    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                       H.R. 3606, THE REOPENING AMERICAN
                       CAPITAL MARKETS TO EMERGING GROWTH
                             COMPANIES ACT OF 2011

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

                                    HEARING

                                   BEFORE THE

                      SUBCOMMITTEE ON CAPITAL MARKETS AND

                        GOVERNMENT SPONSORED ENTERPRISES

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                               DECEMBER 15, 2011

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 112-92

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                       SPENCER BACHUS, Alabama, Chairman

    JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts,
        Chairman                             Ranking Member
    PETER T. KING, New York              MAXINE WATERS, California
    EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
    FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
    RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
    DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
    WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
    JUDY BIGGERT, Illinois               BRAD SHERMAN, California
    GARY G. MILLER, California           GREGORY W. MEEKS, New York
    SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
    SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    JOHN CAMPBELL, California            JOE BACA, California
    MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
    THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
    KEVIN McCARTHY, California           DAVID SCOTT, Georgia
    STEVAN PEARCE, New Mexico            AL GREEN, Texas
    BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
    MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
        Pennsylvania                     KEITH ELLISON, Minnesota
    LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
    BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
    BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
    JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
    ROBERT HURT, Virginia
    ROBERT J. DOLD, Illinois
    DAVID SCHWEIKERT, Arizona
    MICHAEL G. GRIMM, New York
    FRANCISCO ``QUICO'' CANSECO, Texas
    STEVE STIVERS, Ohio
    STEPHEN LEE FINCHER, Tennessee

                       Larry C. Lavender, Chief of Staff
      Subcommittee on Capital Markets and Government Sponsored Enterprises

                      SCOTT GARRETT, New Jersey, Chairman

    DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking
        Chairman                             Member
    PETER T. KING, New York              GARY L. ACKERMAN, New York
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
    DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
    JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
    JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
    RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
    JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
    THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
    KEVIN McCARTHY, California           ANDRE CARSON, Indiana
    STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
    BILL POSEY, Florida                  GARY C. PETERS, Michigan
    MICHAEL G. FITZPATRICK,              AL GREEN, Texas
        Pennsylvania                     KEITH ELLISON, Minnesota
    NAN A. S. HAYWORTH, New York
    ROBERT HURT, Virginia
    MICHAEL G. GRIMM, New York
    STEVE STIVERS, Ohio
    ROBERT J. DOLD, Illinois

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        December 15, 2011............................................     1
    Appendix:
        December 15, 2011............................................    37

                                   WITNESSES
                          Thursday, December 15, 2011

    Brantuk, Joseph, Vice President, NASDAQ OMX......................     7
    LeBlanc, Steven R., Senior Managing Director of Private Markets,
      Teacher Retirement System of Texas.............................     9
    Mitchell, Kate, Managing Director and Co-Founder, Scale Venture
      Partners, and former Chairman and current member, National
      Venture Capital Association....................................    10
    Selfridge, Mike, Head of Regional Banking, Silicon Valley Bank...    12

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer.........................................    38
        Brantuk, Joseph..............................................    39
        LeBlanc, Steven R............................................    50
        Mitchell, Kate...............................................    59
        Selfridge, Mike..............................................   119

                  Additional Material Submitted for the Record

        Written statement of the Biotechnology Industry Organization.   129
        Written statement of Norwest Venture Partners................   131
        Written statement of NYSE Euronext...........................   133

                       H.R. 3606, THE REOPENING AMERICAN
                          CAPITAL MARKETS TO EMERGING
                          GROWTH COMPANIES ACT OF 2011

                                  ----------

                          Thursday, December 15, 2011

                 U.S. House of Representatives,
                    Subcommittee on Capital Markets and
                      Government Sponsored Enterprises,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 9:39 a.m., in
    room HVC-210, Capitol Visitor Center, Hon. Nan Hayworth
    presiding.
        Members present: Representatives Schweikert, Royce,
    Hensarling, Posey, Hayworth, Hurt, Stivers, Dold; Sherman,
    Hinojosa, Maloney, Perlmutter, Donnelly, Himes, Green, and
    Ellison.
        Also present: Representatives Fincher and Carney.
        Dr. Hayworth [presiding]. This hearing will come to order,
    and I ask unanimous consent that Mr. Fincher and Mr. Carney be
    allowed to participate in this morning's hearing.
        Without objection, it is so ordered. And as previously
    agreed with the ranking minority member, opening statements
    will be limited to 10 minutes on each side.
        I recognize myself for 1 minute.
        This hearing of our Capital Markets Subcommittee could not
    be held at a more critical time or a more propitious time,
    really, because yesterday the World Economic Forum reported
    that for the first time ever, Hong Kong was the number one
    center for financial market development.
        Hong Kong topped both New York and London, based in large
    part on its rapidly growing IPO market. K. C. Chan is Hong
    Kong's Secretary for Financial Services and the Treasury, and
    he said, ``We are working very hard to maintain Hong Kong's
    competitive advantages and increase Hong Kong's capital
    markets.'' Our task today, of course, is the same for the
    United States.
        I now yield 2 minutes to Mr. Himes for an opening
    statement.
        Mr. Himes. Thank you, Madam Chairwoman, and I want to start
    by thanking the witnesses for appearing before us today on this
    very, very important topic. I am an original cosponsor of the
    legislation that we are here to talk about, so I am very
    excited about it. It is a good effort toward maintaining what
    are the deepest and most vibrant capital markets in the world.
    Our venture capital community, the way in which young companies
    can get financing and grow from being a figment in somebody's
    imagination to a multibillion dollar market cap company in the
    blink of an eye, is one of the true treasures that the United
    States has. The names that none of us had ever heard of 20
    years ago, Google, Facebook, and the list goes on, exist today
    and are world-beating companies because of the vibrancy of our
    capital markets and particularly those markets that fund our
    early-stage companies.
        I am a real believer in the legislation that we are here to
    talk about today. What we are doing, of course, is trying to
    grease the skids for young companies. And that is the right
    thing to do to be internationally competitive, but let us also
    not lose sight of the fact that in lifting some of the
    regulations, many of which are there for very good reasons, we
    are also running the risk of creating the kind of froth that we
    all saw in 1999 and 2000, where moms and pops and cab drivers
    and local small business owners were acting like tech VCs in
    the IPO market.
        So I would really appreciate it if--and I think we are all
    on the same page with the same goals here--as we grease the
    skids for this wonderful capital formation exercise, we don't
    lose sight of the need to protect retail investors. And I would
    love to hear from the panel specifically about areas in this
    proposed legislation where you think we need to be particularly
    conscious of protecting the retail investors who allow you to
    do what you do.
        Thank you. I yield back the balance of my time.
        Dr. Hayworth. Thank you, Mr. Himes.
        And now, the Chair yields 1 minute to the vice chair of the
    subcommittee, Representative Schweikert.
        Mr. Schweikert. Thank you, Madam Chairwoman.
        As a matter of fact, the center seat fits you well, doesn't
    it?
        I am actually very happy this is moving forward. Mr.
    Fincher deserves some real credit here for being actually
    fairly dogged about this, and I want to also thank a bipartisan
    group for stepping up and embracing this, and moving this
    forward.
        We have had a series of conversations, what does this do in
    Sarbanes-Oxley, how about the 404(b), are we going to run away
    from the good things it provides--which is always a fun debate
    of the good things it provides. But hopefully, this will truly
    help those upstart companies be able to organize and avoid some
    of the excessive costs, but this doesn't walk them away from
    the internal control requirements. Those are still there.
        And ultimately, for many of us, when we are going to invest
    in a young, growing company, it is those internal controls we
    are most interested in.
        Madam Chairwoman, I know I am out of time, but I am really
    hoping our witnesses today will focus on what this really does
    mean to a growing company and the benefits that we will provide
    for that growth.
        Thank you, Madam Chairwoman.
        Dr. Hayworth. Thank you, sir, and the Chair yields 2
    minutes to Mr. Royce of California.
        Mr. Royce. Thank you, Madam Chairwoman.
        Over the last 15 years, we have seen our capital markets
    deteriorate. And if we take a hard look at what is discouraging
    capital from coming to our markets, Exhibit A continues to be
    Sarbanes-Oxley.
        We have a recent SEC study that says that Sarbanes-Oxley
    compliance is the most often-cited reason why companies are
    delisting, why they are choosing to delist--to list elsewhere.
    And we have this phenomenal drop off in IPOs. As all of us will
    remember, in the 1990s, we played host to most of the IPOs
    around the globe.
        Here in the United States, this was the home of the
    majority of those IPOs. Today, it is 11 percent, and it is
    trending downward at a pretty fast clip. And if you want to do
    any research as to the answer why, Exhibit A, again, Sarbanes-
    Oxley.
        So, Mr. Fincher's new legislation, I think, goes some
    distance to helping reverse this trend by making those listings
    slightly less onerous. But given the urgency of this problem, I
    think we need a solution to it, and that is why I introduced
    the Small Business Access to Capital Act, which would exempt
    companies with a market cap of up to $1 billion from Section
    404(b) of Sarbanes-Oxley.
        That was recommended by the President's Council on Jobs and
    Competitiveness. They are on board for this, and this approach
    would address a key component of the SEC study, which shows the
    long-term burden on small businesses is 7 times that imposed on
    large firms relative to their assets. We have overweighted this
    against small business.
        I very much support Mr. Fincher's legislation here today. I
    think it is needed. We need to move it, but we should follow up
    with consideration of the legislation that I have introduced.
        I would ask the committee to do that, and I would ask at
    the same time that the Members take a look at some of the
    studies and the SEC studies that show that the cost of this
    legislation far outweighs its benefits to the investing public.
    We need to remedy this situation before the capital markets
    walk off from the United States overseas.
        I yield back the balance of my time.
        Dr. Hayworth. Thank you, sir.
        The Chair recognizes the vice chairman of the full
    Financial Services Committee, Mr. Hensarling.
        Mr. Hensarling. Thank you, Madam Chairwoman, and thanks for
    holding the hearing. I want to thank the gentleman from
    Tennessee for his leadership and his dogged pursuit of this
    legislation.
        We know that since the President has come into office,
    unfortunately, our unemployment rate has remained at, near, or
    above 9 percent. We have seen the fewest small business
    startups in 17 years, and clearly, our constituents expect jobs
    to be job number one for this Congress.
        One of the key ingredients to job creation is capital
    formation. You can't have capitalism without capital. And as
    some of my colleagues who preceded me in their opening
    statements have well noted, we continue to lose market share in
    the IPO market.
        Some studies have indicated that this has, frankly, cost
    our economy not thousands of jobs but potentially millions of
    jobs. Nearly one in 10 American companies that went public this
    year did so outside the United States, and that compares, I
    believe, Madam Chairwoman, with only two U.S. companies that
    show foreign exchanges in the entire decade of the 1990s.
        And as my colleague, the gentleman from California pointed
    out, certainly one of the most often-cited factors for going to
    list on foreign exchanges, frankly, is Sarbanes-Oxley.
        And so I want to, again, congratulate the gentleman from
    Tennessee. His legislation would take a huge step forward.
    Again, as the gentleman from California indicated, the
    President's own Council on Jobs and Competitiveness indicated
    that Sarbanes-Oxley continues to be an impediment. They have
    recommended the legislation, I believe, that the gentleman from
    California has authored.
        I am happy to be a cosponsor of that legislation. I hope
    this committee will take it up, and I will yield back the
    balance of my time.
        Dr. Hayworth. Thank you, sir.
        The Chair recognizes the gentleman from Illinois, Mr. Dold.
        Mr. Dold. Thank you, Madam Chairwoman, and I certainly want
    to thank our witnesses for coming to join us today. I think
    that in the piece of legislation we have before us that we are
    discussing--and I want to certainly thank my colleague from
    Tennessee and my colleague from Delaware on the other side of
    the aisle for your leadership in this legislation--what we are
    talking about is jobs and the economy. We need to jump start
    these very important aspects, and it is capital formation.
        If we look at what has just happened, studying history, we
    have seen a huge drop off in IPOs that has happened here in the
    United States, a precipitous drop off, and we can only assume
    that in talking to them, what was one of the big factors in
    doing that? It is excessive regulation. And as my colleague
    from California noted, Sarbanes-Oxley is often cited as number
    one in terms of excessive regulations, as what is preventing
    people from going public here or actually delisting here and
    going elsewhere.
        We want to create jobs here in the United States. We want
    to be the land of innovation, and what has been, I believe, a
    competitive advantage for the United States is that we do have
    this vehicle, this mechanism, whether it be through venture
    capital, where people can take nothing more than an idea, bring
    it to fruition, get funding, and be able to take it and create
    additional jobs.
        Those companies that go public, obviously, 90 percent of
    the jobs that they create happen after they go public. This is
    something that we want to foster. We want to make sure that we
    are the land of opportunity here in the United States. It is
    alarming to me that we have lost that in terms of the number
    one spot to Hong Kong. And I think that the legislation that we
    are talking about today certainly is a step in the right
    direction in terms of trying to address Sarbanes-Oxley and the
    excessive regulations that are put upon these businesses.
        For a business that is just starting out, we want to create
    every opportunity to give them, in essence, an on-ramp to give
    them the opportunity to say, yes, we still expect you to do
    this, but we are going to lessen the regulations on these
    businesses for the first several years to give them an
    opportunity to get their feet underneath them, to be able to
    build up the capital and the mechanisms in order to be able to
    provide some of the reporting that we have asked of other
    public companies.
        This is absolutely, I think, a piece of common-sense
    legislation. I am delighted to be a cosponsor, and I again want
    to thank the gentleman from Delaware, and the gentleman from
    Tennessee for your leadership.
        I yield back.
        Dr. Hayworth. The Chair recognizes the gentleman from
    Delaware, Mr. Carney, for 2 minutes.
        Mr. Carney. Thank you, Madam Chairwoman.
        Thank you very much, Madam Chairwoman, and thank you to the
    witnesses for being here. I am pleased to be one of the
    cosponsors and to work on my side of the aisle to line up other
    cosponsors, and we have been pretty effective doing that.
        I want to congratulate and thank my friend from Tennessee,
    Mr. Fincher, for his leadership in this legislation, and
    everybody else who has gotten behind it.
        As many of you know, I represent the State of Delaware, and
    corporate formation is a very important issue for our State. I
    spoke with my good friend Jeff Bullock just a couple of weeks
    ago when this legislation was proposed, and his colleague, Rick
    Geisenberger, who runs the Division of Corporations, and they
    confirmed for me what we all know, that corporate formation has
    dipped off over the last several years.
        We have State officials who travel around the world,
    frankly, encouraging entrepreneurs and businesses to
    incorporate in the United States and, in particular, in the
    State of Delaware. They also inform me what we all know, which
    is that IPOs have been down quite a bit over the last 10 years.
        I have provided them a copy of the legislation, and they
    told me that they believe this is a very good approach to
    addressing that problem. It is not going to fix everything, but
    it is a really good common-sense approach to allowing the
    regulations of Sarbanes-Oxley to kind of phase in, if you will,
    as Mr. Dold said a minute ago.
        So I am pleased to be part of the team that is working on
    this legislation, and I look forward to your comments and to
    our discussion that will follow. Thanks very much.
        Dr. Hayworth. The gentleman yields back. The Chair
    recognizes the gentleman from Tennessee, Mr. Fincher, for 2
    minutes.
        Mr. Fincher. Thank you.
        Thank you, Madam Chairwoman, for the hearing today.
        I want to thank my colleague, Mr. Carney, for his help in
    moving what I think and what we think is a good piece of
    legislation.
        How many times have we heard this year that we need to
    create more jobs, and I think what the consensus that we need
    to focus on as Washington politicians is that we are not in the
    business of creating jobs. The private sector creates jobs, and
    we need to make sure that well-meant reforms that have
    unintended consequences, like our legislation is hopefully
    going to undo, with bipartisan support, will help the private
    sector create more jobs.
        An August 2011 survey of corporate CEOs conducted by the
    IPO task force, whose chair, Kate Mitchell, is testifying today
    before us, found that 90 percent of job growth occurs after a
    company goes public. However, during the last 15 years, fewer
    and fewer start-up companies have pursued initial public
    offerings because of burdensome costs created by a series of
    one-size-fits-all laws and regulations.
        My bill would create a new category of issuers called
    emerging-growth companies that have less than $1 billion in
    annual revenues when they register with the SEC and less than
    $700 million in public float after the IPO. This is a unique
    category that appreciates the fact that young companies face
    expensive hurdles in accessing public capital and complying
    with a variety of laws and regulations.
        This on-ramp status will allow small and mid-sized
    companies the opportunity to save on expensive compliance costs
    and create cash needed to successfully grow their businesses
    and create new jobs.
        This is very, very important. We think this is a step in
    the right direction, and hopefully, it is. Again, my colleague
    from Delaware is showing that bipartisanship can take us where
    we need to go. So, thank you, and I yield back.
        Dr. Hayworth. The gentleman yields back. The Chair
    recognizes Mr. Himes for 2 minutes.
        Mr. Himes. Thank you, Madam Chairwoman.
        I asked for another 2 minutes because I feel compelled to
    make an observation on the bipartisanship that Mr. Fincher just
    called for. Look, we get things done in this committee, and we
    do get things done in this committee because we are factual and
    we leave ideology behind.
        And already in this hearing, we have heard that left
    behind. We have heard statements from the gentleman from Texas
    that unemployment is at, near or above 9 percent, not below 8.6
    percent, which is factual. We have heard Sarbanes-Oxley raised
    as the reason why IPO volume has gone down.
        You know what, I can twist facts, too. I could tell you
    that Sarbanes-Oxley passed in 2002, when there were fewer than
    100 IPOs, and that 3 years later, in 2007, there were 300 IPOs.
    And if I were not concerned with factuality, I might say that
    Sarbanes-Oxley actually tripled the number of IPOs.
        Regulation is important, and if we are going to get a
    bipartisan deal done here, I think we need to be factual and we
    need to understand that some regulation is very important. The
    volume that you look at when you look at the IPO chart shows
    dramatic decreases in IPOs in 2001, 2002, and, guess what, in
    2008 and 2009. And 2008, 2009 were many, many years after
    Sarbanes-Oxley, and just happened to coincide to a period of
    time when the capital markets suffered their biggest
    dislocation since 1929, and $17 trillion in U.S. assets
    evaporated.
        So, let's at least start this because we agree that it is
    important to be bipartisan and to be factual. Let's get this
    done, but let's leave ideology on the side of the road.
        Thank you, I yield back the balance of my time.
        Mr. Royce. Would the gentleman like to yield?
        Mr. Himes. Yes, I will yield.
        Mr. Royce. I think if we are going to look at facts as
    represented by the other side of the aisle, let's look at the
    compliance costs, which are now 30 times what I was told they
    would be on this committee when that bill passed.
        If you want to look at facts, let's look at the fact that
    we now have 11 percent of the world markets in terms of IPOs,
    when we once dominated and had over 50 percent. And it was not
    that long ago. That was in the 1990s.
        So, if you look at the facts, and you interview anyone in
    business as to the main reason why IPO's--
        Mr. Himes. I will take back the time that I don't have.
        Dr. Hayworth. All the time for opening statements has now
    expired.
        Without objection, all Members' opening statements will be
    made a part of the record.
        I now have the pleasure of introducing our panel: Joseph
    Brantuk, the vice president of NASDAQ OMX; Steven LeBlanc,
    senior managing director of private markets for the Teacher
    Retirement System of Texas; Kate Mitchell, the chair of the
    Initial Public Offering Task Force, former president of the
    National Venture Capital Association, and managing director and
    co-founder of Scale Venture Partners; and Mr. Mike Selfridge,
    the head of regional banking for Silicon Valley Bank.
        Thank you for being here.
        Without objection, your written statements will be made a
    part of the record. You will be each recognized for a 5-minute
    summary of your testimony.
        We will start with you, Mr. Brantuck.

        STATEMENT OF JOSEPH BRANTUK, VICE PRESIDENT, NASDAQ OMX

        Mr. Brantuk. Thank you, Chairwoman Hayworth, Ranking Member
    Waters, and all of the members of the subcommittee.
        On behalf of the NASDAQ OMX Group, I am pleased to testify
    in support of H.R. 3606, the Reopening American Capital Markets
    to Emerging Growth Companies Act of 2011.
        Capital formation and job creation are in NASDAQ OMX's DNA.
    Forty years ago, NASDAQ introduced the world to electronic
    markets, which is now the standard for markets worldwide.
        The creation of NASDAQ introduced a sound regulation to the
    over-the-counter trading. Around NASDAQ grew an ecosystem of
    analysts, brokers, investors, and entrepreneurs, allowing
    growth companies to raise capital that was not previously
    available to them.
        NASDAQ is pleased that both Houses of Congress and the
    White House are taking a serious look at reducing regulatory
    burdens that are obstacles to companies becoming and remaining
    public.
        I am here today to inform you that NASDAQ OMX supports the
    legislative efforts of Mr. Fincher and Mr. Carney and the
    sponsors of similar bills in the Senate to create an on-ramp
    for newly public companies that would give them the opportunity
    for growth before being subject to additional, extensive
    regulations.
        We believe this is a significant step toward making our
    public markets more attractive to companies, both domestic and
    foreign.
        The United States used to be the market of choice for
    global IPOs. From 1995 to 2010, the listings on U.S. exchanges
    shrank from 8,000 to 5,000, while listings in non-U.S.
    exchanges grew from 23,000 to 40,000. Prior to the Internet
    bubble, the United States averaged 398 IPOs per year in the
    early 1990s, and there were never fewer than 114 IPOs per year,
    even during a recession.
        Following the regulatory changes of the last decade, there
    have been an average of only 117 U.S. IPOs per year. In 5 of
    the last 10 years, including 2011, there have been fewer IPOs
    than in the worst years of the 1990s.
        In addition to the overall decline in the number of IPO
    companies, the average IPO has increased in size as the cost of
    complying with increased regulation has deterred many small and
    young companies from going public.
        Longstanding rivals to the U.S. market such as the United
    Kingdom, and newcomers such as Hong Kong and Brazil, have taken
    steps to improve the efficiency and competitiveness of their
    market, and this is good for the global economy.
        However, the United States is no longer the jurisdiction
    for capital raised via IPOs, ranking second in 2011. Only 3 of
    the top 10 IPOs so far this year have been from U.S. firms. In
    2010, IPO issuance from the Asia-Pacific region accounted for
    almost two-thirds of the global capital raised.
        There are three critical reasons why, in our view, we need
    to recommit to the public markets. One, efficient pricing and
    funding for entrepreneurial activity. Two, job creation; a
    healthy public equity market enables companies to raise more
    efficient capital more efficiently, funding more rapid growth
    and creating more jobs. Companies create 90 percent of new jobs
    after they go public. And three, wide availability of
    investment opportunity.
        As the committee is aware, on October 20, 2011, the IPO
    Task Force, whose members are some of the best experts on
    capital formation and represent a diverse interest, submitted a
    report to the U.S. Treasury Department entitled, ``Rebuilding
    the IPO On-Ramp: Putting Emerging Companies and the Job Market
    Back on the Road to Growth.''
        This report sets forth a detailed proposal to create a
    regulatory on-ramp for early stage growth companies, during
    which disclosure rules and compliance burdens would be phased
    in while maintaining investor protection. The task force also
    made detailed recommendations about how to improve research
    coverage for smaller companies. Many of these recommendations
    are contained in the House incentives bills, and we applaud the
    Members of Congress for doing so.
        The IPO Task Force report and its recommendations have
    quickly made an impact on this debate and seem to have
    solidified a bipartisan core of support in both the House and
    Senate for quick and decisive action.
        The recommendations include: One, provide an on-ramp for
    emerging companies and use existing principles in scaled
    regulation; two, improve the availability and flow of
    information for investors before and after an IPO; three, lower
    the capital gains tax for investors who purchase shares in an
    IPO and hold those shares for a minimum of 2 years; and four,
    educate issuers about how to succeed in the new capital market
    environment.
        In our markets, the number one source of job creation is
    entrepreneurship. Just as business incubators nurture small
    companies until they are ready to leave the security of that
    environment and operate independently, there should be a space
    for incubating small public companies until they are ready to
    graduate to a national listing.
        Canada, the United Kingdom, and Sweden all have successful
    venture markets with significant numbers of listed companies
    and substantial capital-raising successes. These markets list
    hundreds of small companies that create jobs at a fast rate.
    The NASDAQ OMX Group has received approval to create a new
    listing venue on the former Boston Stock Exchange. The
    availability of the BX venture market will facilitate growth
    companies to raise capital to continue to expand their
    business, create jobs, and support our economy.
        In closing, I would like to make the following
    recommendations for reforms that would restore the ecosystem
    that once existed and is necessary to nurture, sustain, and
    grow public companies and reinvigorate the U.S. engine for job
    growth.
        Solution one, pass the on-ramp bill and further reform
    Sarbanes-Oxley.
        Solution two--
        Dr. Hayworth. The witness' time has expired.
        Mr. Brantuk. Okay. Thank you, again, for inviting me and
    allowing me to testify.
        [The prepared statement of Mr. Brantuk can be found on page
    39 of the appendix.]
        Dr. Hayworth. Thank you, sir.
        And the Chair recognizes Mr. LeBlanc for 5 minutes.

      STATEMENT OF STEVEN R. LEBLANC, SENIOR MANAGING DIRECTOR OF
          PRIVATE MARKETS, TEACHER RETIREMENT SYSTEM OF TEXAS

        Mr. LeBlanc. Thank you, Madam Chairwoman, and members of
    the subcommittee.
        Good morning, my name is Steve LeBlanc. I am the senior
    managing director of the Teacher Retirement System of Texas
    (TRS). I am pleased to appear before you today to share with
    you my views on H.R. 3606.
        TRS is the largest public pension plan in the State of
    Texas. We are the 7th largest in the country and the 17th
    largest in the world. We serve 1.3 million beneficiaries, 1 in
    20 Texans. Approximately 1 million are working members. It is
    teachers, bus drivers, cafeteria workers; it is everyone who
    serves our students in Texas. Approximately 300,000 are
    retirees, and most people may not realize the vast majority do
    not get Social Security. Our retirement is their only
    retirement.
        Our net assets are at $107 billion, and I personally am a
    fiduciary for these teachers and workers for approximately $38
    billion globally.
        At TRS, we have a very diversified portfolio. We invest in
    private equity, public equities, Treasuries, bonds, real
    estate, oil and gas, and small emerging companies are a key
    component to the kind of capital that we can generate for our
    teachers.
        Again, as I mentioned, I personally am a fiduciary, and I
    oversee the real estate, private equity, and principal
    investments of the fund. We include several billion dollars in
    private equity in small and emerging managers.
        I applaud Representatives Fincher, Carney and all the
    others who are cosponsors of H.R. 3606 and I thank you, Madam
    Chairwoman, and the ranking member, for holding today's
    hearing.
        In my view, the proposed legislation's level of regulations
    for new public companies is a progressive approach to enable
    small and emerging companies access to capital and should be
    given positive consideration by this subcommittee, the SEC, and
    the other interested parties.
        I am particularly supportive of the parts that would
    address the disclosure and corporate governance regulation on
    emerging growth companies. This will improve the availability
    and fair information, dramatically improve it and get it to the
    same level that large companies have. Potential investors would
    have more access, not less, to good information.
        I do have some thoughts on the definition of emerging
    growth companies. As you have said, it is for a billion dollars
    in annual revenue. It might be that $700 million is a more
    appropriate level. A billion is quite big, and that I think
    that at $700 million, you would have enough scale to comply
    with the regulations.
        Now, let me tell you where my experience came from. I was
    the CEO of a public company, Summit Properties; we were a small
    emerging company. We had a market float of about, when I
    joined, $500 million, and we implemented Sarbanes-Oxley,
    404(b). I hired an internal auditor, and I will tell you I had
    better internal controls before Sarbanes-Oxley than after,
    because I had to take and hire an internal person when I could
    outsource to a large global scale, and I didn't have the
    resources to put internal capabilities in because it wasn't as
    a fiduciary to my shareholders' economics.
        So I ended up having to sell the company due to Sarbanes-
    Oxley. We were mostly invested by retail investors, and I can
    tell from you 1998 to 2004, through 9/11, our investors made
    nearly 20 percent a year, doubled their money, and got between
    a 6 to 8 percent dividend. And that company was taken off the
    market in a large part because of Sarbanes-Oxley and our
    inability to scale the business to pay for the cost of
    Sarbanes-Oxley.
        So I firmly believe that this legislation will allow the
    corporate growth of the small companies, the retail investors,
    access to that wealth creation opportunity that right now,
    because it is not public, is only available to high-net-worth
    individuals, who are primarily the beneficiaries of the
    regulation of Sarbanes-Oxley. Thank you.
        [The prepared statement of Mr. LeBlanc can be found on page
    50 of the appendix.]
        Dr. Hayworth. The Chair thanks the witness, and the Chair
    recognizes Ms. Mitchell for 5 minutes.

     STATEMENT OF KATE MITCHELL, MANAGING DIRECTOR AND CO-FOUNDER,
    SCALE VENTURE PARTNERS, AND FORMER CHAIRMAN AND CURRENT MEMBER,
                  NATIONAL VENTURE CAPITAL ASSOCIATION

        Ms. Mitchell. Madam Chairwoman, and members of the
    subcommittee, thank you for the opportunity to be here today.
    With research showing that 92 percent of a company's job growth
    occurs after its IPO, restoring access to the public markets
    for emerging growth companies is of national importance.
        In that spirit, I would like to begin by publicly
    supporting H.R. 3606, the Reopening American Capital Markets to
    Emerging Growth Companies Act of 2011.
        I believe that this bipartisan legislation will help spur
    U.S. job creation and economic growth at a time when we
    desperately need both, and it will do so without increasing the
    risk for our country's investors. My support of H.R. 3606 is an
    outgrowth of my services as chairman of the IPO Task Force, a
    private and independent group of professionals representing
    experienced CEOs, public investors, venture capitalists,
    securities lawyers, and acquisitions and investment bankers.
        We came together initially at the Treasury Department's
    Access to Capital Conference in March, where the dearth of IPOs
    was discussed at length. In response to this concern, our focus
    was to develop practical yet meaningful recommendations for
    restoring effective access to the public markets for emerging
    growth companies. Because public investors were an integral
    part of our team, we believe that the scale of regulations that
    we recommended, which H.R. 3606 reflects, strikes the right
    balance between targeted reform and maintaining appropriate
    regulatory safeguards.
        Why do we believe reform is necessary? For the last half
    century, America's most promising young companies have pursued
    IPOs to access the additional capital they need to hire new
    employees, develop their products, and expand their businesses.
        However, over the last 15 years, the number of IPOs has
    plummeted. From 1990 to 1996, over 1,200 U.S. venture-backed
    companies went public on U.S. exchanges. Yet from 2004 to 2010,
    there were just 324 of those offerings. A number of analyses
    suggests that there is no single event behind this decline.
    Rather, the cumulative effect of recent regulations, along with
    changing market practices and economic conditions, has driven
    up costs and uncertainty for emerging growth companies and has
    constrained the amount of information available to investors,
    making them more difficult to understand and to invest in.
         This piece of legislation addresses these issues in two
    crucial ways. First, H.R. 3606 provides emerging growth
    companies with a limited, temporary, and scaled regulatory
    compliance pathway, or on-ramp, that will reduce their cost for
    accessing public capital without compromising investor
    protection. This on-ramp period will enable emerging growth
    companies to allocate more of the capital they raise from the
    IPO process toward growth instead of meeting compliance
    requirements designed for much larger companies.
        So what are the practical aspects of this on-ramp? Most
    importantly, it is temporary. It would last only for a limited
    period of 1 to 5 years, depending on the company's size. In
    addition, the bill's transitional relief is limited to those
    areas that are significant cost drivers, and it would require
    full compliance as the company matures.
        The scaled regulations under the bill include relief from
    Section 404(b) of Sarbanes-Oxley relating to outside auditors,
    as well as permitting emerging growth companies to provide
    scaled management discussion and compensation disclosure. While
    these requirements might make sense for larger companies,
    allowing emerging growth companies to phase in these costs
    simply follows the scaled regulations that the SEC has already
    developed and approved for smaller reporting companies.
        Second, H.R. 3606 addresses the flow of information to
    investors about emerging growth companies. When our task force
    surveyed emerging growth CEOs, many of them expressed concern
    that the lack of available information about their companies
    would lead to a lack of liquidity for their shares post-IPO.
        Institutional investors like Mr. LeBlanc expressed a
    similar concern about the dearth of information and exposure
    they had to IPO companies, making it difficult for investors to
    make informed investing decisions about these new issues. This
    bill improves the flow of information about emerging growth
    companies' IPOs by allowing investors to have access to
    research reports about the companies concurrently with their
    IPOs, while leaving unchanged the robust and extensive investor
    protections that exist today.
        H.R. 3606 also permits emerging growth companies to test
    the waters prior to filing a registration statement. By
    expanding the range of permissible, pre-filing communications
    to institutional, qualified investors, the bill would provide a
    critically important mechanism for merging growth companies to
    determine the likelihood of a successful IPO. This also
    benefits issuers and the public markets by allowing otherwise
    promising companies to get investor feedback and to avoid a
    premature offering.
        In all these ways, H.R. 3606 provides measured limited
    relief to a small population, strategically important
    companies, with disproportionally positive effects on job
    growth and innovation.
        That is why I urge the members of this committee to support
    the passage of this measure. By doing so, we can reenergize
    U.S. job creation and economic growth by helping reconnect
    emerging companies with public capital.
        Thank you for your time.
        [The prepared statement of Ms. Mitchell can be found on
    page 59 of the appendix.]
        Dr. Hayworth. Thank you, Ms. Mitchell.
        The Chair recognizes Mr. Selfridge for 5 minutes.

    STATEMENT OF MIKE SELFRIDGE, HEAD OF REGIONAL BANKING, SILICON
                              VALLEY BANK

        Mr. Selfridge. Thank you, Madam Chairwoman, and members of
    the subcommittee, for the opportunity to testify before you
    today.
        Silicon Valley Bank is a unique institution in terms of
    where we serve the economy. We help entrepreneurs, and we focus
    exclusively on technology, life science, and venture capital.
    We serve nearly half of the venture-backed technology and life
    science companies in the United States, and we finance them at
    the very early stages, as well as very late stages.
        Having spent 18 years at Silicon Valley Bank, I have worked
    with thousands of entrepreneurs and venture capitalists. And
    from my vantage point, I see how critical capital is to
    emerging growth companies.
        I also see firsthand the optimism and energy with which
    entrepreneurs change the world. Every day, I see a company that
    is working to cure cancer, that is looking to protect cyber
    space, that is helping to solve the world's energy challenges.
        And while I am justifiably optimistic about the innovation
    sector's capacity and capability to generate new ideas, this
    subcommittee today addresses a very real problem, which is that
    companies need capital to grow.
        Today, many entrepreneurs need to spend a better part of a
    decade building their companies before they can realistically
    pursue an IPO, and in most instances, those emerging companies
    opt to sell to larger corporations. I believe this has negative
    implications for our economy. The decision to go public or not
    go public is a great debate amongst American entrepreneurs and
    investors.
        For example, I have worked with a company that does
    cutting-edge work on regenerative medicine--medicine that
    repairs damaged tissue and helps the body heal itself. This was
    a company that needed large amounts of capital to develop the
    treatment safely. This company debated greatly about whether to
    go public or not, and they did not. Instead, they sold to a
    foreign corporation.
        I am glad they had a successful exit, but I am also sad
    that they did not pursue an IPO. I fear that job creation for
    this company may occur overseas.
        Let me tell you about three other companies where I think
    this legislation would help. The first is a company called
    Broadsoft. They are right here in Gaithersburg, Maryland. They
    were founded 12 years ago, and they actually went public in
    2010. They are a leading provider of business Voice over
    Internet Protocol (VoIP) applications for residential and
    corporate businesses. They are in 65 countries. They have 400
    employees.
        The money they raised in their IPO helped them grow
    significantly. But as a company--an executive at Broadsoft said
    to me, knowing that the company was out of pocket $2 million
    every year for lawyers and accountants before going public gave
    them real pause about whether to access the public markets.
        For a large company, $2 million might not be a lot, but for
    Broadsoft, that is money that could have been used to hire over
    a dozen engineers, and from what I have seen, one engineer can
    make the difference in terms of global competition.
        The second company is SAY Media, based in San Francisco,
    California. They were founded in 2005 by Matt Sanchez, who was
    just out of college. He started the company with 3 employees,
    and today there are over 400 employees.
        SAY enables advertisers to reach consumers through an
    online audience of over 150 million. For SAY, the period of
    time in which they can access the public markets will be a
    longer path, as compared to their pre-Sarbanes counterpart. And
    accessing the public markets for capital could make a
    significant difference in the growth trajectory and future
    success for SAY Media. Worse, that added time may be too long
    too wait and SAY Media might find itself sold to a larger
    corporation.
        The third company, which I highlight in my written
    testimony, was cofounded by Paige Craig, who attended to West
    Point, served in the Marine Corps, and worked in our defense,
    intelligence, and counterterrorism communities. He started a
    company called BetterWorks, Inc., in Santa Monica, California.
    They help companies engage, retain, and reward employees.
        I know from speaking with Paige that he will face a
    difficult challenge. He knows that selling his company will be
    far easier and attractive given the cost and distraction of
    going public. I know Paige wants to build a sustainable global
    corporation, but that choice may not be available.
        I have seen how aggressively other companies are working to
    displace the United States as the dominant player in the
    innovation ecosystem. To keep leading, we need to adapt to the
    changing times, build on our strengths, and eliminate
    unnecessary impediments that hinder our success.
        This legislation will help address one part of the economy
    by removing legal and regulatory impediments that are a barrier
    to a growing company's ability to access capital markets. I see
    enormous potential for entrepreneurs and growth companies in
    America.
        I watch these companies go from two people to thousands of
    employees and create global corporations. I congratulate this
    committee for working to strengthen the vitality on an
    essential part of our economy, and I thank you for your time.
        [The prepared statement of Mr. Selfridge can be found on
    page 119 of the appendix.]
        Dr. Hayworth. Thank you, Mr. Selfridge.
        Without objection, for our witnesses, your written
    statements will be made a part of the record, as mentioned
    before.
        And now, we will go to questions. The Chair recognizes
    herself for 5 minutes. I am a physician by profession, I am a
    surgeon ophthalmologist, and just reflecting on some of the
    commentary that we had about Sarbanes-Oxley, one thing that a
    medical crisis can do--and I think we would say the same about
    a fiscal crisis--is that it can bring into stark relief where
    there may be lesions or problems in a system. And I think that
    the testimony of our witnesses has amply demonstrated that as
    one might identify a highly constricting necktie that didn't
    cause problems earlier, but in the midst of a heart attack
    needs to be loosened, certain aspects of Sarbanes-Oxley
    unfortunately create more problems than they may solve for what
    we want to be a vigorous marketplace for players of all sizes
    and not lead to a too-big-to-fail scenario, which is
    unfortunately where a lot of regulation that is excessive does
    lead us.
        Specifically, Mr. Brantuck, with regard to your comments
    about opening up a new venture market in the United States,
    there is the AIM in London, there is the Alternext in Paris. I
    have spoken with the SEC, actually, about opening up a better
    marketplace for our IPOs, so I am wondering if you can comment
    on how that kind of a venture market might work, how it could
    help our small companies access capital, and what kind of
    legislative structure would we need to use to help with that?
        Mr. Brantuk. Right. So, we already had approval from the
    SEC to launch the BX Venture Market, which a few years back,
    the NASDAQ acquired the Boston Stock Exchange. We had that
    exchange license, so that is already set up. And what we have
    learned from other competitors like the Toronto stock exchange,
    which is probably, we would point to probably the most venture
    market where they list 2,100 companies on their market with a
    market capitalization of $37 billion.
        And the thing that I want to point out is that 451 of these
    companies that started out in their venture market have now
    migrated or upgraded, if you will, to list on the Toronto stock
    exchange. So we feel there is a strong need for an incubator
    exchange for these smaller companies that have the ability and
    access to liquidity, as well as visibility in the marketplace
    and a mechanism to do what is regulated.
        NASDAQ, the Boston, the BX Venture Market would be a
    regulated national exchange and would comply with NASDAQ's--
    excuse me, the BX Venture Market's listing qualifications, so
    there would be a preliminary examination of these companies
    based on qualitative and quantitative metrics for initial
    listing as well as continued listings.
        So we feel that unlike the OTC, or the pink sheets, this is
    an environment that creates a stepping stone for these
    companies to have access, to get recognition in the investment
    community, while being regulated in the overall market.
        Dr. Hayworth. So, in other words, you provide an additional
    level of assurance to the investor. That is what you are
    seeking to do through establishing things.
        Mr. Brantuk. Correct.
        Dr. Hayworth. And how far along are you in this process?
        Mr. Brantuk. We do have approval from the SEC to launch it.
    The next step is to outline the market structure, and this is
    something that we are taking great pause in to make sure that
    the market structure is there that will help these companies
    get notoriety among the market makers and provide liquidity.
        One would argue that the AIM market has many listings, but
    things that I hear on a real-time basis from CEOs and CFOs that
    have either delisted or deregistered from the United States and
    have switched to the AIM market is that on paper, it was a
    great idea. They left the United States to avoid Sarbanes-
    Oxley.
        But what they found was that by listing on AIM's, there was
    zero liquidity. The stock simply never traded. And I could
    follow up with some statistics of how many U.S. firms left the
    United States to list on AIM and have come back. And the
    companies that have come back have indicated that exact thing;
    there was no liquidity.
        NASDAQ has taken the time to work with the regulators as
    well as the market maker community to get a better
    understanding and to really think through the structure of the
    market maker community to ensure that there's liquidity.
        Dr. Hayworth. So companies want to be in the United States
    for our much more reliable and trustworthy fundamental
    regulatory structure; we just we need to adapt.
        Mr. Brantuk. Absolutely. And just, by way of my role,
    obviously, I am out on the road on a daily basis meeting with
    CEOs and CFOs, sometimes large companies, sometimes very small
    companies. And I would tell you the amount of conversations and
    the number of conversations that I have had around the
    excitement around a market like this has just grown
    exponentially within the last year.
        Dr. Hayworth. That is exciting, and I thank you, sir.
        And the Chair yields to Mr. Hinojosa for 5 minutes.
        Mr. Hinojosa. Thank you, Chairwoman Hayworth.
        I want to thank you for calling this hearing on Reopening
    American Capital Markets to Emerging Growth Companies Act of
    2011, and I thank all the panelists because I think this has
    been an interesting first part of this hearing, listening to
    what you would do to create more IPOs here in the United
    States, and it seems that in the last few years, IPOs are being
    opened abroad.
        But just listening to the news last night and this morning
    on what is happening on the Euro and the European crisis where
    they have much less regulation, it seems to me that I would
    question that we stop being so hard on regulations here in
    these last 2 years because our economy seems to be trying to
    improve and our unemployment seems to be improving, yet Europe,
    with less regulations, seems to be very questionable.
        So I would ask, Ms. Mitchell, can you discuss with the
    committee the totality of factors that have resulted in more
    companies declining to go public, and to what extent is
    regulation a driving factor in the declining number of IPOs
    versus other macroeconomic factors?
        Ms. Mitchell. Thank you, I am happy to answer that
    question, and I think that is a good question.
        You are absolutely right that IPOs are impacted by economic
    and market cycles. We can't deny that. We did a CEO survey this
    summer. In fact, NASDAQ helped us administer that, of pre- and
    post-IPOs, CEOs about their points of view about the market.
    And a couple of interesting facts came out. Over 85 percent of
    both pre- and post-IPOs' CEOs felt that it was much worse today
    to go public than in 1995.
        And the important thing for me, when I look at that, is
    looking at their perception of should I, as Mr. Selfridge
    remarked, should I be attempting to go public? The markets will
    open and close, and the issue is, are you going to be ready? It
    takes 2 years to prepare all the accounting issues you need to
    have pulled together and legal issues to be ready to go public.
        But if I don't think it is possible, and I think it has
    become such a challenge, I am not going to do it. And the CEOs
    again, both pre- and post-IPO--because post-IPO, they know the
    answer--cited over $2.5 million conservatively calculated costs
    to go public and over $1.5 million to stay public each year. As
    Mr. Selfridge noted, for a small company that is trying to
    figure out how to succeed, and compete against much larger
    companies, it really is an important issue.
        And it is interesting, when you think about the tie between
    this and what is happening in the economic markets. IPOs
    started declining in the 1996-1997 timeframe. That was the
    beginning of electronic trading, decimalization. It has been a
    panoply of things that have impacted IPO markets at a time when
    the market was actually taking off broadly the economy.
        So there is a tie between regulation, but certainly, that
    needs to go hand-in-hand with what is happening in the economy,
    and we want CEOs to be ready and willing to be able to spend
    the time and the capital to go public to create the jobs that
    we referred to earlier.
        Mr. Hinojosa. Thank you, Ms. Mitchell.
        I want to ask my fellow Texan here a question. Mr. LeBlanc,
    given the inherently high costs of going public, it seems as
    though private placement is a better alternative for some of
    the smaller firms. If these provisions were in place today, can
    you provide an estimate of how many companies could potentially
    benefit from the expanded exemption under this bill?
        Mr. LeBlanc. Thank you, Representative Hinojosa. I welcome
    my fellow Texan, and I appreciate the question.
        I can give you my own example of having been a CEO of a
    small company. We estimated it cost us approximately $2 million
    to comply with Sarbanes-Oxley and, therefore, I had to lay off
    nearly 10 percent of my workforce to cover those costs. So
    there were quite a number of people within the company I ran
    that lost their jobs due to the regulations that were imposed.
        I would yield the answer to your question on the number of
    companies to my colleague here, who cited the average number of
    IPOs during the 1990s at approximately 300 to 400, a year and
    now down to approximately 100 a year, so I think you are
    looking at 200 to 300 companies a year that the retail investor
    does not have access to. The retail investor does not have
    access to private placements because private placements are
    limited to high-net-worth individuals, and I think this is a
    shame in our country that we don't allow the small mom-and-pop
    retail investors to have access to these growth companies that
    would generate quite a bit of wealth opportunity for our small
    retail investors.
        Mr. Hinojosa. Mr. LeBlanc, in the 1990s, we had the longest
    period of prosperity in our country, wartime or peace time, and
    you all are talking about how many IPOs started up during that
    10-year period.
        As you know, this bill states that a company would qualify
    as an emerging growth company with special status for up to 5
    years so long as it has less than $1 billion. So I will ask
    you, Mr. LeBlanc, can you elaborate on your concerns with this
    threshold and what threshold you think might be more
    appropriate?
        Mr. LeBlanc. Thank you, sir.
        Yes, a billion dollars does seem like, for annual revenues,
    quite a large sum. My recommendation, respectfully, is that the
    committee might consider lowering that amount.
        Mr. Hinojosa. How much?
        Mr. LeBlanc. $500 million.
        Mr. Hinojosa. $500 million. Do you have an estimate of what
    percentage of public issuers this bill would exempt under the
    new emerging growth company exemption? That will be my last
    question.
        Mr. LeBlanc. Yes, sir. We had requested that research. We
    will have to get back to you with that answer. We are looking
    into that, the number of public companies in the market that
    have less than $500 million. I did it as an entrepreneur who
    has run a business, and I started looking at the revenue, what
    my profit margin might be, at what stage could I afford $1
    million to $2 million that would be diminishing my return for
    my shareholders, and I thought $500 million would probably get
    me to that place. A billion might be too large. And I do want
    to have--
        Mr. Hinojosa. Thank you.
        My time has run out, and I thank you for that response. I
    yield back.
        Mr. LeBlanc. Thank you, sir.
        Mr. Dold [presiding]. The gentleman yields back, and I
    certainly appreciate that. The Chair will recognize himself for
    5 minutes.
        Mr. Brantuck, if you could, just shed a little light and
    obviously, we talked about the IPO marketplace and how it
    earlier had--was much more robust and more lately it seemed to
    decline in terms of numbers. Regardless of the reason why, and
    I think there is a number that we can point to, but can you
    just give me your take on what the impact was for the United
    States economy to have the number of IPOs drop so sharply?
        Mr. Brantuk. In terms of IPO drops, I would say I think
    there has been enough data to be shared with the House here to
    identify that there is an issue.
        The exact number in terms of jobs and jobs that were lost
    because IPOs--I could follow up with you; I do not have a list
    of those figures.
        Mr. Dold. Not a problem. If you could talk to me for just a
    second on Asian markets. In your testimony, you talked about
    how Asian markets raised over two-thirds of the world's capital
    in 2010. Can you shed a little light on terms of why they are
    going to Asia as opposed to why they are not doing it here in
    the United States?
        Mr. Brantuk. Asia is seen as a viable alternative to U.S.
    capital markets. Regulation isn't as burdensome. Many companies
    also see that Asia, many of their customers are located over
    there, so they are seeing an alignment over there. But, again,
    the number one reason that we hear companies going over to Asia
    is because of the high regulatory environment that we have here
    in the United States.
        Mr. Dold. And we will follow up with you a little bit later
    in terms of some of the other things that we should be doing.
    If I can just switch for a moment to Ms. Mitchell.
        Your testimony states that approximately 85 percent of what
    would be classified as emerging growth companies under the bill
    do not find going public is as attractive today as they did in
    1995. Can you give me some better perspective from what you are
    hearing as to why and how this has hurt the U.S. economy, in
    your opinion?
        Ms. Mitchell. It is interesting and a contrast to
    entrepreneurs overseas who see going public on their exchanges
    as a great banner and, certainly, in the early 1990s and late
    1980s, companies in the United States were aiming for that
    alternative as well. And I think the issue is--we have referred
    to it quite at length here. In the early 1990s, when you think
    about a normal time period, and I think Congressman Himes'
    comments, which I think are good ones, we are not trying to
    recreate the bubble at all in what we are doing here.
        We are really trying to bring it back to a normalized
    level.
        But entrepreneurs were very specific about their concerns
    about going public, their ability to get information to
    investors and the costs of doing so. And, so, again when there
    is a lot of economic uncertainty in the market, coupled with
    what they know to be an expensive process, they will pull back,
    and as Mr. Selfridge referred to, invest in engineers. And when
    you haven't invested then in getting ready to go public, you
    are more likely to be sold. And when you are sold in the short
    run, you actually have job reductions because you eliminate
    redundant jobs.
        You asked Mr. Brantuck a question about the jobs that might
    have been created, and I think it is always hard to deal with a
    hypothetical. But there is a McKinsey study that is actually in
    the President's Council on Jobs and Competitiveness report that
    refers to over 2 million jobs that would have been created in
    the last few years. So I refer to that element, and we can all
    look at that after this hearing, but McKinsey had taken a look
    at that, and I think it was post 2007 or 2008 that they
    referred to that piece of it.
        Mr. Dold. Thank you.
        Mr. LeBlanc, you just testified a moment ago that in your
    company, when you were dealing with Sarbanes-Oxley and the
    like, it was costing you about $2 million in order to comply.
        Would you estimate, and you are dealing with other
    companies, that would be more the norm or would that be the
    exception?
        Mr. LeBlanc. Thank you, Representative. I believe the
    average is about $1.5 million, so we were estimating between
    $1.5 million and $2 million, and probably of the two, we would
    have spent a portion of that, so I think $1.52 million is a
    good number.
        I would like to respond to your question about Asia. As a
    fiduciary for the teachers of Texas, I would much rather see
    those companies which are going public in Asia, instead going
    public in the United States, because I, as a fiduciary, have
    much more confidence in our rule of law, and our enforcements
    of the regulations we have and the punishment of those that
    violate those regulations than I do, frankly, in the Asian
    markets.
        Mr. Dold. So just following up on that, obviously we would
    all like to see those companies go public here in the United
    States, as opposed to over in Asia. What would you recommend in
    terms of--I think you believe, as I think most of us do, that
    this piece of legislation will move us closer to creating an
    environment that will help us attract more businesses to go
    public here in the United States. Do you have any indication as
    to how this legislation may be able to help them?
        Mr. LeBlanc. Yes, sir. I believe that the reduced
    requirements for the Sarbanes-Oxley requirements, the
    additional information provided to potential investors about
    companies, just ease and reduction of cost over that 5-year
    ramp-up period, will encourage many more small companies.
        My son is a good example. He is 24 years old. He is working
    at a start-up in Silicon Valley called WePay. They are a
    competitor to PayPal. PayPal, as you know, was bought by eBay,
    and is now a large company. And there are 30 kids trying build
    a business that they hope can create jobs, do something, and
    create a competitive environment to give people an alternative.
    They look at the public exit as not viable today, and so they
    ultimately possibly would not want to sell or go public but
    have to sell to a larger company, and the wealth creation would
    be lost to the retail investors.
        Mr. Dold. Thank you so much. My time has expired. The
    gentleman from Colorado is recognized for 5 minutes.
        Mr. Perlmutter. Thank you, Mr. Chairman. And I am generally
    supportive of this legislation, but I have to say, and I am
    sorry I missed the first panelists' remarks, but I haven't
    heard anything about investor protection. And there was a
    reason for Sarbanes-Oxley, there was a reason for the 1933 Act,
    and there was a reason for the 1934 Act, and that is about
    investor protection. If the investors don't feel protected,
    that they are getting fair information in a timely manner, they
    are not going to invest.
        So now that I got that off my chest, do you believe that
    the appropriate investor protections still remain? And I will
    start with you, Ms. Mitchell.
        Ms. Mitchell. You are asking a very pertinent question, and
    something that the IPO Task Force really started out with as a
    premise, and why the composition of our committee included not
    just CEOs, but institutional investors, because we felt if we
    didn't address that issue, we would have failed. Our objective
    was to have practical but meaningful recommendations. And what
    we ended up with, the structure that we decided early on was to
    build and extend on existing regulations, because we do think
    they are valuable. That is why our recommendations on the cost
    side are temporary. And that is why on the research side, they
    still are within the confines of SEC and FINRA regulations and
    governance. And we felt that was a really important piece.
    There are certain people who don't think we went far enough.
    But I think that is why we were looking to strike that balance.
        On the cost side, we have addressed the cost issues, but it
    is a short number of issues for a limited period of time. And
    on the investor information side, we are modernizing it, but we
    are doing it within the context of the existing regulations.
    And we thought that was actually a very important part of this
    to make it successful going forward.
        Mr. Perlmutter. Okay. Mr. Selfridge?
        Mr. Selfridge. Yes?
        Mr. Perlmutter. I have represented people who got caught up
    in WorldCom and in Enron, so I have seen people harmed. I have
    seen capital absolutely evaporate in front of people's eyes.
    So, you are talking about, hey, I have these three companies
    and this would really help them.
        I want to just make sure that we have a system in place,
    sort of as Ms. Mitchell and I were just talking about, that
    protects them. So as a banker, you also have the investor side
    of this. What do your investors think about this?
        Mr. Selfridge. I guess as a banker, I look for the same
    protections in terms of how I analyze risk and manage risk. So
    as Ms. Mitchell so eloquently said, I think the protections are
    still there. Yet what I am dealing with in terms of the segment
    of the economy is far different than global corporations with
    perhaps a few bad eggs. I see companies that are growing at 20
    to 100 percent a year. And in terms of their impact as three
    companies on the total economy, I think it is de minimis.
    However, I see the potential for them to grow to be enormous
    companies and support job growth. What I also see is that every
    dollar that they can spend to help compete against fierce
    competition in countries that have limited respect for
    intellectual property rights, or that they can use to hire
    engineers, or perhaps boost up sales and marketing is a dollar
    that I think has a--
        Mr. Perlmutter. Whoa, whoa, whoa. Do you think every dollar
    goes into employing somebody, or does it go into a dividend to
    the investor?
        Mr. Selfridge. The companies I deal with do not dividend to
    investors. They go into operating expenses to grow companies
        Mr. Perlmutter. Have you heard of an outfit called
    SecondMarket?
        Mr. Selfridge. I have.
        Mr. Perlmutter. Okay? Do you use their services at all?
        Mr. Selfridge. No.
        Mr. Perlmutter. Why not?
        Mr. Selfridge. Personally, I don't want to invest in those
    companies. And that is my personal choice.
        Mr. Perlmutter. Okay. No, no, that is fine. That is fine. I
    didn't know if it was something--because that is one where you
    can take what is locked-up wealth or value in a private
    company, and then hopefully find some other people so that you
    can liquidate or provide some cash--
        Mr. Selfridge. Sure.
        Mr. Perlmutter. --for that locked-up wealth. And that is
    part of what happens in these private companies.
        Mr. Selfridge. Right.
        Mr. Perlmutter. So, Mr. LeBlanc, in your situation was it
    really--sometimes just going public is a tough row to hoe,
    whether it is Sarbanes-Oxley or anything else. You come under a
    lot of new restraints. Did that play into your decision at all,
    just going public and knowing you are going to be under this
    whole new regimen and you have investors that you don't know?
        Mr. LeBlanc. Yes, sir, that did play into my decision. And
    the decision was that the benefits of the access to the public
    markets, the ability to have growth capital to employ more
    people, to get access to retail investors, outweighed the
    Bataan Death March you have to go through to become a public
    company.
        I will specifically speak, though, to your internal
    controls. And let me use 404(b) as an example. I had to hire an
    internal auditor, and I hired the best person I could at the
    salary I could afford. And I could tell you that that person
    was qualified, but I had better resources when I was using
    Deloitte and outsourcing that, because I got global experience,
    global knowledge, and it was much better for me to outsource
    it. So I ended up having to hire that person and supplement
    their work with outside resources.
        So that is where I would tell you that sans Sarbanes-Oxley,
    I had better internal controls before Sarbanes-Oxley than I did
    after. And then my costs went up, with no added benefit.
        Mr. Perlmutter. All right. Thank you for your testimony.
        Mr. Dold. The gentleman's time has expired. The gentleman
    from Virginia is recognized for 5 minutes.
        Mr. Hurt. Thank you, Mr. Chairman. I want to thank each of
    the witnesses for joining us today. And thank you for your
    testimony.
        Obviously, I think we all here on both sides of the aisle
    want to see an increased, vibrant marketplace for new and
    emerging companies. So, I appreciate your insights into that.
    And I thank the gentleman for putting forth this bill.
        One of the questions that I wanted to ask was about the
    PCAOB and the concept that they have put out there about
    mandatory rotation of auditing firms. And I guess the costs of
    that concern me, as well as I think that the diminished quality
    of work that might result from having that sort of disruption.
        And I was just wondering if, and maybe I will start with
    you, Mr. Brantuk, if you could maybe address your views on
    that, and then maybe have the other witnesses talk about that.
    Thank you.
        Mr. Brantuk. Working closely with auditors and auditor
    firms, one big concern that they have is ramp-up time, getting
    to understand the company and understand the books. And a
    natural concern to this rotation would be, how much time does
    it take to ramp up to allow these audit firms to do the proper
    due diligence to properly audit these firms? So the quality of
    the rotation could be hampered in our opinion.
        Mr. Hurt. Mr. LeBlanc?
        Mr. LeBlanc. Yes. We were subject to--when I ran a public
    company--the rotation. I would recommend two things. One, that
    you do have rotations of the auditor within the audit company.
    I think that is good. I am not sure you have to rotate the
    company. And then, I would encourage this committee to enforce
    existing regulations so when there is lying, cheating, or
    stealing, there is punishment for that, and that will have a
    better impact than causing a rotation, in my view.
        Mr. Hurt. Excellent.
        Ms. Mitchell?
        Ms. Mitchell. I am happy to answer the question. The
    pending recommendation that the PCAOB has had out there as we
    were working as a task force over the course of the summer, to
    be honest with you, the members of the task force across-the-
    board almost reacted in horror when they heard that. The
    expenses of it for a small company are huge. Again, they are
    using their capital at that stage not to liquidate investors,
    but to really invest in their growth. Every few hundred, or few
    thousand dollars really is a huge difference in perhaps even
    being profitable and not.
        The expense of bringing in a brand new firm--and by the
    way, small companies buy their services on a retail basis.
    Their hourly rates are among the highest, as one of the former
    accountants on our task force noted to us. And none of us could
    really believe that could be a possibility.
        I agree with Mr. LeBlanc. I think it is very important that
    we continue to have audit partner rotation. That is healthy.
    Frankly, I think that the company benefits. You get the
    objectivity of a new partner coming in. That is a very good
    thing. To have a new firm come in because they have to go back
    and reaudit prior years, and start all over at the beginning,
    is punitive without providing investors with a lot of benefit.
    So that cost-benefit balance is just really not there.
        Mr. Hurt. Thank you. Mr. Selfridge?
        Mr. Selfridge. I would echo Ms. Mitchell's comments, and I
    would also add that I think from what I see, different
    accounting firms have different philosophies and approaches to
    new and emerging growth companies. Some treat them with more
    resources than others. So I would be suspect in terms of the
    rotation of an accounting firm.
        Mr. Hurt. Great. I thank you for answering the questions,
    and I yield back the balance of my time.
        Mr. Dold. The gentleman yields back. The Chair recognizes
    the gentleman from Connecticut, Mr. Himes, for 5 minutes.
        Mr. Himes. Thank you, Mr. Chairman. Let me thank the panel
    again for their very good testimony. I am really hopeful we are
    going to get something done here in good bipartisan fashion,
    which is why I felt obligated in the opening statements to try
    to urge the discussion to stay out of the realm of ideology.
        I do want to just run through just a couple of concerns
    that I have. And Mr. LeBlanc, one of the concerns, maybe the
    prime concern I have had with the legislation is how we pick
    the number, $1 billion. I looked at some data, 3 years, $1
    billion in revenues would basically be about 80 percent of all
    IPOs. I heard you say both $500 million and $700 million as a
    counter-recommendation. Did I mishear?
        Mr. LeBlanc. Thank you, Representative Himes. I believe the
    proposed legislation was $1 billion in annual revenue.
        Mr. Himes. Right.
        Mr. LeBlanc. And my suggestion is to reduce that number
    down to $500 million.
        Mr. Himes. Can you give us a feel for why--at some level,
    these things are arbitrary--$500 million may be better than $1
    billion in revenues?
        Mr. LeBlanc. As you wanted to stay fact-oriented, it is
    less factual about the number of companies but about me looking
    at running an operating statement, a balance sheet, and saying,
    if I have $500 million in annual revenue and I have a 10
    percent, 20 percent, 30 percent profit margin, then I have $50
    million, $100 million, $150 million in net revenue. And then if
    I had $1.5 million, well gosh, that seems like at $50 million,
    it is still going to be burdensome. At $50 million, I am
    actually concerned that maybe the $500 million needs to be
    higher. But at $150 million, 1 percent of my net revenue, if I
    had to implement a full $1.5 million, that seems like an
    appropriate level where I could ramp up to Sarbanes-Oxley.
        Mr. Himes. Thank you. I appreciate that. My second question
    is not so much a question as a request. I get a lot more
    comfortable on this stuff, on these ideas, if the investors who
    are purchasing these securities understand that they are
    purchasing a slightly different category of securities than
    everything else, than blue chip stocks. I remember back when,
    if you were on the New York Stock Exchange, you had a one- or
    two- or three-letter symbol, and if you were NASDAQ, you had
    four-letter symbols. I would make a request to the panel if you
    couldn't help us think through and maybe submit some ideas on
    how we make it plain to investors that when they purchase this,
    they are purchasing unmatured, emerging companies. That, I
    think, would help a lot of us get some comfort. So, that is
    just an offline request.
        My last question, and this is directed at Ms. Mitchell and
    also Mr. LeBlanc, it is a sort of ``dog that didn't bark''
    question. I have now heard the $2.5 million figure a number of
    times. We have made no mention of the fees to underwriters.
    Back when I was doing this when I was a tech banker, there was
    notable consistency in gross spreads fees to underwriters of
    about 7.5 percent. Is that still more or less where we are?
        Ms. Mitchell. Yes.
        Mr. Himes. Okay. Is it true--so that I do can do a little
    math here, I looked at some data--that the average IPO is
    somewhere between $350 million and $400 million? Is that more
    or less true? Let me use $350 million. A little quick math in
    my head here would suggest that 7.5 percent times $350 million
    is about $25 million in fees to underwriters. That is 10 times
    the $2.5 million that we are talking about as burdensome here.
    What do I make of that? Am I not hearing about that because
    issuers and the investing community feel like they are getting
    really good value for that $25 million, or just what am I to
    make of that?
        Mr. LeBlanc. That is a great question. Do keep in mind your
    $25 million is a one-time event. The $1.5 million to $2 million
    ongoing expense is ongoing every year. And ultimately,
    companies are valued based upon the net present value of their
    income stream over a long period of time.
        I would love to see a more robust Dutch auction similar to
    what Google did--you see Facebook is talking about this--and to
    disintermediate that 7.5 percent, and I would love to work with
    you and others to find a way to make that market more efficient
    and make that cost of going public less costly.
        I am a capitalist; I believe in market valuations. The
    market seems to be settled in on that. Hopefully, you will see
    some companies, some providers of those services maybe start to
    reduce those costs.
        Mr. Himes. Thank you. Ms. Mitchell?
        Ms. Mitchell. I am happy to answer that. And interesting
    enough, one of the objectives, and we did have investment
    bankers, as I noted, on our IPO Task Force, and our hope is
    that we have more IPOs, that we have smaller IPOs. A number of
    the IPOs that we all know about this year really are not small
    cap IPOs, they are multibillion-dollar companies raising huge
    amounts of capital that are driving really large fees. And if
    the recommendations in H.R. 3606 that you sponsored come to
    bear, we are hoping that smaller companies come to market, the
    average raise will be smaller, and frankly, the fees from an
    investment banking point of view would come down because the
    average raise would be smaller.
        In the early 1990s, the average raise, as you pointed out,
    was a fraction of what it is today. And we are looking to
    actually allow for the opportunity for smaller companies to go
    public.
        A quick response to the question that you asked Mr. LeBlanc
    about the size, I think it is a good, healthy discussion for us
    to have. We were thoughtful about where you draw that line. And
    the reason we picked the two pieces, one $700 million in public
    float, the amount of shares that are available on the market,
    is that is consistent with the common SEC definitions for a
    large accelerated filer. So we were trying to build on existing
    regulations out there.
        The revenue test, we picked that, partly feedback from the
    institutional investors on our committee, the way they look at
    small cap companies versus large. Also as I mentioned, it takes
    2 years to plan for an IPO from a cost and infrastructure point
    of view. As you noted, these are companies that are growing 30
    to 50 percent a year. So you are having to begin, let's say, if
    you are 5 years on the on-ramp, in year 3 to begin to be ready
    by year 5.
        And then last, that this really is a lot of these
    companies--and because of these high-growth, frankly, job-
    creating companies that we are referring to that really can,
    again, revitalize the economy as we talked about, grow so
    quickly, they often are investing in the future; they are
    investing in future growth. A lot of them are on the cusp of
    cash flow breakeven, and aren't generating the kind of steady-
    state net income or cash flow that Mr. LeBlanc refers to, so
    that is why we left it at that level.
        I would say, by the way, companies like Zynga and Groupon,
    who obviously had well-publicized and successful IPOs of late,
    within the first year would be off the on-ramp, if not
    available even at the beginning.
        We weren't looking to solve the problem for GM or HCA or
    companies like that. We were really trying to get the smaller
    companies, again, revitalizing those small IPOs and for the
    poor bankers.
        Mr. Himes. Thank you. I note I am way out of time, but if
    you can get back to us with a response to this question: How
    can we make sure that retail investors know they are investing
    in something a little more risky than perhaps the average stock
    out there? I think that would be helpful.
        Ms. Mitchell. That is important.
        Mr. Himes. Thank you. Thank you, Mr. Chairman.
        Mr. Dold. I thank the witnesses. And the Chair recognizes
    the gentlewoman from New York, Ms. Maloney, for 5 minutes.
        Mrs. Maloney. Thank you. Thank you for your testimony. I
    would like to ask Ms. Mitchell, recently we had a hearing on
    Mr. Fincher's proposal to permanently exempt companies with a
    larger market capitalization from section 404(b) of Sarbanes-
    Oxley. And it was noted at that time by exempting companies of
    $75 million or less, which was in Dodd-Frank, we were really
    capturing 60 percent of the public companies that are out
    there.
        So can you explain to me why you believe a 5-year exemption
    from compliance, for companies with almost 10 times that in
    market cap as the ones we exempted in Dodd-Frank, is a good
    idea?
        Ms. Mitchell. Thank you for asking that. That was something
    we pondered carefully when we began thinking through this group
    from the broader ecosystem, because it is--from an investor
    protection point of view, can be concerning if it is a large
    percentage of any population. And the reason we chose that 5
    years is the opportunity to use the capital to grow and, in the
    process, prepare for full compliance. And the result is that--
        Mrs. Maloney. Ms. Mitchell, my time is limited. Aren't we
    really talking about very small companies that want to go
    public but don't have the resources to create full compliance
    regimes or cover the cost of registering? Why is the threshold
    so high? I can understand wanting to help smaller companies
    comply, but this is a huge exemption.
        Ms. Mitchell. And the benefit that we put forth, the 5-year
    time horizon, actually means that less than 2 percent of the
    market cap on the total exchanges would be impacted by the
    recommendations that we are making. And it is less than 15
    percent of the companies that are on the exchanges because we
    have set a limited time for compliance.
        Mrs. Maloney. But it is a huge cap; it is 10 times what we
    had in Dodd-Frank.
        Let me ask you, what are the investor protections that are
    there during that 5-year period? What is there to protect
    investors?
        Ms. Mitchell. Number one, it is important that they are on
    the public exchanges, because all the SEC and FINRA regulations
    exist for small through large companies, and the governance at
    a large level. When we looked at very small reporting
    companies, the list of exemptions that they have, we actually
    took a lot of them off that on-ramp list because we felt that
    we should leave everything in place that we possibly can. So if
    it didn't generate cost, we left it on. If it also was not
    valuable for investors, even if it was expensive, we also took
    it off that on ramp.
        As an example, projections of future commitments of cash
    flow are really important for investors to understand the cash
    position of a small company. So even though that is costly, we
    felt it was important that companies still comply with that
    from day one. So, again, we looked at building and extending
    existing regulations, not throwing them all out and making
    these companies exempt from everything. And they are exempt
    only for a limited period of time. So again, we tried to do it
    within the spirit of investor protection, and consistent and
    clear communication with investors.
        Mrs. Maloney. Okay. I would like to ask Mr. Joseph Brantuk
    from NASDAQ, I regret I had another hearing I had to vote in
    and so I am getting here late, but in your statement, you were
    talking about opening up some new exchange called the BX
    Venture Market, which is going to be helpful for small
    companies. Can you explain why it is helpful? Why do we need
    this? What do you see as the benefits of this? What is the
    difference in the way a small company's stocks trade? And also,
    your comments on what protections are there for investors
    during this 5-year period?
        Mr. Brantuk. Right. I will take the protections for
    investors in this 5-year period; I would point to the exchanges
    themselves. These companies that are listed on NASDAQ, NASDAQ
    Global Select, our highest listing here, has the highest
    listing standards in the world. So not only is it very
    difficult, both qualitative and quantitative metrics, for these
    companies to list on NASDAQ, but there is also ongoing
    regulations and continued listing qualifications that monitor.
        So we have a team here in Rockville, Maryland, that is
    constantly monitoring these companies to make sure that both on
    a qualitative and quantitative basis, they are following the
    rules of NASDAQ.
        To the BX Venture Market, we believe this is an absolutely
    critical and important market for small companies looking to
    access capital. It is an efficient way where there is no middle
    ground between companies that are trading on the OTC in an
    unregulated market, and companies that cannot qualify to list
    on NASDAQ. Right now it is sort of a no man's land. And we
    believe by creating a BX Venture Market, that it is highly
    regulated, and that these companies will have access to mature,
    grow, incubate, and hopefully one day list on the main
    exchange, on the NASDAQ Stock Market.
        There are fundamental issues that we are concentrating on
    right now, which is market fragmentation and the lack of
    liquidity, and pricing discovery on these smaller companies and
    smaller cap companies. And we believe that the committee should
    also take a look at innovative market structure rules to ensure
    that these companies are provided and supported by the market-
    maker community.
        Mrs. Maloney. Very briefly, Ms. Mitchell, you mentioned
    that small companies pay retail rates for auditors--and you can
    get back to me in writing since my time has expired--but what
    are those rates, and how do they compare to the rates for
    larger companies, since we are doing sort of a contrast between
    large and small? Or if you can answer quickly, I think that is
    an important point for my colleagues.
        Ms. Mitchell. I will submit that. In the interests of being
    accurate, I will go back to my committee members and supply
    that to you in response.
        Mrs. Maloney. Great. Thank you so much. Thank you. I yield
    back.
        Mr. Dold. The gentlelady yields back. The Chair recognizes
    the gentleman from California, Mr. Royce, for 5 minutes.
        Mr. Royce. Thank you, Mr. Chairman. Mr. Brantuk, you noted
    the President's Council on Jobs and Competitiveness, and they
    had this report on Section 404(b), their recommendation. Can
    you expand on why you believe that providing a permanent
    exemption for 404(b) is necessary?
        Mr. Brantuk. The permanent extension of 404, quite
    honestly, we believe there is no additional value in 404, just
    additional cost. I believe one thing we did mention is for
    companies, a suggestion to have these internal controls done
    every other year. We just think that the additional costs of
    having these controls for 404 every year are just not
    necessary.
        Mr. Royce. Now, you also cited testimony regarding the
    potential negative consequences of companies staying private.
    You mentioned some research on that. Why is that the case? Why
    would it matter on a macro level if a given firm decided to
    remain a privately held company? We had that statistic we
    talked about earlier here. We have the majority--or you have a
    smaller number of public companies today than you did 10 years
    ago here in the United States, despite the fact of so many
    going public overseas. Why would that matter?
        Mr. Brantuk. It really comes down to job creation. These
    smaller companies need access to capital to grow and create
    jobs. And without that access to capital, they really are only
    left with one option, which is to sell themselves to recognize
    the true value of their company.
        One big concern is that there is $1.5 trillion of cash on
    the balance sheets of U.S. corporations. We believe that money
    is just sitting there and ripe to acquire a number of
    companies. And as we all know, M&A equals job reductions. IPOs
    equal job creations. And we believe that is the main focus and
    driver behind job creation is fostering and creating valid IPO
    capital markets.
        Mr. Royce. So you think this phenomenon of delisting, and
    the mergers and acquisitions that go on in place of it as firms
    become more inward looking, and as they are not engaged in R&D,
    and don't have access to the capital, and they sort of change
    their outlook, and as a result, it impacts employment here in
    the United States?
        Mr. Brantuk. Absolutely. These companies are looking to
    where they can fit a niche product or service for a larger
    corporation in the goal to be acquired, whereas, looking at it
    holistically, looking at the innovative nature of the U.S.
    economy and the U.S. entrepreneurs in the United States and
    really grow and strive and thrive and, again, raise and create
    jobs.
        Mr. Royce. In your work with clients, do the
    disproportionate way in which these costs affect smaller firms
    relative to larger ones, given the way that larger ones can
    more easily absorb the costs, does that have an impact? We have
    compliance cost evidence from an SEC survey that suggests that
    the ratios are 7 to 1 or 8 to 1, something in that
    neighborhood. What impact does that have?
        Mr. Brantuk. Absolutely. We are not against regulation. In
    fact, NASDAQ is an SRL. We embrace regulation. We believe it
    supports capital formation and protects investors. But we also
    believe that we just need to strike a balance. It is not a one-
    size-fits-all in terms of regulation. The ability for a company
    making a billion dollars in revenue to absorb these additional
    compliance costs is much different than a company making $75
    million to absorb these compliance costs.
        Mr. Royce. So for example, the piece I had from the Wall
    Street Journal about some of these rules, companies have had to
    undertake exhaustive investigations of such minor issues as how
    many people should be required to authorize small customer
    refunds at a retail location, you are saying that when this
    happens, the disparate impact on small firms is considerable?
        Mr. Brantuk. Exactly. I have heard crazy stories of how,
    because of 404, companies needed processes in place to order
    staplers, order business supplies.
        Mr. Royce. So the economies of scale relative to large
    firms versus small, would argue that an exemption under a
    certain amount would be very beneficial in terms of the
    competitiveness of up-and-coming smaller firms, which are the
    larger hiring firms, right?
        Mr. Brantuk. Absolutely.
        Mr. Royce. They the ones that are most likely to hire and
    grow.
        Mr. Brantuk. Absolutely. I would point to the data that 90
    percent of all new jobs are created after a company goes IPO.
        Mr. Royce. Thank you, Mr. Chairman. I will yield back.
        Mr. Dold. The gentleman yields back. The Chair recognizes
    the gentleman from Minnesota, Mr. Ellison, for 5 minutes.
        Mr. Ellison. Thank you, Mr. Chairman.
        My question is, looking at H.R. 3606, there are a number of
    things that would comprise this widened on-ramp you all are
    talking about. And they come in the form of exemptions. I
    haven't gotten on the bill yet. I might. I am just thinking
    about it. And the thing that kind of drew my attention first is
    not some of the regulatory stuff that may make things better.
    Experts who know more than me, I might want to listen to. But
    other things sort of got my attention, like how would exempting
    these companies from say-on-pay votes--and there are a number
    of compensation-related things--how does this help a small
    company?
        Again, I have never run a company. I guess I ran my law
    firm. That is the only one. But how do these things play? The
    stuff about 404(b) and the other stuff, it does make sense to
    me, but just letting--just dropping all accountability around
    compensation, I would just love to hear your thoughts on how
    that helps a company achieve public status. There is probably a
    good reason, but I just don't know it.
        Ms. Mitchell. Simply, and I should yield to a former CEO as
    well, at your direction. And again, it is really important that
    you bring this up. There is detailed compensation disclosure
    that will be included. So we are narrowing for a short period
    of time. Frankly, the truth is for these small companies, their
    compensation is very simple and not as complex, and frankly not
    as lucrative as some of the larger companies.
        Mr. Ellison. Exactly. So that is why I don't know why the
    exemption needs to exist. Usually, it is simpler.
        Ms. Mitchell. What they have to do, though, is go through a
    much more detailed compensation disclosure when most of it
    doesn't apply to them. But because it is a larger company, what
    is required for IBM is required for a smaller start-up, and
    they still have to fill out all the paperwork and have all the
    lawyers take a look at all that piece for compensation.
        What we are saying is they do disclose, using the small
    reporting company format. It is important for shareholders to
    understand compensation. But let's for that initial on-ramp use
    the smaller company reporting that the SEC allows today, and
    then over that 5-year period, they will either grow out of the
    on-ramp status themselves; or, at the end of the 5-year period,
    regardless of their size, they will need to comply with the
    same requirements that an extremely large company would have,
    the much longer, more lawyers' fees kind of disclosure. But it
    would be disclosed.
        Mr. Ellison. That is good to know. And also too, when I
    heard about the reduction in IPOs, I was disturbed by those
    statistics. And then, I heard the migration to the Asian
    markets is really where we see the growth. I thought to myself,
    if I had a lighter regulatory burden in some other part of the
    world, I might go there. But then, is Asia in for its own Enron
    and WorldCom because they don't have the regulations that we
    have? The reality is if you look at this housing bomb that we
    just went through, it really took place in the more unregulated
    part of our market. Ultimately, Sarbanes-Oxley was passed, as
    my friend said, for a reason. Is the migration to Asia's lower
    regulatory burden, is it necessarily--I guess it is a bad
    thing, but are they just not being prudent? Mr. LeBlanc?
        Mr. LeBlanc. It is hard for me to respond to say whether or
    not they are being prudent. Would I rather have those companies
    in the United States--
        Mr. Ellison. Me too.
        Mr. LeBlanc. --under a rule of law that I have faith and
    confidence in? Yes. I don't think Enron or WorldCom would be
    affected by this legislation. If we look back at what has been
    too- big-to-fail as what has caused a lot of the financial
    burden, it has not been small companies.
        Mr. Ellison. Right. I agree. And I hope you accept my
    questions as one who would love to see us increase our number
    of IPOs. I like the spirit of this legislation. I just want to
    make sure, like other questioners have, that we are basically
    not ripping off regulatory burdens that protect investors, and
    at the end of the day we get rid of all this stuff, and we are
    just back in a bad economic situation.
        Mr. LeBlanc. Representative Ellison, I applaud you for
    that. I think that is critical. Business in this country is
    based upon trust. And if we lose trust, there is no business.
    There is not a regulation in the world that will keep a
    dishonest person honest. But if you have a set of rules that
    are fair and equitable, and then enforcement of those rules--I
    sign Sarbanes-Oxley as a CEO in certification. To my knowledge,
    there has not been a prosecution of a CEO under Sarbanes-Oxley.
    I am stunned.
        Mr. Ellison. I am out of time, but I will say that we do
    have to talk about nonregulatory ways to increase basic civic
    virtue and honesty. And I am curious to know in the future how
    the corporate community is doing that. Thank you.
        Mr. Dold. The Chair recognizes the gentleman from
    Tennessee, Mr. Fincher, for 5 minutes.
        Mr. Fincher. Thank you, Mr. Chairman. Let me be clear, too.
    I thank my colleagues on the other side of the aisle for some
    good questions. This is an attempt to move forward in a
    bipartisan manner. Mr. Carney and I have had the conversation,
    not putting the blame on any one person or party, but in order
    to move the country forward and in order to stay with the focus
    of job creation. I have said many times that I don't know what
    was happening here before I got here, but I know what is
    happening now. So, we are just looking at moving forward.
        Mr. LeBlanc, a few minutes ago you made the statement of
    dialing back the $1 billion to $500 million. Do the other
    panelists agree with that? Mr. Brantuk?
        Mr. Brantuk. I think it holds merit to do an analysis. And
    absent the data of exactly how many companies would fall into
    each of those categories, I think it would be difficult to
    comment on.
        Ms. Mitchell. The IPO Task Force in its recommendations
    actually supported the $1 billion cut-off for the reasons that
    we talked about. Institutional investors that were
    participating in our committee looked at that because of the
    time it takes to prepare and the growth, you have to actually
    start--you have to aim for a couple of years. And because these
    companies are still investing in their growth, it is a large
    percentage of their bottom line. So we are supportive of the $1
    billion revenue and the $700 million public float definition.
        Mr. Fincher. Mr. Selfridge?
        Mr. Selfridge. I would agree with Ms. Mitchell, I support
    the billion dollars. I think as I understood Mr. LeBlanc's
    testimony, the litmus test of a net profit margin is far
    different than the company's IC, where they are rapidly
    investing in operating expenses. So on a net margin basis, that
    is a far different metric than gross revenues.
        Mr. Fincher. Okay. Mr. Brantuk, just again a common-sense
    question here. How soon after a company files with the SEC to
    go public will it take for them to actually enter the
    marketplace and issue shares for the sale to the public?
        Mr. Brantuk. In a good economy, a minimum of 3 months. But
    given the volatility just in this year alone, it is taking
    companies significantly longer than that. So 8, 10, or 12
    months. And there are even some companies that are on file now
    that filed their S-1 a year-and-a-half ago.
        Mr. LeBlanc. One comment, question, that is from the date
    you file. There is a tremendous amount of time that occurs
    before the date you file to prepare for the filing, which could
    be 6 months to a year to put all the information you need
    together financially to prepare the application.
        Mr. Brantuk. Absolutely. And to that point, I apologize if
    I didn't understand the question. But we advocate that a
    company should begin acting like a public company 2 full years
    before they actually file their S-1.
        Mr. Fincher. Okay. Ms. Mitchell, when a company is unable
    to go public, why are job losses so heavy when the company is
    sold or merges with another company?
        Ms. Mitchell. It is an important fact, and you see it. We
    have talked about the longer-term studies showing that 92
    percent of a company's growth occurs post-IPO. The study that
    we did with NASDAQ this summer actually looked at newer
    companies. So we wanted fresh data around the cost of going
    public, including Sarbanes-Oxley as an example.
        It is interesting, one of the questions we asked in that
    was job growth. These are companies that had gone public since
    2006. So let's say the average age is somewhere in the 3-year
    range, roughly. Their statistics were that 86 percent job
    growth had occurred post-IPO, which tells you that most of that
    job growth occurs early in that company's IPO cycle.
        So number one, that is why you want to go public. When a
    company sells itself--as one of my colleagues always said, what
    would Seattle look like without Microsoft? What would Silicon
    Valley look like without Intel?
        When you become a division of a company, first of all when
    you get acquired, all of the redundant positions, the CFO, the
    CEO, a lot of the management team gets laid off. And you may
    not have the opportunity to grow and become an independent
    company like you could have if you had been able to stand on
    your own and go public. And it is interesting to see with all
    these M&As, and it used to be 90 percent of venture-backed
    companies went public; now 90 percent sell themselves. One of
    the impacts of that is the number of tech listings has gone
    down, the number of acquirers has gone down. So there is even
    less competition.
        If you decide to sell yourself, there are even fewer
    companies to sell to. We need to get more companies public that
    are big, that not only can themselves create jobs but even
    acquire some of the smaller companies. It is really a shrinking
    pie. And again, it is moving overseas.
        Mr. Fincher. Thank you guys.
        One last comment before I yield back. Making sure the
    investors are protected is critical. It is. But also making
    sure that the environment is friendly for the creation of these
    companies will also give the investors an opportunity to
    invest. And you can't have one without the other.
        And so no one here is wanting to--the pendulum sometimes
    here swings way too far in either direction. But we are trying
    to take a common-sense approach. Again, I thank Mr. Carney and
    my other colleagues. But with that, I yield back. Thank you,
    Mr. Chairman.
        Mr. Dold. The gentleman yields back. The Chair recognizes
    the gentleman from Delaware, Mr. Carney, for 5 minutes.
        Mr. Carney. Thank you, Mr. Chairman. And I want to once
    again thank Mr. Fincher for his leadership on this, the
    gentleman from Tennessee. As a Representative from Delaware,
    the first State, I am the last one, I am the lowest man on the
    totem pole on this committee. And when I have a chance to ask
    questions to a panel, it usually looks like this: the Chair and
    nobody else but staff. And everybody else has left.
        I have been carrying the ball on this side of the aisle,
    and I have heard a lot of the questions that you heard from our
    side and from our members. And by the way, Mr. Himes and Mr.
    Perlmutter are cosponsors of the legislation. But they have
    real concerns that you heard. And they fit in really three
    categories, why the $1 billion threshold, and we have had a
    very good conversation. By the way, this panel is excellent.
    Your responses to our questions have been very insightful, and
    we appreciate that.
        What about investor protection? And then, what you heard
    from Mr. Ellison on why on say-on-pay. And first, I would like
    to hear, Ms. Mitchell, just talk about the IPO Task Force
    itself for the record, kind of get it on the record who was
    involved in that. And if you could end that kind of description
    with Treasury's kind of view of the legislation and the issues
    that were identified in that task force.
        Ms. Mitchell. I would be happy to. I will quickly say on
    behalf of small companies who have incorporated in Delaware,
    maybe you are small on the map, but in the small company's mind
    you actually loom quite large.
        Mr. Carney. All my friends in California who are lawyers
    can always tell me who the Secretary of State is in Delaware.
        Ms. Mitchell. Exactly.
        Mr. Carney. At the risk of malpractice, they file their
    companies in Delaware. And we appreciate that.
        Ms. Mitchell. Exactly. And we appreciate that it exists,
    actually. It is quite healthy. The IPO Task Force actually came
    together after the Treasury's Access to Capital Conference,
    which was a very healthy discussion in and of itself. We were a
    private group, an independent group, and we literally came
    together in the halls. And the good discussion that has
    happened today, this balance between, as Congressman Fincher
    referred, of making it more palatable for small companies to
    access public markets, but to do so without compromising
    investor protection, led us to put a diverse group together.
    It, as I mentioned, included CEOs and institutional investors,
    probably the first-class citizens, I would say, of that IPO
    Task Force--and they should have been--along with private
    investors, securities lawyers to help us fathom how all this
    works, academicians, and investment bankers.
        And it was interesting because when we started working
    together, we each came with our own list, like we all do. And
    when we came together, we all ended up shortening our list. We
    all had our dream statement. And we came together with
    something that was designed, again, to work with existing
    regulations, to find that balance that really wasn't extreme in
    either point of view. We were really trying to come back with a
    very balanced perspective was really the objective overall.
        Mr. Carney. So could you just talk a little bit about the
    investor protection piece of it and how that discussion played
    out, and if there were other things that maybe weren't--that
    didn't make it into this legislation? I have heard all these
    questions before as I have tried to encourage my colleagues to
    become cosponsors. And we have a good list of cosponsors, by
    the way, from this side.
        Ms. Mitchell. You do. It is important to note how much is
    still applicable to these companies. The current and the
    periodic reporting, risk factor disclosures, audited financial
    statements, disclosures of related party transactions, the
    mandatory requirement to disclose all material information.
    That gets to the SOX 404(b) issue. It is mandatory that they
    disclose material weaknesses. They actually still have to
    certify it. So that was new in 2012 with SOX. They still have
    to do that. And they still have to comply with all corporate
    governance. So we really tried to keep as many of the existing
    regulations as we could.
        Mr. Carney. I think that is really important to get on the
    record, and it is the points I have tried to make with my
    colleagues, that this doesn't do away with regulations that are
    important in terms of those kinds of things.
        Mr. LeBlanc, could you comment on that? You said some
    things at the outset I thought that were very important to hear
    with respect to investor protection and access to information.
        Mr. LeBlanc. Yes, sir. Thank you, Representative Fincher.
    And thank you, also, for sponsoring this bill.
        Two points I would like to make. One is, I believe the
    disclosure of information will be increased through this bill,
    not decreased. And as Ms. Mitchell has said, the regulations
    will still be there. We are just trying to reduce the
    regulations that are burdensome to small companies that cannot
    afford it until they get to scale.
        One thing I do want to mention about capital and the access
    to capital that is very important: Most of these private
    companies have access to not permanent capital. It is provided
    by mostly closed-end funds or high-net-worth individuals who
    have a timeline, who say I will put my money in and you have a
    distinct timeline to get my money out. And therefore, you
    either will have to do an IPO or you will have to sell
    yourself.
        If we do not open up the IPO market, these small companies
    will be forced to sell to larger companies, who will then lay
    off a portion of the smaller companies due to redundancy. So I
    think a critical part to this is to get access to permanent
    capital on our public markets, which are the best public
    markets in the world.
        Mr. Carney. I think that point has been well made by each
    of you today in terms of having IPOs as an outlet, as opposed
    to being bought by a larger company in terms of job creation,
    which is important to all of us.
        And I see my time has run out. So I just want to thank the
    panel once again. I want to thank Mr. Fincher again for putting
    together and working with this group on a piece of legislation
    that I think is common sense and a way to help with the IPO
    market and create jobs in our country. And I am pleased to be
    the cosponsor on this side.
        Mr. Dold. The gentleman's time has expired. The Chair
    recognizes the gentleman from California, Mr. Sherman, for 5
    minutes.
        Mr. Sherman. Thank you, Mr. Chairman. I am one of the few
    members of the committee who has actually done auditing. I had
    hair before I started that process. And so, I see the
    importance of internal control. I know we have a panel of four
    distinguished witnesses here who have shown their brilliance
    perhaps in every respect except for their support for the
    language chopping back on 404(b). So I won't ask a question
    about that. I will just say that without internal control, you
    simply don't have numbers that investors can rely on.
        I am also concerned about mandatory firm rotation, because
    I have been on audits when our firm was new to the audit, and
    it was twice as hard; but that was okay, we just charged them
    twice as much.
        So I want to focus my questions on this mandatory firm
    rotation. I will start with Mr. Brantuk. Is mandatory partner-
    in-charge rotation sufficient, or should we move to mandatory
    firm rotation?
        Mr. Brantuk. Again, we testified before, and we are against
    mandatory firm rotation. We believe that it is inefficient and
    it brings additional costs to especially these smaller
    companies.
        Mr. Sherman. Mr. LeBlanc?
        Mr. LeBlanc. I agree. I think mandatory partner rotation is
    good unless you want the bill to be called the Auditor Full
    Employment Act.
        Mr. Sherman. I have friends. But they are all fully
    employed already.
        Ms. Mitchell?
        Ms. Mitchell. I concur. And particularly for small
    companies, paying the freight for a brand new audit firm every
    year is too much. Having the audit partner, though, is very
    important, having that rotation.
        I would also say, by the way, H.R. 3606 does support
    internal controls. It just excludes for a short period of time
    the external audit of internal controls. They still exist. They
    have to be disclosed if there are weaknesses. The CEO and CFO
    have to certify them. And corporate governance rules still
    comply.
        Mr. Selfridge. I do not agree with mandatory firm rotation.
    As I stated earlier in my testimony, I had mentioned, and I
    think as you just said, you charge them twice as much. I see
    different approaches from different accounting firms. Some do
    spend as much attention with emerging growth companies as
    others. And as such, I think those companies suffer.
        Mr. Sherman. I would also point out that all four firms,
    the major firms, at least I believe all the major firms, not
    even the four largest, have done something that I think is even
    more important than mandatory partner rotation, and that is a
    rule within the firm, what we used to call the quality control
    and technical compliance partner has to sign off.
        Arthur Andersen had a policy with their technical review
    department. It was called, ``Don't Ask, Don't Tell.'' That is
    to say the partner in charge of golfing with the client could
    choose whether to consult with the technical review department
    or not. I think this policy gave Arthur Andersen its
    significant growth and its complete demise.
        And I look forward, as this bill goes forward, if we are
    going to focus, and it is germane to taking a look at the yes,
    you should have a rotation of the managing partner on the job,
    but you should also require the technical review department's
    consent before the audit is signed.
        So I applaud the firms I am familiar with, whom I might add
    are still in existence, unlike Arthur Andersen, for following
    that policy. Perhaps, Congress will play a role there. And with
    that, I yield back.
        Mr. Dold. The gentleman yields back. And I certainly want
    to thank the witnesses for their time today. Without objection,
    the NYSE Euronext testimony will be submitted for the record.
        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.
        This hearing stands adjourned. And again, thank you for
    your time.
        [Whereupon, at 11:29 a.m., the hearing was adjourned.]

                                A P P E N D I X

                               December 15, 2011