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




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

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           DECEMBER 15, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-92









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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

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

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

                  SCOTT GARRETT, New Jersey, Chairman

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












                            C O N T E N T S

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

                               WITNESSES
                      Thursday, December 15, 2011

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

                                APPENDIX

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

              Additional Material Submitted for the Record

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

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

                              ----------                              


                      Thursday, December 15, 2011

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

    STATEMENT OF JOSEPH BRANTUK, VICE PRESIDENT, NASDAQ OMX

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

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

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

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

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

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

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

                            A P P E N D I X



                           December 15, 2011






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