    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                      A PROPOSAL TO INCREASE THE OFFERING
                          LIMIT UNDER SEC REGULATION A

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                DECEMBER 8, 2010

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-168

                                   ----------
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    STEVE DRIEHAUS, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan
    DAN MAFFEI, New York

            Jeanne M. Roslanowick, Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        December 8, 2010.............................................     1
    Appendix:
        December 8, 2010.............................................    27

                                   WITNESSES
                          Thursday, September 00, 2009

    Cutler, Scott, Executive Vice President and Co-Head of U.S.
      Listings and Cash Execution, NYSE Euronext.....................    11
    Eshoo, Hon. Anna, a Representative in Congress from the State of
      California.....................................................     3
    Hambrecht, William R., Founder, Chairman, & Chief Executive
      Officer, WR Hambrecht + Co.....................................     8
    Lempres, Michael T., Assistant General Counsel and Practice Head,
      SVB Financial Group............................................    10

                                    APPENDIX

    Prepared statements:
        Cutler, Scott................................................    28
        Hambrecht, William R.........................................    31
        Lempres, Michael T...........................................    49

                      A PROPOSAL TO INCREASE THE OFFERING
                          LIMIT UNDER SEC REGULATION A

                                  ----------

                          Wednesday, December 8, 2010

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:04 a.m., in
    room 2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Members present: Representatives Frank, Maloney, Watt,
    Moore of Kansas, Hinojosa, McCarthy of New York, Baca, Lynch,
    Miller of North Carolina, Scott, Klein, Foster, Himes; and
    Castle.
        The Chairman. The hearing will come to order. Our
    Republican colleagues are caucusing, and we will begin. I know
    our colleague from Delaware, Mr. Castle, is on the way, but
    unexpected traffic problems have caused a problem.
        This hearing was called--we haven't been doing much in the
    lame duck session, but we thought that this was a topic that
    was, frankly, not a partisan or terribly controversial one in a
    lot of ways.
        As I understand it, the Securities and Exchange Commission
    would have the power to do what we are talking about today,
    which was to raise the level on Regulation A. I know people
    keep talking about it as ``Reg A,'' but that led some people to
    think that there would be Caribbean music and dancing. And I
    don't want to attract the wrong--not the wrong, but a different
    crowd to this particular hearing. My legislation on the
    legalization of marijuana will be heard in another committee.
    So I did want to keep the distinction clear, although both of
    these have a certain support in northern California.
        The question is whether or not we should be urging--our
    colleague from Delaware has been able to join us, and we
    appreciate it--the SEC, as a practical matter, to increase this
    limit. The argument, clearly, is that it is helpful for capital
    formation for smaller companies and, in fact, is no detraction
    from a reasonable regulatory scheme.
        We invited some witnesses, and we worked with the
    gentlewoman from California, Ms. Eshoo, who is here, who is a
    major proponent of this. We did not specifically invite people
    we knew to be opposed, but we haven't heard from people who
    are. But let me make clear that the record stays open, if there
    are groups. And I know that sometimes when we deal with
    questions--for instance, on the reach of Sarbanes-Oxley, there
    are various groups representing investors or pension funds who
    express concerns. We have heard of none in this case, but this
    hearing may elicit some. And the hearing record will be open if
    there are any who would like to exercise different views.
        I do have--where is that paper--two statements I wanted to
    mention now.
        One, the National Venture Capital Association has offered a
    statement in support of this, arguing that it will enable more
    small companies to attract capital. And if there is no
    objection--and there does not appear to be any--that will be
    put into the record.
        And, without objection, the record will stay open for any
    further comments that people might have on this proposal.
        I should note also that it was Speaker Pelosi who first
    called this to my attention. Earlier in the year, we were a
    little busy with a couple of other matters people may remember.
    But it is something that the Speaker has taken a great interest
    in because of her interest in job creation. So we are glad,
    finally, to have this hearing. It may be in the next Congress
    that legislation could happen; it may also be that the SEC
    might be persuaded by some of what they hear today to do this.
        I, finally, will apologize for the fact that at 10:25, I
    will be leaving and turning the hearing over to the gentleman
    from Kansas, Mr. Moore, because I will be required to attend
    the meeting of the Democratic Steering and Policy Committee to
    make the case as to why I should remain the ranking member--or
    not remain, but return to the position I once had of ranking
    member.
        With that, I will recognize our colleague from Delaware.
        Mr. Castle. Thank you very much, Mr. Chairman.
        I really don't have an opening statement. I think we should
    get right to our witnesses, with the time limitations, except
    to welcome Anna Eshoo and the other witnesses who are to
    testify today.
        I yield back, Mr. Chairman.
        The Chairman. I thank the gentleman.
        The gentleman from Georgia, Mr. Scott, wanted to make a 2-
    minute statement.
        Mr. Scott. Thank you, Mr. Chairman.
        Let me just say a couple of points about this issue. It is
    of some interest to me, and I just wanted to make for the
    record a couple of points that, certainly, I think should be
    made regarding the increase of the offering limit under SEC
    regulations.
        I think it is very important that the proposed increase
    from $5 million to $30 million, though substantial, could
    indeed yield possible results if implemented appropriately.
    Because I think that this could help with job creation. And, as
    you know, on this committee I have been very, very much at the
    forefront of trying to appropriate our policy to place job
    creation at the forefront. And so I think that there is an
    advantage to this as job creation. And to facilitate the
    development of new technologies and products could also result
    from such an increase.
        We have seen the dollar limit increase incrementally 5
    times from its original level of $100,000 to the current level
    of $5 million, which was established in 1980. Since 30 years
    have now passed, the effects of inflation alone could be argued
    as a reason to increase the offering limit. And such an
    increase could enable smaller companies, small businesses, many
    of whom are backed by venture capital firms, more timely access
    to funding. And, again, these are the areas where jobs are
    created, our small businesses. And I think that this will be,
    certainly, helpful.
        So I am certainly interested in hearing from my colleague,
    Ms. Eshoo--I know of her great interest in this issue--in terms
    of what her opinions are in terms of what increase should be
    made to the offering, if any.
        Certainly, beyond any numerical increase in the limit,
    Congress should also consider the expected implementation by
    the SEC and whether such an increase would either be mandated
    or simply authorized.
        Those are some important points I wanted to make. I look
    forward to Ms. Eshoo. I certainly respect her opinion on these
    areas.
        Thank you, Mr. Chairman.
        The Chairman. The gentlewoman from New York, Mrs. Maloney,
    is recognized for 2 minutes.
        Mrs. Maloney. First of all, I want to welcome my good
    friend and colleague, Anna Eshoo. And I very much look forward
    to her testimony, so I will be very, very brief.
        The issue of giving smaller companies the tools and
    resources they need to raise capital and become the driving
    force of our economy is really critical for economic recovery.
    So I think that this hearing is very timely and important, as
    it pertains to job creation.
        And I look forward to her testimony about the benefits of
    raising the offering limit under Regulation A, as well as
    whether it will increase the use of the exemption for small
    issuers. So I welcome her, and I look forward to her testimony.
        I yield back.
        The Chairman. And our colleague from California is now
    recognized.

      STATEMENT OF THE HONORABLE ANNA ESHOO, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Ms. Eshoo. Thank you, Mr. Chairman and members of the
    committee, for inviting me to testify today to talk about this
    proposal to increase the offering limit under SEC Regulation A,
    which was, as you know, enacted during the Great Depression to
    facilitate the flow of capital into small businesses.
        As you know, I represent the innovation capital of our
    country, Silicon Valley. And we know there if we don't
    constantly innovate, we stagnate.
        The larger policy context for raising the Regulation A
    limit from $5 million to $30 million is to create what we are
    so desperate for: good jobs. We need to promote capital
    formation, technological innovation, and job creation. And I
    think that we can achieve these goals by revitalizing what is
    essentially a nonworking section of the Securities Act.
        So you may all ask, what is the problem and why should we
    consider increasing today's limits in Regulation A? The main
    problem is that hardly anybody uses it. Currently, there is
    little incentive to support the small initial public offerings
    under Regulation A. In fact, the current regulations are a
    disincentive, burdening a $5 million offering with $1 million
    to $2 million in underwriting expenses. So that is a pretty
    good reason why people aren't using it. At the same time, the
    threshold for traditional IPO funding has grown out of reach
    for most small companies, leaving them without the viable
    alternatives to raise money.
        Two firms in my congressional district, Silicon Valley Bank
    and Wilson Sonsini, have more than 9,000 private company
    clients between them--companies that are or will need an
    infusion of public capital. Under a revised Regulation A, small
    companies would gain access to capital, and it is a way to test
    the market to see if there is additional support. Regulation A
    will allow companies to seek small infusions of funds as they
    go along, and then investors can demonstrate their confidence
    with their checkbooks.
        But without this access to public capital markets, good
    ideas are really withering on the vine. And the impact of this
    recession on the venture capital market cannot be understated;
    it has been devastating.
        Raising the Regulation A cap from $5 million to $30
    million, I think, is a jobs program, and we should think about
    it that way--good jobs that are focused on the cutting edge of
    innovation, creating new products, new markets, additional
    growth for our economy. And these would be jobs created here in
    the United States.
        In considering whether to raise the limits, it is useful to
    examine the history. In 1933, Congress set the dollar limit
    under Regulation A at $100,000. It has been raised several
    times since then: $300,000 in 1945; $500,000 in 1972; $1.5
    million in 1978; $2 million in 1978; and $5 million in 1980.
    But, in 1980, the SEC waited until 1992 to actually adopt the
    same change in the rule. So it has been some time.
        In Silicon Valley, companies are seeking capital for the
    next breakthrough of technologies and finding the available
    capital--and this is what really gets me--in other parts of the
    world. We are falling behind as the world's technology leader,
    and a few simple modifications could make Regulation A an
    engine for capital formation and economic growth.
        Congress, of course, must weigh the potential risks to
    investor protection and the potential benefits--that is our
    job--all associated with Regulation A. It is a meaningful
    capital conduit, as it was originally intended. And the SEC can
    and should use its recently invigorated, thanks to your
    committee and your leadership here, reinvigorated enforcement
    program to prevent abuses.
        But make no mistake: There is pent-up demand. The money is
    available, and investors are willing. And there are unnamed
    ventures today that have the potential to be the future:
    Googles; Genentechs; Facebooks; and eBays. And we can do
    something to help make this happen.
        So I think overall this is a modest proposal, but I think
    it has high potential for capital formation, for technological
    innovation, and for job creation in our country. And, for all
    these reasons, I urge the committee to give all due
    consideration to the proposal to raise the cap on Regulation A
    offerings.
        And I thank you for having me here today. It is an honor to
    appear before the committee.
        The Chairman. Thank you.
        I am going to ask just a brief question.
        One of the things you mentioned in the bill--what I am
    hoping is that, in the funding resolution that is about to go
    through, both the Securities and Exchange Commission and the
    Commodities Futures Trading Commission get the significant
    increases they have asked for. We give a number of regulatory
    bodies increased authority, but the FDIC, the Fed, and the
    Comptroller, the new version, are largely self-funded through
    fees, and the new consumer agency will be. But the SEC and the
    CFTC, which both get significant increased responsibilities
    over derivatives and other issues, need the extra money.
        In a small way, though, this would seem to me to
    contribute--if I am correct, doing this would considerably free
    up some SEC resources. That is, by increasing this level, you
    would theoretically allow people to--not theoretically--you
    would allow people to go forward, and the SEC would not have to
    divert resources. Not huge, but it would go in the right
    direction.
        Would that be accurate?
        Ms. Eshoo. It seems to me, on the face of it, that you have
    just stated the case; it would. It would free up resources.
    And--
        The Chairman. And allow the SEC to concentrate on--
        Ms. Eshoo. Exactly, on other things.
        And I think, too, Mr. Chairman, that when you look at how
    many IPOs there were in 2005 and you take it to 2009, there is
    a drastic, drastic falloff.
        So this is a wonderful tool. It is not government money;
    this is private-sector money that would go into the public
    capital markets. So it is an important tool. It is not being
    used. There is a pent-up demand.
        So I think it is really an important proposal. And we are
    desperate to create jobs in this country. We know that. No
    matter where we go, people talk about it, ``What are we going
    to do?'' Here is a way of addressing at least part of it, a
    very important part of it.
        The Chairman. I appreciate that.
        And I do say, those who are fully familiar with the works
    of Jonathan Swift might want to refrain from calling this a
    ``modest proposal,'' since his modest proposal was not a great
    idea, if people remember it. It was somewhat sarcastic. But
    that does not detract from the merits of this.
        With that, I will recognize the gentleman from Delaware,
    and ask the gentleman from Kansas to assume the chair.
        Mr. Castle. Thank you, Mr. Chairman.
        I have no questions of the Congresswoman, except to thank
    her for, I thought, a clear statement of advocacy for this. I
    don't know what the other side is, but you did a good job on
    the pro side of it.
        Ms. Eshoo. Thank you.
        Mr. Castle. So we thank you.
        And I yield back.
        Ms. Eshoo. It is lovely to see you, and we are going to
    miss you here a great deal.
        Mr. Castle. Thank you. Thank you, Anna.
        Mr. Moore of Kansas. [presiding] I understand Mr. Castle is
    finished.
        Do you yield back?
        Mr. Castle. I do.
        Mr. Moore of Kansas. Thank you, sir.
        And do any other members have questions for Ms. Eshoo?
        Mrs. Maloney. I do.
        Mr. Moore of Kansas. Yes, Mrs. Maloney?
        Mrs. Maloney. Congresswoman, does the SEC need an act of
    Congress to raise the exemption, or could they do it by
    themselves and set the limit?
        Ms. Eshoo. I believe the SEC can take this on itself; they
    have before. But I think the oversight of the committee is very
    important, as well. And I know that the next panel, especially
    Mr. Hambrecht, can talk about or raise the issue of where there
    could be potential abuses and the protection of investors. But
    I do believe that the SEC can take this on themselves.
        Mrs. Maloney. And how did you arrive at the $30 million
    number? How was that derived?
        Ms. Eshoo. It really is--that number was arrived at by the
    needs of what small companies really need to help get off the
    ground. In other words, it is a workable number. Is it hard and
    fast? I don't think so, but I think that that range is very
    important.
        Mrs. Maloney. And how does Reg A work now?
        Ms. Eshoo. It is not working. No one uses it. That is the
    problem.
        Mrs. Maloney. But I am told that eight companies used it
    last year.
        Ms. Eshoo. Eight in our whole country.
        Mrs. Maloney. Yes.
        Ms. Eshoo. That says something in and of itself.
        Mrs. Maloney. Okay.
        Ms. Eshoo. When I have two firms in my congressional
    district, as I mentioned, Silicon Valley Bank and Wilson
    Sonsini--just between the two of them, they have about 9,000
    company clients that are looking to make investments. So that
    is why this has collected dust. The ceiling on it simply
    doesn't work in the 21st Century. And there is pent-up demand,
    and we should want to meet that demand.
        Mrs. Maloney. Okay. I have no further questions.
        Ms. Eshoo. Thank you.
        Mr. Moore of Kansas. Any more questions?
        Mr. Scott?
        Mr. Scott. Ms. Eshoo, could you walk us through and give a
    good example of just how this is a tool for job creation and,
    specifically, how the $30 million in increase would turn over
    into an increase of jobs, as specifically as you could?
        Ms. Eshoo. It is a great question, because I think that,
    because we are so desperate for jobs, that whatever we do, we
    want to attach ``and this will create jobs.'' And it seems to
    be illusory, in many instances.
        It is important to understand how this money works. First
    of all, the regulation with a new cap would allow companies to
    seek these small infusions of funds as they go along. Then
    investors would demonstrate their confidence, as I said
    earlier, with their checkbooks. Now, what happens? Once these
    dollars are invested, that is when the hiring starts taking
    place; that is how the companies actually start to grow.
        And it is important to know that, even against the backdrop
    of an economy where investment funds are scarce, at the high
    end, in deals of $100 million or more, there is a lot of
    action. But at the low end, deals of $50 million or less, the
    traditional IPO capital has really disappeared, and it hasn't
    come back. And, as I said, in 2004, there were 40 IPOs at $50
    million or less; in 2005, there were 38 IPOs at $50 million or
    less; and in 2009, there was one. So, clearly the existing IPO
    structure is not getting the job done for smaller companies.
        And those innovative companies, those new companies that we
    want to be born and grow, as the dollars come in, they keep
    hiring.
        I remember when Eric Schmidt, when I saw him somewhere some
    years ago, I said, ``Eric, what is new? What are you doing?''
    And he said, ``Well, actually, I am going off to this outfit
    called Google.'' And I said, ``You have to be kidding.'' It was
    the first time I had heard the word ``Google.''
        So we need new companies to be born, but these are the
    ingredients that help them grow. And, at this lower level of
    investment, nothing is going on. Essentially, the IPO market
    is--I don't want to use the word ``dead,'' but, in 2009, one
    IPO? That says something.
        Mr. Scott. Yes. I agree with you. And I think what you are
    saying in terms of almost any direct infusion of capital, the
    lead consequence has to be job creation. And it certainly does.
        Would you not agree that the argument that the increase in
    this $30 million would pose a potential risk to investors, that
    argument is kind of weak and that the upside is and the benefit
    is this job creation that would be created? Is that the best
    way we can respond to the argument that some people might feel
    that there may be a risk to investors in this?
        Ms. Eshoo. I think it is important for both the SEC and for
    Congress to examine what the risks could be. I think that is a
    very important thing to do. Here we are at the end of 2010. We
    know what the cost of risk is in this country. People in the
    country have paid a great price for risks that have been taken.
        So I think that Mr. Hambrecht can better answer that. I
    think he knows in a broad and deep way what the risks could be
    and what areas need to be examined.
        But I have no doubt that, if this is structured correctly,
    with the right oversight, and this committee has built in a lot
    of new enforcement mechanisms, that this can be carried out
    very well, without abuses, and rebuild the IPO market in our
    country--which, as I said, there is a pent-up demand for this,
    and I think that we can do something about it. And America will
    win.
        Mr. Scott. I agree with you, Ms. Eshoo. Thank you very
    much.
        Ms. Eshoo. Thank you.
        Mr. Moore of Kansas. Thank you.
        Any other questions?
        Thank you very much for your testimony, Ms. Eshoo.
        Ms. Eshoo. Thank you, Mr. Chairman, and members of the
    committee. It was lovely to be with you.
        Mr. Moore of Kansas. And could the next panel of witnesses
    please be seated?
        Thank you for being here today for this committee hearing.
        And we will ask each of the witnesses please to give their
    statement, if they have a statement to make. We will start with
    Mr. Hambrecht, founder and chairman and chief executive officer
    of Hambrecht & Co.
        Sir, if you would, please.

     STATEMENT OF WILLIAM R. HAMBRECHT, FOUNDER, CHAIRMAN, & CHIEF
                 EXECUTIVE OFFICER, WR HAMBRECHT + CO.

        Mr. Hambrecht. Thank you, Mr. Chairman, for the opportunity
    to present our proposals to hopefully--how shall I put it--
    rebuild an IPO market that has basically been moribund for the
    past decade.
        I think, rather than read my remarks, I would like to--I
    have submitted our answers to the questions that were directed
    to us from the committee. If I may, I would like to highlight a
    few of the points.
        Mr. Moore of Kansas. Please do.
        Mr. Hambrecht. And then hopefully, if you have any
    questions, I would be happy to deal with them.
        Mr. Moore of Kansas. Yes, sir.
        Mr. Hambrecht. First of all, the jobs question, which is
    really why we are all here.
        I think there is significant data out there that very much
    shows that the major engine of job creation for the past 4 or 5
    decades in this country has come from new entrepreneurial
    companies. The National Venture Capital Association has
    estimated that 90 percent of job creation has come from these
    companies. Living and working in Silicon Valley, it is so
    obvious that even the Hewlett-Packards and the Intels are
    really young companies. They started in our generation, and
    they have grown tremendously.
        And it continues to happen. There are still some great
    young companies that come along. In our testimony, we pointed
    out three examples. Google, of course, is the obvious one. Ms.
    Eshoo brought it up. But when they went public 5 years ago,
    they had 1,628 employees. Today they have 19,800 employees.
        Now, it is easy to say, well, Google is a very unusual
    company. And it is. But there are countless examples of it.
    Another one, Salesforce, which became public really, I guess,
    just a year or so before Google, they had 500 employees; they
    now have 4,000 employees.
        But the one I do want to bring up, because I think it is
    more applicable to the world we are talking about, is Adobe,
    Adobe Systems. They went public in 1986, $5.5 million, a tiny
    little offering. At that time, they had 49 employees. Today
    they have 8,600 employees.
        And that is the kind of company we are worrying about. The
    Googles and the Salesforces of the world will attract
    underwriters and will be able to go into the public market. But
    it is the small software company, like an Adobe, that does not
    have access to the public market.
        Representative Eshoo, I think, described the IPO market for
    under $50 million better than I could. We have a chart in our
    testimony that shows it. It is basically a number of
    offerings--it is 3 percent of all public offerings in the past
    decade. And so, clearly, it just isn't working for small
    companies.
        To move to the Regulation A exemption, the reason we
    focused on it is that, first of all, it is part of the
    regulatory landscape. It was written into the 1933 Act. It
    worked pretty well until, actually, 1996. And in 1996, under
    the Securities Markets Act that was passed then, it granted a
    blue-sky exemption to any company that was listed on an
    exchange. And what this did is it took the burden away of
    having to file with 48 different State regulators--a very
    expensive, very time-consuming process. And it streamlined the
    IPO process.
        But the problem is, you really have to have an offering of
    somewhere between $20 million and $30 million to qualify to
    list on any of the exchanges, including NASDAQ. So to get the
    blue-sky exemption, you have to have an offering of $20 million
    or more. And this is what basically drove the Regulation A
    exemption into just an unworkable position.
        When you look at it, it has some advantages. It is
    basically a simplified S-1 registration statement. For those of
    you who have read prospectuses, the way to describe it is it
    leaves the last 50 pages out, which are largely schedules,
    backup data that apply to big companies but really, for the
    most part, don't really apply to smaller companies.
        Secondly, it allows you to test the market. It allows you
    to go out and talk to investors to see if they are interested
    before you commit to the expense of hundreds of thousands of
    dollars or, in an S-1 process, millions of dollars. You can
    find out whether you have a good chance of basically
    succeeding. This is particularly important now because, since
    2007, over 30 percent of the S-1 filings have been withdrawn,
    they have been unsuccessful. So this was a tremendous burden on
    the companies that tried to do the deals.
        And thirdly--
        Mr. Moore of Kansas. If you can, please wind up your
    testimony. Your time has expired, but if you could--
        Mr. Hambrecht. Okay. Let me just close, then--
        Mr. Moore of Kansas. Sure.
        Mr. Hambrecht. --with one set of data that I would ask you
    to look at. This is the data on M&A transactions versus IPO
    transactions. We have it in our testimony.
        Effectively, what you will see is that the M&A number is a
    minimum of 10 times what the IPO volume is. And, as a result,
    virtually every M&A transaction results in job loss. It is the
    consolidation of two companies, and you have overlap of
    overhead, and people lose jobs. And that is what is happening
    in Silicon Valley today. That is the exit route people are
    taking because the IPO possibility is not there.
        Thank you very much.
        [The prepared statement of Mr. Hambrecht can be found on
    page 31 of the appendix.]
        Mr. Moore of Kansas. Thank you, sir, Mr. Hambrecht.
        And next, Mr. Lempres, if you would please make your
    opening statement. And you are assistant general counsel and
    practice head for SVB Financial Group. Sir, you have 5 minutes.

    STATEMENT OF MICHAEL T. LEMPRES, ASSISTANT GENERAL COUNSEL AND
                   PRACTICE HEAD, SVB FINANCIAL GROUP

        Mr. Lempres. Thank you very much.
        As mentioned, I am here with SVB Financial Group and its
    subsidiary, Silicon Valley Bank. One of the things that is
    unusual about SVB is that we have an extraordinarily deep
    connection with emerging growth companies, not only in Silicon
    Valley but throughout the Nation and, increasingly, throughout
    the world. Our platform gives us insight into both debt and
    equity funding channels.
        Through our subsidiary bank, Silicon Valley Bank, we are
    the premier provider of financial services for companies in the
    technology, life science, venture capital, and premium wine
    industries. We serve more than 13,000 client companies through
    26 U.S. and 5 international offices. And we provide banking
    services for approximately half of the venture-backed
    technology companies in the world today.
        In addition to our core banking service, SVB, the holding
    company, also sponsors or has sponsored venture capital funds
    through our SVB Capital Division and made investments in
    certain third-party venture funds.
        One of the things we do is a survey of startup businesses
    annually. In our Startup Outlook 2010 survey, executives for
    early-stage growth companies cited access to capital as their
    number one concern. So the executives identified that as their
    biggest challenge going forward.
        This is an accurate observation, in many ways: Both debt
    and equity to raise capital exists, but nearly all funding
    channels are currently under stress. You have heard some of the
    statistics about that already. Revising Regulation A could fill
    a need.
        The impetus behind the creation of Regulation A was a very
    good one. Unfortunately, in recent years, as you have been
    hearing, Regulation A has not proven to be a useful capital-
    raising vehicle for small issuers. It was used only a total of
    78 times during the 10-year period between 1995 and 2004. An
    average of 8 filings a year, with a maximum amount of $5
    million each, really proves the irrelevance of Regulation A in
    today's economy. It is simply not a viable vehicle as currently
    structured.
        The proposed revision of Regulation A strikes a better
    balance. If Regulation A is to become effective, the offering
    size will have to be raised. And $30 million seems an
    appropriate limit to increase Regulation A offerings. In our
    view, actually, $50 million would make the Regulation A
    offerings more useful to companies engaged in capital-intensive
    sectors. And, in the innovation economy, there are some very
    good examples of these capital-intensive companies. For
    example, clean-energy companies now require substantial capital
    at relatively early stages in order to establish that a new
    technology is commercially feasible.
        I would also like to stress that many new products, new
    technologies are developed and implemented by emerging
    companies. High-growth small companies are more nimble, more
    entrepreneurial, and less invested in the status quo than
    larger companies as a general rule. Thus, it is the emerging
    company that often implements improvements and disruptive
    technologies that help revolutionize the way we work and live.
    And that is truly where much of the job growth comes from in
    America today.
        I know the committee asked six specific questions, and I
    look forward to answering them in more detail, as we have in
    the record. But I do want to stress a couple of things.
        You asked specifically about drawbacks to raising the limit
    under Regulation A. I think it has to be noted that smaller
    companies do tend to present different financial risks than
    bigger companies. They have, typically, a shorter financial
    history. But I would also say that the benefits of raising the
    limit to $30 million or $50 million, in our view, far outweighs
    any risks that would be presented. In job creation alone, it
    would be a significant step.
        I just would like to thank you for this opportunity to
    present information on such an important topic. I believe the
    proposed revision of Regulation A could make a real difference
    to small businesses and the entire economy, particularly its
    innovation sector.
        With that, I thank you and look forward to answering any
    questions.
        [The prepared statement of Mr. Lempres can be found on page
    49 of the appendix.]
        Mr. Moore of Kansas. Thank you, Mr. Lempres, for your
    testimony.
        And next, the Chair will recognize Mr. Scott Cutler,
    executive vice president and co-head of U.S. listing and cash
    execution at New York Stock Exchange Euronext.
        Mr. Cutler, you are recognized for 5 minutes, sir.

    STATEMENT OF SCOTT CUTLER, EXECUTIVE VICE PRESIDENT AND CO-HEAD
           OF U.S. LISTINGS AND CASH EXECUTION, NYSE EURONEXT

        Mr. Cutler. Thank you, Mr. Chairman, and members of the
    committee.
        I represent, as you said, NYSE Euronext, the world's
    leading and diverse exchange group with businesses in equities,
    futures, options, and markets throughout the United States and
    in Europe.
        I appreciate the opportunity to testify today, and I
    applaud your strong commitment, even in the late days of this
    Congress, to promoting legislation that will help more American
    entrepreneurs access the capital that they need to expand their
    businesses and create jobs.
        Across America's economy today, small businesses are
    struggling to find capital. A record 41 percent of small-
    business owners cannot get adequate financing, according to the
    most recent data of the National Small Business Association, up
    from 22 percent in 2008.
        Regulation A was adopted to address this very challenge,
    specifically to provide small businesses with the opportunity
    to access capital markets without incurring the expense or
    meeting the regulatory burden of full registration under the
    Securities Act of 1933.
        Increasing the SEC's Regulation A exemption from $5 million
    to $30 million would open the capital markets to more
    entrepreneurs--a vital step towards fueling America's most
    vigorous job-creation machine.
        Oftentimes, the greatest acceleration in job growth occurs
    after a company's initial public offering. In fact, the
    National Venture Capital Association reports that 92 percent of
    all job growth within publicly traded companies occurs after
    the company's IPO.
        Consider a few examples. When Pixar released its first
    full-length movie, a little animated film called ``Toy Story,''
    the company employed fewer than 100 people. Going public
    provided the financing for Pixar to grow from a small animator
    to a major motion picture studio. By the time the company
    released ``Toy Story 3'' last summer, the number of jobs at
    Pixar alone had grown more than eightfold.
        Another growing company, Vitamin Shoppe, went public last
    year in 2009. In the 9 months that followed, the company
    created nearly 300 new jobs and opened 29 new stores, the
    fastest expansion in its history.
        Congress has long recognized the benefit of helping small
    businesses secure capital through public offerings, yet, over
    the years, the Regulation A exemption has not been scaled to
    meet the demands of our modern economy. The $5 million
    exemption, which was last raised in 1980, is not indexed for
    inflation. It is now too small to warrant companies incurring
    the time and expense to satisfy the offering and disclosure
    requirements of Regulation A. As a result, between 1995 and
    2004, as others have said, on average, only eight companies per
    year utilize Regulation A.
        While some believe that Regulation D, which is the
    mechanism that most companies use for private placements,
    offers a viable means for small companies to raise capital,
    this provision has critical limitations. Regulation D offerings
    can only be made to a small group of qualified investors, and
    securities sold in such transactions are subject to transfer
    restrictions. A Regulation A offering, on the other hand, is a
    public offering, providing access to a large pool of investors.
        Raising the Regulation A exemption to $30 million seems to
    be a reasonable maximum, although most full registration IPOs
    today involve significantly higher offering minimums. Thus,
    this still leaves a gap between the $30 million ceiling and the
    level at which a company can realistically access the full
    registration IPO market.
        So, in order to be effective, any modification of
    Regulation A must be implemented in a way that promotes capital
    raising by smaller companies while also protecting investors.
    This is why NYSE Euronext believes Congress should also direct
    the SEC to avoid imposing disclosure, governance, and other
    burdensome provisions that may actually increase costs and
    reduce the attractiveness of Regulation A.
        An exchange trading platform may have advantages for
    companies that issue securities in Regulation A offerings.
    Establishing a separate exchange trading platform may make
    these offerings more effective by providing some structural
    elements to improve liquidity, trading interest, and economics,
    as well as investor interest. However, we believe that further
    investigation would be required to determine if such platforms
    would be economically feasible.
        We believe all the relevant data point to one direction:
    Entrepreneurs and small businesses cannot access the capital
    they need to grow and create jobs. And I urge you to revive
    Regulation A and dedicate it to the role Congress originally
    intended.
        Thank you again for allowing me to testify, and I look
    forward to answering any questions.
        [The prepared statement of Mr. Cutler can be found on page
    28 of the appendix.]
        Mr. Moore of Kansas. Thank you, Mr. Cutler.
        And thanks to all of our witnesses, including
    Representative Anna Eshoo, for your testimony here today.
        And I would like to now begin my questions for Mr. Lempres.
    I appreciate the point you made on page 4 of your written
    statement that, ``Small, growing companies need a variety of
    funding options, including equity-based financing, to compete
    and grow their businesses. Congress should continue doing all
    it can, as we have with legislation like the Small Business
    Jobs Act enacted into law earlier this year, to empower small
    businesses and give them every opportunity to succeed and
    create jobs.''
        On page 6 of your statement, sir, you indicate your support
    for increasing the Reg A threshold from $5 million to $30
    million and even a further increase up to $50 million. It seems
    to me like an increase to $30 million make sense, but I think
    we should also make sure this increase is designed to help
    smaller issuers and not their mid-sized or larger competitors.
        Mr. Lempres, would you support legislation that raises the
    threshold to $30 million for now but then require the SEC to
    review this threshold every 5 years or so, and if there is
    sufficient evidence to provide for a higher limit, they would
    be given flexibility to do so? Would you support that, sir?
        Mr. Lempres. Yes. I think that is a good idea.
        I don't think there is any magic to a $30 million or $50
    million figure. But I do think that we should be aware that the
    world is changing and that there are companies now, as I
    mentioned earlier, particularly, for example, in the clean-
    energy sector, where it takes a great deal of capital to get
    going. We have some wonderful ideas, again, not just in Silicon
    Valley but around the country, and it is difficult to make sure
    those ideas are able to be fully funded.
        I think $30 million is a reasonable number. I think it is
    certainly more effective, and I think you would see some real
    activity at that level.
        Mr. Moore of Kansas. Thank you, sir.
        Mr. Hambrecht or Mr. Cutler, would you support providing
    the SEC with some flexibility on this threshold if they have
    strong evidence that raising it will benefit small issuers
    while not compromising oversight or adequate investor
    protection? Does $30 million strike the right balance?
        Mr. Hambrecht, do you have a comment on that?
        Mr. Hambrecht. Yes, I believe $30 million would allow
    companies to use it. The vast majority of companies that don't
    have access to the market, I think, could and would use the $30
    million exemption.
        I might add, if I could, on the risk side of it, the one
    criticism of Reg A is that it doesn't require audited
    financials. And I think it would be important to have the SEC
    implement it with whatever else they think is necessary.
    Because virtually every company that raises money outside has
    audited numbers, so it doesn't really mean anything. So I think
    applying a requirement for an audit would be a positive step,
    along with the $30 million.
        Mr. Moore of Kansas. Thank you, sir.
        Mr. Cutler, any comments?
        Mr. Cutler. Yes, we would also be supportive of that.
        I would note that becoming a public company is important
    because it provides permanent access to capital. And we noted
    earlier that most companies today are not able to access the
    public markets and access to permanent capital without raising
    $75 million to $100 million. And so, having a much lower
    threshold to be able to attract permanent capital in the public
    markets at $30 million is an adequate level.
        I would note that still does create a gap between what is
    currently a standard IPO for most companies. And so I think we
    would be very supportive of that; as well, also supportive of
    what Bill had indicated. The need for audited financials and
    disclosure to protect investors for these types of offerings is
    also important.
        Mr. Moore of Kansas. Thank you, sir.
        Mr. Hambrecht, on page 4 of your testimony, you lay out a
    rough estimate of about 750,000 jobs that could, in theory, be
    created by raising the Reg A limit to $30 million.
        Do you have any sense of how long it might take to create
    that many jobs through adjustments to Regulation A? And is
    there anything Congress can do to speed up job creation through
    these or other adjustments to Reg A?
        Mr. Hambrecht. First of all, I think it is important that
    this Regulation A adjustment be made as soon as possible. Right
    now, every day, you read more and more companies are being
    acquired. So I think it is a very real time problem today that
    has to be adjusted.
        How long it will take to get going, it is hard to say. We
    have talked to literally dozens of companies that are very
    willing and able to move ahead as soon as this is implemented.
    I would hope that basically, the small-cap market declined by
    about 4,000 companies over the last decade. So that says to me
    there probably should have been 4,000 IPOs over the last
    decade. Which, incidentally, would be 400 a year, which is
    about equal to what it was in the 1990's and the 1980's.
        So, to me, as soon as you can get it going, I would
    imagine--it is hard to imagine 500 offerings the first year,
    but I would be willing to bet it would happen over the next 3
    to 4 years.
        Mr. Moore of Kansas. Thank you, sir.
        And I would like to ask the same question of the other
    gentlemen, except my time has expired. And I would ask you, if
    you have any comments on that, to submit those in writing,
    please.
        Next, the Chair will recognize Mr. Castle for 5 minutes.
    Sir?
        Mr. Castle. Thank you, Mr. Chairman.
        I want to try to take the conversation a little bit beyond
    some of the testimony and something that the chairman asked a
    moment ago that was the latter part of what he stated. But all
    of us here--it has been stated in both opening statements and
    by Congresswoman Eshoo--we are all concerned about job
    creation. Obviously, the whole country is, and Members of
    Congress are.
        And my question to you is: Beyond the changes in Regulation
    A which you have discussed today, which seem to make sense to
    me, what could Congress do to enable our small companies to
    raise capital which would allow them to expand and create jobs?
    Or what else would you recommend Congress be doing in general
    for the creation of jobs and economic opportunity, perhaps even
    beyond the raising of capital?
        And I ask that question to any one of you or all of you, if
    you are willing to take a shot at it.
        Mr. Lempres. One answer I can offer up relatively quickly
    that undercuts the utility of Regulation A is the effect of
    State blue-sky laws on raising moderate amounts of capital.
    Complying with the various State blue-sky laws is a burden for
    companies that are seeking to access capital, particularly
    smaller companies. That should be addressed, it seems to me, as
    part of a look at Regulation A.
        I think, more broadly, Congress should take a look at what
    is happening to our venture capital markets, what is happening
    to our innovation sector. It does not look the way it did 5
    years ago or 10 years ago, and there is much more being done
    overseas than there was.
        I think that a thorough review should look at the layers of
    regulations that have been added over the years to see if they
    are all still justified, because regulatory compliance does
    impose a burden, particularly on smaller companies as they
    begin to look to grow.
        But rather than provide a solution for you at this time,
    unfortunately all I can do today is point out the issue and say
    I think it is an important one.
        Mr. Castle. Very good.
        Mr. Cutler?
        Mr. Cutler. I would comment that, when you look at the
    state of the capital markets, one has to have a global
    perspective. Today's capital markets are global. We have
    capital that is being created around the world. And, more
    importantly, the companies that are created here in the United
    States that are employing hundreds of Americans are also
    competing globally.
        And so, any regulation that we can do to enable companies
    access to capital in a way that is efficient and cost-
    effective, where the regulatory and the tax burdens are
    competitive with what these companies are competing up against
    around the world, would certainly go a long way towards
    fostering more job-growth creation and innovation in our
    economy and also help allow the United States to compete
    globally.
        Mr. Castle. Thank you.
        Mr. Hambrecht, any thoughts?
        Mr. Hambrecht. I know the Congress has been very active
    with the Small Business Act and have made more money available
    through the Small Business Act. My own personal belief is that
    if you really want companies to grow and be aggressive, you
    should allow them access to equity. Debt has to be paid back,
    and debt is something that controls growth and holds growth
    back.
        And I think the great companies that have risen in Silicon
    Valley and elsewhere have largely done it with equity and have
    done it in equity markets. This was one of the great advantages
    we have had over the last 3 or 4 decades. And what we are
    trying to redress here is the fact that it isn't working right
    now for small companies.
        I wish I had some other ideas. I keep asking, and, somehow
    or another you have to get the IPO market going. Congresswoman
    Eshoo asked me--that is what led to this hearing. She said,
    ``How do you get the IPO market going?'' This is the only way I
    know.
        Mr. Castle. If you have other ideas after you leave here,
    please feel free to write to me and suggest some. As I
    indicated, we are all looking for these opportunities, and it
    makes a difference.
        The other concern that I have is that, just listening to
    your testimony and the answer to your questions, while you are
    here to testify on behalf of $30 million, the concept of
    perhaps going higher than that is not something that you would
    object to; is that correct? Do any of you feel there should be
    a cap on how high we should go?
        Mr. Hambrecht. I think $50 million would be great. Thirty
    million was arrived at by--that was the average size IPO in the
    1980's and the 1990's. That worked well. That worked for so
    many of these companies. The $100 million and above was a
    creation of the Internet bubble that happened in the last 2 or
    3 years of the 1990's. So, to me, $30 million would get us back
    to what used to be normal. It certainly wouldn't hurt; it would
    help. It would add to the companies that use it, and they would
    have the same characteristics as the smaller company, yes.
        Mr. Castle. Thank you.
        I yield back, Mr. Chairman.
        Mr. Moore of Kansas. I thank the gentleman for his
    distinguished service and for his questions here, and the Chair
    next recognizes Mrs. Maloney of New York for 5 minutes.
        Mrs. Maloney. Earlier, it was testified that the SEC could
    raise it if they saw fit, and due to the fact that we are still
    reeling from economic challenges and the financial crisis, what
    is the downside of doing this? Does the investor community
    support raising the offering or not? What are the protections
    for investors by exempting them from filing with the SEC?
        Mr. Hambrecht. May I?
        Mrs. Maloney. Sure. Anybody.
        Mr. Hambrecht. I think, first of all, the addition of an
    audit requirement would go a long way towards answering any
    questions people have about added risk into the marketplace. In
    our testimony we have some data that shows the historical
    performance of the small cap indexes in the market over the
    last 20 and 30 years, and while it is true that small cap
    markets are generally more volatile than larger ones, the
    performance has been as good as or better than large-company
    investors. So there are plenty of people out there, plenty of
    institutions that run very aggressive and very professional
    investment funds and small cap companies, and I think the
    protections that they have now in terms of transparency and
    reporting requirements has worked well, and I don't see why you
    would need any more.
        Mrs. Maloney. Under the Dodd-Frank bill, I join many of my
    colleagues in sponsoring the amendment that would exempt
    smaller companies under $75 million in market capitalization
    from the 404(b) audit--independent auditor requirement, because
    the small businesses in my district were telling me that it was
    onerous. So to replace the filing with an auditor requirement,
    I think we would hear the same type of resistance from small
    businesses. They were telling me this is very costly.
        Could you explain exactly what how Reg. A works? It is
    merely filing with the SEC, correct? Why is that going to cost
    a company $2 million? Something is wrong with the filing
    requirement if we are asking them to spend $2 million to file.
    We should look at that. And, if you could explain exactly how
    it works and why is it so onerous that only eight companies
    filed under Reg. A.
        Mr. Hambrecht. The first basic difference is that under
    Regulation A, you file an offering circular, not a prospectus,
    and there are some liability differences there, not just--not
    major, and if you look at it, it looks just like a prospectus,
    except it doesn't have all the supporting data in the back is
    about what it boils down to.
        One of the great frustrations of my career has been dealing
    with the legal and accounting costs of an IPO. They just
    continue to multiply. And it is a system that has scaled up
    along with the underwriters, and it is very difficult to fight.
    There is no reason in the world why you shouldn't be able to
    file a Regulation A, almost without a lawyer.
        Mrs. Maloney. Why do you think--and I will ask all of you--
    companies are choosing not to list in the United States?
        Mr. Cutler. Companies that are domiciled in the United
    States are listing in the United States public markets. If they
    want to provide stock options to their employees, if they want
    to sell stock to U.S. investors, they have to list within the
    United States. So we are not actually seeing a trend of
    companies, entrepreneurial companies, from the United States
    listing in foreign markets.
        We do continue to see a trend of nondomestic companies
    coming to the United States markets because of what they
    represent to the world: fair, transparent, deep, and liquid
    markets. And we want to continue to promote that opportunity
    that the United States capital markets continue to be
    competitive with other markets around the world.
        Today, the leading markets for initial public offerings are
    actually Shanghai, Shenzhen, and Hong Kong. The New York Stock
    Exchange is number two.
        Mrs. Maloney. Your CEO, Mr. Cutler, recently said that this
    is the most robust IPO pipeline that we have seen in years, and
    I understand that companies are lining up to go public. Can you
    expand on this, what you attribute this to?
        Mr. Cutler. We have seen in the last 2 months, in October
    and November, more capital raised in those 2 months than we had
    seen in all of 2009 and 2008--or 2008, and so we see a very
    deep pipeline, and I think that is reflective of recovery in
    the markets, recovery from the financial crisis, and it is
    global and across all industries. But I will still note that
    companies that are trying to raise capital below a $50 million
    amount, we are not seeing that.
        Mrs. Maloney. My time is up, and let us end with that
    positive statement that the capital markets are rebounding.
        Thank you, Mr. Chairman.
        Mr. Moore of Kansas. Thank you, Mrs. Maloney.
        The Chair next recognizes the gentleman from North Carolina
    Mr. Watt, for 5 minutes, sir.
        Mr. Watt. Thank you, Mr. Chairman.
        Mr. Cutler, are there comparable limits on non-U.S. stock
    exchanges, comparable to the $5 million limit?
        Mr. Cutler. I am sorry, I don't understand the question.
        Mr. Watt. On other stock exchanges, non-U.S. stock
    exchanges in other countries, are there comparable limits?
        Mr. Cutler. There are opportunities in other countries that
    have smaller marketplaces that are less regulated. For example,
    we operate a marketplace in Europe called Alternext that has
    sort of a nonregistration element to it which is accessible by
    companies, raising $5 million to $10 million--
        Mr. Watt. I am talking about the regulatory structure now.
    Are there, on any of the other stock exchanges worldwide,
    comparable restrictions?
        Mr. Cutler. Yes, there are initial listing requirements,
    minimum thresholds in terms of the dollars amounts or market
    capital--
        Mr. Watt. And what are they? I am just trying to figure out
    how we are comparing to other countries.
        Mr. Cutler. Every exchange around the world in every
    country has those requirements. They all differ. The ones with
    the lowest standards would be those markets that you find in
    Shenzhen, London AIM, the Alternext market in Europe that are
    available for--
        Mr. Watt. And what are those limits? I am just trying to--
    what is the range of the limits?
        Mr. Cutler. I would have to get back to you with the exact
    details, but--
        Mr. Watt. Okay. That is fine.
        Mr. Cutler. Very small companies are going public on those
    markets, below $50 million in market cap.
        Mr. Watt. Okay. Let me ask you to discuss, Mr. Hambrecht,
    the interplay between Rule 506 of SEC Regulation D and what is
    happening here. I take it the whole reason for registration is
    to protect potential purchasers of stock, right? That is the
    rationale for it, and I am sympathetic to job creation. I am
    sympathetic to capital formation, capital raising, but what we
    don't want to do is compromise exposure of consumers, and rule
    506 at least has some protections there. Should we be expanding
    those, the flexibility under rule 506, as opposed to raising
    this limit, or is that not an acceptable alternative?
        Mr. Hambrecht. I think Regulation D basically regulates
    private placement, and as a result of a Regulation D filing,
    you do not get a public market afterwards. Stock is not freely
    tradable afterwards. This is the advantage of an IPO, and this
    is the process that leads a company to--
        Mr. Watt. Okay. So I should be comparing this with other
    public offerings, not rule D, Regulation D?
        Mr. Hambrecht. Exactly.
        Mr. Watt. That is fine. All right. So then are there--you
    mentioned audits, an audit requirement you think ought to be
    one of the requirements, but then you turn around two or three
    sentences later and said you ought to be able to do this
    without even having a lawyer.
        Mr. Hambrecht. Right.
        Mr. Watt. I am a little perplexed about how you square
    those things now. You are not really serious about issuing a
    public offering of stock of any kind without the benefit of a
    lawyer, I assume. That was a little hyperbole, I take it.
        Mr. Hambrecht. Yes and no. My philosophy has always been--
        Mr. Watt. Let me ask a more direct question. If you are
    expanding this from $5 million to $50 million or $30 million,
    what are the other things that you would want to impose to
    protect potential buyers, if any? You mentioned the audit
    requirement, but are there other things that you would want as
    a precondition for doing that?
        Mr. Hambrecht. Yes. I think, first of all, the registration
    process now in place in the United States works well. There
    have been very few fraudulent IPOs in the United States. It is
    a good process.
        The reason I put the lawyer comment in is I have always
    felt it should be an investment document. It should be a
    document that gives the investor every fact that he should
    consider or want to consider before he makes his investment.
    That, to me, is the essence of a registration statement, and
    that is why they have to be done by the management and by the
    financial people, along with the lawyers to make sure they
    comply with the law. But it has to be an investment document.
    That is the whole point of it, because I think if the
    marketplace gets a complete information package, it will make
    good decisions. The market is pretty smart.
        Mr. Moore of Kansas. The gentleman's time has expired.
        The Chair will next recognize the gentlelady from New York,
    Mrs. McCarthy, for 5 minutes.
        Mrs. McCarthy of New York. Thank you, Mr. Chairman.
        A number of my questions have already been answered, and
    just going over some of the background that I had in a meeting
    last night, I guess the question I would like to ask all three
    of you is that if we do specific terms and conditions that
    should be imposed in connection with an increase in the
    offering limit, should Congress stipulate those terms, or
    should we be looking at those terms and conditions and leave
    them to the SEC? Which basically would work out better, and
    what are the drawbacks, and what are the positive aspects on
    Congress or the SEC?
        Mr. Lempres. I can say from my standpoint, the imposition
    of terms and conditions is the kind of thing a regulatory
    agency, the SEC, is better positioned to do for a number of
    reasons. One would be they have greater flexibility. They can
    go through a regulatory reform process, issue proposed rules,
    take comments from the public, and adjust more readily than
    Congress can. I think that the imposition of these kinds of
    terms and conditions is the kind of detail that is
    appropriately left to the regulators. I think the SEC generally
    handles those kinds of things quite well.
        Having said that, I would stress that there is an important
    role for Congress here. The need for congressional involvement
    is shown simply by the state of Regulation A today, because the
    SEC does have the authority to take the kinds of actions that
    we have been talking about, and it has chosen not to do so. I
    think it is very important for Congress to step in and say this
    is a priority. Congress can provide the impetus to get helpful
    reform going. But I do believe the SEC has real expertise, and
    it should be tapped.
        Mrs. McCarthy of New York. Do you think that then the SEC
    would need more resources to basically go forward with that?
        Mr. Lempres. I can't say off the top of my head that the
    answer is yes. My gut is probably not, but I think that one of
    the problems, we are measuring it against something that
    doesn't exist now, because Regulation A filings are essentially
    not occurring, so they are not applying resources to them
    today.
        I don't know the answer to that. I don't think it would
    require any substantial increase in resources.
        Mrs. McCarthy of New York. Being that there is a little bit
    of time left, which usually never happens, is there anything
    that was in your testimony that you couldn't talk about that
    you would want to bring out in front now?
        Mr. Hambrecht. I would just add one addition to the SEC. In
    the 1990's, the SEC would process 500 to 600 S-1 registration
    statements a year. Now that--they are under 100. I know they
    are doing a lot of other things because of the financial
    crisis, but a Regulation A registration is much simpler. It has
    a 28-day reporting requirement back, and it used to work pretty
    well. They used to actually do them in their regional offices.
    I don't know if they would do that now, but it is less of a
    burden than a lot more S-1.
        Mrs. McCarthy of New York. Thank you for your testimony.
        Mr. Moore of Kansas. I thank the gentlelady, and the Chair
    next recognizes the gentleman from Massachusetts, Mr. Lynch,
    for 5 minutes, sir.
        Mr. Lynch. Thank you, Mr. Chairman, and I want to thank Mr.
    Castle as well for his leadership here, and I want to thank our
    witnesses for helping us with this work.
        I tend to think that the lack of applications or interest
    in this is more to do with the economy than some of the
    limitations at the current time, but I am with you. I believe
    that this is something that has not been changed since 1980,
    and I think that an increase is certainly a reasonable request.
    I am not so sure that $30 million is the number.
        But I am concerned about the fact that we are now going to
    open this up to unsophisticated investors, and while I know
    that in your testimony, you mentioned companies like Pixar and
    Twitter and Facebook, there are also a lot of dogs out there
    that probably weren't thoroughly vetted and yet were launched.
    And so I am concerned about the consumer protection angle of
    this. I think we can strike a balance, however.
        Let me ask you, have you actually reached out to the SEC
    given the new responsibilities that we are giving them under
    the Dodd-Frank Act? Have you asked them about concerns that
    they might have in terms of raising this exemption from $5
    million to $30 million?
        Mr. Cutler. Thank you, Congressman.
        What I would comment about that is if you look at the
    requirements of the offering circular under Regulation A, there
    is a section in there that requires the issuer to identify
    risks associated with the offering, which are very similar
    requirements that you would see in an S-1 full registration
    statement. So the similar sort of identification of risks to
    the offering, risks to the issuer would be required in an
    offering circular under Regulation A as you do have under a
    full registration statement.
        So I think when we talk about additional risks to
    investors, I don't think that we are adding any more risk than
    a regular public offering, which also discloses risk factors of
    the company. The only thing you are introducing is earlier-
    stage companies which, by their nature, are more risky
    investments by themselves as a class, but the adequacy of this
    disclosure on the risk factors is actually required in their
    offering circulated already under Regulation A.
        Mr. Lynch. Right. You are getting to my point. The newness
    or the lack of history, financial history, here often makes
    these companies a real gamble, and I am just trying to figure
    out if there is a way that--in addition to the audited
    financials that you mentioned earlier, I think that is a great
    suggestion, are there other precautions that we might take
    proactively to say, okay, we are going to lift this limit;
    however, here are some additional safeguards so that we don't
    end up with folks really going into this completely in the
    dark; that there is--it almost asks for some type of not a
    rating agency, but some type of vetting process given the
    larger amount that we are authorizing here under the exemption.
        Mr. Hambrecht. The problem that I have always seen from
    trying to quantify the risk is--or set a set of standards,
    which a lot of countries do--a lot of countries will have
    certain numerical standards for companies in terms of operating
    income and history and everything else--it is difficult, very,
    very difficult, to do that in an economy that has moved as fast
    as the technology world has.
        Mr. Lynch. Sure.
        Mr. Hambrecht. To me, the answer has always been
    transparency. The answer has always been an absolute commitment
    to presenting every fact you have and everything you can about
    that company, and I find that the investors generally make
    pretty good decisions. The latest financial crisis really has
    had nothing to do with really small consumers. It was really
    markets that lacked transparency, dealer markets, and a lack of
    information, and frankly, as you know, poor rating agencies.
        Mr. Lynch. Let me just close by saying I appreciate those
    remarks. I think you help your cause very much by having
    Congresswoman Eshoo speak on your behalf. I think the fact that
    she came forward today, she has a lot of credibility with the
    people on this committee on both sides of the aisle, and I
    think you are well served by having her speak on your behalf.
        I yield back.
        Mr. Moore of Kansas. I thank the gentleman.
        The Chair next recognizes for 5 minutes the gentleman from
    Georgia, Mr. Scott.
        Mr. Scott. Thank you very much.
        We have heard a lot of very good information in the
    question-and-answer period. I think now, though, we might want
    to examine what do we do now and how do we craft the proper
    legislative vehicle to move forward. Do we language it in such
    a way as we authorize the SEC to raise this limit, or do we
    require them to do it? And the history of the SEC and the
    Securities Act of, I think, 1930, 1933, that language was not
    clear. At one point when we changed it last, I think about
    1992, it took them a while before they actually implemented it.
        So I would like to get each of your thoughts on--I think we
    all agree this is great, we are going to do it, but it is up to
    us now to craft the best legislative vehicle to get the job
    done. So what would be your recommendation there, particularly
    on the language of whether we authorize them to do it or we
    require them to?
        Mr. Lempres. In my view, sir, the ideal solution would be a
    mandate from Congress to raise the offering limit for
    Regulation A and to set a minimum ceiling figure. I do like the
    idea of revisiting it periodically and deferring to SEC the
    terms and conditions. I also think, however, that through
    oversight and other means, Congress should keep an eye on those
    terms and conditions, because oftentimes the layering of very
    well-intentioned individual regulatory obligations can undercut
    a legislative goal. So in this case what I would urge is that
    Congress mandates the higher limits and permits the SEC to set
    the terms and conditions.
        Mr. Scott. All right. Mr. Hambrecht?
        Mr. Hambrecht. I would agree with that. I have great
    respect for the SEC. They are a fine regulatory body. I do
    think, though, that there are some time pressures here, and
    that everybody would like to see this get going quickly.
        I think if the SEC has a rule change, they have to go
    through a process that could take some time, and I would think
    a congressional mandate would move it quickly, and then
    definitely leave the SEC to implement it and to change whatever
    they see fit to change to make sure that they live up to their
    regulatory responsibilities.
        Mr. Cutler. I would say this is an opportunity to address
    an economic and political challenge, and that is creating a job
    growth opportunity engine, and the opportunity of the committee
    here is to recognize the role of the public markets in the
    creation of jobs, and mandating a part of a solution to
    encourage more efficient and more accessible public markets,
    and then leaving the discretion with the SEC in terms of how
    that is implemented. But the opportunity to act now, I think,
    is real.
        Mr. Scott. All right. How deeply do you think Congress
    should go in this? Do you think we should stipulate terms and
    conditions, such as a requirement for audited financials?
        Mr. Hambrecht. I would leave that up to the SEC really. I
    think it would be beneficial. I would think that their natural
    reaction would be to do it that way. But they have dealt with
    Sarbanes, they have dealt with all the accounting issues. I
    would leave it to them.
        Mr. Scott. So, in other words, what you are saying, all of
    you, is that we should craft this legislation, we should
    mandate that they do it, but we should leave the discretion up
    to them in terms of the specific particulars.
        Mr. Cutler. The only caveat I would add, Congressman, is
    the fact that we should be promoting investor protection, but
    at the same time avoiding imposing disclosure, increased
    governance or burdensome provisions that would actually
    increase the costs of the application of Regulation A as it
    currently stands. That would be the only risk.
        Mr. Scott. And then finally, just for your opinions, do you
    feel that $30 million is the adequate figure we need? You have
    a chance here to make a statement on whether or not each of you
    feel this is the right number. Or is there any feeling among
    you that it needs to be larger?
        Mr. Lempres. As I have said, Congressman, from our
    standpoint the $30 million figure is a workable figure, but $50
    million would be a better figure. After transaction costs, it
    would provide sufficient resources to startups, particularly
    startups in the innovation industry that sometimes are quite
    capital-intensive.
        Mr. Scott. Okay.
        Mr. Moore of Kansas. The gentleman's time has expired. I
    thank the gentleman for his questions.
        And the Chair has just been advised that there will be
    votes called between 11:30 and 11:45, so we will move right
    along here. We have time to give the two additional members
    time to ask their questions.
        The Chair next recognizes the distinguished gentleman from
    Florida, Mr. Klein.
        Sir, you are recognized for 5 minutes.
        Mr. Klein. I have no questions.
        Mr. Moore of Kansas. The Chair will next recognize Mr.
    Foster.
        Sir, you have 5 minutes.
        Mr. Foster. Thank you.
        Is there a best method for indexing this limit? Is it
    simple inflation, total market capitalization so you don't have
    to revisit this every decade or two?
        Mr. Hambrecht. I personally don't think it is a question of
    inflation. It is much more a product of consolidation and of a
    change in the makeup of the distribution mechanism for equity.
        Mr. Foster. But still, $5 million was set in 1980, if I
    remember right.
        Mr. Hambrecht. Yes.
        Mr. Foster. So simple inflation, we would be up near 10- or
    15-, which at least would do something for you.
        Mr. Hambrecht. The problem with that is that it still would
    not get you to a large enough offering to allow you for the
    blue-sky exemption and the exchange base listing. So you would
    still have that same problem of having a limited aftermarket,
    and it would help on the expenses, sure, but you would have the
    limited aftermarket.
        Mr. Foster. My next question is about the Alternext
    exchange and that sort of approach. Has it been tried and
    failed in the United States? Is it successful at providing an
    alternate exit route for startups and so on?
        Mr. Cutler. In the United States, we have not had a
    regulation light exchange platform; that is, an exchange
    platform that would allow companies to sell to public investors
    in a lightly regulated fashion that exists in other markets
    around the world. I mentioned both the AIM marketplace in
    London as well as our marketplace, Alternext, which is really
    only applicable to the smallest of issuers, and in some
    instances they are actually regulator overseen by
    representatives who represent them.
        Mr. Foster. My question is, is that an effective exit route
    for startups or not? What is wrong with that? Is that what you
    anticipate would happen if we raised it to $50 million, that
    there would be a much more active market here? Or what is the
    change, if any, that you anticipate in the structure of things?
        Mr. Cutler. It essentially enables smaller companies'
    access to the public markets as a public offering where today
    they don't have the similar access. That is the big change.
        Mr. Hambrecht. If I may, for example, the AIM market has
    been looked on as an example of regulation light opening for
    small companies. And it is interesting, the performance of
    AIM--and I believe--they have had, I believe, about 1,800
    listings in the U.K.--the performance of the investors has been
    not statistically different than the London Stock Exchange,
    pretty much the same.
        Mr. Foster. The business of testing the waters, what is the
    argument against that for very large IPOs; or is that something
    where there is sort of an insider abuse thing that people are
    worried about, and could that morph into existence if you raise
    it up to $50 million?
        Mr. Hambrecht. Traditionally, the SEC used to be very
    sensitive to any pre-filing publicity. They still are. The
    rules are against it because they didn't want, in effect,
    companies out there promoting their stock before a registration
    statement was available to investors. So the whole point is a
    quiet period where you are not allowed to talk.
        To be candid, most companies now try to read the market
    somewhat before moving ahead, but do it through investor
    relations firms, not underwriters. It is happening anyway, and
    I think the Reg. A rule is actually a very practical rule. It
    allows you to go out and talk to a small group of people or,
    you know--
        Mr. Foster. You don't think we should be worried about some
    sort of abuses as that threshold goes up?
        Mr. Hambrecht. I would say, to be candid, it is being used
    in most S-1 registration statements now probably to the
    advantage of both parties.
        Mr. Foster. Okay. And I guess just one last question. It is
    sort of my impression, without having to tell you, that the
    whole malaise in the VC industry has to do with the fact that
    there are not that many great investments, and the overall
    return on investments has not been that great for the last
    decade. Is that just my impression, or is there some element of
    truth to that that is really driving a lot of the difficulty in
    raising money here?
        Mr. Cutler. I would say that this is not related to venture
    returns, although that statement would be true. This is more
    about access to permanent capital in the public markets, and
    that it is related to how is it that we can help the venture
    capital industry.
        Mr. Foster. Exiting is very relevant, and so--
        Mr. Cutler. And exit does provide liquidity for the initial
    investors, but probably, more importantly to this discussion,
    creates access to the long-term, permanent capital as a public
    company for the issuer to then be able to reinvest in the
    business, hire more people, expand operations.
        Mr. Foster. Okay. Thank you. I yield back.
        Mr. Moore of Kansas. I thank the gentleman.
        The Chair notes that some members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for members to submit written questions to these
    witnesses and to place their responses in the record.
        The Chair thanks the witnesses for their appearance today
    before this committee and for answering our questions.
        This hearing is adjourned.
        [Whereupon, at 11:27 a.m., the hearing was adjourned.]

                                A P P E N D I X

                                December 8, 2010

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