[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.]



















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                            December 8, 2010

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