element in their raising capital. 
Effectively, the Securities and Exchange Commission took public 
companies out of the regulated market so that they could raise 
small amounts of capital with limited bureaucratic review. In 
my opinion, it is a sad situation, a public scandal really, 
that this critical legal avenue is not open to small business 
anymore.
    Several tables are in the formal testimony, but I have a 
larger version here. You see what happened when the Securities 
and Exchange Commission adopted Rule 504. The market went up 
and up and up, for years in fact. This is, in fact, the plot 
from one of these automatic computer programs for it. I didn't 
fit it in that line.
    Now other things were happening. There were tax cuts and 
things. I am not saying it is the only thing, but clearly that 
is what happened after those initial Rule 504 reforms.
    Now we see in a second chart what happened after the 
Securities and Exchange Commission made the 1999 change. And 
this one really amazed me when I looked at it, and again, the 
computer fitted the lines. It is almost as if there is a 
perfect correlation. As a former Professor at the University of 
Maryland and now at Bellevue University, I know this doesn't 
happen very often. I was just bowled over by it.
    But the fact of the matter is that when the Securities and 
Exchange Commission rule went into effect on April 7th, 1999, 
the market dropped. It was unstable during the whole period of 
the OTC registration process. When the OTC registration process 
ended, it dropped again enormously; and, at the same time, the 
regular market kept going up. I had that on there too, but it 
is too confusing to add it.
    I have all of the details in my formal testimony here. But, 
to me, that is the proof. The Securities and Exchange 
Commission is supposed to pay attention to capital formation. I 
think their former response to this subcommittee shows they do 
not.
    As I tried to outline in detail in my testimony, the Rule 
504 process did not find them taking capital formation into 
consideration. The only specific amount they mentioned was a 
$30,000 registration fee, which is a very small part of costs. 
I estimate that cost alone is about 10 percent, or $250,000, of 
an offering of about a million dollars. I presented some GAO 
figures for higher offerings in my formal testimony.
    So I just can't say how pleased I am that the subcommittee 
is looking into this, that they are going to presumably 
question the Securities and Exchange Commission and ask them 
why they aren't following the law. I recommend that you also 
apply consideration of capital formation to their rule for 
oversight of private exchanges, that the Securities and 
Exchange Commission try to find a new way for public companies 
to use Rule 504 or a different rule. It doesn't matter what 
rule it is, but some way to raise capital. Also, I would 
encourage giving more control to stockholders. They are the 
ones that really can keep fraud from happening.
    And that is my time. Thanks for having me.
    [The prepared statement of Hon. Donald J. Devine can be 
found on page 55 in the appendix.]
    Chairwoman Kelly. Thank you very much, Donald Devine. We 
appreciate very much hearing from you.
    Next we have some more testimony that I read last night 
from Mr. Steinkirchner. Mr. Steinkirchner, thank you so much 
for your testimony; and thank you for appearing here today. 
Please proceed.

  STATEMENT OF JAMES A. STEINKIRCHNER, CO-CHAIRMAN, NATIONAL 
            SMALL PUBLIC COMPANY LEADERSHIP COUNCIL

    Mr. Steinkirchner. I would like to thank Madam Chairwoman 
Kelly and Ranking Member Gutierrez and other Members of the 
subcommittee for the opportunity to testify on critical issues 
facing small business.
    I am testifying today as the Co-Chairman of the National 
Small Public Company Leadership Council and on behalf of the 
small business marketplace we represent.
    The Leadership Council, based in Washington, DC., seeks to 
educate and inform Members of Congress about the economic 
contributions of small emerging growth companies. Although the 
Government has made great strides in the right direction, the 
Leadership Council believes that more cost-benefit analysis 
needs to be conducted on how it affects small business before 
laws and regulations are passed.
    In my written testimony, I address 10 key issues affecting 
small business. Today, I will address four.
    In 1982, Mr. Devine covered the Rule 504-C exemption. In 
1999, the Government amended Rule 504 to a point where nobody 
would really want to use it. Also, the Securities and Exchange 
Commission and the press have created a stigma relating Rule 
504 to fraud. I doubt very seriously if it ever will be used 
again in its current form.
    Instead, my proposal would be to create a new Rule 509 
offering. It is kind of like a quasi-public offering. It would 
be available to both public and private companies, be able to 
raise up to $10 million.
    Some key points to address. Investor protections, I would 
mandate that an NASD underwriter would have to be used in this 
type of offering, can advertise the offering, can use only line 
road shows, use the modernization that Ms. Sweeney addressed 
earlier in her testimony.
    Abuses of the current short sale rules are depriving 
individual investors of essential investor protections. They 
also are making it more expensive for companies to raise 
capital.
    Some possible solutions to the illegal short-selling abuses 
are: apply the uptick rule to both the NASDAQ small cap and the 
bulletin board issues; develop a mechanism for tracking short 
sales; identify 5 percent or more holders of the outstanding 
stock or 10 percent of the public float; and create a new Rule 
13S which would be filed with the Securities and Exchange 
Commission. Those that have beneficial ownership must currently 
use a 13D if they earn over 5 percent. Why not make those 
holding substantial short positions report also?
    Some other issues I would like to address are: one, minimum 
stock price listing requirements for some of the exchanges. 
When a company stock price approaches or drops below minimum 
listing requirements, it actually fosters fraud and unethical 
practices by imposing an artificial guideline in a free market 
mechanism. A company's management has limited options to keep 
itself from being delisted. It could create artificial demand 
by issuing press releases, hiring promoters or reverse 
splitting its stock. All these efforts are usually offset or 
exceeded by the short sellers.
    Another problem that we have in our industry right now is 
what is called a ``toxic convertible'' or a ``death spiral 
convertible.'' These instruments have exploded over the last 5 
years from $274 million to $3.2 billion last year. Private 
Investment in Public Equity, or another name it is called, 
PIPE, deals have become a major source of capital for public 
companies. PIPE deals do have their place in the markets, but 
it is their offspring, the ``toxic convertible,'' that needs to 
be regulated. In simple terms, the ``toxic convertible'' is a 
private placement that enables investors to convert their 
securities at a discount to the current market price usually 
with no floor as to how low the conversion can go.
    An investor who buys common stock of an issuer in a toxic 
convertible loses, on average, 34 percent of his investment 1 
year after a toxic convertible is issued. In the year 2000, 
there were 220 toxic convertibles done, and only five were at a 
higher price than before the offering. It is obvious the common 
stock investor is getting burned by these convertibles.
    Thank you. I would like to go into a little more. I guess I 
ran out of time. I would like to thank the Leadership Council 
and thank you.
    Chairwoman Kelly. We thank you, Mr. Steinkirchner. You have 
a little more time because we will ask you questions.
    [The prepared statement of James A. Steinkirchner can be 
found on page 69 in the appendix.]
    Chairwoman Kelly. I would like to begin the questioning by 
asking all of you one general question, and I want a very 
succinct answer, please, because I, too, have a time limit.
    My question is, I want to know how you think that we can 
use, or you can use, the internet more effectively to get 
information there to the Securities and Exchange Commission and 
to make the disclosures. You have all mentioned the internet. 
There is a reason that I am sure you want to do that. So, very 
quickly, if you could all just chime in here. Thank you.
    Ms. Sweeney. I guess I will start.
    I think the thing that we see, we invest in companies every 
day, so we are an investor ourselves, is that you can use a 
company's website to do everything a registration statement 
does and in a much more plain English, dynamic disclosure 
means. So why not set out what are the disclosure requirements 
that the Securities and Exchange Commission and the law 
requires and ask companies to comply with them by keeping that 
information updated on a quarterly basis right on their own 
website?
    I don't know if you have pulled down information from EDGAR 
recently, but EDGAR is a very, very cumbersome system. There 
are a lot of private sector systems like 10-K Wizard, and other 
things that do a lot of things better than does EDGAR, but 
companies on their own website are really the best at telling 
their own story. So I think you use the website as the virtual 
prospectus.
    Chairwoman Kelly. Thank you, Ms. Sweeney.
    As you were talking about that, you brought up the issue of 
registration. I just want to quickly ask you one question about 
that. Since you worked over there, is the registration process 
used by the staff to leverage extract concessions from a 
registrant like on a related or an unrelated matter? Is that 
part of what is happening with the registration process?
    Ms. Sweeney. I don't think so. I think what it just simply 
is, is cumbersome. I brought, just so you could see, Allied 
Capital's registration statement. This is our Form N-2, OK? No 
one reads this. It is impossible. Look at the depth of the 
print. I mean, what individual shareholder is going to pore 
through this? They are not going to.
    What is the problem in the registration statement process, 
is that it is an outdated medium of communication. Plain 
English, didn't really do anything. It made it so you could 
maybe read it, but still there are tables in here that defy the 
average shareholder to understand. I mean, it doesn't make any 
sense. So I think that is the real problem. I don't think 
necessarily that even the staff understands what is required in 
a registration statement.
    Chairwoman Kelly. Thank you. I want to go on and ask my 
first question on down, but thank you very much.
    I have more questions, but we have been called to a vote. I 
am going to finish my questions, then I am going to take a 
break, and with the subcommittee's indulgence we will be back 
here--can I give everybody just 10 minutes to come back, or do 
you want a standard 15? We will be back in 10 minutes, but 
please answer the question.
    Mr. Halpern. The current question?
    Chairwoman Kelly. The first question.
    Mr. Halpern. Sure. Certainly, I would second everything Ms. 
Sweeney said, and I would add a couple of fundamental things.
    As you had said, we had the distinction of doing the first 
end-to-end stock offering on the internet, and I actually 
thought that it was quite a novel approach, we worked closely 
with the staff of the Securities and Exchange Commission to 
clear it and we thought it could be an outstanding model for 
companies to use in the future.
    What we did was, we had the risk disclosure shown first; 
and it was a simple two pages of risk disclosure that the user 
could read. After that, they were forwarded on to the 
downloading of the prospectus; and, finally, if they passed 
through that, they could see the marketing material and then 
subscribe online. It was done quite efficiently, in a matter of 
a week's time we raiseed several million dollars. I thought it 
would be a great opportunity for small businesses to have 
access to capital markets.
    But the other caveat that I would put in there, which camps 
on to what was just said, is that if people were to read the 
registration statements cover to cover and really understand 
it, they probably wouldn't invest in anything. So that is the 
reality of it. I think that the idea of full disclosure is an 
important one, because it basically says, if we have junk, we 
are telling you we have junk, and you can make a decision if 
you like junk and you want to invest in it. But, beyond that, 
the process becomes entirely subjective. Because if somebody 
doesn't like any aspect of the business, then it becomes a 
subjective process, and that can go on for some extended period 
of time.
    Chairwoman Kelly. Thank you.
    Mr. Devine.
    Mr. Devine. Well, these people in Government deal much more 
in this on a practical level. In my experience in the 
Government, it is very hard for the bureaucracy to do anything 
new to keep up. That is why, in general, the fewer regulations 
the better. And certainly it just makes fundamental sense to 
bring the Securities and Exchange Commission into the 21st 
century here and use the internet. It is just so elemental, 
common sense.
    Chairwoman Kelly. Mr. Steinkirchner.
    Mr. Steinkirchner. The Securities and Exchange Commission 
has already issued quite a few no-action letters; and Mr. 
Halpern, I believe, received one relating to the internet. The 
problem here is it has taken so much time to get the Securities 
and Exchange Commission no-action letters, and basically what 
they do is they test the waters with these Securities and 
Exchange Commission no-action letters. This started way back in 
1995, and we are already in the year 2001, and we still don't 
have a general ruling on internet road shows, things of this 
nature, offering prospectuses online, signature requirements 
online. You could go on and on.
    I believe right now that in the public arena you will find 
that probably 90-something percent have a website right now. So 
it is not like people don't have access to these companies.
    I think you could get the private market to embrace the 
internet also by providing financials, and Mr. Devine says I 
would like to see them get into the 21st century.
    Chairwoman Kelly. Good. That is wonderful. Thank you very 
much for answering and being, all of you, all four of you, 
being very clear about it.
    We are going to take a break so that everyone can go to the 
floor and vote, and we will see you back here in 10 minutes.
    [Recess.]
    Chairwoman Kelly. Mr. Gutierrez.
    Mr. Gutierrez. Thank you very much.
    Professor Devine, the dramatic growth of the internet has 
provided a new medium for fraudulent operators to reach a much 
larger audience than was ever possible over the telephone. Mr. 
Devine, you obviously disagree with the approach that the 
Securities and Exchange Commission has taken to prevent fraud 
and ensure that adequate public information is available to 
investors about small business insurers of securities. What 
would you do to protect investors from fraud in these markets?
    Mr. Devine. Well, it is not so much me that thinks that. It 
was Congress in 1996 that passed the law saying that beside 
taking into account questions of fraud, that the Securities and 
Exchange Commission should also consider efficiency, 
competition, and capital effects. And that is what I think they 
need to do to make a balanced judgment, as the law requires 
them to do. I am not sure that the internet does, in fact, open 
things up to more people than the telephone. I would suspect 
more people have a telephone than have a computer or are hooked 
up to the internet. So, I don't think it's a question of 
broader opportunities for fraud. I think, in their rulemaking, 
as opposed to their enforcement action, they need to take into 
account these other activities.
    The Securities and Exchange Commission has had--and they 
haven't asked for any major changes in the fraud statutes and 
regulations themselves--they have sufficient powers to pursue 
fraud. So I don't think it is a question of neglecting fraud. 
When it happens, they should go after it and prosecute it, and 
they do and they should continue to do that. I just think it is 
a question in their rulemaking. They should consider these 
other important things, and not so much because I say it--
although I happen to agree with it--but it also happens to be 
the law.
    Mr. Gutierrez. Mr. Halpern, if you could just follow up on 
what Mr. Devine just said and answer the question. And also, 
your company has successfully raised capital over the internet 
in 1998, but dropped out of the registration process in the 
year 2000. Could you tell us a bit more about how you were 
successful in 1998 and why you dropped out in the year 2000 and 
what has changed and maybe talk a little bit concerning the 
question I raised with Mr. Devine?
    Mr. Halpern. Yes, sir. Well, to follow on to what Mr. 
Devine, I think, put well, there are many good rules already to 
protect investors. Yet many investors still lose most, if not 
all their investments. I mean, we legalize gambling, for 
example, and let people go lose all of their money. And in 
essence, you know, investing in the market is a form of 
legalized gambling. But again, there are many good rules to 
protect the investors. What I am calling for in that score is 
if we want to protect investors, then let's protect all 
investors, including those who have already invested in small 
business. You see, there is this space in small business where 
a lot of people don't want to invest because it is risky. And 
most of these newer businesses, these emerging businesses get 
their humble beginning from anywhere from credit card financing 
to their friends and family to get started. Well, after that it 
is hard for a lot of investors to want to participate, because 
they don't see where the liquidity is going to come from.
    One of the ways, a tremendous stimulation to the economy, 
is to give investors a greater degree of confidence in these 
emerging companies, which is--our acronym is advanced small 
business. It is a business which is growing much faster than 
businesses used to. In other words, in 3 to 5 years the company 
is going to hit $100 million. It couldn't do that, you know, 10 
years ago. It could only hope a much smaller fraction of that. 
So I am saying let's protect all investors.
    In my case, I already had almost 500 investors in the 
Regulation A offer I conducted successfully online, and I 
thought--I think you might have just stepped out when I started 
to say that I thought that was a very novel process. I was very 
proud of fact that we had done it online because it worked so 
well. And I thought, wouldn't this be novel in a lot of small 
businesses that have a difficult time in getting access to the 
capital markets. And with Rule 504 and all the OTC things that 
you hear that are so negative, wouldn't it be great if they had 
a novel process the way Ms. Sweeney said, to use the internet 
to produce commerce and investment capital in their business at 
a minimal amount of effort and a minimal amount of cost. We 
could essentially create a lot more opportunity for our 
society. But, you know if we will give investors the confidence 
to invest in early stages that they are going to achieve 
liquidity, I believe we are going to dramatically stimulate the 
economy, and I think new investment capital in that space is 
sadly lacking.
    So the other thing I wanted to say about any negativity 
about protecting the investor, there are a lot of investor 
protections. But we must remember that while we can't legislate 
risk out of existence, we can legislate the future of small 
business out of existence. And in my own process, all that 
really happened, Congressman Gutierrez, was that when we did 
the Reg A we said this is very novel. And by that time the 
Securities and Exchange Commission was looking at a lot of 
companies raising money online and saying ``this is making us 
nervous.'' We didn't see that it would really work. And so when 
we went back in the process with another self-underwriting, 
which was the SB2, the small business regulation, I firmly 
believe, although again I don't blame anybody. I feel that it 
would almost be a relief for the Securities and Exchange 
Commission if it had an easier way to cope with small emerging 
businesses. I don't believe they have a way to cope with it. So 
they have to move you from point A to point B until someone 
else says, well, you release it. Well, no I don't want to. You 
do it. And I think that is a huge problem.
    Mr. Gutierrez.  Well, following up on that, I would like 
Ms. Joan Sweeney to wrap up, because I am over my time. We have 
an Executive Summary of ``Modernizing the Regulation of 
Business Development Companies.'' I would like to ask that this 
be entered into the record of this hearing and ask Ms. Sweeney 
when she thinks the report will be done.
    [The information can be found on page 34 in the appendix.]
    Chairwoman Kelly. Without objection.
    Mr. Gutierrez. And give us just a brief overview of the 
report and when you think it will be done.
    Ms. Sweeney. Sure. We, Allied Capital, are a member of 
something we call the Committee for Modernization of BDC 
Regulation. And there are a handful of BDCs out there who also 
share our views that it is just very difficult to operate 
within the 1940 Act. I don't know how much time any of you have 
spent with the 1940 Act, but it is a very cumbersome piece of 
legislation. The subcommittee is now circulating a report 
within the committee to make sure that everyone agrees that 
these are the issues, things that need to be done, very, very 
simple things to modernize BDC regulation. I touched on one in 
my testimony, which is integrated disclosure.
    I mean, that is somewhat of a no-brainer when you get down 
to it. That is just simply allowing us to do what other 
companies can do on their Form S-3 registration statement. The 
other things that we are looking to do is, for instance, break 
down some of the barriers with respect to affiliated 
transactions.
    The Investment Company Act of 1940 is set up to prevent bad 
external managers from doing bad things to shareholders of 
mutual funds. That is a noble purpose and there are bad fund 
managers. For instance, if you know, the management company is 
external; it could have cross purposes with the fund. A 
business development company is usually internally managed. 
There is no way the business development company is going to 
disadvantage itself dealing with itself. It is the same entity.
    And there is a whole cadre of rules within Section 57 of 
the Investment Company Act of 1940 that is set up to 
essentially prevent an activity that really wouldn't happen in 
any operating company. So there are various things like that 
that are really simple fixes to the operation that we think 
could encourage the flow of public company capital to small 
businesses.
    You know, the hardest thing about investing in a small 
business--Mr. Halpern touched on it--isn't even necessarily the 
risk, it is the liquidity. You are a company with a market cap 
of less than $100 million. People will not invest in you simply 
because you are illiquid. You know getting in and getting out 
of the stock can cause problems. BDC has fixed that. If you 
look at Allied Capital, we are about a $2.2 billion market cap 
BDC. We have huge liquidity. People can invest in Allied 
Capital, get a nice 8 percent dividend because we pass our 
earnings to our shareholders. Come in and out of us, while we 
put money into illiquid companies. Our portfolio to date is 
about 125 companies that have gotten their investment capital 
from public investors, but in a liquid format. So we think BDCs 
are a great thing that should be really studied and embraced.
    Mr. Gutierrez. Thank you. Thank you very much.
    Chairwoman Kelly. We turn now to Mr. Shows.
    Mr. Shows. No.
    Chairwoman Kelly. No questions?
    Mr. Shows. No.
    Chairwoman Kelly. All right. Since there seems to be a bit 
more to be discussed here I think we will go into--with the 
indulgence of the panel--a second round of questioning, if that 
is all right.
    Ms. Sweeney, you had mentioned a couple of things that I--
one thing in particular I would like to ask you about. I would 
like to know how the regulatory process can be used to impose 
unduly burdensome requirements on a company. Can you give us 
some examples of that?
    Ms. Sweeney. Sure. You know, I think, as I say, there are 
some pretty simple things and probably the most burdensome 
process any public company can undertake, whether it is in the 
initial public offering or in registering securities a second 
time, third time, fourth time around, is the registration 
process. That is probably where the average public company 
touches the Securities and Exchange Commission most frequently. 
That process is so antiquated and outdated, and it causes huge 
delays. This is where you will get questions on whether we 
should be using the word ``such'' items versus ``certain'' 
items. OK, that is a comment. To spend the legal time 
addressing that comment adds little value, if any, to the 
registration process.
    I don't know if any of you have spent an all-nighter at a 
financial printer with an army of lawyers responding to a 
litany of staff questions, largely in plain English. But I can 
tell you it adds a lot of cost and burden to the process.
    The other thing is, I don't think necessarily the level of 
examiner you get within the Division of Corporation Finance, or 
other divisions within the Securities and Exchange Commission, 
really have the business savvy to understand the magnitude of 
some of their information requests. For instance, we took a 
company private in the fourth quarter of 2000. This was a 
company that really couldn't access the public markets, 
unloved, low market cap. It is our job as a BDC to fund these 
companies. We took it private and we had to do it through a 
merger. We actually issued Allied Capital stock to complete the 
transaction, a very innovative way of using a BDC capital to do 
something good for another public company. In that process we 
were floored to find out that, because it was a merger in form 
and a going private transaction, that there was a requirement 
in the rules that we had to actually file and disclose board 
presentations that were done to effect the merger. We are 
talking about a company's trade secrets, the internal works of 
the board of directors, as they evaluated why the merger was 
good, taking their projections and filing it with the public. 
Now, that is kind of stepping over the bounds of disclosing 
trade secrets that most likely really wasn't necessary for 
those shareholders to make an educated decision on the proxy 
that they were being presented to decide, whether or not they 
were getting an adequate premium over their market price. There 
is fairness opinions done by the investment banks. Shareholders 
can make their own decisions. Shareholders can call management. 
Understand this: There is no need to take the inner workings, 
you know, that is pretty confidential information of the board 
of directors, and file it. So those are the types of things 
that are just huge, time consumers and also maybe overreaching 
in terms of disclosure through kind of a registration process.
    Chairwoman Kelly. I thank you very much, Ms. Sweeney. One 
other question that I had was the question about the shelf 
registration. You mentioned in your testimony that there is a 
question in my mind about the fact that you can't use 
information that is already provided to the public through the 
different forms, the 10-Ks and the 10-Qs. Could you speak about 
that just a little bit, please?
    Ms. Sweeney. Yes. This is what we think is pretty much an 
oversight for BDCs. BDCs are required to file 1940 Act forms. 
So we re-file our registration statement on a Form N-2 every 
time we post new quarterly information. So, once a quarter we 
have to update this thing, and fully, all the way through, and 
refile it and subject ourselves to staff review, once a 
quarter. If we were Coca-Cola, any other company out there, 
public company, that doesn't file under the 1940 Act, that 
files their shelf on something called an S-3, which most 
companies file, they don't have to do that. They put their S-3 
up at the Securities and Exchange Commission and they are 
allowed to have integrated disclosure. Form 10-Qs and Form 10-
Ks update their shelf registration statements. So we have a 
kind of mechanism that doesn't work, where companies that file 
on N Forms aren't allowed to do that. Companies that file on S 
Forms are. A very simple fix would allow those on N Forms to do 
the same thing.
    So this is the thing we have been waiting on for about 3 
years to try to solve.
    Chairwoman Kelly. Well, good. I am glad we at least had a 
chance to discuss it. Thank you.
    Mr. Steinkirchner, I wanted to just quickly ask you one 
question, and if you would just fill me in on your thoughts and 
the new Rule 509 legislation that you had proposed. Could you, 
sir, please pull the microphone closer to your mouth so we can 
all hear you? Thanks.
    Mr. Steinkirchner. OK. Rule 509 is actually a rebirth of 
Rule 504 almost. But it adds some more investor protections in 
there. And basically what I wanted to do with Rule 509 is 
create a modernization type instrument where you could use 
online road shows, put your financials up on the site, offer a 
prospectus all online, because using the internet is cost 
effective. I mean, it is just much less costly to use the 
internet. So the Securities and Exchange Commission has allowed 
it in certain circumstances and it has all worked out 
relatively well. They haven't revoked anybody's Securities and 
Exchange Commission no-action letter, so I would say that the 
online no-action letters that have been approved to date have 
been working quite effectively.
    But I also wanted to create a new investor class that could 
get involved in private offerings. Currently, the Securities 
and Exchange Commission segregates investors into two classes, 
nonaccredited and accredited, and what I wanted to do is create 
a semi-accredited. It is an investor class that is in between 
these two. Last year, there were five million Americans that 
qualified as credited investors. Out of that five million, 
250,000 contributed about $60 billion to the private 
marketplace to fund small businesses. And if we could create a 
new investor class that has the financial sophistication--I 
mean, I deal with these people on a day-to-day basis. They want 
to get involved in these private transactions, but are 
restricted under these requirements. And by adding a layer of 
protection by making sure that an NASD member underwriter is 
the only type of underwriter that can underwrite this type of 
security, what you are doing is you are effective putting the 
investor under all the NASD scrutiny that both the broker 
dealers and the issuers have to deal with. So I am kind of 
covering the investor protection rule there and making sure 
that the client is suitable for the investment.
    Some other issues are I would like to put a cap on it of 
$10 million, but I also wanted to have a minimum contingency of 
$2 million, and that the money had to be escrowed in an escrow 
account. Although this is a little more costly, I think it will 
protect the investor a lot more. More importantly, by putting a 
minimum contingency, this will ensure, hopefully, in a lot of 
cases, that there is enough money for the business to progress.
    And I could go over numerous other examples, but the bottom 
line, Rule 509 is kind of like a quasi-public offering. What 
you have right now is you have public offerings that are doing 
private offerings, which are called pipe deals, and we are 
talking hundreds of billions of dollars have been done in these 
pipe deals. It is a quick, effective way for public companies 
to raise money. And now, by using the internet, you have 
private companies offering over the internet. So effectively 
they are becoming public offerings. So instead of having two 
separate classes, why don't we just put it right in the middle? 
In a way, it is like a quasi-public/private offering. But it 
would open it up to another 12.8 million Americans, would 
afford them investor protection. It would give small business 
an instrument that is cost effective.
    I will give you an example. In the State of Georgia, where 
I reside, over the last 5 years there were roughly 200-and-
something, low 200s, Rule 504 offerings filed with the 
Secretary of State. There were only 32 offerings that were 
completely subscribed, and out of that 32, 80 percent of them 
used an underwriter. The bottom line is that even if you do get 
through and you put a registration statement together using 
Rule 504 and you are a private company and you submit it with 
your State regulator and they approve it, these aren't people 
where their profession is raising capital. And the problem is 
they get through this whole process and at the end of the day, 
they find that they haven't raised the money. And I think in 
order for small business to have a way of raising capital, I 
think they need to use a professional.
    Thank you.
    Chairwoman Kelly. Thank you very much.
    Mr. Gutierrez.
    Mr. Gutierrez. Thank you very much. You just, real quickly, 
commented that, well, there probably are more phones than 
people hooked up to the internet. The fact is that people are 
using the internet a lot more than phones, especially to make 
investments. Senior citizens are a growing group of people that 
are using the internet.
    So while you might have more phones than internet, the 
internet is the vehicle of use for making investments. All you 
have to do is turn on the TV to see all the different companies 
who are making offerings and competing with one another for 
$9.95 a trade, $19.95 a trade. It is an explosion, and it is 
all on the internet. They don't say ``call this phone number.'' 
They say ``get on the internet and make these trades.'' It is 
the quick way to do it. And especially senior citizens we have 
noticed have an increased--and I am surprised, because I am 47, 
so I am hoping the next 20 years go quickly so I can become an 
internet user, too, given that at the age of 47 it appears that 
older folks and younger folks than me, I think it is the people 
in the middle that don't know how to use the computer. If you 
are young or if you are older, it seems like that is what you 
are doing.
    So that was kind of where I was going with my questions. 
But I thank you, Doctor, for your answer and for the security 
questions. I do want to ask a couple of questions, another one 
of Mr. Devine.
    During the period before Rule 504 was--I am sorry. I need 
to also get glasses--was put into law, how many companies took 
advantage of it and how much money was raised?
    Mr. Devine. I don't think anybody really knows the answer 
to that question. At least I haven't been able to find it. The 
anecdotal assumption is that a very large proportion of the 
capital for small public firms was raised through Rule 504. 
Since these were only required to be listed in States--and in 
New York didn't have to be listed at all, and I think the 
Securities and Exchange Commission correctly got rid of that 
exemption--nobody really knows. But, at least anecdotally, it 
was a very large proportion of the funding of small public 
companies.
    Mr. Gutierrez.  OK. I have a question, another question, 
for my fellow Illinoisan. You expressed in your testimony 
another issue that affects particularly advanced small 
businesses such as yours in the Investment Act of 1940, which 
requires public companies to hold up to a maximum of 40 percent 
of their values in the securities of other companies. How do 
you think this law can be amended and/or improved to better 
serve the current needs of companies such as yours?
    Mr. Halpern. Well I think that is an excellent question, 
and Ms. Sweeney, I think, made a good point about the 
Investment Act. And just really the purpose of the Investment 
Act was to manage and regulate the mutual fund industry. And we 
clearly are an advanced small business, as we had said earlier. 
I mean, these are companies that have grown much quicker and 
are trying to help companies in a much earlier stage and have 
very little to do with public investing and mutual funds. I 
think that the Investment Act of 1940--not the Investment Act, 
but the NMSIA, the 1996 National Market Securities Improvement 
Act, clearly gives some latitude. It gives latitude to allow 
companies to be exempt from some of those processes, and when 
we go through that department, what happens is they really 
don't know what to do with us. I get that feeling. I don't get 
the feeling that there is somebody there that is antagonistic. 
They are just saying ``How do we fit you into that mold from 
1940?'' And since they can't figure it out, every time we 
reinvent ourselves to try to suit it they say, ``Well, gee, 
then you have a problem with accounting.'' And if we change the 
accounting by restating financial statements, then they say, 
``Well, then you have a problem with the Investment Act.'' And 
then, if you have a problem with the Investment Act, but you 
are operating as an Investment Act company, and you do that for 
an extended period of time, then you have to go the enforcement 
department and have an enforcement action because you are out 
of compliance.
    So these processes are neither effective or economical for 
anybody in the Government. And I generally--if I were--I am 
trying to put myself in a staff member's shoes and say, well, 
if I was them looking at me I would say all I have got is 
oranges and apples in my bowl and you are a kiwi. Well, there 
are a lot of kiwis now and they need a bowl.
    And I don't know if this helps you, but I think something 
that is a very good point here is, I think this subcommittee 
and the Securities and Exchange Commission have an opportunity 
to do for the Securities and Exchange Commission and to do for 
small business what was done a few years back for the IRS, 
where if you think about it, you know, if you are already 
collecting upward of 40 percent of someone's hard-earned income 
and in addition you are taking 20 percent of their after-tax 
family budget in hidden regulatory costs, you would think that 
it pays to be very nice to those people, because they are 
working hard so the money can be distributed, so the Government 
can proliferate and do a good job managing its interests.
    But I think that in the case of the Securities and Exchange 
Commission, it is like an accident out on the highway. Two cars 
crash, nobody knows whose fault it was--and I am not here to 
say it is anybody's fault, because I don't think there is any 
fault. I just think we have a process which clearly doesn't 
work. And if you ask me to summarize, what I would tell you is, 
it could work, but somebody there at the staff has to let it 
work. They don't know it is OK to let it work.
    No-action letters? Well, those are irrelevant, because 
everyone has a disclaimer at the bottom that says ``By the way, 
if we change our mind later, then this doesn't apply any 
more.'' And those disclaimers are continuously put into every 
single process at the staff. I don't think it is from the 
intent to harm small business, I think it is the reality of the 
regulatory machine that has built itself up into a corner and 
put a lot of tape around it. And so they can't see a clear way 
to do this.
    But I clearly represent the 21 million small business 
professionals who have businesses, and many of them avoid 
altogether, or once in the process, drop out because it is too 
costly, it is too time-consuming, it doesn't produce the 
desired result. So I am calling for a process to assist the 
Securities and Exchange Commission in continuing on with its 
mission to protect investors.
    I think Mr. Steinkirchner made some excellent points about 
how investors could be protected in the smaller markets, but 
give more stimulation. And I think what you get then is like we 
said with the IRS. Now if you call the IRS, you get a friendly 
process. A few years ago that wasn't the case. I think there 
should be a spirit of cooperation and a friendly process that 
we can participate in and grow these economies of scale and 
produce, as was mentioned earlier, a transparent process using 
what the other panelists have quite accurately said, the 
internet process.
    Mr. Gutierrez.  I think that we will be delving into that 
issue. Let me say the only Federal regulator I have to deal 
with is the Federal Election Commission in terms of keeping my 
reports, and we have gone online. And since we have gone online 
it certainly has helped us and everybody gets to know what I am 
doing and the information, and it has worked pretty well. But 
they are not--they haven't been particularly cumbersome over 
there. I mean, if they raise a question about a $10,000 
contribution to the Democratic Party of the State of Illinois, 
we kind of write them back. But that is where I spend my money, 
my legal money, dealing with the--unfortunately I have to spend 
money, because they raise an issue and, of course you don't 
want your opponent to raise it later on and you want to be 
within the law--only to find out that they were wrong, that I 
could indeed give that $10,000 to the State Democratic Party 
and that they made a big thing. But in this particular case, 
don't worry. All the Democrats in Illinois gave the same 
$10,000. So we all got the same letter. So we figured if we are 
in trouble we are all in trouble together.
    But it does cause anxiety. I mean, the anxiety that it 
causes is something that I want to relieve for investors out 
there that are developing businesses that I don't--it causes--
you know, your lawyer calls you, ``call your lawyer.'' It is 
like everybody is in a panic that you have done something wrong 
and illegal, and I want to make sure that we can get through 
that process in a manner in which investors can--especially 
that are trying to run companies, especially small businesses. 
They have got a lot of other things to deal with than a lawyer 
calling them panicked that they are out of regulation, that 
somebody is going to come down hard on them.
    And so, thank you so much to all the panelists for coming 
here on behalf of the minority. Thank you very much.
    Chairwoman Kelly. Mr. Shows.
    Mr. Shows. Thank you, Madam Chairwoman.
    Mr. Halpern, I was reading your testimony, and Mississippi 
has a lot of startup small businesses going even though we are 
a small State. And one of the questions I would like to ask you 
in your statement, and I will read the question first, is what 
do you think the main factor affecting the responsiveness of 
the Securities and Exchange Commission to the needs of small 
business--this probably is outdated laws, and maybe 
undertrained personnel or disorganized regulatory structure or 
maybe a tracking system. But your statement says here, when you 
were trying to get your money and raise capital, you said 
``staff members continue to contact our service, saying they 
still do not understand the nature of our business.'' I find 
that true in dealing with reporters sometimes, in that when you 
try to explain--as a Highway Commissioner back in Mississippi, 
I tried to explain a project to a reporter, who may be a young 
reporter, who didn't really understand what I was trying to 
tell them and I didn't know how to break it down where you 
didn't make them feel bad about asking that question. And I 
know that is probably the same problem that you have.
    How do you explain to the Securities and Exchange 
Commission what you are trying to do and yet get it to where 
they can understand where they can write the guidelines for you 
to perform like you would want to? And that is what I am 
interested in, is trying to let small business be able to come 
in and work with the Securities and Exchange Commission and so 
we still have the--and I guess what everybody else is talking 
about--you know, simplify it enough so that the company doesn't 
get like you did, so disheartened with the system that you 
almost throw the paper up and walk out the door. And we need to 
turn that around. And what would you say would be the thing 
that we need to do to the Securities and Exchange Commission to 
help them to help small business?
     Mr. Halpern.  Well, I think that is an excellent point 
that you are raising, and it brings back to mind two of the 
different approaches that we have discussed here. One is that 
in the short term I would like to see the processes that are in 
place be used the way I believe that they were intended to be 
used. In other words, in the National Market Security 
Improvement Act of 1996, clearly that is an act of Congress 
which said the Securities and Exchange Commission will consider 
efficient competition and capital formation in its rulemaking 
activities. But I don't think there is any spirit of 
cooperation there, because as the internet evolved there became 
a sort of fanaticism within the staff that there must be a lot 
of scams there. In fact, I attended one of these Securities and 
Exchange Commission meetings, an enforcement meeting in New 
York early-on, about 2 years ago, and one of the marketing 
people from the staff got up and said, ``Well, you know, people 
think that you know we are not on it. We don't have enough 
people to keep track of all the scams out there. But actually 
we are way ahead of it. We have hired hundreds and hundreds of 
new people, and we are on it all the time.'' And what I think 
it became was a fishing expedition. And again, you know, not 
with the intent, but the idea that, well, with the internet 
evolving there must be all these scams. And sure, there are 
scams. But as I said before, and I want to reestablish this 
point, you cannot legislate risk out of existence. But you can 
legislate the future of small business out.
    So that was the first point. The point was let the systems 
that are in place do what they were intended to do. First, you 
need a person in there that says, ``Now wait a minute, we have 
a process that could work.''
    Regulation SB was designed, and it was released in 1992, 
because in the late 1980s, banks started tying up the coffers 
on lending to small, new, emerging companies. And you have seen 
this. So they said we are not going to lend. So in response, 
Congress said let's do Regulation SB. And so SB was designed 
for small business to have an easier and friendlier process. 
The problem is, it is not an easier and friendlier process. In 
fact, if you go in and say ``I am a small business,'' they say, 
``Ooh, I don't know what that means to me, other than I don't 
have a bowl to put you in.'' So you will have to go around and 
around the staff. In our case, the first registration process 
was successful, but the second one wasn't because it took too 
long to get through. And by that time, most of my competitors 
had lost 98 percent of their initial value of a year earlier. 
Now, we had the distinction of funding 10 companies in that 
process. And today our 10 companies stand tall, have strong 
beating hearts and have grown and thrived in a down market, 
which I think says something about we are more of a traditional 
style of business rather than the dot.com that, you know, 
selling buzzwords such as B2B, B2C infrastructure. But with 
your small businesses that are in your home State I think it is 
critically important that they have a process.
    Maybe the Rule 509 prepared by my collegue would be an 
earlier stage process. They must be inspired though, no matter 
what the process, to follow the process that should work. And 
when the company gets in the process, I think they should be 
embraced. If you come here to Washington to the Securities and 
Exchange Commission and you say ``I am a small business,'' I 
think you should have a red carpet thrown out and say, ``You 
are going to create more jobs and more money for our staff to 
run itself and take care of real problems. So therefore, we 
embrace you.''
    But it is really not that way. It is more of a mean-
spirited approach, saying ``We don't really understand, 
therefore we will shuffle you around and see what happens.'' 
And you know, I survived it. OK. I am here on my dime to come 
here because you were willing to take your time and listen. But 
I think it is a critically important issue. And I think, step 
one, let's make the processes that are already in place work. 
They have latitude. Let's give latitude. Let's get rid of these 
things. Let's give latitude to this BDC. Let's give latitude to 
investors and let's make them work. My second phase will give 
the Small Business Advocacy and Liaison Office, the 19th office 
in the Commission, a long-term latitude, a long-term 
communication process that would allow us to keep track of what 
is going on and make sure that there is a special interest 
group within the staff that always says no matter what rules 
are going on, you know, we have a process to help the small 
business get through so it can become a big business some day 
and create more jobs and more economy and more value.
    Mr. Shows. But don't you think that is the intent of 
Congress, but the mindset of some of the Securities and 
Exchange Commission is still set this way and not initially the 
intent of Congress? We would like for it to work. Like you 
said, it is in place. Now, why isn't it working? Is it because 
some of the people have been there so long their mindset is set 
in that fashion?
    Mr. Halpern.  Yes.
    Mr. Shows. And they are locked in and they don't feel like 
they are going anywhere?
    Mr. Halpern. Yes. I think it is as frustrating for the 
staff as it is for us out here. You know, they may not be aware 
of it, because they will go home and come back every day, you 
know, going to the same job, not being concerned in the least 
with what the outcome is. But we are concerned because it is 
our business. I think this is an issue where we all can say 
yes, we get it. We have to figure out a way to help small 
business and achieve the desired result. And I think given that 
opportunity the staff would say, ``OK, give us some clear 
instructions on how to handle these other entities and we will 
do it.''
    Mr. Shows. Thank you.
    I appreciate it, Madam Chairwoman.
    Chairwoman Kelly. Thank you, Mr. Shows.
    Mrs. Jones, have you questions?
    Mrs. Jones. Yes.
    Good morning. I missed some of your presentation and I am 
trying to quickly read through your statements to kind of catch 
up here. I also sit on the Small Business Committee, so the 
combination of these two works very well. I am trying to, in my 
second term in Congress, improve. I come from the City of 
Cleveland and we are always looking for more capital investment 
in Cleveland. So if you don't have any investment in 
Cleveland--I don't have a company, but please come on in and do 
some work because we need it.
    Let me also say, I think that small businesses are key to 
creating stronger communities throughout this country. We have 
had great success in building new homes in Cleveland in many 
communities, but we need some businesses to go with those new 
homes to really create a community.
    Ms. Sweeney, I am looking at your statement, and you speak 
about not being able to use an integrated disclosure for 
purposes of your shelf registration statement and other things. 
Are there other examples of improvements that you can suggest 
that the Securities and Exchange Commission could do in order 
to assist small business in working its way through the 
process?
    Ms. Sweeney. Yes. I will answer that and also follow up on 
some of the points Mr. Halpern made.
    Mrs. Jones. No problem.
    Ms. Sweeney. I have kind of got an interesting background 
myself, because I was with the staff of the Securities and 
Exchange Commission.
    Mrs. Jones. I read that.
    Ms. Sweeney. In the Enforcement Division, and I have got to 
tell you, there are lot of bad people out there and there does 
need to be a very strong Securities and Exchange Commission 
that does protect the widows and orphans, because there are a 
lot of scam artists out there. So regulation, I think, is a 
good thing.
    What I think has happened to our Securities and Exchange 
Commission, and I think it has happened more in the decade of 
the 1990s than you saw in the 1980s, is there has been a 
misplacement of emphasis and a misplacement of leadership at 
the core of the Securities and Exchange Commission to focus 
time on interpretive positions, rulemaking, and exemptive 
orders, because we are dealing with a body of law that is 70 
years old. The capital markets move. Law can't possibly keep 
pace with the speed of the capital markets. Death spiral 
preferred is a classic example. This is a preferred stock 
instrument that is killing common shareholders. How can people 
at the Securities and Exchange Commission stay on top of that 
if their time is spent in low value-add activities like 
reviewing registration statements?
    There is a ton of very, very talented staff members at the 
Securities and Exchange Commission that have the capabilities 
to spend their time thinking of interpretive positions, 
rulemaking and ways to increase access to capital. But when 
their hours, their daily work hour is spent pouring through 
these--do you know I have to file one of these every quarter 
and someone has to review it? I mean, when that time is spent 
doing that, how can they have time to think of the bigger 
picture and think about how to push access?
    So it really is a very simple change. It is a change in 
emphasis from low value-add to maximum value-add, and that is 
really all that needs to happen.
    Mrs. Jones.  OK.
    Mr. Devine, or Mr.--want to pronounce that for me?
    Mr. Steinkirchner. Steinkirchner.
    Mrs. Jones. Steinkirchner. Would either of you like to add 
anything based on what we have discussed before my time is up?
    Mr. Devine. On the question of the Securities and Exchange 
Commission itself, I will speak as somebody with some 
background in Federal personnel, being in charge of it at one 
time. Bureaucracies aren't known for quick response. I mean, 
that is kind of the nature of bureaucracy. And the Securities 
and Exchange Commission is no better or no worse than probably 
any other bureaucracy, maybe a little better than most. But the 
problem is that changing ways of thinking in a bureaucracy is 
enormously difficult. And I think the history of the 1996 Act, 
in Chairman Oxley, and former Chairman Bliley's attempt to get 
the Securities and Exchange Commission to respond, in the kind 
of response that in my opinion was enormously inadequate, you 
can see right there reading it--that they are not responding--
or in reading the cost-benefits section of the change to Rule 
504. I mean, you can see they just don't get it. And I don't 
think it is necessarily a bad spirit; but they just don't get 
it. And that is why these hearings, to me, are so important.
    The Congressman from Mississippi--I am afraid, unlike Mr. 
Gutierrez, I am already old, so I can't read his name. I 
apologize.
    Mrs. Jones. Shows. Ronnie Shows.
    Mr. Devine. He asked, ``Congress didn't intend.'' And that 
is very clear. Congress intended the Securities and Exchange 
Commission to look at the broader picture. And in my experience 
in this business, the only way you can do it is you keep going 
back and telling them again and again. That is why my every 
other word is thanking you for having this hearing.
    Mrs. Jones. Do I have a moment to allow the last gentleman 
to respond?
    Chairwoman Kelly.  Of course.
    Mr. Steinkirchner. Thank you. Well, I will give you two 
conviction solutions, one a standardization of the offerings. 
The reason why that book is as big as it is is because the 
Securities and Exchange Commission asks you to put what is 
pertinent that investors should know. But that is all they say. 
They don't tell you exactly what is needed to be put in that 
document. And I think if they found what was necessary for 
investor protection to put into a document of that nature, that 
would go down dramatically, and I think Ms. Sweeney would 
probably agree with me.
    Two, education. If we want people to stop getting burned 
over the internet or through whatever, we need to educate the 
public a lot more about private and public offerings, and that 
is the number one way. I mean, we have been harping for--I 
don't know, 20 or 30 years, to use seatbelts and now people are 
using seatbelts. And I think if we harp on them that, ``Hey, I 
think you should get a registration document, here are 10 
things that you should look at before you place money in a 
private company,'' or a public company or whatever, and harp 
this continually, I think you will cut down the amount of scams 
and frauds that are occurring over the internet, through the 
mails, and over the telephone.
    Mrs. Jones. Thank you.
    Chairwoman Kelly. Thank you very much, Mrs. Jones.
    If there are no more questions I am going to note that some 
Members may have additional questions and they may wish to 
submit them in writing. So without objection, the hearing 
record is going to remain open for 30 days for Members to 
submit written questions to these witnesses and to place their 
responses in the record.
    I really thank this panel. You have been extraordinarily 
patient with us. We do have more questions I am sure. You have 
also been very interesting in your responses, and we do thank 
you for your indulgence in allowing us a second round of 
questions here.
    This panel is excused with our great thanks, the 
subcommittee's great thanks, and appreciation for your time. 
This hearing is adjourned.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]




                            A P P E N D I X



                             June 26, 2001
[GRAPHIC] [TIFF OMITTED] T3742.001

[GRAPHIC] [TIFF OMITTED] T3742.002

[GRAPHIC] [TIFF OMITTED] T3742.003

[GRAPHIC] [TIFF OMITTED] T3742.004

[GRAPHIC] [TIFF OMITTED] T3742.005

[GRAPHIC] [TIFF OMITTED] T3742.006

[GRAPHIC] [TIFF OMITTED] T3742.007

[GRAPHIC] [TIFF OMITTED] T3742.008

[GRAPHIC] [TIFF OMITTED] T3742.009

[GRAPHIC] [TIFF OMITTED] T3742.010

[GRAPHIC] [TIFF OMITTED] T3742.011

[GRAPHIC] [TIFF OMITTED] T3742.012

[GRAPHIC] [TIFF OMITTED] T3742.013

[GRAPHIC] [TIFF OMITTED] T3742.014

[GRAPHIC] [TIFF OMITTED] T3742.015

[GRAPHIC] [TIFF OMITTED] T3742.016

[GRAPHIC] [TIFF OMITTED] T3742.017

[GRAPHIC] [TIFF OMITTED] T3742.018

[GRAPHIC] [TIFF OMITTED] T3742.019

[GRAPHIC] [TIFF OMITTED] T3742.020

[GRAPHIC] [TIFF OMITTED] T3742.021

[GRAPHIC] [TIFF OMITTED] T3742.022

[GRAPHIC] [TIFF OMITTED] T3742.023

[GRAPHIC] [TIFF OMITTED] T3742.024

[GRAPHIC] [TIFF OMITTED] T3742.025

[GRAPHIC] [TIFF OMITTED] T3742.026

[GRAPHIC] [TIFF OMITTED] T3742.027

[GRAPHIC] [TIFF OMITTED] T3742.028

[GRAPHIC] [TIFF OMITTED] T3742.029

[GRAPHIC] [TIFF OMITTED] T3742.030

[GRAPHIC] [TIFF OMITTED] T3742.031

[GRAPHIC] [TIFF OMITTED] T3742.032

[GRAPHIC] [TIFF OMITTED] T3742.033

[GRAPHIC] [TIFF OMITTED] T3742.034

[GRAPHIC] [TIFF OMITTED] T3742.035

[GRAPHIC] [TIFF OMITTED] T3742.036

[GRAPHIC] [TIFF OMITTED] T3742.037

[GRAPHIC] [TIFF OMITTED] T3742.038

[GRAPHIC] [TIFF OMITTED] T3742.039

[GRAPHIC] [TIFF OMITTED] T3742.040

[GRAPHIC] [TIFF OMITTED] T3742.041

[GRAPHIC] [TIFF OMITTED] T3742.042

[GRAPHIC] [TIFF OMITTED] T3742.043

[GRAPHIC] [TIFF OMITTED] T3742.044

[GRAPHIC] [TIFF OMITTED] T3742.045

[GRAPHIC] [TIFF OMITTED] T3742.046

[GRAPHIC] [TIFF OMITTED] T3742.047

[GRAPHIC] [TIFF OMITTED] T3742.048

[GRAPHIC] [TIFF OMITTED] T3742.049

[GRAPHIC] [TIFF OMITTED] T3742.050

[GRAPHIC] [TIFF OMITTED] T3742.051

[GRAPHIC] [TIFF OMITTED] T3742.052

[GRAPHIC] [TIFF OMITTED] T3742.053

[GRAPHIC] [TIFF OMITTED] T3742.054

[GRAPHIC] [TIFF OMITTED] T3742.055

[GRAPHIC] [TIFF OMITTED] T3742.056

[GRAPHIC] [TIFF OMITTED] T3742.057

[GRAPHIC] [TIFF OMITTED] T3742.058

[GRAPHIC] [TIFF OMITTED] T3742.059

[GRAPHIC] [TIFF OMITTED] T3742.060

[GRAPHIC] [TIFF OMITTED] T3742.061

[GRAPHIC] [TIFF OMITTED] T3742.062

[GRAPHIC] [TIFF OMITTED] T3742.063

[GRAPHIC] [TIFF OMITTED] T3742.064

[GRAPHIC] [TIFF OMITTED] T3742.065

[GRAPHIC] [TIFF OMITTED] T3742.066

[GRAPHIC] [TIFF OMITTED] T3742.067

[GRAPHIC] [TIFF OMITTED] T3742.068