[House Hearing, 112 Congress] [From the U.S. Government Publishing Office] EQUITY FINANCE: CATALYST FOR SMALL BUSINESS GROWTH ======================================================================= HEARING before the SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS OF THE COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS SECOND SESSION __________ HEARING HELD APRIL 19, 2012 __________ [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 112-064 Available via the GPO Website: www.fdsys.gov _____ U.S. GOVERNMENT PRINTING OFFICE 76-471 WASHINGTON : 2012 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON SMALL BUSINESS SAM GRAVES, Missouri, Chairman ROSCOE BARTLETT, Maryland STEVE CHABOT, Ohio STEVE KING, Iowa MIKE COFFMAN, Colorado MICK MULVANEY, South Carolina SCOTT TIPTON, Colorado CHUCK FLEISCHMANN, Tennessee JEFF LANDRY, Louisiana JAIME HERRERA BEUTLER, Washington ALLEN WEST, Florida RENEE ELLMERS, North Carolina JOE WALSH, Illinois LOU BARLETTA, Pennsylvania RICHARD HANNA, New York ROBERT SCHILLING, Illinois NYDIA VELAZQUEZ, New York, Ranking Member KURT SCHRADER, Oregon MARK CRITZ, Pennsylvania JASON ALTMIRE, Pennsylvania YVETTE CLARKE, New York JUDY CHU, California DAVID CICILLINE, Rhode Island CEDRIC RICHMOND, Louisiana GARY PETERS, Michigan BILL OWENS, New York BILL KEATING, Massachusetts Lori Salley, Staff Director Paul Sass, Deputy Staff Director Barry Pineles, General Counsel Michael Day, Minority Staff Director C O N T E N T S ---------- OPENING STATEMENTS Page Hon. Mick Mulvaney............................................... 1 Hon. Kurt Schrader............................................... 2 WITNESSES Mary Dent, General Counsel, SVB Financial Group, Palo Alto, CA... 4 Jason W. Best, Co-Founder, Startup Exemption, San Francisco, CA.. 6 Tony Shipley, Founder and Chairman, Queen City Angels, Cincinnati, OH................................................. 8 Angela Jackson, Managing Director, Portland Seed Fund, Portland, OR............................................................. 10 APPENDIX Prepared Statements: Mary Dent, General Counsel, SVB Financial Group, Palo Alto, CA......................................................... 29 Jason W. Best, Co-Founder, Startup Exemption, San Francisco, CA......................................................... 41 Tony Shipley, Founder and Chairman, Queen City Angels, Cincinnati, OH............................................. 44 Angela Jackson, Managing Director, Portland Seed Fund, Portland, OR............................................... 54 Questions for the Record: None Answers for the Record: None Additional Materials for the Record: None EQUITY FINANCE: CATALYST FOR SMALL BUSINESS GROWTH ---------- THURSDAY, APRIL 19, 2012 House of Representatives, Subcommittee on Economic Growth, Tax and Capital Access, Committee on Small Business, Washington, DC. The Subcommittee met, pursuant to call, at 10:05 a.m. in room 2360, Rayburn House Office Building, Hon. Mick Mulvaney presiding. Present: Representatives Mulvaney, Chabot, Schrader, Cicilline, and Chu. Mr. Mulvaney. If everybody is ready, we will go ahead and get started. Thanks again for coming in today. As I was just mentioning to Mr. Schrader, I am filling in for Mr. Walsh, who was unexpectedly called back to Illinois. So on his behalf and on Chairman Graves' behalf, thanks very much for coming in today. All of us in the room today know that small businesses are important to job creation and the economy. But the question is how does a business go from the idea of a business to an engine of job creation? That is one of the things we will be looking at today. One thing entrepreneurs need to grow a business, obviously, is access to capital. Most businesses begin with an original investment from the entrepreneur or borrowed funds from friends and family, as did the four businesses that I started. In these early growth stages, the future is very uncertain. Entrepreneurs are trying to prove that their idea is viable and can attract customers for their product or their service. For successful ventures, once the idea shows promise, the entrepreneur will typically need more capital to expand. Because of the high failure rate of new companies, financing from a lending institution can be difficult to come by. So where do entrepreneurs go for this access to capital when they are turned away by a bank? They must rely on outside investors who share in the vision that the entrepreneur has that the new company can and will be successful. While equity investment can come in many forms, an entrepreneur receives funding in exchange for a stake in the success of a company. While this is a risky proposition for the investor, they are motivated by the belief they can add value to the company and one day profit from the investment. We are here today to hear from a distinguished panel of witnesses about the current state of entrepreneurial finance and recent legislative changes impacting this environment, and finally, what can be done to focus our efforts as lawmakers on job creation. With that, I will yield to Mr. Schrader for his opening comments as well. Mr. Schrader. Thank you, Mr. Chairman. And thank you, panel, for coming all this way to give us your thoughts and advice, which we definitely need. Today, more than ever, we are relying on America's small businesses to create our jobs, driving the innovation that our country is known for and to unlock new markets. In previous recoveries, it has always been the entrepreneurs that have paved the way. Companies like Microsoft, FedEx, Hewlett- Packard, all those great companies started in someone's basement or garage. And at this time, we hope that entrepreneurship is again the driving force that gets this economy going again. It takes money to get a business off the ground, as I well knew in my small business; mortgaged basically everything I had to start my business. Probably wasn't the smartest thing I did, but I was successful, thank goodness. It also takes capital to keep the business running. And under normal circumstances, access to capital has not been a problem. Today, that task has become particularly challenging for small businesses and continues to be a big, big issue for small businesses. During the hearing, hopefully, we will examine some of the challenges these businesses face. On the positive side, it would appear, now I stand to be corrected, at the same time investment activity in early stage companies, the so-called angel investors, is starting to pick up a little bit and rebound. I would like to hear the extent to which that is and what we can do to actually foster that. We passed a JOBS Act bill, nice bipartisan bill that hopefully is of some value in getting some of these small businesses off the ground and continue to stay viable going forward. These developments I think are a source of optimism in the current investing climate. Still, there is much more we need to do to get a robust return for our Nation and small business. Although the JOBS Act is still in its infancy, hopefully, it will prove to be of great value. And your suggestions today will hopefully pave the way for the next JOBS Act. Thank you very much for coming. Mr. Mulvaney. Very briefly, one logistical matter before we get started. You will see that television screen change here probably in the next 15 or 20 minutes, and we will be called to our first vote series of the day. Mr. Schrader and I will have to excuse ourselves to go over and vote, hopefully for only a very short period of time. So when we get to that, we will adjourn the meeting for as brief a period of time as possible to allow us to go over and vote. We will try and find a nice convenient stopping point when we get to that point. Now what I would like to do is introduce the witnesses for the record. And then, after we do that, we will take your testimony, and we will finish with questions at the end. So we will begin, the first witness today is Ms. Mary Dent, general counsel at the Silicon Valley Bank, located in Palo Alto, California. Silicon Valley Bank provides financing for a wide variety of entrepreneurs, investment funds, and start-up companies. As general counsel, she is responsible for the banks' legal and compliance departments, providing strategic guidance to the company's management team and board of directors. It is always nice to hear your own bio read back to you, isn't it? We go through it all the time. Mr. Schrader. It is embarrassing. Mr. Mulvaney. Every time I go through this on my Web site, it gets shorter and shorter. Prior to joining Silicon Valley Bank, Ms. Dent served as general counsel to New Skies Satellites, a global communications firm where she was responsible for the company's regulatory filings related to its IPO. Ms. Dent, thank you very much for being here today. Our next witness will be Mr. Jason Best, co-founder of the Startup Exemption. The Startup Exemption has played a key role in developing the framework to change securities laws to make crowdfunding a reality. Prior to becoming involved in the Startup Exemption, Jason has served in a variety of roles at Medem, Inc.--am I pronouncing that correctly--a technology company that provides communication services to the health care sector. He has an MBA from the Thunderbird School of Management and an undergraduate degree from William Jewell College. Thank you again, Mr. Best, as well. I am also going to introduce Mr. Shipley. Mr. Shipley, I understand Mr. Chabot is on his way, but we will go ahead and introduce you before he gets here. And I apologize for stepping on his toes. Mr. Shipley is the founder of Queen City Angels in Cincinnati, Ohio. After being a successful entrepreneur, he founded Queen City Angels, an angel capital investment group with 50 investors which provides financing for seed stage and small high-growth companies. Queen City has invested over $30 million in 52 entrepreneurial companies. He is testifying on behalf of the Angel Capital Association, a trade association representing more than 7,500 accredited angel investors. Mr. Shipley, thank you again for being here today and for your testimony. With that, I will yield to Mr. Schrader for the introduction of our final witness. Mr. Schrader. Thank you again, Mr. Chairman. I am really pleased to introduce Angela Jackson as co- founder and co-managing director of the Portland Seed Fund, a $3 million private-public seed fund investing in high-growth capital-efficient companies in my State of Oregon. She brings significant experience securing angel investments in multiple business sectors for the seed fund. She advises hundreds of entrepreneurs and seed stage companies across the broad spectrum of industries at AB Jackson Group. Also oversees Portland State University's Business Accelerator, which is a really neat deal in our State. Ms. Jackson is president of the Portland Chapter of the Keiretsu Forum---- Ms. Jackson. Well done. Mr. Schrader [continuing]. The largest angel network in the world, and was chair of the State's premiere angel investment event, Angel Oregon, in 2010. She holds a B.A. from Boston University, M.A. from University of Oregon. Go Ducks. And thank you for being here today. I yield back, Mr. Chairman. Mr. Mulvaney. We are not going to have a quack attack in this meeting, are we? My brother married into a family of Oregon Ducks. It is a disturbing group of people sometimes. One housekeeping matter. For those of you who haven't testified before, the general rule is that the testimony is supposed to take about 5 minutes. There should be some green, yellow, and red lights that you can see in front of you. While that is the rule, we don't typically enforce it very strictly here. So if you feel the need to go over a few minutes, that is fine. If you get extraordinarily long-winded, and believe us, we know what it is like to be long-winded, you will hear me very quietly tap the gavel. If you could start to wrap up at that time, that would be great. And what we will do is we will go through as much of your testimony as we can before we have to break, and then Mr. Schrader and I will ask questions after we come back. STATEMENTS OF MARY DENT, GENERAL COUNSEL, SVB FINANCIAL GROUP, PALO ALTO, CA; JASON W. BEST, CO-FOUNDER, STARTUP EXEMPTION, SAN FRANCISCO, CA; TONY SHIPLEY, FOUNDER AND CHAIRMAN, QUEEN CITY ANGELS, CINCINNATI, OH; AND ANGELA JACKSON, MANAGING DIRECTOR, PORTLAND SEED FUND, PORTLAND, OR Mr. Mulvaney. So Ms. Dent, with that, please tell us why you are here. STATEMENT OF MARY DENT Ms. Dent. Representative Mulvaney and Ranking Member Schrader, thank you very much for having me here today to talk about the very important question of how we make sure that small businesses get the capital they need to thrive. As you said, my name is Mary Dent, and I am here as general counsel for Silicon Valley Bank. I will focus in particular on a small but critically important part of the overall landscape, which is high-growth, small young businesses. As you said, we all know why these companies are so important. It is because they are the single best source of job creation we have as a country. High-growth companies create roughly 12 million jobs and more than $3 trillion in annual revenues. They are also helping us solve challenges in fields like health care and energy. And importantly, they serve as the growth pipeline for mature American corporations around the country. SVB, as its name implies, works pretty much exclusively with these high-growth companies. We work with about half of the venture-backed companies all around the country through 27 different offices, and we are one of the only banks in the United States that will lend to startups before they are profitable. I will first talk for a minute about what I see in bank lending. I will then touch on what is happening on the venture capital investing side of things and then a bit on the intersection between policy and the world of startups as we see it. So, first, on bank lending, while access to credit does remain an issue in the broader economy, in the sectors that we serve, actually loans are readily available. There are few other sectors today that can deliver the kinds of risk-adjusted returns that banks can get lending to high-growth technology companies, and so competition there is actually fierce. Even for very early stage companies, on the debt side, we think about the right amount of financing is generally available. The availability of debt does, however, vary by sector. And in clean energy, for example, companies face a very well known what we call valley of death as they try and scale from technology proof to commercial scale production. Turning to the equity front, we recently did a survey of early stage companies, and their executives said that access to equity funding is their second most significant challenge, right after scaling operations for growth. And we think this reflects a few underlying trends. On the positive side of things, companies are adopting much more capital-efficient models, which means they just need less money to get started and to begin growing. Venture capital investing levels have largely recovered from the steep falloff we saw during the financial crisis. And other sources of capital, including many of those you are going to hear from today, are providing more and more funding to early stage companies. Public equity markets are also starting to rebound. And the health of the IPO market, as you understand from your work on the jobs bill, is very important, because traditionally about 90 percent of growth, of job creation by high-growth small companies has occurred after they have gone public. But the picture isn't universally rosy. While venture investing has recovered, venture fundraising actually has not. In addition, access to capital remains more difficult in capital-intensive, heavily regulated sectors, most notably life sciences and clean technology. This is already affecting the kinds of innovation that is occurring, and it has potentially serious long-term implications for our country. Turning to the question of the role of policy, we believe that the innovation economy depends first and foremost on the people who build and back high-growth companies. But we also think that policymakers can have a dramatic effect on the overall ecosystem. To thrive, startups need government leaders who take the long view, who understand the importance of letting people take risks, who base decisions on facts, and who refuse to entrench the status quo. Top of my issues for start-up entrepreneurs include education, access to talent, the regulatory environment, intellectual property protection, health care, and R&D funding. Like you, Mr. Schrader, I see the recently enacted JOBS Act as a very positive sign, and I commend the House for its leadership and its bipartisan approach to passing this important piece of legislation. I have also been heartened by steps that Members of Congress have taken and are taking to make sure that Dodd-Frank is implemented in a way that doesn't inadvertently stifle the amount of capital flowing to high- growth small businesses. Looking forward, I hope the House will reauthorize the U.S. Export-Import Bank soon. To give you a sense for this agency's impact on small business, in 2010 just our EX-IM loan commitments helped 75 small businesses generate more than $1.4 billion in sales and support more than 6,000 U.S. jobs. The United States is lucky. We have a vibrant innovation sector. Other countries are trying desperately to recreate what we are lucky enough to have naturally. All we need to do is avoid stifling it. I commend this Committee for holding this hearing, and I look forward to working with you to strengthen the vibrant part of our economy that we are here discussing. Thank you for your time, and I am happy to answer any questions you may have. Mr. Mulvaney. Thanks, Ms. Dent. Mr. Best. STATEMENT OF JASON W. BEST Mr. Best. Chairman Mulvaney and Ranking Member Schrader and members of the Committee, thank you very much for the opportunity to discuss crowdfunding and how it can function as a part of the solution for the small business funding crisis in the United States. I would like to begin by thanking the members of this Committee and the House at large for their bipartisan and overwhelming support for the crowdfunding as part of the JOBS Act the President signed on April 5. It was a great testament of the willingness of both parties to work together in support of small business and entrepreneurs, which we all know are America's economic engine. When entrepreneurs have access to capital to grow their organizations, it translates into new American jobs and American innovation. My name is Jason Best, and I am an entrepreneur who has been part of the executive management team also of Kinnser Software, that was ranked as one of the 500 fastest growing private companies in the United States both in 2010 and 2011. I am also co-founder of Startup Exemption. Startup Exemption was formed to advocate for the legalization of equity-based crowdfunding. I and my co-founders, Sherwood Neiss and Zak Cassady-Dorion, saw firsthand the realities of the capital formation crisis in January of 2011. We created a proposal to update securities laws that were written almost 80 years ago to enable crowdfunding to take place in the U.S. We began working with the House on our ideas. And thanks to the collaborative leadership of the House, the Senate, and the President, crowdfunding has now become law. Now the SEC has begun its 270-day rulemaking process, and I appreciate the opportunity to share my perspectives on what this means for small business, as well as what I would respectfully suggest that this Committee and the House consider between now and the conclusion of the rulemaking period. Crowdfunding will enable organizations to use SEC-regulated Web sites to raise modest amounts of capital from large numbers of regular Americans. In exchange for that capital, these small businesses will issue equity or debt securities. If we think of the Internet as Web 1.0 and then the rise of social networks, like Facebook and Twitter, as Web 2.0, this legislation really creates Web 3.0. Web 3.0 is where the social Web meets capital formation. Finally, we are able to harness the power of social networks as well as communities of geography and communities of interest to build businesses that create jobs and innovation. I live in San Francisco, California, where venture capital and angel investors are plentiful. The same can be said of places like Austin, Texas, and New York City. How will this crowdfunding benefit companies in these places? It really is looking at providing them with another option for some early stage businesses who need to establish proof points with professional investors that the management team can execute and there are markets for its goods and services. Mr. Chairman, I believe that companies may use crowdfunding as an onramp to professional capital and investment from angels and VCs. But what about places like Natchitoches, Louisiana, where I grew up, or Arnold, Nebraska, where my family first settled in this country? There are great ideas, talented entrepreneurs, and hardworking small business people in towns like these all across the country, and many of these individuals have no access to venture capital or even bank loans. Many Main Street businesses may never fit the typical venture-backed business model, but may be really good investments for individuals in those communities. Now, crowdfunding can provide these businesses and entrepreneurs the chance to raise capital from their own communities. Soon the dry cleaner could crowdfund to add much needed equipment or a restaurant could open a second location. While crowdfunding alone cannot solve all capital formation challenges, it may provide benefits to many businesses. Mr. Chairman, there is still a great deal of work to do in the 256 days remaining in this rulemaking process. As the President noted during his signing ceremony, the crowdfunding industry has formed the Crowdfunding Leadership Group. I was meeting with this group yesterday in fact. This group's goal is to collaborate with the SEC during the rulemaking period as it seeks to provide oversight, education, and investor protection for the industry. These 14 crowdfunding companies and industry experts that created this group have already begun their work. And as a board member of this group, I ask for this Committee's help in ensuring the SEC can complete its work within the 270 days mandated by the legislation of the JOBS Act. The crowdfunding industry has committed to do all it can to create an orderly market with investor protection, investor education, transparency, and data flows that can demonstrate that the market can create jobs, innovation, and successful companies. Please help us as we collaborate with the SEC to create rules that will enable this industry to thrive. Thank you, Mr. Chairman and this Committee, and I look forward to your questions. Mr. Mulvaney. Thank you, Mr. Best. If you can give me just a second to go over a couple housekeeping things with Mr. Schrader. At this point, with Mr. Schrader's approval, I would like to yield a few minutes to Mr. Chabot for an opening statement. Mr. Chabot. Thank you. I will be very brief. I just wanted to welcome and thank Tony Shipley, who is from my district, from my city, Cincinnati. And Cincinnati is known as the Queen City. And they are the Queen City Angels. And they have invested I believe in 52 entrepreneurial companies now, have raised about $30 million, and have I believe about 50 investors in your company. And Tony Shipley is testifying on behalf of the of the Angel Capital Association, which is a trade association representing more than 7,500 accredited angel investors. And I know we have got a vote, so I don't know if we want to get his testimony in before. If so, I will yield at this point. Mr. Mulvaney. Actually, I think we have just enough time for that. Mr. Shipley, if you would present your testimony. And then, after that, we will adjourn for a brief time. Mr. Chabot. So, welcome to Washington. You have 5 minutes. STATEMENT OF TONY SHIPLEY Mr. Shipley. That is what I was told. Thank you very much. Chairman Mulvaney, Ranking Member Schrader, Member Chabot, and all the other members of the Subcommittee, thank you for holding this hearing on equity finance as a catalyst for small business growth. The capital that equity investors provide, both financial and intellectual, is important for the successful creation and growth of innovative entrepreneurial companies. My name is Tony Shipley, and I am a co-founder of the Queen City Angels, a Cincinnati, Ohio, group of 50 angel investors that have invested more than $30 million of our own money in 52 entrepreneurial companies in 11 years. We make multiple investments in these small businesses to support their development, and as such, we have made a total of 115 investments in our portfolio companies. Our money has leveraged an additional $60 million in direct co-investments in our companies and $120 million in follow-on venture capital. I am pleased to represent the Angel Capital Association, a growing community of sophisticated private investors known as angel investors, who invest money and expertise in high potential start-up companies. The Angel Capital Association, ACA, is the professional alliance of angel groups in the United States and Canada, and includes 165 member angel groups in 44 States and another 20 affiliated organizations. The Angel Capital Association has about 350 angel groups in its database, located in every State, compared to about 100 groups 10 years ago. The new HALO Report from the Angel Resource Institute, Silicon Valley Bank, and CB Insights describe the investments angel groups made in 2011: Median round size of $700,000; 58 percent of investments were in health care/life sciences and Internet/IT sectors; two-thirds of the investment rounds were syndicated, often with multiple angel groups; and investments were distributed throughout the country. Two-thirds of the deals were outside of the traditional equity centers California and Boston. Queen City Angels' experience fits within these national statistics. From conversations with my colleagues in Cincinnati and across the country, my angel journey has a lot in common with many active angels, including past entrepreneurial experience and interests, investing for more than financial returns, connecting with other smart investors, becoming part of a start-up ecosystem, and providing continuing support to entrepreneurs and start-up companies. Angel groups like Queen City Angels actively work to market and brand themselves so that entrepreneurs can find us. We work with many organizations to conduct initiatives, such as monthly mentoring sessions and incubators, and conduct an annual 2-day entrepreneurial boot camp to prepare entrepreneurs who are making effective presentations to investors, judging business plan competitions, participating in regional venture forums, and many other events. I recommend a few things to help strengthened the environment for starting and growing businesses, including leverage the large number of Baby Boomers. In addition to their equity capital, they can bring many of the skills, experience, and mentoring needed by startups and early stage companies to help them be successful in shorter periods of time without making many of the costly mistakes that startups tend to make; leverage private investments to get companies out of the capital gap that was testified to a moment ago, the valley of death; ensure enough angel capital to support new ideas. The Angel Capital Association calls your attention to a few public policy issues to ensure the health of these investors. Reinstate the 100 percent tax exemption on gains in qualified small business stock; consider tax credits for angel investments in qualified entrepreneurial companies; and develop education, training, and awareness programs for investors and entrepreneurs. Thank you for this opportunity to describe the unique role and significant impact that angel investors have in our economy supporting the innovative startups that create important jobs in our country. I would be happy to answer any questions you may have and for the Angel Capital Association to provide you with additional information where and when you need it. Thank you. Mr. Mulvaney. Thank you, Mr. Shipley. And Ms. Jackson, with our apologies, I think we are going to draw a temporary close right now. Mr. Schrader and I and Mr. Chabot need to run over. So what we will do, three votes, gentlemen, best guess 30 minutes? We are going to shoot to be back here as close to 11 o'clock as we possibly can. So as soon as everybody is back in the room, we will get right back to it and wrap up this afternoon. Thank you very much. We will see you in a little bit. [Recess.] Mr. Mulvaney. If it is all right with everybody else, we have got one more witness to testify, and we have got some questions. We also welcome Ms. Chu from California. And so, Ms. Jackson, when we were so rudely interrupted, it was your turn. So fire away, and then we will move to the questions. STATEMENT OF ANGELA JACKSON Ms. Jackson. Thank you very much. Thank you, Chair Mulvaney, Ranking Member Schrader, members of the Committee. As you know, I am Angela Jackson, and I am delighted to be presenting my testimony here today. I am fortunate to be involved in the entrepreneurial ecosystem from several angles, one as fund manager of a professionally managed seed fund, called the Portland Seed Fund; one as a chapter president of an angel group of private citizens getting together to invest angel capital; and third, as the director of the Portland State University Business Accelerator, which is a facility housing 25 to 30 fast high- growth technology, biotech, and clean-tech companies. In addition, I grew up in a serial entrepreneur household. And much like Mr. Schrader, got to witness my father betting the last $2,000, $3,000 on starting a company, which fortunately one day did have a nice exit and generate a lot of jobs and economic activity. I got to go to college off the earnings for one. Like my father, many entrepreneurs do choose to bootstrap their companies. And in that case, they trade sort of a slower level of growth--this was a 20-year overnight success--for the faster, explosive growth that you might achieve by seeking venture or angel capital, where you can accelerate that growth. So I look forward to answering questions later. I thought it would be helpful to talk about some things that are going on in Portland, Oregon, which is a real entrepreneurial destination. We are actually having entrepreneurs start to move to Portland to build their companies because of the quality of life, the access to tech talent, and the cost of living vis-a- vis other communities where they might like to be. So, from my vantage point, things are looking good and getting better. Investors are coming back into the game, startups are creating companies. So from the Portland Seed Fund standpoint, my partner, Jim Huston, and I raised $3 million in a hybrid public and private fund; $3 million doesn't sound like a lot by anyone's measure. But what we do is invest initially very small amounts of capital, $25,000 to start, in who we see as the highest potential, high-growth, capital-efficient companies that we can find in Oregon. We do these in classes or cadres of eight at a time. And with the capital comes strings attached in the form of mentorship, intensive connections and investor introductions, as well as introduction to the ABCs of running a business. Very often these seed stage entrepreneurs come at it from the standpoint of the product, but they don't understand the other nine-tenths of what building and running a successful business encompasses. And we expose them to that. To date--this is quite new--we kicked off the fund with our first investments last July, eight at a time, and we did a second class just in early March. So 17 total investments to date. Those companies, even after we just invested an initial $25,000, have created 60 jobs and have gone on to raise over $4 million in follow-on priced capital. So we are very proud of the progress to date. But I also want to point out and set expectations, we are playing at a high-risk, high-failure rate asset class, the seed and angel class, and we know that failure is a key part of the game. And we do expect failures. So we call this the catalyst and the crucible. The discipline around what we do at the seed fund is we think what makes the difference in accelerating these company's success. We take a similar approach at the Portland State University Business Accelerator. But the types of businesses that we serve are a little different, and they have a longer time to market. Bioscience cannot be a $25,000 overnight success, for example. So, instead, we help these companies access larger formal rounds of capital. And we are proud to report that those companies were the subject of a Portland Business Journal lead article last November, something along the lines of, What is in the water at 2828 Southwest Corbett? These companies have attracted $128 million in private capital to Oregon, which is kind of a cash-starved venture State, through their great work. And that was over a 5-year period. These companies are hiring rapidly. These 25 to 30 companies have 15 open positions today. So these are in fact job-creating companies. The third hat I wear is with the Keiretsu Forum, the angel group. And this is actually a global angel group, but I participate in the Northwest Circuit, which encompasses 240 members. Those 240 members last year invested $24 million of their own capital in 36 companies, to grow them and to expect a return. I would sort of tap groups like Keiretsu Forum as a logical partner with the new crowdfunding legislation to put a face in a room to create an online-offline experience to vet out some of the deals, the due diligence, and the deal screening that will be a necessary part of crowdfunding, which we are excited about, by the way. If there were, if I could wave a magic wand and ask for a couple of things, I am seeing that--first of all, we are supportive of the crowdfunding legislation. We also know, we are cautiously optimistic, we know that the devil will be in the details of rulemaking. So we are hopeful that that process will go well. But it is early to tell. We are probably more excited about the easing of the nonsolicitation ban in the short term anyway from Reg D, which will make it easier for the already in place angel infrastructure to advertise, attract, and recruit new members, who, by the Keiretsu example, you can see are ready and willing to put, you know, funds into good companies. In the yet-to-do column, increased incentives to angel investors who are putting risk capital into place to grow the economy would be a top priority as well as easing the friction through the Tax Code to startup companies, who are struggling to create these jobs. And I know you are well aware of many proposals. I am not going to suggest or back a specific one. A couple of other potential upstream choke points to be aware of. I am not experiencing the easing of lending with the small companies that I work with yet. I would like to see some provision where the top performers, as vetted by groups like mine, can access loan capital earlier in the form of working capital and inventory financing. These are huge potential choke points to the growth that they could put on. And they are still, in my experience, struggling to get those loans. And I am happy to talk to anyone who knows a way around that. And lastly, we are seeing a choke point of talent actually. So the training, and whether we are training organically here or recruiting highly skilled tech workers to fill out these jobs that are becoming available, this is the new choke point that I am seeing in the job-creating companies. So, with that, I am looking forward to your questions. Thank you. Mr. Mulvaney. Thank you, Ms. Jackson. Thanks to all the witnesses. As is my custom, I usually defer to the ranking member. So, Mr. Schrader, you are recognized for as much time as you will consume. Mr. Schrader. Thank you, Mr. Chair. Appreciate everyone for coming. Both the chair and I were kind of anxious to hear your testimony and learn how we can continue to help this critical part of our economy develop and grow. I guess I would start with Ms. Jackson, if that is all right. Elaborate maybe a little bit on your last two points about the choke points. And maybe Ms. Dent could chime in also about--I agree, in my State at least, the small, small businesses are still having a lot of trouble with the credit. The middle stage and larger businesses I think are in much better shape. So, you know, a little bit on what some of the solutions are that you think. And Ms. Dent, if you could follow up on that. Ms. Jackson. Sure. Understanding bank underwriting, that is not my sweet spot. But what I can report is when we put in the hours and--you know, we are professional fund managers; we are able to select top performing companies and surround them with everything they could possibly get and need to ensure their success. And again, there will still be failures. But there are companies that will fail first because of lack of access of that next year capital and not for any other factor. If there is a way to achieve some sort of seal of approval or some sort of loan guarantee that those particular hotshot companies could achieve some, you know, kind of line of credit--again, it is not for every company. It is not for small business, Main Street America; this is a different type of company I am talking about---- Mr. Schrader. Are you familiar with the new market venture programs SBA has? Are they too cumbersome, too whatever? What is the deal? Ms. Jackson. In my experience, again, I work with hundreds of entrepreneurs, I have yet to meet one who has successfully accessed those programs. Mr. Schrader. That is telling. Ms. Jackson. It is not to say that they aren't elsewhere, but in my experience in Oregon, that is true. Mr. Schrader. Ms. Dent, any comments? Ms. Dent. Sure. I think there are probably at least two things going on. One is, by definition, we see the companies that we see, and there are relatively small lenders who will lend to these very small startups. So some of it may be an information flow thing. If the companies can't find their way to one of the handful of people who is open to lending to very early stage companies, by definition, we will believe everybody is getting the credit they need, and they won't be getting the credit they need. So I am happy to introduce you; we do have an office in Portland, and I am happy to introduce you to my colleagues there and let them continue the conversation. Ms. Jackson. I know your colleagues. They are lovely people. Thank you. Ms. Dent. The second is, frankly, harder to solve. And that is that lenders have relatively little upside; they earn interest, and they really can't therefore take the downside risk that an equity investor can and often chooses to take. In addition, under the banking regulations you have to have one or two sources of repayment. That doesn't mean potential repayment, that means accounts receivable, cash on hand, or something else that you can count on as a source of repayment. And if you don't have that, you actually have to treat the loan as a loss. It doesn't matter if you remain optimistic that it will be recovered, but you have to take it out of income in this period and then hold it basically in a separate account. And then when you recover that, that flows back in. But it does impose a rigidity on what banks can do on potential they believe in, potential they see and they share with the investors. A belief that the company will perform well and will be able to pay, that is not enough for a bank to be able to lend. They really need to see the actual source of repayment. And there usually have to be at least two sources of repayment. And that is a basic gap between I think the desire for credit, the realistic and reasonable desire for credit on the part of the entrepreneurs in these startups and the legitimate views of the lenders looking at the credit from a credit perspective. Mr. Schrader. So then a question for the whole panel I guess is, I agree, banks never lent me money unless I really didn't need it. And that is not a slam on the banks; it is just the real world. Because like you said, they have to have some sort of asset. And when I started, I didn't have a whole heck of a lot. So what do you use to guide your decisions? You know, obviously, you have more flexibility as angel investors. How do you decide which is a better risk than another? Because eventually, you do want to make some money on your investment at some point in time. So what are some of the things you look for to guide your decisions? Ms. Dent. There are probably two big differences between Silicon Valley Bank and most banks. One is that we will lend against the probability of the next round of financing as a source of repayment; that when we are in conversations with the investors and we know that they are backing a company and we know that when that company reaches the next round, they will be there. In the near term, the company usually has cash because equity goes into companies in chunks. So they sort of get a load of cash, we can lend against that cash. As they use that cash and develop their product or service, as it gets closer to the point where they are going to need to raise another round, then we can engage more with the investors. And it is our focus on the ecosystem and our deep relationships that let us have all the conversations we need to have to go figure out, is this company going to get that next round, in which case we can hang in there with them, or not going to, in which case we would work with the management to wind down the company because it is approaching that end point. And it is better to do it gracefully if they are not going to make it. I think the second difference that we believe really differentiates ourselves comes later. It is after you get the credit, so you get past that initial gate, what happens when you hit the inevitable bumps in the road? And I think we believe, again, because we focus on the sector and we work so much with entrepreneurs, that we are better able to understand what is really going on and not react too strongly to things that happen, and sort of hang in there and figure out, again, we have an obligation to the Federal Government and to our shareholders to continue to be safe, sound lenders. But the more you understand, the more you can differentiate real risk from perceived risk and hang in there where it may look like there is a risk, but you understand the facts, and it actually is a risk that is manageable and can you stay with the management team and let them work through that risk. Mr. Schrader. Very good. Mr. Best. We will just go right down the road. Comment? Mr. Best. I guess we definitely see, in my work with Kinnser Software in the last 4 years, we spent a lot in Austin, Texas, and certainly a lot of venture capital there. But from a small business lending perspective, definitely a very challenging environment still. I think Mr. Shipley has made an investment in a company that is part of the leadership group, this crowdfunding leadership group that we are working on on the debt side, SoMoLend, and he may have some more specific comments about them. But certainly this crowdfunding on the debt side, the opportunity there really is in the research work that that platform has done, the typical amount of money that a small--a Main Street business needs is around $20,000 to $25,000. So it is a fairly small amount. It is an amount of money that could certainly be crowdfunded effectively for Main Street businesses. So I think whether that is on the equity side or the debt side, I think there is a lot of opportunity there. Mr. Schrader. Very good. Mr. Shipley. Mr. Shipley. Yes, just a couple of follow-on comments. Mr. Best talked about the company that we have invested in, which is SoMoLend. And it is a part of this crowdfunding. In fact, the lady who started that business is going to be working with the SEC and the committee that they are putting together to finalize the regulations on this. So we are really interested in what will come out of that. And as Ms. Jackson pointed out, I think the devil will be in the details. So it is going to be very interesting to see how that shakes out at the end of the day. And I think the question is, is it going to be more appropriate, ``it'' meaning crowdfunding, for those companies that are more lifestyle oriented, or will it also apply to companies that are venture oriented, that can actually get organized angel rounds of capital or VC rounds of capital. So I think we are going to shake that out over this next several month period. There is another company in Cincinnati that we are affiliated with. One of our angel members started a company called the Business Backer. And it is exactly for those companies who need--maybe it is a pizza parlor and, they need a $25,000 loan that they can't go through the bank and get because they don't have the collateral to support the loan. And as long as they have a revenue stream, they can get a loan from this organization. And the way the loan is repaid is on every revenue transaction they take a little piece of that revenue and repay the loan. So over a several month period, and generally a 9-month period, they have repaid that loan. So it is one way to fund these companies who need these small amounts of capital. Another concept that one of our ACA members is working on is this idea of revenue funding. And it is a higher level of activity that I have talked about with the Business Backer. And a gentleman that is looking at all of the ins and outs of how you would do revenue funding, in fact he is Rob Wiltbank. I am sure you know Rob. Ms. Jackson. Yes. Mr. Shipley. I think that is a very interesting concept, because there are a lot of companies that are never going to be the strategic kind of companies where venture debt or recognized angels or VC money will come to the table. But they can be very nice $5 million, $10 million, $15 million kinds of companies, and they may need a half a million or a million dollars, and they could raise this through revenue funding. It is the same concept where the people lending will take money back on the revenue stream until they have gotten the returns that they expect to get. If it is a 2return or a 3 return, once that happens, there could be some follow-on warrants that you retain some small equity sliver in the company. But it is another way for those more lifestyle kinds of companies can actually get the revenue--or the funding that they need to grow their business. So I think that as a pretty nice concept. And Rob Wiltbank is doing a lot of work around standard term sheets, standard documentation that these kinds of companies would sign and put in place for that kind of funding. So we are really looking forward to see what comes out of that. Ms. Jackson. Thanks. I would agree with Mr. Shipley; that is a really interesting and important new trend. And Professor Rob Wiltbank and also Thomas Thurston, both in Oregon, are taking a leadership role on defining what those types of deals would look like. The type of investor that that might attract is a little different than a pure angel investor, who sometimes is going for more of a home run return. So I think what is important here is there is a role for everyone to play. And to Ms. Dent's point, absolutely, we understand there is certain regulatory issues and covenants. But there is an opportunity for somebody to lend money--and I don't know who it is--to lend money quickly to the right types of companies, and they will get a nice return. Now, who that is I think, you know, bears some discussion. But it is an interesting topic for filling in the gaps. We need to create this seamless capital ecosystem. And I think we are doing a really good job now on a seed level, where 3 years ago, that was seen as the area of greatest paucity. Now, I almost think we might be--I hate to say we are over- allocated on the seed side, but I promise you companies will get funded that probably don't deserve to be because there is a lot of seed capital out there right now. I think the next place we need to turn our sites is just upstream of that, so the real top performers get the capital they need to continue. Another issue I just want to mention, loan versus equity. Professional investors don't want to come into a deal that is over-allocated to other investors. And so everyone has a role to play. Can grants, can loans create a nondilutive sort of capital influx into the company at the key moments? If that can, it is a better deal for the investor. You can have an easier time attracting upstream institutional financing. So these are all things to consider at the early stage. Mr. Schrader. Last question for me, Ms. Jackson, and anyone else who wants to comment. You talked about the talent pool choke point. Could you elaborate a little bit on that? Ms. Jackson. Absolutely. So, in Oregon, we are benefitting from an extreme talent choke point in Silicon Valley right now and a lot of competition for individual developers and teams. Some people say acquisitions are happening just to acquire tech teams. So there is a dearth of that top talent. Now, in Oregon we have a lot of that talent. It has also become very competitive for that talent. But we have the advantage of you can build in scale a company and hire top talent for less than you can in those talent pools. But if a company is scaled, you know, to take the next step and has 50 open key positions, it is a choke point. So how do we address that through training and acquiring by any means the appropriate talent to keep our businesses growing? Mr. Schrader. Very good. Ms. Dent. If I might briefly add, we do an annual survey of very early stage start-up companies. And we have just gotten the results back. We will be releasing it in a few weeks. But there were a number of findings from that that speak to your question. One, the biggest challenge they see is scaling operations for growth, which, based on our conversations with them, we do think is directly tied back to talent. Two, only one in five believe that the higher education system is training people with the skills they are going to need. And three, on a more optimistic note, I think there are emerging sectors with enormous potential. We talk a lot about regaining manufacturing in the United States. There are huge sectors that require new skills where the fight is not going to be based on the lowest cost producer; it is going to be the highest skill force. And so there is an opportunity, if we address this and start really getting our educational institutions, mostly at the higher ed level and then percolating down to earlier education, training people with the skills they need, I think that the opportunity for the U.S. economy is really enormous. Mr. Best. Just to echo that, one of the things I heard a couple weeks ago is there is now a vocational school in Massachusetts that is offering a vocational degree in development, software development. And so to begin--and so in addition to the traditional vocational education programs that occur today, to add an information technology track, the ability to train people to write code in Java and Ruby and these other languages that are desperately needed. Having spent a lot of time in Austin and in San Francisco, there are so many open positions now for developers. And so, especially in States like where I am from, Louisiana, or in other places where there are not a lot of--where you can develop software and you don't have to be physically in the same place as the company, a lot of virtual workers that could be in South Carolina, or Oregon, or other places, there is an opportunity to create these kind of vocational education programs that could make a huge difference in local economies and also to stop the gap we have right now in these technical positions. Mr. Mulvaney. Thank you, folks. Thank you, Mr. Schrader. At this time, I yield to Ms. Chu for any questions she might have. Ms. Chu. Thank you. A very important point of the Community Reinvestment Act is that it brings lending investments and services to low- and moderate-income neighborhoods that are traditionally underserved by lending institutions. And we have a situation here where historically minority-owned businesses have not taken advantage of equity financing. In fact, it is estimated that of the total amount of equity capital invested in the United States, minority businesses receive 1 to 2 percent. So how can we work together to help underserved entrepreneurs learn more about equity financing and start to utilize equity financing? Do you have any policies with regard to diversity in lending and helping these underserved small business communities through equity financing? For everybody on the panel, if you have any thoughts on that. Mr. Best. At the Startup Exemption, the organization that worked on the crowdfunding portion of the JOBS Act, one of our early supporters actually was Whoopi Goldberg, because she really believed that it was an opportunity to bring financing on an equity basis to underserved communities. So in her neighborhood in New York City, the ability to allow women entrepreneurs the ability to get microfinance and community- based lending, community-based equity investments to those people who are able to build businesses. You know, so I think that is one of the opportunities that is there. I think that providing education programs and providing, you know, through the SBA or other touch points where we could reach out to those communities and explain the opportunities for crowdfunding, for crowd lending, I think would be really powerful. Ms. Dent. I have a couple of thoughts. One is there are programs for kids that are really interesting. There is one at the high school where my kids attend. It is a very mixed high school with a very high dropout rate. And it is a program called BUILD. And they spend the first 3 years working with the kids to develop little micro businesses, maybe making a cover for a cell phone or something like that. And local entrepreneurs and VCs from the area coach the kids. They build the business. They sell their products. They make a few hundred dollars. And then, during their senior year, they still work with them, but they use all those skills they have developed over the prior 3 years to help them select a college and get a college application. And they have a wonderful success rate with the kids, and the kids learn entrepreneurism. And they also increase dramatically their chances of going to college. It as relatively young program, but at least the data they have so far shows that the chance they stay in college and finish college also seems to be higher. So I think programs to teach entrepreneurship to kids and give them the skills and the aspirations is part of it. The second, there is a program in San Francisco called Astia that works with women entrepreneurs, because actually funding for women entrepreneurs is also surprisingly less prevalent than for companies led by men. And they do a lot of coaching of very early stage companies to help them get ready, develop their business model, develop their staffing plans, their marketing plans, their pitches so that they get ready and are more successful when they go to seek institutional investments from venture funds or others. And I think that kind of--it really takes I think a lot of mentoring. And that kind of program might also be helpful. And the third is a little bit more to a legislative fix. The Community Reinvestment Act was enacted a long time ago, where banking was much more physically based. And it has moved to a more virtual system. Silicon Valley Bank, for example, exists in 27 different offices all over the country, but we only have four--five branches, and they are all in California, in Napa Valley and in Silicon Valley. All of the other offices don't count as branches. So, from a Community Reinvestment Act perspective, they are irrelevant. And I think if you stepped back and realized that so much of banking is now virtual and rethought about Community Reinvestment Act in terms of, how do you get pools of capital into the communities that need them, and that may or may not be a strict geographic tie between a bank that physically sits in a location with a branch and the community that physically surrounds that branch, that might be a really interesting way to go. Mr. Shipley. Just a couple of other comments. I absolutely agree, pushing entrepreneurship down to the lowest level we can to get kids interested in it is--that is a longer-term program, but I absolutely endorse that. You know, kids these days have their heroes. And most of them that they think are rock stars or sports figures and people like that, movie stars. But most of them don't have rock star heroes that are entrepreneurs. And so one of the programs we are looking at in Cincinnati is how do we take our entrepreneurs and really elevate them to that rock star status and give them special privileges in the city so that we become a magnet so that people who want to be entrepreneurs come into our city because we treat entrepreneurs in a special way? And of course, sports stars are really treated in a special way. So why don't we do that same thing with entrepreneurs? And one other idea, this lady I mentioned that started this crowdfunding company also has a venture called Bad Girl Ventures. And it is for women who want to start basically small businesses, and they need $5,000 or $10,000 or $15,000 to allow them to start the business. I don't know a lot of details about how it operates, but she has had a successful--or a number of classes of women who have gone through their program and then have started their own lifestyle kind of business. So that would be something to look into. Ms. Jackson. These are wonderful ideas being shared by my fellow panelists. I just want to point out a trend that I think is exactly the opportunity you point out and that crowdfunding is serving so well, and that is just the democratization of information and entrepreneurship. Literally, anyone can be an entrepreneur today. The costs of entry have come down so far. Anyone can study and learn how to write--can create a mobile app, get it out on the marketplace very quickly. So anyone can be an entrepreneur for very little capital. With that democratization of entry comes more competition. And people actually need to get better at what they do to stand out above the other entrants. And that is where I think it gets trickier. You can get a lot of people to play, but how do you nurture them so they can actually succeed? And, you know, I maybe have more questions on that than answers at this point, but there are some great programs. The other point is just to keep in mind, we are at the point now where over half the world's population is under 25. And the acquisition in the news lately is Instagram and a billion dollar market cap by 15 people. I am not sure of any other example of a per-head-count market cap like that in 3 years. And these are all, you know, young people. But if you go upstream, the fish that acquired Instagram was created by someone at the time who was under 25. So how do we really bring not just access to create a company, but that velocity education to scale a company quickly? Because as these two examples have pointed out, they can create a lot of economic value in a short time. Ms. Chu. Thank you. Mr. Mulvaney. Thank you, Ms. Chu. I have a couple of general questions to begin with, and then I will have some final questions for you as individuals. But one of the things several of you mentioned in your testimony was the recent JOBS Act that we passed. And I know the parts that I liked, and I know the parts that my colleagues across the aisle liked, but I would be curious to know the parts of the bill that stood out as being particularly helpful to each of you. And then perhaps as a follow-up to that, things that you would have liked to have seen in that bill that were missing if we decide to take it up again in sort of a 2.0 version next section. So I will start down here, Ms. Dent, with you. If there is anything about that bill that particularly stood out to you, let's hear about it. Ms. Dent. We probably knew best the IPO onramp provisions. We had worked on and off with that committee over the course of last year developing the recommendations. And we see the impact that the lack of IPO--or maybe better said, the unpredictability about whether an IPO will be a possibility. It takes about 2 years to get ready for one. And so it is not a question of whether you can pull it off when you are ready; it is a question of do you devote the resources to try to get ready and the costs, millions of dollars of costs, away from all the other things you could use that money and your time to do. So we think that providing a more predictable path, scaling those requirements is really, really important. The other piece that we had worked on, the other pieces we had worked on were, what if you don't want to go public? What if you still are the right size to be a private company, and so the Reg A, the Reg D and the shareholder limit provisions, we think in some ways the bill was strong because it addressed both halves, from the earliest stage to the latest stage, to give people different options. I forget who it was who said, there is no single answer; it is a mosaic. In response to your other question, I guess I don't have a version 2.0. What I loved about the IPO act was it avoided the desire to solve all problems. And it said, let's going something done. So I think it is great if you are looking to 2.0, but I think what you really should be commended for is being willing to do 1.0, get it done, move it forward, pass something and then keep moving forward. Mr. Best. Obviously, for us, for Startup Exemption and myself, it would be the crowdfunding act that was part of the JOBS Act, and the opportunity to raise--for regular Americans to make investments in their communities and with ideas-- entrepreneurs they believe in and ideas that they love. For a while now, the donation-based crowdfunding space has been in act. So companies, like Kickstarter and Indiegogo, where you can go and contribute in sort of the PBS model of, I would like to donate money to an artist or a filmmaker or a band, and in return for that, I get a prize. And typically that is the movie or the CD or whatever it is that that artist is creating. There will be more money that is donated through those platforms this year than the NEA will distribute this year. So well over $100 million. And that has all been delivered with virtually no fraud. And so it is a real huge opportunity. To give you a sense of the scale of what crowdfunding could become from an equity or debt perspective, I think it is a data point to look at. So I think that is one of the things that we are really thrilled about. And again, from the opportunity to say let's get something done, let's put a stake in the ground and move forward, we were so grateful for that, for taking, you know, for really moving forward with a new idea in this way in a really rapid and meaningful way. And we appreciate that so much. From a 2.0 perspective, I think that I would like to ask for the opportunity to continue to engage with you, Mr. Chairman, and this Committee during the SEC rulemaking process. Because that is where we are really going to need support in making sure that we create a process that does protect investors really well but also doesn't create so much friction on the process of making these small investments, these modest investments, that it kills the market. So it really is going to be that delicate balance, because so much of--a few data points about what is happening today on those donation-based platforms. Only about 40 percent of those, of projects that are posted on those platforms that say, please, we would like to-- please, fund my idea, only 40 percent actually reach their funding goals. So what that says is the crowd is doing a pretty good job of vetting the ideas that they think are good ones and bad ones. My guess would be that as we look at the equity side, that those numbers may be even a little smaller than that, as people really are looking at, what are my returns, and really taking a very close look at those things. So making sure--and also typically these investments will be made by people you know. And so your first-degree connections on LinkedIn, or your second-degree connections, or third-degree connections, people who know you or know people who know you. What we see on these donation-based platforms today is you have to get to a tipping point of about 30 percent of your funding goal being reached by people that know you or know of you before strangers will invest in you. I think that also will be true with equity-based or debt-based crowdfunding as well. And so really allowing this market that is very delicate from a social interaction perspective to take place, I think there is a way to do it and ensure--create some prudent investor protections. But just making sure that we can work with the SEC effectively to do it in a way that doesn't restrict the market so much that it kills that market dynamic. So thank you. Mr. Mulvaney. Thank you, Mr. Best. Mr. Shipley. The other panel members are much more expert in the JOBS Act than I am. But certainly we--and we have never had a company that has gone through an IPO. But certainly with the modifications made that would allow some of our companies to perhaps go through that process much quicker and for less cost, we like that feature of the bill. On a personal basis, I like the idea that companies that previously couldn't get access to appropriate amounts of funding to start their companies, because I think there has been comments made on that, it could be more lifestyle kinds of companies, they may never be an organized angel or a venture capital kind of opportunity, but they are companies that if you can put a half a million bucks or a million dollars a year into those companies, they can be very significant lifestyle companies. And I like to tell the story of when I was a part of a CEO group of about 15 members, and we had low-tech, no-tech, and high-tech folks in the group, but the most successful company in the group was a lifestyle business. It was $250 million in annual revenue. He wouldn't tell us the profits that he made, but I am sure they were much more significant than the profits we ever made. But that was considered to be a lifestyle company. So the fact that we could get more of those kinds of companies, and probably 80 or 90 percent of the companies that we have in the country today are lifestyle kinds of companies. So to be able to give them funding to them get the traction that they need in the marketplace I think is pretty significant. Mr. Mulvaney. Ms. Jackson. Ms. Jackson. Thank you. Again, supportive and complimentary that this exciting new form of crowdfunding can be passed this quickly and soon will be available to the market. A couple of concerns, and they have yet to--we have yet to know if they will be concerns, but this is an area for possible future work. As a large number of investors relates to converting into follow-on rounds, there may be the need for some changes in regulation on some upstream funding to accommodate the crowdfunded investor invested companies. Again, it is too early, I think, to know whether that is going to be an issue. Mr. Mulvaney. And that sort of transitions into my next question. Maybe it is you, maybe it is Mr. Best, anybody else. You mentioned something that was of interest to me. I am not a new-tech kind of person. The companies I have started have always been old-tech, very old-school, boring companies. But you mentioned the restaurant in Louisiana. Maybe now there is the opportunity for them to use this crowdfunding. Why don't you walk through how you would like to see that work? Ideally, how would it work if you are a small business owner of a restaurant in Lafayette, Louisiana, and you want to do this? And then I would like your input into what needs to happen during this rulemaking process that we are in the middle of right now to get to that ideal outcome. Mr. Best. So, in the best-case scenario, I am a restaurant owner, I want to add a second location. I would go to a Web site that would be what we call it a funding platform, a place where all of these transactions will take place. I as a business owner and equity--investment seeker would then put in a lot of information about myself and my business. My Social Security number, and my business information, and my sources and uses of cash, and some pro forma kind of business statements, accounting statements so that I am able to explain fully to my potential investors what I am going to be doing with that money and how I am going to be utilizing it. There will be a video there, like there are on a lot of these sites today, letting you sort of get a chance to virtually interact with this entrepreneur. And then I would then go out to my social network, both physically in the community, and I love the idea Ms. Jackson has of creating a physical space for this to take place as well as an online space, but also through my virtual community of saying, you know, to my customers and my friends and my relatives and say, please, invest, I want to add a second location. That money would come in over some period of time. Let's say, you know, typically, we would say between 60 and 90 days would be a typical window you would want to leave this open for. And then, once the funding goal was reached, because the legislation requires, obviously, there to be a 100 percent of the funding goal to be reached, if I reach that goal, then the cash call occurs and I am able to then receive that money and then continue to communicate through this funding portal with my investors. And so there would be, you know, standards required for this restaurant owner to be able to then say on a quarterly basis. Mr. Mulvaney. Tell me what those are. Now we have moved into what has to be done during the rulemaking. So give me the standards. Tell me the type of things that when the SEC calls my office and says, what happened at the hearing today, what is your input, what am I supposed to tell them? What do we want to focus on as we go through this rulemaking process? Mr. Best. You want to provide the same type of quarterly reporting that would be expected from a bank loan or an investor. Just, you know, provide that basic level of information on---- Mr. Mulvaney. Does it have to be audited? Mr. Best. The legislation--I think it depends on the level. I think that below a half-million dollars, it basically should be just a signature of the CEO. Above a half-million dollars, what we have called for is not fully audited, but that it would be certified by a CPA. Reviewed and certified by a CPA. Mr. Mulvaney. Now tell me, you mentioned something else, about it is not the charitable, but the other type---- Mr. Best. Donation based? Mr. Mulvaney. Exactly. And you mentioned something very interesting to me, which is that it is almost completely fraud free. How is that happening? Mr. Best. I think it is just the power of the social Web I guess is one way to say it. And I guess what that means is it is, to use a term Ms. Dent used, it is an optimistic way of moving into this sort of arena, where I say I really want-- because people make donations for a number of reasons. They do it because they want the perk that comes along with what you get. Like if you give me $50, I give you my CD of my band. They do it because they believe in the individual and want to help out. They want to be a micro patron of the arts. Or they just believe in the cause or the idea, or want to be part of something bigger than themselves. I may never be in a band--I will never be in band--but I might want to support someone who is. And so those are the things that, reasons that people would donate. I think that when you add the equity return piece to it, I think all those things still exist. But you are adding also to it the desire to be part of something bigger that may have a financial return for you. Mr. Mulvaney. And do you think that the risk for fraud would be higher or lower? Because you have just described essentially the old-fashioned charitable--you are right, you are a micro patron of the arts, which is a slightly different calculus that you go through versus investing in that restaurant. Do you think when we switch over into that return on equity, that the risk of fraud goes up, goes down, or stays about the same? Mr. Best. I think it stays about the same. I mean, there may be some--it is totally hard to predict because it is kind of a whole new area. But I don't see it being orders of magnitude different than what we are seeing today with the donation-based platforms. Because I think that the main reason is the disinfectant quality of social media, the ability--the power of sunlight, if you will. If I am signing into these platforms, both as an investor and as an entrepreneur, and I am signing in with my online identity, and all of my network is there, it is really hard to hide. Because in the past, the fraud that took place was I knocked on a door, or I made a phone call, or I sent you a one-to-one communication email that said, you know, I got this great idea. This is you putting yourself out in front of the entire Web, with all of your social connectivity watching. And there will be online rating systems, just like there are on Amazon or on the other Web sites. Mr. Mulvaney. So it sounds like there is a strong argument for a fairly light hand when it comes to prophylactic fraud prevention. Because it is people that you know, because of the forums that you are moving in, that I guess you are trying to-- I am trying to make an argument for you that the SEC and whoever else gets involved in rulemaking should not go too heavy on trying to anticipate fraud and hope that perhaps the market will insulate itself against that to begin with. Okay. That is great. Ms. Dent, very quickly, and I don't want to have a hearing and mention the words IPO and not have somebody saying something about Sarbanes-Oxley. So you win by default, because I have got my angel investor, my crowdfunder, and you are the closest we get to IPOs. And you actually mentioned it a couple times. Is it working? We all know that formation of public entities is at an all time low. I think it was you who mentioned, I think accurately, that it is when that company gets over that hump and becomes public that we see the dramatic increase in jobs because the access to capital allows the company to grow so dramatically. So how are we doing on IPOs, and if you have some suggestions on fixes to Sarbanes-Oxley, would there be any? And what would they be if there are? Ms. Dent. I think for growing companies the two most important things are they have scarce resources, so you really want to make sure--it is not a question of I wouldn't say get rid of Sarbanes-Oxley across the board. Personally, there are things I would get rid of about it. But it is really scaling to the level of risk. And so I think what the JOBS bill did, for example, which is reduce the number of years of audited financial statements you have to provide when you go public, and remove the audit, the external auditor attestation around the 404 controls, those were both steps in the right direction. Because for a smaller company, those don't add almost any value to investors, and yet they add a lot of costs. And that cost is coming out of somewhere else, hiring an engineer or expanding into a new market. So I think continuing to really look at what have we learned from Sarbanes-Oxley for a larger, more complicated institution that it may be that the costs are justified, but I think as you go down the curve, it gets into a much bigger question. I think a second thing that really came out during the debate over the JOBS Act is, do people understand small business? I think there is still in Washington policy circles a view that small business is really, really small. And the reality is that for these technology companies, you can get pretty big in terms of revenue and still be investing everything you have got in new products and not profitable. Mr. Mulvaney. I can assure you we don't understand small business. Right now, the current debate right now was a small business tax reduction that could go to companies that have several tens of billions of dollars in revenues. But go ahead. Ms. Dent. Oh, really. That is probably a whole different problem. But I think the tendency is sometimes to cut off small business at a very low level. So I think Sarbanes-Oxley had a $75 million threshold. And that is just not really that relevant. I think something that slides is more relevant than saying small ends at a certain end point. And then the third I would say, which arguably is the most important, which is predictability; that in a sense what people need to know is what they have to do. And they can cope with any reality. Different things will happen. And so, for example, there are some things that won't happen if the cost of doing them is higher. And that is a loss to our country. But at least with predictability, you can start to make investments that make sense. And I think that is what we are seeing play out right now in life sciences; there is so much unpredictability. The cost of getting through the regulatory process has increased so dramatically--and I recognize this isn't Sarbanes- Oxley, but it is that same theme of, how much do we require companies to spend on extra levels of protection? And are we really sure that we are getting extra levels of protection that warrant that additional investment, recognizing that it is coming out of somewhere else? And I think those are the questions I would really recommend this committee look at, because my guess is there is still more movement to scale 404, other parts of Sarbanes-Oxley and regulation more generally back, so that it hits companies with a responsible level of regulation. Mr. Mulvaney. One last question for Ms. Dent. You mentioned earlier that you all have the ability to lend against the likelihood of the next round of equity funding or next round of funding. Is that a choice that you make, or is there something specific to your bank that you have done that you can do that, or is it something all banks could do if they chose to do it? Ms. Dent. All banks could do it if they chose do it. It does take very deep relationships and a very deep understanding of how companies grow in order to do it well. Mr. Mulvaney. So that is not our problem or our issue. That flexibility exists in the marketplace already. Some choose to do it; some banks choose not do it. Ms. Dent. Yes. Mr. Mulvaney. Mr. Shipley, before we wrap up, and I am trying to wrap up here by noon, you had three recommendations. And I want to make sure I got all three of them, because I am pretty sure I missed one. You talked briefly about your 100 percent exemption suggestion. The last one was develop education and training. And then I didn't even get notes on the second one. So if you could maybe walk me through those for the record, that would be helpful, sir. Mr. Shipley. Sure. These are recommendations that are generally approved by the Angel Capital Association, with our public policy group that we have as part of ACA. First one was reinstate the 100 percent tax exemption on gains of qualified small business stock. And I think a number of organized angel groups saw a dramatic increase in investments that they were willing to make. I think they felt like they were on the clock, so they were pushing investments into that time period. So we think if you made this a permanent part of the bill, that we would get more investments in companies because people would be--the idea in angel investing or venture investing or basically any kind of investing is to have greed overcome fear, and so if we think we can get enough return so that we are willing to make the investment in a company, and this is one way to help people step up to the plate and make that investment. The second point there, consider tax credits for angel investments. There has been a very successful program in our State and other States that are using investor tax credits. Mr. Mulvaney. We just passed a bill in South Carolina this week I think. Mr. Shipley. Is that right? Mr. Mulvaney. Yeah. Mr. Shipley. In Ohio, we give a 25 percent tax credit. And we have had literally hundreds of millions of dollars invested in companies over the period of time that this has been in play. I know, in the State of Wisconsin, which is part of the testimony, you can see the impact that it has had on both job creation and on amounts of money that angels have invested in companies. And I think, from my perspective, we view it as a way to derisk the investment in some ways. Because as we have all talked about the kinds of investments that we make, the failure rate is going to be about 50 percent. These are stats that have been generated through studies that the ACA has done, where we surveyed literally hundreds and hundreds of deals that angels had invested in. And 52 percent was the number that came back. So we invest in 10 deals; five of them we expect to write those off. So I think some people--they are going to invest in the deal not because there is a tax credit, but it is a little more icing on the cake. And if it is a failure, then we have got some of the money back by virtue of the tax credit. So I think that has been very important in our State. And the third point was then developing educational tools, training, and awareness programs for both investors and entrepreneurs. I think a lot of the panel members have talked about those issues. But certainly from an investor standpoint, to have more accredited investors who understand the process of angel investing. When we first started, we actually created a one-day boot camp to teach prospective angel investors what it means to make an angel investment. So the ACA now offers those kinds of programs, which I think are invaluable, so that you teach people not only the process, but the fact that it is a high risk that you are taking. And so they understand that risk profile before they start writing checks. You don't want an angel investor to write one or two checks, see those investments go south, and then declare that angel investing is not worth it. You have to understand that risk profile. Mr. Mulvaney. Thank you, Mr. Shipley. Last question, and it is to you, Ms. Jackson. You mentioned a suggestion, an idea you had about at some point companies that you term ``vetted companies'', companies that sort of received a seal of approval at some level of early equity financing, would have better access to debt. And I am just wondering if you have any suggestions on how the government could help that happen. Are there regulations that need to change? Are there specific things we need to do in order to encourage that type of behavior? Ms. Jackson. I will use a community bank as an example. We have use run into lots of cases where there is a desire to support a specific company with a loan product but the inability to overcome, you know, some of the regulations in order to do so. Again, I am not an expert in banking, so I don't want to go too deep on what specifically. But what I do see is an opportunity to have another couple of conversations to put people together. I think it is because of the failure rate; I understand why people don't want to loan money to this risk pool. But if we have a known behavior of selecting, nurturing, vetting, you know, the least likely to fail, then is there something that we could do to get them a loan product? And is there any regulation that could be eased to make the community banks, for example, comfortable doing that? Ms. Dent. Might I also offer one suggestion? Mr. Mulvaney. Please. Ms. Dent. There is a provision in the Dodd-Frank Act called the Volcker rule that says that banks--it was intended to deal with very high risky activities, proprietary trading and investing in hedge funds in particular, private equity funds as well. And one of the issues before the regulators right now is, will it apply to venture funds? And that includes both venture equity funds as well as venture funds that provide credit, debt. And if it is applied broadly to all those funds, banks will no longer be able to sponsor or invest in venture debt funds. I think they are an incredibly important part of this overall ecosystem because they aren't regulated banks; they do have more flexibility to come up with some hybrid solutions that I think are more likely to be able to address the opportunity Ms. Jackson says. But if Volcker is applied broadly and all bank capital is legally prohibited from going into those funds, arguably the investors who are most able to understand and back those funds are now locked out of that. And so I would encourage the committee to join with other Members, there have been a lot of Members of Congress who have gone on the record saying that the Volcker rule should not dry up equity going into venture generally. And I think that is an important thing, because it will affect the very people who are most likely to solve the gap you are talking about. Mr. Mulvaney. Thank you, Ms. Dent. Thank you to everybody. I really appreciate you all taking the time to do this. I know that sometimes it seems that you spend all this time to come all this distance, as many of you have, and then you get maybe 5 minutes to ask questions--or give your testimony and then get a chance to just do a couple of questions. And I can't overestimate for you the importance of what it is that you all do when you come and do this. What we are helping to do here is drive the debate. Inevitably, something that you said today, all of which goes in our permanent record, will end up being discussed in a trade association paper someplace. And then it turns into a discussion at the next symposium. And then it turns into something that somebody brings through an association to their Member of Congress. And that is how we drive the debate. And I have seen that firsthand. I know then that at some times, you think it is a complete waste of time to come out here and talk for 5 minutes and travel for 3 days to do it, but I can assure it is not. The opportunities we get to get your ideas on Sarbanes-Oxley and the Volcker rule, the trends about the donative funding or whatever, I can't remember the term, and then the experiences with the fraud especially, it has been very helpful. And we certainly do appreciate your input into the process. With that, since there is no objection, because there is nobody else here but me to object, I will allow members to submit questions for 5 days after the hearing. And with that, we will stand adjourned. I thank you for your time. [Whereupon, at 12:04 p.m., the subcommittee was adjourned.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]