[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 2 return 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]


