[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
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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
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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