[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




                               before the


                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                              HEARING HELD
                             APRIL 11, 2013


                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13

            Small Business Committee Document Number 113-010
              Available via the GPO Website: www.fdsys.gov

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                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missour
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director

                            C O N T E N T S

                           OPENING STATEMENTS

Hon. David Schweikert............................................     1
Hon. Yvette Clarke...............................................     1


Mr. Lona Nallengara, Acting Director, Division of Corporation 
  Finance, United States Securities and Exchange Commission, 
  Washington, DC.................................................     3
Mr. John Ramsay, Acting Director, Division of Trading and 
  Markets, United States Securities and Exchange Commission, 
  Washington, DC.................................................     3
Ms. Jean Peters, Managing Director, Golden Seeds, Midlothian, VA, 
  testifying on behalf of the Angel Capital Association..........    17
Mr. William Klehm, III, President and CEO, Fallbrook Technologies 
  Inc., San Diego, CA, testifying on behalf of CONNECT...........    18
Mr. Kevin Rustagi, CEO, Evolutions of Noise, Co-Founder, Ministry 
  Supply, Austin, TX, testifying on behalf of the SBE Council....    20
Mr. James J. Angel, Associate Professor, McDonough School of 
  Business, Georgetown University, Washington, DC................    22


Prepared Statements:
    Mr. Lona Nallengara, Acting Director, Division of Corporation 
      Finance, United States Securities and Exchange Commission, 
      Washington, DC.............................................    30
    Mr. John Ramsay, Acting Director, Division of Trading and 
      Markets, United States Securities and Exchange Commission, 
      Washington, DC.............................................    30
    Ms. Jean Peters, Managing Director, Golden Seeds, Midlothian, 
      VA, testifying on behalf of the Angel Capital Association..    46
    Mr. William Klehm, III, President and CEO, Fallbrook 
      Technologies Inc., San Diego, CA, testifying on behalf of 
      CONNECT....................................................    55
    Mr. Kevin Rustagi, CEO, Evolutions of Noise, Co-Founder, 
      Ministry of Supply, Austin, TX, testifying on behalf of the 
      SBE Council................................................    61
    Mr. James J. Angel, Associate Professor, McDonough School of 
      Business, Georgetown University, Washington, DC............    66
Questions for the Record:
Answers for the Record:
Additional Material for the Record:
    Letter from Hon. Chris Collins, Member of Congress to the 
      Hon. Elisse Walter, Acting Chairman, Securities and 
      Exchange Commission........................................    80
    NASE - National Association for the Self-Employed............    81



                        THURSDAY, APRIL 11, 2013

                  House of Representatives,
               Committee on Small Business,
     Subcommittee on Investigations, Oversight and 
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. David Schweikert 
[chairman of the subcommittee] presiding.
    Present: Representatives Schweikert, Bentivolio, McHenry, 
Luetkemeyer, and Clarke.
    Chairman SCHWEIKERT. Let us call this hearing to order.
    Good morning. I have a wonderfully written opening 
statement but I was going to do something slightly different. 
Being someone who actually bathed and lived in the JOBS Act 
when it was individual bills moving through the system and the 
once we actually consolidated it and ran it up, think of this. 
In the previous years it really was in many ways our only 
really great bipartisan success. There was great optimism, 
great hope, on, April 12th, when the president signed it. Now 
we are this much time, a year beyond some of the rule sets, and 
yet I go around the country and I've spoken to different groups 
that are very optimistic and looking forward to an opportunity 
to use this new path of options to raise capital for small 
businesses. Our bottleneck right now is within the rule 
writing. I accept there are great difficulties. You have had 
leadership transitions.
    So I am going to ask for my friends who are on the 
Committee, today's goal is not to beat up the SEC. It is to 
have a dialogue on what do you need? What are our expectations 
both in drafting and time that you are able to share with us? 
Are there any things we should be doing as members of Congress? 
Do you need us to provide a piece of legislation that provides 
more detail? Do you need us to stay out of your way for a 
while? What gets it done? In many ways the goal here is 
actually to have the positive that will come, I believe, once 
the rule sets are done and the crowdfundings, the Reg A's, the 
others are able to start to stimulate a tier of our economy and 
our small business access to capital. And with that I hand over 
to the ranking member for an opening statement.
    Ms. CLARKE. Thank you, Mr. Chairman. I am going to stick to 
the script.
    I would like to welcome everyone to this morning's hearing. 
For the past two years our nation's economy has experienced 
positive private sector job growth. However, these gains have 
not been enough to overcome our nation's above average 
unemployment which currently stands at 7.6 percent. Minority 
unemployment for African-Americans and Latinos, while 
retreating, remains at a 13.3 and 9.2 percent, respectively.
    These facts, along with last week's job numbers illustrate 
the work we have yet to complete. Creating nearly two-thirds of 
all new jobs, our small businesses must remain front and center 
to our recovery. For our national economy to experience a more 
robust recovery, our entrepreneurs and small businesses must 
play their traditional job-creating role, and for that we must 
have access to capital.
    For entrepreneurs who have a solid business plan yet lack 
immediately marketable products, equity capital has been a 
crucial aspect of getting their businesses off the ground. Many 
are turning to crowdfunding to finance their businesses, 
however, the number of small businesses that can access capital 
is severely limited due to the prohibitions on equity investing 
via crowdfunding.
    In response, Congress has passed the Jumpstart our Business 
Startups or JOBS Act in 2012, which provided a new exemption 
from SEC requirements to register public offerings for equity 
investing via crowdfunding. This exemption has the potential to 
unlock the virtually untapped resources of millions of ordinary 
investors to small businesses; however, as evidenced by the 
rigorous congressional debates before passage of the act, a 
balanced approach to investor protection must be in place 
before allowing the general public in this inherently more 
risky realm of small business investing. Pursuant to the JOBS 
Act, the SEC was mandated to create rules to do just that. 
However, the SEC has yet to complete the rulemaking process; 
thus, preventing full implementation of the JOBS Act, missing 
several congressionally mandated deadlines.
    In today's hearing, we will discuss the SEC's delays in 
implementing the JOBS Act and the needs of our small business 
community. While no one is happy waiting for these rules to be 
drafted, we must remember that it is vitally important that the 
SEC strike the appropriate balance between investor protection 
and producing a functional system that provides the capital for 
small businesses and entrepreneurs to create jobs.
    I want to thank you again, Mr. Chairman, for holding this 
important hearing, and I yield back the balance of my time.
    Chairman SCHWEIKERT. Thank you, Ranking Member Clarke. 
Maybe I should have stuck with the script.
    Our first two witnesses representing the SEC, Mr. 
Nallengara and Mr. Ramsay. You are both probably very familiar 
with the lighting system. My understanding is you are going to 
be sharing your five minutes on the opening statement. When you 
hit yellow, just talk faster.
    Mr. Nallengara, please.



    Mr. NALLENGARA. Thank you. Good morning, Chairman 
Schweikert, Ranking Member Clarke, and Members of the 
Subcommittee. My name is Lona Nallengara. I am the Acting 
Director of the Division of Corporation Finance of the 
Securities and Exchange Commission. Joining me today is John 
Ramsay. John is the Acting Director of the Commission's 
Division of Trading and Markets.
    Thank you for the opportunity to testify on behalf of the 
Commission. Implementing the JOBS Act is one of the 
Commission's top priorities. As you know, the JOBS Act made 
significant changes to the federal securities laws. While 
certain provisions of the JOBS Act were effective immediately, 
others required Commission rulemaking. In addition, the JOBS 
Act required the Commission to conduct several studies and send 
reports to Congress.
    Since enactment, the Commission staff has taken steps to 
inform the industry of how the JOBS Act operates. For instance, 
the staff provided guidance about the IPO on-ramp provisions by 
publishing answers to frequently asked questions. These 
questions address such things as how emerging growth companies 
could use these new provisions, including those related to 
research reports, test the waters materials, and scaled 
disclosures. The staff also provided guidance on the amendments 
to the registration requirements of 12(g) of the Exchange Act.
    With respect to rulemaking, the JOBS Act required the 
Commission to adopt rules that revised Rule 506 of Regulation D 
to allow general solicitation and advertising for offers and 
sales of securities under that rule and to implement a new 
crowdfunding exemption and a new exemption from broker-dealer 
registration for funding portals that facilitate crowdfunding 
transactions. And finally, to create a new exemption for 
offerings of up to $50 million.
    To fulfill this responsibility, we have formed rule-writing 
teams consisting of staff from across the Commission, including 
economists from our Division of Risk, Strategy and Financial 
Innovation, who are considering the potential economic impact 
of the rules we are considering.
    To aid the rulemaking process and increase the opportunity 
for public comment, we have allowed interested parties to 
submit comments and recommendations on the JOBS Act provisions 
through the Commission's website even before we have proposed 
rules. The Commissioners and staff have participated in 
numerous meetings with a wide array of interested parties. The 
input the Commission and the staff have received in these 
written submissions and these meetings has been very helpful to 
the rule-writing teams as we consider the implementation of 
these mandates.
    As you may know, there has been significant interest in the 
provisions requiring the Commission to revise Rule 506 to allow 
for general solicitation and advertising. Under the rule 
proposal the Commission issued last August, companies issuing 
securities in an offering conducted under Rule 506 would be 
permitted to advertise and solicit potential purchasers 
provided that the company takes reasonable steps to verify that 
the purchasers of those securities are accredited investors.
    The proposing release explains that issuers should consider 
the facts and circumstances of the transaction when determining 
the reasonableness of the steps to take to verify that a 
purchaser is, in fact, an accredited investor. Prior to and 
after issuing this proposal, the Commission received 
significant public comment, and the staff is now developing 
recommendations for the Commission's consideration as to how to 
move forward on the implementation of this mandate.
    The JOBS Act also required the Commission to submit several 
reports to Congress. First, it required a report on how 
decimalization has impacted the number of initial public 
offerings. That report, which was submitted to Congress in 
July, recommended that the Commission conduct a roundtable to 
discuss the impact of decimalization. That roundtable took 
place in February. Second, the JOBS Act required a report on 
how our disclosure requirements could be modernized and 
simplified to reduce the costs and burdens for emerging growth 
companies. The staff is in the process of completing that 
report. And finally, it required a report examining the 
Commission's authority to enforce the anti-evasion provisions 
of Rule 12g5-1 of the Exchange Act. That report was submitted 
to Congress in October.
    In addition, the JOBS Act mandated the Commission to 
provide information and conduct outreach to small- and medium-
size businesses and businesses owned by women, veterans, and 
minorities about the changes made in the JOBS Act. The staff is 
working to develop and implement an outreach plan tailored 
specifically to these business communities. The Commission and 
staff continue to work diligently to implement the JOBS Act 
mandates, and we look forward to completing the remaining 
provisions as soon as possible.
    Thank you for inviting us to appear today, and we would be 
happy to answer any of your questions.
    Chairman SCHWEIKERT. Thank you. I will start with the first 
five minutes and have a couple questions.
    Mr. Ramsay, one of the big questions that I get around me, 
what should our expectations be on rule sets coming out and 
what do you think will be the first ones we see?
    Mr. RAMSAY. Thank you, Chairman Schweikert. And again, we 
appreciate the constructive tone that you have set for the 
    It is very difficult for staff to create any specific 
expectations in terms of timing, and so I will not attempt to 
do that here. We understand there is a lot of interest. We 
understand that there is a fair amount of frustration with the 
pace at which the rulemaking process has taken. I will say 
that, from the people that I talk to within the Commission, 
there is a shared sense of interest in moving this forward. Our 
new chairman, Chairman White, indicated in her recent testimony 
that she saw this as a high priority, and so I will resist the 
urge to make any specific predictions in terms of timing, but 
certainly stress that this is a very high priority for us.
    Chairman SCHWEIKERT. Is my being unrealistic that by 
October, by fall? Part of this is I feel like many of us have 
gone out around the country talking about the crowdfunding and, 
a year later I feel like I am breaking people's hearts by 
getting them excited and enthused and trying to line up 
capital. Any window of the time of year?
    Mr. NALLENGARA. Chairman, those are questions that we hear 
as well from some of the same parties interested in taking 
advantage of these new rules. And these are important rules. 
These are important rules because you gave us a mandate, but 
also important rules because of what is underlying that 
mandate. What is underlying it is providing new ways for 
businesses, but really focused on small businesses, to raise 
capital and grow their companies, create jobs, and strengthen 
the economy.
    But what is also important about these rules is these rules 
are in many respects fundamental changes to the way private 
offerings have been conducted, and the rules--some were very 
specific but some also provide discretion for the Commission.
    Chairman SCHWEIKERT. Mr. Nallengara, in that case, what do 
you think will be the first to come out understanding the 
actual date is unknowable at this point?
    Mr. NALLENGARA. Chairman, it would be hard for me to tell 
you which would be the first to come out. Chairman White has 
indicated that all congressional mandates are her priority and 
specifically, the JOBS Act provisions are her priority. And the 
three main rulemakings that we have are the Title II General 
Solicitation, the Title III Crowdfunding, and the Title IV Reg 
A+ Rulemaking. Those are all a priority. We have issued a 
proposal already with respect to the General Solicitation 
provisions, so that has already been proposed, and we have 
received comment on that. The sequence of those rulemakings--
that will be for the Chairman and the other Commissioners to 
determine. But the staff is working--we have independent rule-
writing teams on each one of those and the staff for each one 
of those rulemakings is working as if their rulemaking is the 
first one to go. So the staff is working very hard to get these 
in place to get recommendations.
    Chairman SCHWEIKERT. Mr. Nallengara, is there any way I 
could organize like an X prize; the first one to get it done 
wins something?
    Mr. NALLENGARA. What would be the prize, Chairman?
    Chairman SCHWEIKERT. Exactly.
    Mr. NALLENGARA. Exactly.
    Chairman SCHWEIKERT. Last one and then I will turn to the 
ranking member. I would love some guidance because many of us 
are starting to work on what should be the next act in the, 
JOBS Act 2.0. Is there something we, as members of Congress can 
do in the way we write it, in the way we ask for rule sets, to 
make it run smoother? Do we need to provide more direction? Do 
we need to provide substantially more detail? What would make 
this process that our bottlenecks and the timing become 
compressed? What do we do to do this better?
    Mr. NALLENGARA. Chairman, the mandates you give us, we look 
at them as you give us--as you give them to us, and we do our 
best to implement the mandates you give us and the intent 
underlying those mandates. So some of the mandates you give us, 
and even within an individual title within the JOBS Act, have 
specific requirements and some give us discretion. We look at 
all of those questions that you provide us in the rules and 
implement them in a way that, both the ones that are specific 
and both the ones that give us discretion in a way that allows 
us to further the purpose of legislation.
    Chairman SCHWEIKERT. This is more than just an academic 
discussion. It really is affecting people's lives. The next 
generation of entrepreneurs, folks out there whose businesses, 
as we will hear on the second panel, who are trying to get to 
that next level where they can hire people and grow and help 
both as a nation and their own futures. I hope you feel the 
same sort of weight on your shoulders as we do on this side 
that yes, getting it right is important, but getting it done is 
    Mr. NALLENGARA. Absolutely, Chairman. The staff feels that 
way and the direction from the Chairman and the Commissioners 
is to get these rules done. And that is what we are committed 
to do.
    Chairman SCHWEIKERT. All right. We may end up with a second 
round if we go fast enough.
    Ranking Member Clarke.
    Ms. CLARKE. Thank you very much, Mr. Chairman.
    I want to do a follow-up to the chairman's question, Mr. 
Nallengara and Mr. Ramsay. Can you give us an idea of the work 
volume you are dealing with in concurrently developing the 
rules for the JOBS Act while still engaged and fully 
implementing Dodd-Frank?
    Mr. NALLENGARA. Ranking Member, the Commission is facing an 
unprecedented workload when you factor all of the 
congressionally mandated rulemakings. There are over 90 Dodd-
Frank provisions that have rule-writing requirements and over 
20 studies. Although we have completed 80 percent of those and 
17 of those studies, there is still plenty to do. And some of 
the rulemakings that are left to do, particularly the ones in 
John's division, are related to systemic risk. And then when 
you add the JOBS Act rulemakings, the three main rulemakings 
but there are ancillary rulemakings and studies and reports to 
do, that is an unprecedented level of work. And the ones 
related to the JOBS Act, as I mentioned earlier, those are 
fundamental changes to the way the capital markets--the private 
offering markets--will work. Those are mandates you have given 
us, but for us to implement them and implement them in a way 
that achieves the goals that you mentioned in your statement, 
which are to provide an efficient and effective way for small 
business to raise capital but at the same time ensure that 
investors feel safe and feel like they are getting a secure 
investment and they are investing in a real business that 
provides opportunity for return and growth to them, that 
requires us to make sure that we are getting the rules done 
    That being said, we need to get them done. We appreciate 
that you gave us deadlines and those deadlines have passed, but 
we are focused on getting those rules done.
    Mr. RAMSAY. If I may, yes, Ranking Member Clarke, I think 
just from the standpoint of my division, Title VII of Dodd-
Frank and all the derivatives reforms, which require us 
essentially to adopt a whole new regulatory regime that did not 
exist before over a huge international market, is an effort 
that is consuming and has consumed huge amounts of resources 
and continues to over a period of time. And this is all 
mandated rulemaking as well. So we would ask people to 
understand that we do not expect much sympathy for it, and we 
are not really asking for any sympathy for it. As Lona said, 
regardless of what else is on our plate, we know this 
particular set of rules, as Chairman Schweikert said, is 
something that is affecting people's lives and ability to raise 
capital currently; it ought to be prioritized accordingly and 
we take that to heart.
    Ms. CLARKE. Yeah. I just thought, excuse me, it was 
important to sort of put things in context. This is not 
happening in isolation of many other responsibilities and 
obligations of rulemakings that you are currently engaged in, 
so I think it was just sort of important for us to get a sense 
of the universe that you are working within. And, you know, I 
think one of the things that would be helpful for all of us, 
and maybe even for yourselves, is, you know, for you to sort of 
set a timeframe for yourselves. Maybe it is an internal 
timeframe but one that sort of drives this process to a timely 
conclusion given the fact that things have already passed 
deadlines. It is going to be important that there is some 
motivating factor to really get this done.
    Mr. Nallengara, some experts are concerned that a conflict 
of interest could arise between funding portals and the 
companies seeking funding, specifically financial interests of 
the funding portals could lead to more lucrative, yet risky 
deals receiving preferential treatment when presented to 
potential investors. How does the SEC plan to address this 
concern in the final crowdfunding regulations?
    Mr. NALLENGARA. Ranking Member, I will start with the 
answer and then I will turn it to John whose division has 
primary responsibility for the funding portals. But the 
legislation you provided us in the JOBS Act lays out a 
regulatory regime for funding portals. It provides oversight by 
FINRA and the rules that FINRA will adopt will be able to 
monitor and watch those activities. Funding portals are 
intended to be a portal between the investor and the companies 
seeking money. They are intended to present the picture and the 
idea of that entrepreneur, of that business, and let the 
entrepreneur tell the story. But also serve as a gatekeeper, 
serve as someone ensuring that both the company knows what they 
are doing but also that investors understand what they are 
investing in--understand the risks associated with the 
investment and also understand the security they are investing 
    Mr. RAMSAY. Yes, Congresswoman, an awful lot of the time 
that we have been spending in our division has been devoted to 
meeting with representatives of various funding portals or of 
that part of the community that are interested in investing in 
the space. As Lona said, many of the JOBS Act provisions are 
intended to ensure that intermediaries for crowdfunding 
offerings operate in a way that protects investors' funds, that 
takes account of the privacy interests of investors, that makes 
sure that investors get the right kind of disclosures that they 
need, where there is a contingency on the amount, minimum 
amount of offering that is a subscription that is required, 
that that all takes place. These are all critically important 
provisions and I would just say that our sense is there is a 
lot of very capable, smart, creative people in this space who 
want to do the right thing and who have an interest, as we do, 
in making sure that the rules are written in a way that 
excludes the bad actors as much as possible because I think 
they would agree with us is my sense that nothing would 
undermine the ability to use this as a capital-raising tool 
faster than if the rules were written in such a way that they 
do not exclude the bad actors as much as possible. So that is 
part of the reason we want to be very careful about how they 
are written.
    Ms. CLARKE. Very well. Thank you both. Mr. Chairman, I 
yield back.
    Chairman SCHWEIKERT. Thank you, Ranking Member Clarke.
    And I would like to extend a welcome to Patrick McHenry, 
who is the chairman of the Financial Services Oversight 
Committee and I appreciate you spending a moment or two with 
    Mr. Luetkemeyer, you are next.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    I had a number of questions from some of my constituents 
with regards to the delay on issuing the Rule 506 Reg D 
situation. Can you explain what happened there? That should 
have been done last summer and here it is almost nine months 
later and we are still not anywhere near it. What is going on.
    Mr. NALLENGARA. You are correct, Congressman. You provided 
us a deadline, which was 90 days after enactment, and we did 
not meet that deadline. We did issue a proposal in August. That 
proposal, as I outlined in my opening remarks, provided a 
framework for the implementation of the rule. We received 
significant comments before and after the proposal, and the 
Commission is considering those comments right now. We have had 
some transition in our Chairman's office, but our Chairman, 
Chairman White, has indicated that the JOBS Act rulemakings, 
and in particular the one related to 506, are a priority to be 
moved forward.
    Mr. LUETKEMEYER. Why would the transition of a new chairman 
change the ability of you to be able to do your job? How many 
people do you have working on this project? Let me start there.
    Mr. NALLENGARA. We have a number of people in my division 
who are principal rule writers. We have economists in our 
Division of Risk, Strategy and Financial Innovation.
    Mr. LUETKEMEYER. Do you have a particular group that works 
on just this rule or they work on all sorts of other rules as a 
    Mr. NALLENGARA. On this particular rule we have a group of 
attorneys in our chief counsel's office.
    Mr. LUETKEMEYER. Is this their full-time job that they work 
on just this one rule?
    Mr. NALLENGARA. It is not their full-time job to work on 
just this rule.
    Mr. LUETKEMEYER. How much time do they spend on this then?
    Mr. NALLENGARA. They spend as much time as is necessary.
    Mr. LUETKEMEYER. Well, they are not spending very much if 
it is nine months later and we still have not got a rule; are 
they? My concern is that it does not seem to have the attention 
of the SEC. And this is a real big deal because, you know, we 
as a Congress have not agreed on a heck of a lot over the last 
two or three or four years here. And we actually finally got to 
agree on something. This is a way to help small business. And 
we are very concerned about the lack of action here because we 
have small business groups out there that would love to be able 
to put together offerings, expand their businesses, buy new 
businesses. Entrepreneurs are sitting on the sidelines.
    I can tell you from the past two weeks of going around and 
talking to a lot of my constituents, they are sitting on the 
sidelines waiting to get into some of these businesses but 
cannot because the rules are not there. And I know you proposed 
it a long time but yet it was pulled. The chairman, I guess, 
killed the rule, so what is the problem with it? Why did you 
kill the rule once it was proposed?
    Mr. NALLENGARA. Congressman, I do not think anyone killed 
the rule. I think what you are referring to----
    Mr. LUETKEMEYER. It was proposed and then it was withdrawn; 
    Mr. NALLENGARA. I think what you are referring to is at one 
point the Commission was considering moving forward on the rule 
with an adopted rule immediately, rather than proposing the 
rule for public comment and considering that comment. And just 
to frame how our rule-writing process works, almost all of our 
rules, virtually all of our rules are proposed and adopted in a 
manner where----
    Mr. LUETKEMEYER. You withdrew your proposal; correct?
    Mr. NALLENGARA. No. No, we did not withdraw our proposal. 
The Commission considered it in August, considered a proposed 
    Mr. LUETKEMEYER. The Commission withdrew it?
    Mr. NALLENGARA. No, the Commission did not withdraw it.
    Mr. LUETKEMEYER. We do not have one. How come it has not 
gone forward. Put it that way.
    Mr. NALLENGARA. Congressman, we do have a rule proposal. 
Almost all of our rules are proposed and provide a comment 
period for the public. The public gets to look at the rules and 
comment on it, give us their ideas.
    Mr. LUETKEMEYER. When do you think you are going to get 
this one finalized?
    Mr. NALLENGARA. Our new Chairman has indicated----
    Mr. LUETKEMEYER. Is he going to give you 90 more days? Is 
it a priority?
    Mr. NALLENGARA. She has indicated it is a priority. So if 
she has indicated it is a priority, it is a priority for us.
    Mr. LUETKEMEYER. So what is a priority? Is it 90 days or 9 
    Mr. NALLENGARA. I cannot say.
    Mr. LUETKEMEYER. We are at a year on this now. I mean, it 
does not seem to be a priority of the SEC. This is a big deal. 
This is how we are going to get our economy going. I do not 
think you see the importance of your job. You help create 
economic activity in this country, sir. Your agency does. And I 
do not think--and now you are standing in the way of it, and I 
think that is a big problem. And if you hear frustration in my 
voice it is there because I am only venting to you what is 
being vented to me. And I think that we have to find a way to 
get things back on track.
    I see my time is up and I appreciate you being here this 
morning. Thank you.
    Mr. NALLENGARA. Thank you.
    Chairman SCHWEIKERT. Thank you, Mr. Luetkemeyer.
    Mr. Bentivolio.
    Mr. BENTIVOLIO. Chairman, Ranking Member, thank you for 
holding this very important hearing.
    Our country has a jobs crisis, and in my district it breaks 
my heart to drive through industrial parks and office parks and 
see ``For Sale,'' ``For Lease,'' or ``Available'' signs rather 
than ``Help Wanted Signs.'' Last year both parties recognized 
that the creativity and ingenuity of our citizens could be 
unleashed if they had greater access to capital. They 
recognized the power of start-up businesses to create 
opportunity and jobs, and the result was the JOBS Act. The SEC 
has the important job of creating rules and regulations that 
walk a fine line between creating access to capital and 
protecting investors. I have a few short questions. Thank you 
very much for being here.
    Companies that are required to file reports with the SEC 
are given deadlines; correct?
    Mr. NALLENGARA. Yes.
    Mr. BENTIVOLIO. Are there consequences for missing those 
    Mr. NALLENGARA. Yes.
    Mr. BENTIVOLIO. So would it be correct to say that the SEC 
understands the concept of deadlines?
    Mr. NALLENGARA. Yes, Congressman.
    Mr. BENTIVOLIO. Well, I am not sure I agree. The JOBS Act 
became law over a year ago and you have missed two important 
deadlines. One was more than nine months ago. Does the SEC 
believe they can miss deadlines stated in law because they are 
too busy?
    Mr. NALLENGARA. Congressman, all the deadlines that you 
provide us in the legislation that you mandate are important 
deadlines. We work as hard as we can to meet those deadlines.
    Mr. BENTIVOLIO. Does the SEC believe they can miss 
deadlines because of changes in leadership; yes or no?
    Mr. NALLENGARA. No. I am not sure the question you can 
answer with a yes or no, but the closest I can get is to no. 
How about that?
    Mr. BENTIVOLIO. Great. The SEC expects reporting companies 
as the regulator to respect their deadlines. Congress is your 
regulator. Is it fair for us to expect you to respect our 
    Mr. NALLENGARA. We do, Congressman.
    Mr. BENTIVOLIO. Well, it is debatable. And I think it is 
reasonable for Congress to be more than a little upset about a 
federal agency's failure to meet the deadlines set forth in the 
laws we create, especially when it has a big impact on our 
economy and job creation.
    I have a question about the modification of Reg A, which 
increases the limit to $50 million from $5 million. There was 
no deadline in the act about this change, which is probably 
good for you or it would have been strike three. Are you in 
this process and when should we expect the rules to be 
finished? Can I have a date?
    Mr. NALLENGARA. Congressman, I cannot provide a date. I am 
not the one who is setting the dates. I can say that Chairman 
White has indicated that getting rules proposed and completed 
on Regulation A+ is a priority for her, so it is a priority for 
    Mr. BENTIVOLIO. No date? No real deadline? Just when you 
get around to it? That is the impression I am getting. I am 
getting a lot of verbal moonwalking but I am not getting 
    Mr. NALLENGARA. Congressman, I cannot provide you dates but 
I can provide you that we are committed to get the rules done 
as quickly as we can.
    Mr. BENTIVOLIO. Mr. Ramsay, regarding crowdfunding, what 
are you doing to ensure the cost of compliance is not too high, 
especially when many investors may only want to invest $20 or 
    Mr. RAMSAY. Well, Congressman, in terms of the requirements 
on intermediaries I will defer to Lona on the rest of it, but I 
think that we have been, as I said earlier, talking to--have 
had dozens of meetings with people who are in this community 
currently to understand what practices they follow now, what 
best practices are in their area, what kinds of requirements 
might pose a significant cost burden issue for them. That 
certainly is an issue that we have been looking at closely in 
terms of looking at the comment letters that have already come 
in. So on issues like how do intermediaries--what do they have 
to do in order to protect privacy interests; what kind of 
arrangements can they have for holding customer funds; what 
obligations do they have in terms of providing issue disclosure 
and how can that be provided? A significant part of our focus 
has been on trying to make sure that that is done in as cost-
effective a way as possible.
    Mr. BENTIVOLIO. Thank you very much.
    Mr. Chairman, I yield back my time.
    Chairman SCHWEIKERT. Thank you, Congressman.
    Mr. McHenry.
    Mr. McHENRY. Mr. Chairman, thank you for allowing me to 
step in and visit your Subcommittee. Thank you for your 
leadership on financial services issues and your interest here, 
especially your offering within the JOBS Act the piece dealing 
with Reg A in particular.
    Chairman SCHWEIKERT. You had something to do with this I 
think somewhere.
    Mr. McHENRY. Well, crowdfunding is my deep and abiding 
interest within the JOBS Act. Reg D rules as well. That is 
certainly something we care about. The crowdfunding piece. 
Certainly, you will have heard from me and from my staff.
    Mr. Ramsay, Mr. Nallengara, thank you for your service to 
our government. I certainly appreciate it. I am certainly 
aware, as members of Congress are, that you are the lead staff 
in terms of your divisions within the SEC. However, the SEC, 
with the five Senate-confirmed members of that board, set the 
agenda. In particularly the chairman sets the agenda for your 
agency, your very important agency, that is supposed to 
facilitate capital formation and protect investors. Of course, 
that is a balancing act, and I certainly do appreciate your 
willingness to testify today.
    But Mr. Nallengara, in terms of my colleague, Mr. 
Luetkemeyer's questions, I do want to give you an opportunity, 
and there was some hesitation with his questions, but just to 
correct the record and make sure that this is accurate. 
According to my understanding, the staff recommendation to the 
board last summer when it dealt with Reg D rulemaking, the 
staff recommendation was to offer a final rule during the 
August SEC Commissioner's meeting. Is that true?
    Mr. NALLENGARA. That was our initial recommendation. Yes, 
    Mr. McHENRY. And there was a decision made to pull back and 
open back up for comments on that what then became a proposed 
rule. Is that correct?
    Mr. NALLENGARA. Yes.
    Mr. McHENRY. Okay. I just want to make sure that is correct 
because in terms of these questions, the staff recommendation 
was for a final rule. The comments have been heard. Based on 
the e-mail traffic that I have now received, these are 
documents that have been provided to Congress. That was clearly 
the case and the then chair, Chairman Shapiro, had an enormous 
pullback and a huge change of approach based on being contacted 
by the consumer federation lobbyists. I wrote a letter to Mary 
Shapiro to that regard at the end of last year, and I am 
certain that you all are aware of that. So, I just want to make 
sure that record is corrected.
    Mr. Ramsay, in terms of intermediaries when it comes to 
crowdfunding, broker-dealers are allowed to participate and 
there are pure intermediaries that are allowed as well under 
the law. I just want to confirm that the intention is to time 
the rulemaking for both those entities is the same. The date 
will be the same for both those different types.
    Mr. RAMSAY. Yes, Congressman. I believe that is the intent. 
The registered broker-dealers, since they are already 
registered as broker-dealers would not need any further 
authorization. Firms who would be operating as funding portals 
would need to register with the Commission and with FINRA. We 
have been working closely with FINRA to make sure that their 
program will be in place so, as you say, firms will be in a 
position to choose which of those paths they want to go down.
    Mr. McHENRY. So there is a cap on the amount--and back to 
you, Mr. Nallengara--in terms of the rulemaking, SEC has to 
write rules when it deals with capping individual investors, 
the amount that they can invest in a crowdfunding offering; 
    Mr. NALLENGARA. Yes.
    Mr. McHENRY. And so looking at the cost of crowdfunding 
offerings, this is a tricky issue based on what the final 
senate language came back with, with a cap of $2,000 or 5 
percent of a person's income. It is segmented out. Is the SEC 
looking at having a very simple way of tracking individuals' 
crowdfunding investments?
    Mr. NALLENGARA. Congressman, that is a question that we 
have received from many of the crowdfunding or the future 
crowdfunding participants asking how are they going to be able 
to track investments because that cap is intended to be across 
any crowdfunding investment you made. There are a number of 
ways to proceed. One of the ways that proponents have 
recommended to us is self-certification. You tell the issuer, 
you tell the crowdfunding portal how much you may have 
invested. That is something we are certainly considering and 
certainly that is what the Commission will consider as well.
    Mr. NALLENGARA. So that is on the table as one of the ways 
to implement that provision.
    Mr. McHENRY. Are there other ideas on the table?
    Mr. NALLENGARA. Well, I mean, as part of our rulemaking, 
when there are choices we need to consider all the choices. We 
need to look at those choices and look at the costs and look at 
the benefits of every choice. And I know you all want us to do 
that. So we will do that.
    Mr. McHENRY. Yes. I, in particular, want you weigh both the 
costs and the benefits. Yes. I have been a major proponent of 
that. But thank you for acknowledging it.
    Mr. Ramsay, I am sorry.
    Mr. RAMSAY. No. So Congressman, with respect to costs on 
funding portals, certainly, on questions of how do you--how 
does one ascertain whether the investors are within the limits 
or not, it certainly has been an important focus of our 
discussions with them and the rule-writing efforts to think of 
those costs. We are certainly cognizant of the concern that, if 
there were a significant new structure that would be required 
to be put in place, that they would have to fund it in order to 
do that, that that could create some significant costs that 
would deter them from participating.
    Mr. McHENRY. Thank you. Thank you both for your service, 
and thank you for testifying. We have the acting chair 
testifying next week to the Oversight Subcommittee on Financial 
Services, Elise Walter, so we will follow up on some of these 
questions there. I know that your staff sitting behind you will 
pass that along I am sure.
    Chairman Schweikert, thank you so much for your 
graciousness in allowing me to sit in, and thank you for your 
    Chairman SCHWEIKERT. Chairman McHenry, is this the nicety 
language? I am still working on that southern thing.
    Mr. McHENRY. The bowtie is southern enough; right?
    Chairman SCHWEIKERT. Patrick, thank you for giving us some 
of your time. It is appreciated.
    We are now heading towards the lightning round. My 
understanding is it was last year court ruled that they were 
not particularly happy with how the SEC was doing its cost 
benefit analysis; is that correct?
    Mr. NALLENGARA. I think, Chairman, you are referring to the 
proxy access decision.
    Chairman SCHWEIKERT. Yeah, actually, it is on top of my 
desk and I wish I had grabbed it. I know it was D.C. Circuit, 
which would be everything.
    Mr. NALLENGARA. Right. I think from that decision our 
Commission, led by our economists in our Division of Risk, 
Strategy and Financial Innovation and our General Counsel's 
office, put out new guidance on how we are supposed to conduct 
our economic analysis.
    Chairman SCHWEIKERT. Where I am heading is what has that 
done to the timeline internally within the process?
    Mr. NALLENGARA. I think the role of economic analysis in 
our rulemaking has always been there. What we have done with 
the new guidance is we have put a framework around it, and we 
have provided it to everyone. It is on our website. The 
questions we ask and the considerations we make with respect to 
costs and benefits, with respect to identifying the baseline, 
with respect to identifying the regulatory fix or the market 
failure that your mandates are trying to achieve, all of those 
questions were questions we asked in our rulemaking before. 
What we have now done is formalize them in the form of that 
    Chairman SCHWEIKERT. And that puts you in compliance with 
what you believe the D.C. Circuit requested?
    Mr. NALLENGARA. We think the guidance that the Commission 
has provided related to our economic analysis keeps us in 
compliance with what the APA requires for our rulemaking.
    Chairman SCHWEIKERT. This is going to be probably closer to 
a statement than a question. One of the reasons parts of the 
JOBS Act that I believe are really important, whether it be 
within the crowdfunding, some of the broker-dealer solicitation 
mechanics, is when I look at small business, it is not only the 
business side of the ledger but there are also small investors. 
We have this habit of, in particular even the design of our 
Committee, we fixate on business as we should. But if I do not 
have a million dollars--actually on one of the definitions, you 
know, when we start saying, okay, you get to be a qualified 
investor, qualified to assess the risk and could bear such 
risk. If I am the young electrical engineer, I may not have 
accumulated my million dollars to be a qualified investor, but 
I am an expert in that. So if I am going to invest in a 
business that is doing that, it is my fear you are bifurcating 
the society. You are polarizing parts of the society. Here is 
the folks that are there, they get to be qualified, they get to 
know what is out there, they get to invest. Because you have 
not met a threshold that is defined by wealth, you do not get 
to participate. One of my great hopes that things like 
crowdfunding actually created a much more egalitarian access to 
participate in ultimately the American dream. So this is more 
than just the access to capital for businesses. This is the 
access to financial security and growth for a huge portion of 
our nation's population.
    Ranking Member.
    Ms. CLARKE. Thank you, Mr. Chairman.
    Along those lines, Mr. Ramsay, sophisticated investors 
typically have protections in place and distribute their 
funding over time to protect their financial interests. Due to 
the nature of crowdfunding, investors are less likely to be 
sophisticated and lack the ability to negotiate similar 
protections. What steps has the SEC taken to address the 
shortcoming of the crowdfunding model as regulations are being 
    Mr. RAMSAY. I appreciate the question, Congresswoman.
    I think there are a number of measures that are in the 
legislation which will be important parts of the rules that we 
provide in this area to make sure, number one, that investors 
are given very clear risk disclosures; that intermediaries take 
steps in order to make sure that they fully understand all of 
the risks that are provided; that they receive appropriate 
disclosure from the issuers that allow them to evaluate the 
investment in a reasonable way. It's particularly important 
that the customers' funds and securities are adequately 
protected. In this regard, the legislation was clear that 
broker-dealers who are fully registered are able to handle 
customer funds and securities. Funding portals would not by 
themselves. They need to have a separate bank escrow agent to 
hold those funds. We think that is an important protection as 
well. Certainly, making sure that customers' personally 
identifiable information is protected and that their privacy 
interests are protected as well. All of these are respects in 
which we are trying to make very sure, as I said before, that 
this is a capital-raising tool that investors will want to use 
because we are very concerned that, if there is, particularly 
at the outset, bad experience in a few significant cases, that 
that could deter people from using this mechanism, and that is 
something that would not be in accord with what the 
congressional intent is.
    Ms. CLARKE. Mr. Nallengara, clearly much of the debate over 
crowdfunding regulation comes down to investor protection 
versus access to capital for small business, again, along the 
lines of the chairman's rationale. Has the SEC investigated 
current platforms, like Kickstarter for predictors of fraud to 
incorporate into the equity-based crowdfunding rules?
    Mr. NALLENGARA. Ranking Member, we have had the opportunity 
to meet with a number of non-securities-based crowdfunding 
proponents. There are a number. Kickstarter is one, but we have 
met with a wide variety of them. And what we found, what we 
learned is that the evidence of fraud or the existence of fraud 
on those platforms is very low. The ability for people 
participating in the offerings, the crowd, their ability to 
comment on a potential campaign, as they call them is a 
remarkably powerful way to determine whether this idea is 
something that is viable. And that will be a part of the rules 
that the Commission proposes. An ability for the crowd and to 
provide the wisdom of the crowd, as crowdfunders like to refer 
to it, to provide their idea on whether this is a good 
business, whether it is viable, whether it has a real 
opportunity for success. And that vetting by the crowd has been 
very powerful in the non-securities-based crowdfunding. And the 
crowdfunding proponents are hoping that will be the diligence 
tool for investors. So you will have people who are smart in 
that area be able to look at what this business venture is 
offering and be able to ask questions and be able to give their 
views on whether that is a viable opportunity.
    Ms. CLARKE. Mr. Chairman, I have one final question.
    The JOBS Act explicitly mandates an effort by the SEC to 
reach out to the minority veteran-owned small businesses. Can 
you give us an update on this ongoing process?
    Mr. NALLENGARA. Yes, Ranking Member. Our Office of Minority 
and Women Inclusion, as well as my division, and in particular, 
our Small Business office, are focused on implementing that 
mandate. So there are a number of ways we hope to do that. Our 
OMWI office has a number of ways which, through Commission 
activities, we reach out to those communities. We are going to 
piggy back on those same outreach efforts and use those as 
opportunities to explain what the JOBS Act will bring. Much of 
this effort will come when we get the rules in place so there 
is something to talk about that is more tangible, but we are 
beginning that process. And we have a number of ways through 
our Small Business office where we provide information and 
discuss what the JOBS Act has done. And as the rules come 
online we will be able to be more meaningful in that regard.
    Ms. CLARKE. Thank you very much, Mr. Chairman. I yield 
    Chairman SCHWEIKERT. Thank you, Ranking Member.
    You touched on one thing there. I will encourage you in 
more simple language. I love the idea of there are crowdfunding 
platforms; that there is also associated, absolutely open 
discussion, whether you refer to it as blogs, where if I am an 
expert in that area, if I am not, if I am just, passing by, but 
that access to information, it is sort of the new world of 
ratings. I mean, how many of us these days before we buy a 
product go on and look at customer reviews. It is sort of the 
new era of egalitarian access to reviews and information.
    Gentlemen, thank you for your time. I appreciate it. As you 
start to get windows on timelines, I know a number of members 
on the panel would be just elated to hear it.
    And with that we will seat our second panel. Thank you.
    I am going to do each introduction. So I will introduce Ms. 
Peters, have her give her testimony, and we will actually work 
our way down the line.
    So shall we now call the second panel up? I do not know if 
you heard it before. The lighting system is a five-minute 
clock, as is sort of the humor around here. When you see 
yellow, just talk faster.
    I would like to introduce the second panel of witnesses 
here with us today.
    First up we will have Jean Peters, managing director of 
Golden Seeds, Angel Capital Network. Jean Peters is an angel 
investor based out of Richmond, Virginia. Through Golden Seeds 
Angel Network, Ms. Peters invests her own money and time to 
support women-owned entrepreneur start-up business. Jean also 
serves as a board member for the Angel Capital Association 
which she is testifying on behalf of. Welcome to the Committee. 
We actually look forward to hearing what you have to say.
    Ms. Peters.


                    STATEMENT OF JEAN PETERS

    Ms. PETERS. Thank you, Chairman Schweikert, Ranking Member 
Clarke, and the Subcommittee members. Thank you for inviting 
the Angel Capital Association to speak.
    I am Jean Peters. I am a managing director of Golden Seeds, 
the fourth largest angel group in the country. Our 280 members 
collectively have funded more than $50 million in equity to 60 
women-led startups. Golden Seeds is a charter member of the 
Angel Capital Association on whose behalf I am testifying 
    ACA is the world's leading association of accredited angel 
investors. We have 200 angel groups from across the continent 
and there are 8,500 individual angel members. We share the 
Committee's concern with the length of time the SEC is taking 
for rules, but also with the substance of the prepared rules.
    So let me briefly describe angel investing. By definition, 
angels are accredited investors who invest from our personal 
pocketbooks. Most are former entrepreneurs, or were successful 
in business, and we want to help others up that ladder. We 
invest in the most primal point of capital formation--small 
business startups with high growth potential.
    We also speak for the 250,000 accredited investors across 
the U.S. who already fund startups each year. These are just a 
subset of 8 million people who meet that definition and are an 
untapped source of capital that could become active.
    Angels are the only source of equity for most startups and 
supply up to 90 percent of all outside equity for seed-stage 
companies according to the Kauffman Foundation. In fact, angels 
fund 20 times as many startups as venture capital. In 2011, 
angels provided $23 billion of capital to 66,000 startups, 
while VCs put a couple of billion into 1,800 startups in total.
    Angels work for Main Street, not Wall Street. And angel-
funded companies are crucial for job growth. According to the 
Census Bureau, startups make up less than 1 percent of all 
companies, but they create 10 percent of all new jobs in a 
given year. Without angel funding, these companies would never 
get off the ground.
    We bring disciplined due diligence and deep experience to 
the table. We have to. Capital comes out of my own pocket. We 
understand that what we do is highly risky and extremely 
illiquid. We give our time and expertise without compensation 
and often without liquidity for 8 to 10 years. We do this to 
make a return, but we also do it to give back, to keep up with 
our industries, and because entrepreneurs value what we do.
    So this brings me to a key part of the JOBS Act, Title II, 
which ends the ban on general solicitation for issuers who sell 
securities only to accredited investors, angels.
    We understand entrepreneurs desperately need capital. 
Companies that could get bank loans or at least small business 
credit cards are now shut out. So the potential for 
crowdfunding and general solicitation are exciting. We also 
understand that these vehicles have high risks for the unwary, 
and we appreciate the efforts to safeguard those risks. But the 
rules provide the issuer to take reasonable steps to verify 
that investors are accredited. The problem is the SEC has not 
provided any clarity on what those steps are. Instead, they say 
they will determine that on a case-by-case basis.
    This lack of any safe harbor leaves investors and 
entrepreneurs in a deeply uncertain position. The ACA surveyed 
its investors who said they are likely to not invest if they 
have to turn over financial records to entrepreneurs. Their 
lawyers are telling them not to invest. This would cause a 
dramatic slowdown in angel funding. We recommend that the final 
rules specify safe harbors.
    At last fall's SEC Forum on Small Business Capital 
Formation there was a unanimous recommendation to make 
reputable angel groups a safe harbor for general solicitation.
    Angels have a history of disciplined due diligence, deal 
screening, governance, and almost total absence of fraud. As 
investors enter this class, the ACA will lead in providing 
those professional standards. We will be the adult supervision 
for crowdfunding and general solicitation and social networks. 
We will be there when companies that crowdfund need that extra 
capital. We will be the sorting mechanism for these startups 
that are most promising. We will ensure that companies seeking 
funding are legitimate, appropriately structured, managed, and 
valued, and that will mean that the innovation that is now 
bubbling up on every professional district and job-seeking 
community will stand the better chance for success for the 
entrepreneur, for its employees, and for the investor that is 
willing to take that risk.
    I thank you.
    Chairman SCHWEIKERT. Thank you, Ms. Peters. That is 
    Bill Klehm, the next witness with us is--do you prefer Bill 
or William?
    Mr. KLEHM. Bill is fine.
    Chairman SCHWEIKERT. Bill Klehm is CEO of Fallbrook 
Technologies. Fallbrook Technologies is an automotive company 
focused on the development and manufacturing of energy-
efficient vehicle transmissions. I actually spent some time on 
the Internet looking at some of your technology. It is 
fascinating what you have accomplished. Prior to joining 
Fallbrook, Bill served in various executive positions in the 
automotive industry with Visteon.
    Mr. KLEHM. Excuse me, Visteon.
    Chairman SCHWEIKERT. Visteon Climate Control Systems at 
Ford Motor Company. Bill is testifying on behalf of CONNECT, a 
San Diego-based California innovation trade organization.


    Mr. KLEHM. Thank you. Good morning, Chairman Schweikert and 
Ranking Member Clarke, as well as other Committee members.
    First of all, thank you for the invitation to be here. It 
is an honor to appear before this Committee today and testify 
on the challenges those of us have raising capital for early 
stage innovative new companies in the face of this financial 
and regulatory environment. I commend you for calling this 
hearing to check up on the status of the JOBS Act 
implementation to ensure the goals of the JOBS Act get 
accomplished, namely to increase access to capital for 
America's innovators.
    My name is Bill Klehm. I am the Chairman and CEO of 
Fallbrook Technologies. I have served as Fallbrook's CEO since 
2004 and have over 20 years of automotive-related experience.
    We are a private company based in San Diego, California and 
Austin, Texas. We manufacture and market proprietary 
continuously variable transmission products and support our 
global partners in the design and development of our 
proprietary transmission technology.
    Fallbrook currently holds over 500 patents and 15,000 
patent claims. Our mission is to deliver the best performing, 
most versatile and most reliable mechanical power transmissions 
on the planet. We employ 133 people in the U.S., including 
approximately 25 of the best transmission engineers in the 
    We have passed the commercial test of physics and 
economics. We have partnered with worldwide industry leaders, 
including national leaders like Allison Transmission of 
Indiana, Dana Holding Corporation of Ohio, and TEAM Industries 
of Minnesota. Our proprietary variable transmission technology 
is potentially applicable to any product that uses a 
transmission. It replaces conventional transmission technology 
that uses gears to transfer raw power to managed power.
    As you might imagine, transmissions are ubiquitous. They 
are in virtually every electromechanical system today on the 
planet. The most obvious examples are motor vehicles, but they 
exist everywhere. The range of applications should give you a 
sense of the size of the opportunity we are trying to address. 
Today, for the market opportunities that we are currently 
investing in, it is about a $30 billion market opportunity for 
us. Our technology allows the next generation transmissions to 
increase fuel efficiency, reduce emissions, and improve overall 
vehicle performance, serving as an important function in 
protecting the environment.
    Our great country prides itself on entrepreneurship and 
innovation. In my opinion, Fallbrook is the poster child for 
those values. From an idea starting in San Diego in 1998 with 
negligible revenue through 2009, to over $43 million in revenue 
last year and all that money being poured back into the 
business to help it grow sounds like a good start, but the maze 
in which small business and innovative companies must navigate 
to acquire capital is becoming increasingly challenging. We 
have an opportunity to grow faster and drive innovation faster. 
The only thing preventing us today is access to affordable 
capital. Our ability to access capital is the most significant 
challenge we face as a business. I personally spend 50 percent 
of my time on it.
    With additional capital we could expand our manufacturing 
base in Texas, build out our engineering and development team 
which would create new high-tech jobs, accelerate our product 
development and partnership opportunities. It is important to 
note that expansion would also have a significant impact 
outside of our particular company in that both our suppliers 
and customers would also benefit from that job growth. This 
Committee should remember that high-tech engineering and 
manufacturing jobs are the kind of jobs this economy needs, not 
only because they enhance America's competitiveness but they 
also pay above average wages compared to other sectors. That is 
why Congress's bipartisan work to pass the JOBS Act was so 
important and why regulatory hurdles should not slow us down 
now. The jobs and innovation will materialize once the JOBS Act 
is fully implemented.
    The changes enacted by the JOBS Act will make acquiring 
capital less challenging for America's new innovators. The 
current Regulation A cap of $5 million is outdated and 
unworkable, and Congress was absolutely right to modernize that 
for today's innovation climate.
    To meet our needs at Fallbrook an incremental $5 million 
round simply would not fund the type of development and growth 
we are targeting at Fallbrook. Additionally, the opportunity 
cost to file a registration statement with the SEC, including 
legal accounting fees and printing costs for a company our size 
amounts to hundreds of thousands to millions of dollars. Middle 
and large cap companies that raise public equity benefit from 
their scale of the transactions relative to their 
administration costs but small and emerging companies across 
this country in various tech sectors are robbed of that benefit 
until the Reg A rules are implemented. This means that new 
well-paying jobs are not created, new technologies sit dormant, 
and new products do not affect lives for the common good.
    The changes in the JOBS Act will enable Fallbrook to 
accelerate our development and commercialization, driving 
innovation growth, which creates jobs.
    Thank you very much.
    Chairman SCHWEIKERT. Thank you very much, Mr. Klehm.
    Our next witness is Kevin Rustagi, CEO of Evolutions of 
Noise and cofounder of Inc. Magazine's 2012 Coolest College 
Startup, Ministry of Supply.
    Mr. RUSTAGI. Yes, that is correct.
    Chairman SCHWEIKERT. Kevin graduated from MIT Technology in 
2011 with a degree in mechanical engineering. Prior to 
graduating, Kevin cofounded Ministry of Supply, a dress shirt 
company with MIT classmates in 2010. Kevin is currently CEO of 
Evolution of Noise, a product development company that is 
working on several new customer products, including a re-
engineering of business cards using laser etching.
    Mr. RUSTAGI. That is correct.
    Chairman SCHWEIKERT. I was teasing Kevin earlier that when 
I run into someone as brilliant as he is at his age I am always 
fearful I am going to wake up one day and be working for you.
    Kevin, share with us.


    Mr. RUSTAGI. Good morning, Chairman Schweikert, Ranking 
Member Clarke, members of the Subcommittee. I am so glad to be 
meeting with you and that you will take the time to hear my 
    As Chairman Schweikert mentioned, I graduated from MIT in 
2011 with a degree in mechanical engineering focused on product 
design. My senior year I got into Stanford Business School. I 
have deferred that for three years to work on interesting new 
high-tech and high-growth startups. I have had experience with 
different types of funding, family and friends' loans, angel 
investors, and most recently donation crowdfunding through 
    The company I last founded, Ministry of Supply creates 
high-tech business apparel for men. I am actually wearing one 
of the shirts right now. I just want to talk a little bit about 
on what we did on Kickstarter. Our goal was to raise $30,000 
last July. You have to meet or exceed that goal to maintain 
those funds. We raised in a little over a month a grand total 
of $429,000.
    The JOBS Act will greatly increase an entrepreneur's chance 
of success by going beyond things like crowdfunding and really 
talking about crowd investing when you need further access to 
capital as we did, and I will talk about it today.
    With Kickstarter, it is very interesting. For consumer-
packaged goods what I focus in, it has really become a preorder 
destination. And what was phenomenal about our product and 
service is that we did what in the start-up world is known as 
``going viral.'' So our global viral PR strategy enabled us to 
get over 100,000 views of our videos with preorders from over 
two dozen countries.
    Unfortunately, what ended up happening afterwards, what was 
so exciting is we had so much funding that we began to rapidly 
scale a supply chain and hire new employees. However, the money 
that we were offered from multiple investors around the world, 
many of whom were smaller investors, we were unable to take 
based on lack of legal precedent and vetting tools. We 
experienced the deep irony of having a great business 
opportunity and having to turn investors away.
    I just want to delineate the difference between equity-
based and donation-based. Donation-based crowdfunding is a 
great opportunity. However, it is not nearly as reliable as 
equity-based as dictated through the JOBS Act. One of the 
interesting things as well with high-tech hi-growth startups is 
dilution. When you have a limited number of investors, say an 
angel investor community, surrounds the entrepreneur or venture 
capital associations, you deal with smaller potential 
valuations. Simply, the entrepreneur is subject to whatever 
valuations the market will bear, given the number of investors 
they have. If you open it up to the crowd, I believe this will 
have a leveling smoothing effect that will enable further 
    The timing of the JOBS Act is very important with regards 
to the global stage. MassChallenge, a Boston-based startup 
competition--it is one of the largest in the world--actually 
received applications last year from 35 countries. 
MassChallenge, like the marketplace, is judged solely based on 
traction and market adoption. Competition is now a highly 
global democracy. It is very important that America matches the 
speed of global competition. I believe the JOBS Act will help 
us do that.
    I believe also that crowd investing would be used. There 
are limitations on other types of investing. Angel investing, 
you are talking about connections in the liquid market 
surrounding the entrepreneur. Venture capital, it is the idea 
of being ``proven.'' They reject 98 percent of startups that 
walk in their door. In crowd donation you are really dealing 
with the time window. Does your product exactly match that 
window? As far as I know in terms of entrepreneurs that I have 
met over the past six years, given new effective crowdfunding 
tools we would make quick use of them.
    In conclusion, crowd investing within the JOBS Act clearly 
demonstrates or will demonstrate America's continued commitment 
to developing the next generation of small businesses and 
startups. It remains vital to consider all elements of 
supporting startups, especially other items that are caught up 
in legislation, including the Startup Visa.
    New businesses are very difficult ventures to undertake. 
There are a ton of risks, and I have found, as well as my 
colleagues, that we spend a lot of our time fund-raising as 
Bill mentioned.
    As I have noted, I have used a variety of tools to create 
new ventures, both for product design and business development. 
My hope is that my colleagues and I can continue to create new 
ventures in a way that leads and inspires the world. I eagerly 
await the day that I can fully utilize crowdfunding and crowd 
investing to help create successful new ventures.
    I thank you for this opportunity to explain the concerns of 
the startup community and welcome any questions.
    Chairman SCHWEIKERT. Kevin, thank you for sharing with us.
    I would like to yield to the ranking member. Ranking Member 
    Ms. CLARKE. Thank you very much, Mr. Chairman.
    It is my pleasure to introduce James Angel. He is an 
associate professor of finance at Georgetown University's 
McDonough School of Business. He currently is on leave where he 
is serving as a visiting associate professor at the Wharton 
School of the University of Pennsylvania. He specializes in the 
structure and regulation of financial markets and has expertise 
in the IPO process and capital formation. Dr. Angel's current 
academic research focuses on market regulation and he has 
previously testified before Congress about issues relating to 
the design of financial markets. He holds degrees from Cal 
Tech, Harvard, and Cal Berkeley. Welcome, Mr. Angel.

                  STATEMENT OF JAMES J. ANGEL

    Mr. ANGEL. Thank you. It is an honor to be here, and I want 
to thank the Committee for taking the time to investigate this 
very, very important topic.
    Now, as you know, the JOBS Act was passed in reaction to 
the twin crises we face. First, there is the jobs crisis of the 
Great Recession, but there is also a crisis in capital 
formation. The most obvious symptom of this is what is 
happening in our public equity markets. We have less than half 
as many public companies as we used to have 15 years ago.
    You may have heard of the Wilshire 5000 index that 
represents all the U.S. exchange-listed companies. Well, guess 
what? There are no longer 5,000 companies there. There are no 
longer 8,000 like there used to be. Now there are less than 
3,600 companies in the Wilshire 5000. Our markets have been 
steadily shrinking.
    Now, there are many contributing factors to this crisis, 
and I would be more than happy to sit down with any of you or 
your staff and go into it in a lot of detail, but it is 
something that was one of the things that was addressed in the 
JOBS Act with many of these contributing factors.
    Now, and I want to thank Congress for really doing such a 
good bipartisan job of addressing many of these different 
factors. You know, there is no one silver bullet that affects 
everything. But many of the parts of the JOBS Act make it 
easier to avoid becoming a public company because of the 
burdens we have placed on public companies. Well, that is fine 
for smaller companies, but I think we really need to pay 
attention to also fixing the public markets and not just making 
it easier to avoid the public market.
    Now, a lot of the stuff in the JOBS Act could have very 
easily been done by the SEC on its own authority. The SEC has 
very broad rulemaking authority, very broad exemptive 
authority. They could have done almost everything in the JOBS 
Act by themselves without needing an act of Congress. So the 
real question to ask is ``Why did they not?'' How is it that 
this specialist agency, which is tasked with making this 
tradeoff between consumer protection, economic growth, 
competition, capital formation, market efficiency--they are 
told to make the right tradeoff. How is it that they have 
consistently failed over the years to do this? And it is not 
the fault of any one commissioner or any one staff member. 
Congress really needs to take a look at the big regulatory 
picture and say ``Why is this agency not getting it right? Why 
did we have to step in with this very precise law and here a 
year later why did we have to grill these staff members as to 
why they have not implemented the law?
    Well, if you think about it for a minute, the SEC had long 
ago decided that they did not want to do any of the things the 
law said, so it is not really a surprise that they have been 
dragging their feet. And indeed, despite their protestations 
that it is a high priority, they have been spending their time 
on other things that were not mandated by Congress in either 
Dodd-Frank or the JOBS Act. For example, they just released a 
377-page rule finding on Regulation SCI, which yes, it is an 
important area. No doubt about it. But it is not one of the 
things that Congress mandated with specific deadlines to get 
done now while we have 11 million people standing in an 
unemployment line.
    So anyhow, let us look at the other issues here, like 
crowdfunding. Simple idea. And yes, there are serious consumer 
protection concerns there. We do not want the fraudsters 
running in and ripping off Aunt Sally. But we do not want to 
study it to death either. No matter what they do, they are 
never going to get it perfect. No human is going to do that. 
There will be unintended side effects that nobody has thought 
about. And like good regulators, they are paralyzed by the fear 
that that is what is going to happen.
    Now, there is a common sense solution to this. The common 
sense solution is to put out interim temporary rules, learn 
from the experience, and then fix it. They are not going to get 
it right the first time or even the second time. So we need to 
adopt an attitude of innovation, try it, see what works, and 
when we find a problem, fix it.
    The same thing on tick size. Again, another technical 
matter I would be more than happy to sit down with you or your 
staff to talk about the pros and cons. But one thing we know is 
that the optimal tick size is not the same for every company. 
So the real public policy question is not, oh, let us study it 
for five years. No, the real question is who decides? Do we let 
the SEC come up with a ``one tick fits all'' policy like they 
did in Rule 612? I do not think that is the right approach. Who 
has the incentive to get it right? The issuers do. So why do we 
not let the companies themselves fix it?
    So anyway, thank you very much, and I look forward to your 
    Chairman SCHWEIKERT. Thank you. I hope you will forgive me 
for throwing this in but I find this just fascinating what you 
are all doing.
    Kevin, something I have been trying to partially get my 
head around and also I am trying to encourage the SEC and 
others is let us say you and I have an equity crowdfunding 
    Mr. RUSTAGI. Great.
    Chairman SCHWEIKERT. If you were designing it or your 
personal experience of out there raising money using 
technology, is access to information, you know, my comment 
before of affiliated blogs, how would you do that? Because if I 
am a believer that information is the ultimate regulator and 
vetter, what would you do?
    Mr. RUSTAGI. So I completely agree, Chairman Schweikert, 
that information is key. So this is very important. With 
Kickstarter we had over 1,000 conversations with different 
potential customers given that it is a preorder facilitator. So 
if we were to make and create a crowdfunding platform, there 
would have to be a couple things that we would do. One, we 
would have to have transparency about who is involved in the 
company, especially at the managing partner level. For 
instance, if Bill is going to go on a crowdfunding platform and 
create a company, a cupcakery as was mentioned in the briefing 
here, we would have to know who is his main baker, who are any 
past financiers, as well as who is really managing the team. 
Specifically, I completely agree with the idea of a blog 
detailing progress about the company and also basic financials.
    Chairman SCHWEIKERT. Okay. Ms. Peters, when you are 
actually out there working with your Angel Network--just as a 
side question and this sort of passes back to what Kevin was 
just saying--information on the management, the individuals, 
when you are weighing, how much are you all investing in the 
concept or investing in the people?
    Ms. PETERS. Well, with startups, a lot of time there is no 
revenue. There is a very nascent business model and you are 
really investing in the jockey very much. And so angels do get 
together in groups and we do a very substantial amount of due 
diligence. We end up looking at everything, from management 
capabilities, from the competitive arena, from past history of 
the management. We do reference checks. Angel Capital Investing 
and Accredited Investor investing is not something you do on 
PayPal. I mean, it is negotiated. You work very closely with 
the companies. We go on their boards and we offer advice. We 
offer strategic advice. We spend time with those companies 
throughout their history.
    So transparency is just imperative. We require information 
rights with any company that Golden Seeds invests in and most 
angel groups do that.
    Chairman SCHWEIKERT. Thanks, Ms. Peters.
    Mr. Angel, being someone who is actually very interested in 
the tick size mechanic. Not only seeing the crisis of the 
number of publicly traded equities out there, but also how the 
curve seems to be pulling further and further out. The big caps 
are traded and the smaller ones are orphans. Obviously tick 
size, are we to the point now where I need to try to put 
together a bipartisan piece of legislation and drive it through 
our process? Because many of us have had the discussion of do 
you do a sliding scale? Do you just allow the company, the 
exchange, the interested parties to basically pick a tick and 
say, hey, we are going to be a five cent, we are going to be a 
10 cent. The last part of that is would you go 5 to 25? How 
much range would you create?
    Mr. ANGEL. Why thank you. Thank you.
    For those watching on TV who are not as familiar with the 
tick size, the tick is the minimum price variation. Now, you 
can trade a stock right now at $10 or $10 and a penny, but you 
cannot trade it at $10 and a half penny. And it sounds like a 
very technical issue, and it is, but what that really indicates 
is how much you have to pay to jump ahead of other people who 
are bidding the same price you want to pay. So if right now 
other people are out there bidding $10, if you want to jump to 
the front of the line you have to bid $10 and a penny.
    Now, it sounds very technical. It sounds like a minor 
thing, but it has a big impact on the way people trade. And the 
real question is what is the optimal tick size? I have 
published papers with mathematical formulas of this and it is 
really a function of many different things--everything from the 
size of the company to how many people know about it, and it is 
not the same for every company. So if we try to have a ``one 
formula fits all,'' we would miss a lot of stuff and we 
probably would not get it perfectly right. So I am of the 
opinion that the best thing to do is to ask who has the right 
incentive? That is what good economic analysis is all about. It 
is not about did the SEC properly manage or properly count how 
many paperclips will be used in implementing a law or a rule; 
it is the question of did they get the economics right to make 
the right tradeoff between consumer protection, capital 
formation, market efficiency, and competition.
    Now, if you make the tick too wide, that puts a floor on 
the bid-ask spread. That is a transaction cost. So if you make 
the tick too wide you are driving up costs. That is going to 
hurt the stock price. On the other hand, if you make the tick 
too small you are not providing enough protection to people who 
provide liquidity in the market and that will hurt the stock 
    Chairman SCHWEIKERT. Would you use a sliding scale? Would 
you use a volume adjustment? Would you just allow the company 
and the Exchange to pick a number and then review it on 
velocity of trade?
    Mr. ANGEL. Right. I would let the companies pick their own 
tick size because they have the incentive to get it right. It 
is their stock that is being traded, and if they get the wrong 
number they should have the flexibility to experiment with 
different stock.
    Chairman SCHWEIKERT. We may be calling you because I am 
frustrated on this one and maybe actually trying to draft----
    Mr. ANGEL. Happy to assist.
    Chairman SCHWEIKERT. Mr. Klehm, you have a great interest 
in what we refer to as the Reg A. You know, it is now a $50 
million offering, a simplified process, and as you and I have 
talked about. The $50 million allows you to be on the big 
exchanges and the great hope of then becoming a covered stock 
where researchers are following you, which makes additional 
offerings possible. In a company like yours with the growth and 
the technology and the capital intensive you need, is $50 
million an appropriate threshold?
    Mr. KLEHM. We are actually a capital light business. So we 
run a mix of intellectual property licensing as well as 
manufacturing. So the business model that we employ has the 
flexibility to be able to do all those things. So a $50 million 
capital raise--so for the first time in nine years my angel 
investors, my 203 angel investors, I do not have to go out and 
raise money because we are going to be a cash flow positive 
business this year. So this is the time to raise money. But 
what we will require money for is that next jump in growth. We 
went from $8.7 million in revenue to $43 million in revenue in 
one year.
    Chairman SCHWEIKERT. Tell us where you are going. Let us 
say you had the 50 million in new capital. You were able to 
go--what does that do to your employment base? What does that 
change in your local economy?
    Mr. KLEHM. So for us we have relied on licensing and 
contract manufacturing. We have small manufacturing in Austin, 
Texas, and what this would allow us to do is to expand that 
manufacturing base. So as I think about the business, I think 
about the business as a triangle. So the base of the business 
is the manufacturing and creating of products, so that covers 
the expenses for the business. Then the licensing, we go into 
markets that we are not organized or capitalized to be able to 
address, like full-blown automotive transmissions. We license 
those to other markets. But for the markets that we can get our 
great return for our shareholders and be very economically 
efficient, we would look to manufacture that. So the capital we 
would look to employ is to bring that manufacturing capability 
in-house and build manufacturing jobs.
    Chairman SCHWEIKERT. Okay. Thank you, Mr. Klehm.
    Ranking Member Clarke.
    Ms. CLARKE. Thank you, Mr. Chairman. This testimony is 
truly fascinating. I want to thank all of you for your 
testimony here today.
    My first question is for Dr.--is it Angel or Angel?
    Mr. ANGEL. You can call me Jim.
    Ms. CLARKE. Well, thank you. Excuse me.
    The JOBS Act included some investor protections, including 
restrictions on the amount ordinary investors can invest in 
each company based on income levels. As you know, the SEC has 
grappled with balancing capital raising by small businesses 
with investor protections in the past. In your opinion, are 
investment caps enough to protect investors with limited wealth 
and financial knowledge from crowdfunding issuers?
    Mr. ANGEL. By itself, no. Whenever you have money, money 
attracts flies just like garbage attracts fleas. And so that is 
why there are other good things in the JOBS Act, for example, 
that require criminal background checks of the people running 
these operations because we do not want the fraudsters to come 
in, set up bogus operations, sell them on the Internet, and run 
away with the proceeds. So definitely this is something that is 
contemplated in the Act, and we just need to move forward with 
    Ms. CLARKE. I want to follow up on a question from your 
written testimony. You pointed out the challenges public 
companies face with regards to possible litigation and how that 
can be a disincentive for private companies to go public. Given 
that litigation can at times be an investor's only recourse, 
how would you mitigate that concern for private companies who 
may want to go public?
    Mr. ANGEL. Well, one thing is that Congress and the SEC can 
create various safe harbors for disclosure in that whenever 
something bad happens to a company that not only do the 
stockholders suffer because the price goes down, but then the 
strike suits come in and basically the shareholders end up 
suing themselves and paying twice. So better safe harbors I 
think are one very important thing. But you are right. We need 
to strike a balance and that is a tricky thing to do.
    Ms. CLARKE. Let me thank you.
    To Mr. Rustagi, as someone who has successfully used the 
Kickstarter platform to raise capital for your small business, 
what recommendations would you make to the SEC to ensure that 
new equity-based crowdfunding rules are workable for both 
investors and issuers?
    Mr. RUSTAGI. So I think that is really interesting. With 
Kickstarter, what happens is a lot of it is centered around the 
companies themselves and the videos that create. And so as 
Chairman Schweikert was mentioning, a lot of it is very review-
based. So there is a lot of back and forth there.
    I think the SEC would have to create something very simple. 
If they were to--just from the company's perspective or from 
the investor's perspective, I would want a lot of that 
regulation bottled up into the crowdfunding or crowd investing 
platforms themselves. It is imperative that the system is very, 
very simple. The biggest thing in startups is time. So the 
longer something takes, the longer the process takes, the more 
you spend on legal, the less likely it is that you are to use 
that. And so a lot of friends and colleagues of mine have been 
coming to me asking about Kickstarter advice, because it is 
such a simple and elegant tool. There is a large backend for 
the companies and there should be for investors as well.
    Ms. CLARKE. And my final question to you is what is high-
tech apparel?
    Mr. RUSTAGI. That is the eternal question.
    So we create synthetic materials that have specific 
properties. So the easiest one to explain is the dress shirt 
that I am wearing. So a regular dress shirt has issues with 
wrinkling and holds moisture; this one does not. So it has 
special properties, like you can wear it for four or five days 
because it does not smell. It has an antimicrobial coating. It 
has a phase-change material inside of it, which is the same 
thing used in space suits. So it can hold your body heat, store 
that, so if you are out on a hot day it will pull that heat 
away. And if you go into a cool environment it will release it 
back to you. So it is basically, as the blog dog tech crunch 
put it, a magic shirt.
    Ms. CLARKE. The magic shirt.
    Thank you Mr. Chairman.
    Chairman SCHWEIKERT. It just sets your mind a racing, does 
it not it?
    Mr. Bentivolio.
    Mr. BENTIVOLIO. Thank you very much, Mr. Chairman. I think 
it is more appropriately named the ``smart shirt.''
    Mr. RUSTAGI. Thank you.
    Mr. BENTIVOLIO. It is a very good idea.
    Actually, my questions are for Ms. Peters. I am sorry I was 
not here to hear your initial testimony, but I got the gist of 
it and I have a few quick questions.
    A startup. Somebody wants to raise money for a good idea 
what they think is a good idea, they should put together a 
business plan I am assuming. Do you help them with that? Do you 
have a format or a style?
    Ms. PETERS. There are a number of tools that startups use. 
There are some technological systems that they can go on that 
show them what they need to do, how to put up an executive 
summary, a business plan. They need a business plan for their 
business. I mean, we do not write that for them. If they are 
not capable of writing that, that is one of the signals we 
would have about how likely they are to succeed. They need to 
be able to understand and provide us with financials and 
financial projections and the basis for those projections.
    So there are a whole array of templates that you can see on 
the Angel Capital Association site for entrepreneurs. There are 
a number of other sites that do that as well. These have been 
around for many years. Then also, entrepreneurs come through 
economic development, through incubators in their towns, 
through accelerators, through tech transfer offices of colleges 
and universities, and frankly, a lot of the schools that used 
to promote their MBAs are now promoting their masters in 
business entrepreneurship, not administration. So you are 
finding entire course curriculum around how to create a startup 
and develop the sources of capital that you need.
    Mr. BENTIVOLIO. That is great. That is great.
    One other thing, Mr. Rustagi?
    Mr. RUSTAGI. Rustagi.
    Mr. BENTIVOLIO. In another Committee we were discussing 
military uniforms. Is there any chance you could get involved 
with us on that, in developing a smart uniform?
    Mr. RUSTAGI. I could speak with my former partner about it. 
There is an SBIR out about a year and a half ago that we were 
going to apply to, but certainly. Yeah.
    Mr. BENTIVOLIO. That would be great.
    And just one last question. How can I get you to come to my 
district and give a seminar on how to do a startup?
    Mr. RUSTAGI. My e-mail is just my full name at gmail.com.
    Mr. BENTIVOLIO. Great. Thank you very much. Thank you. I 
yield back my time, Mr. Chairman.
    Chairman SCHWEIKERT. Oh, it is not fair. We wanted to get 
him to our district first.
    Mr. BENTIVOLIO. He is going to be sought after.
    Chairman SCHWEIKERT. Thank you. This was one of those 
unique occasions. I have sat through hundreds of hearings from 
my time in the state legislature to here in Congress. As a 
collection of witnesses, you are singularly the most 
interesting group I think I have ever had in front of me. It is 
rare for me to look out and say I would love to sit down and 
have a coffee with each one of you. So thank you for joining us 
today. You may find that we may send you some questions to put 
into the record, so let me make sure I do the proper closing. 
    And with that I ask unanimous consent that the members have 
five legislative days to submit statements and supporting 
materials for the record. Without objection, so ordered. The 
hearing is now adjourned.
    [Whereupon, at 11:42 a.m., the Subcommittee was adjourned.]

                            A P P E N D I X


























                              Testimony of

                          William G. Klehm III

               Chairman and CEO of Fallbrook Technologies

                          on behalf of CONNECT

                     U.S. House of Representatives

                      Committee on Small Business

       Subcommittee on Investigations, Oversight and Regulations

                               Hearing on

                     JOBS Act Implementation Update

                             April 11, 2013

    Good Morning Chairman Schweikert and Ranking Member Clarke. 
It is an honor to appear before the committee today and testify 
on the challenges those of us raising capital for early stage, 
innovative new companies face in this financial and regulatory 
environment. I commend you for calling this hearing to check up 
on the status of JOBS Act implementation to ensure the goals of 
the JOBS Act, namely to increase access to capital for 
America's innovators, get accomplished.

    I am Bill Klehm, Chairman and CEO of Fallbrook 
Technologies. I have served as Fallbrook's CEO since 2004 and 
have over 20 years of automotive related experience. I have 
held several positions with management responsibilities in the 
automotive business, including finance, marketing, sales, 
product development, and manufacturing operations.

    We are a private technology company based near Austin, 
Texas and San Diego, California, dedicated to improving 
products relying on mechanical transmissions. We both 
manufacture and market proprietary continuously variable 
transmission products, and support our global partners in the 
design and development of our proprietary transmission 

    Fallbrook currently holds over 500 patents and pending 
applications worldwide.

    Our mission is to deliver the best performing, most 
versatile and most reliable mechanical power transmissions in 
the world. We believe the next generation of transmissions 
including our technology will be less expensive and more 

    We employ 133 people in the U.S., including approximately 
25 of the best engineers in the transmission sector.

    We have secured major partnerships with global players in 
the automotive sector to design and develop applications of our 
transmission technology. We have passed the commercial tests of 
physics and economics and have partnered with industry leaders 
like Allison Transmission of Indiana, Dana Holding of Ohio and 
TEAM Industries of Minnesota. Our proprietary continuously 
variable transmission technology is potentially applicable to 
any product that uses a transmission. It replaces conventional 
transmission technology that uses gears to transform raw power 
to managed power with a mechanism that seamlessly provides an 
unlimited number of ratios within its ratio range.

    Transmissions are ubiquitous in anything that has a power 
source, from your bicycle or vacuum to the most obvious 
example, the motor vehicle. That range of applications should 
give you a sense of how big an opportunity we have in front of 
us--more than $30 billion in just the markets we are active in 
today. Our technology allows next-generation transmissions to 
increase fuel efficiency, reduce emissions, and improve overall 
vehicle performance.

    We've grown from negligible revenue in 2009 to more than 
$43 million last year. And that is money that we are investing 
back into the business to grow. This is a good start, but we 
have an opportunity to grow faster and to drive innovation 
faster. The only thing preventing us from doing this is 
affordable capital. Our ability to access capital is one of the 
MOST significant challenges we face. I spend over 50 percent of 
my time on it.

    We have raised more than $15 million in capital. Our early 
investors were angels from California, individuals that 
recognized the benefits our technology could bring to the 
mechanical transmission sector. VC investors from California 
came in next, followed by a VC from Switzerland and more 
recently corporate investors from Canada, Indiana and Ohio.

    The maze through which small innovative companies, like 
Fallbrook, must navigate to acquire capital is becoming 
increasingly challenging. Our great country prides itself on 
entrepreneurship and innovation. Fallbrook is a poster child 
for those values. From an idea in San Diego in 1998 to the 
launch of our first commercial product, right through to the 
automotive development agreements we signed last summer.

    With additional capital we could expand our manufacturing 
base in Texas and build-out our engineering and development 
team which would create new high technology jobs to accelerate 
our product development and partnership opportunities. We also 
believe there would also be a significant impact on new job 
opportunities within both our suppliers and end user customers, 
such as automobile manufacturers. This committee should 
remember that high-tech engineering and manufacturing jobs are 
the kinds of jobs this economy needs because not only do they 
enhance America's competitiveness, but they pay above the 
average salary and wages compared to other sectors. That is why 
Congress' bipartisan work to pass the JOBS Act was so important 
and why regulatory hurdles shouldn't slow down the jobs and 
innovation that will materialize once the JOBS Act is fully 

    The changes enacted by the JOBS Act will make acquiring 
capital less challenging for companies like Fallbrook, 
specifically the Regulation A change which simply raises the 
limit on capital a company can currently raise from $5 million 
to $50 million. Regulation A is already law and is already 
enforced by the SEC. But the $5 million cap is outdated and 
unworkable and Congress was absolutely right to modernize the 
cap for today's innovation climate and to provide more access 
to capital for America's innovators.

    To meet our needs, an incremental $5 million round is 
simply not sufficient to fund the type of development and 
growth that we are targeting at Fallbrook. Under the status 
quo, to raise more than $5 million we are required to file a 
registration statement with the SEC. The opportunity cost of 
that filing, including the legal and accounting fees and 
printing costs, is significant for a company of our size, 
amounting potentially to hundreds of thousands of dollars. Mid 
and large cap companies that raise public equity benefit from 
the scale of their transactions relative to the cost of the 
registration statement. But innovative companies all across the 
country in various tech sectors that are the size of Fallbrook 
are robbed of that benefit until the JOBS Act Regulation A 
rules are implemented. This means that new, well-paying jobs 
aren't created, new technologies sit dormant, and the public 
misses out on new products that could change their lives or 
advance the common good.

    The changes in the JOBS Act will increase access to capital 
for companies like Fallbrook. They will enable us to accelerate 
our development and commercialization; driving innovation and 
growth, which creates jobs. New jobs will be created not only 
local to Fallbrook but also across the nation within the supply 
and customer chain both upstream and downstream of our 
proprietary technology. Fallbrook's technology can have a 
meaningful impact on the mechanical transmission market, using 
energy more efficiently through the art of simplicity. 
Fallbrook is not the only company that will benefit from Reg A 
implementation. I know of several other companies ready to 
utilize this new option for accessing capital. I encourage the 
sub-committee to help us in this goal by ensuring the full and 
speedy implementation of the changes proposed by the JOBS Act. 
Thank you Mr. Chairman, Ranking Member and Committee Members.




                   ``JOBS Act Implementation Update''

                              Testimony of

                             Kevin Rustagi


                          Evolutions of Noise

                             April 11, 2013

                               Before the

                        Small Business Committee

                 United States House of Representatives

           The Honorable David Schweikert, Committee Chairman

              The Honorable Yvette Clarke, Ranking Member
    Good morning, Chairman Schweikert, Ranking Member Clarke, 
and members of the Committee. It is an honor and privilege to 
be here today to share my experiences and knowledge with the 

    My name is Kevin Rustagi, and I am an American entrepreneur 
and product designer.

    As an alumnus of the Massachusetts Institute of Technology, 
I've had the privilege of working with firms such as Apple on 
the iPhone 5 and GE during my undergraduate career. Over time, 
the entrepreneurship community at MIT drew me to the world of 
high-tech, high-growth early stage startups. I opted for a 
multi-year deferral from Stanford Business School to explore 
startup opportunities.

    Since then, I have been a student of the modern economy and 
sought to start ventures using highly mobile labor and capital. 
As such, I have experience with loans from family and business 
partners, angel investing with accredited investors, and most 
recently, donation-based funding through Kickstarter.com. I am 
also an active member of the young startup community, acting as 
a sounding board in the early venture space.

    A recent company that I co-founded, Ministry of Supply 
(MoS0, creates high-tech business apparel for men and held the 
record in the fashion category on Kickstarter for the latter 
half of 2012 by taking pre-orders for our new space-age dress 
shirts. Our goal was $30,000. In 33 days, we raised over 14 
times that for a total of $429,000. Since inception, we have 
created 14 new jobs.

    Though new technologies such as viral marketing and rapid 
prototyping are highly effective, the need for accessible 
funding and backing remains as pertinent and challenging as 

    Today, I aim to discuss how funding has played a role in my 
ventures as of late, and how access to new methods of 
fundraising, as cited in the Jumpstart Our Business Startups 
Act, or the JOBS Act, would greatly increase every 
entrepreneur's chance of success in starting new ventures, 
thereby stimulating the creation of new jobs and economic 

    Kickstarter and `going viral'

    Kickstarter is one of the web's primary curated crowd-
donation sites, and is known for taking only a 5% cut of 
donations to a project. As with MoS's high-tech dress shirts, 
the site has in part evolved into a pre-order destination for 
new consumer products.

    Despite its focus on early creative projects, launching on 
Kickstarter requires substantive concept development. For 
example, multiple prototypes are generally required for market 
adoption. Started in late 2010, MoS raised angel funding before 
going on Kickstarter to increase our odds of success. We waited 
one-and-a-half years to launch on Kickstarter, engaging a viral 
PR strategy using social media to raise awareness. Surprisingly 
effective, our story was featured online in Australia, India, 
Sweden, China, and the United States, sparking pre-orders in 
over two-dozen countries.

    With global traction and roughly 100,000 views of our 
videos, we experienced what is known in the startup world as 
`going viral'.

    Involuntarily rejecting crowd-investors

    As a young company, we used the money from pre-orders to 
feverishly grow, but we required further funding to build a new 
supply chain and hire new employees. Given the buzz from 
Kickstarter, we had multiple offers from investors around the 
world. However, many were smaller investors (in the $1,000-
$15,000 range). Absent sufficient regulation, legal precedent, 
and vetting tools, we experienced the deep irony of having to 
turn them away.

    Albeit ultimately fruitful, the company's continued search 
for angel funding has taken valuable time away from vital 
product and business development.

    The difference between equity-based and donation based 

    Donation-based funding remains the holy grail of early 
stage ventures, due to its ability to help bootstrap a business 
without dilution. Crowd donation is based on goodwill; equity 
based funding is based on a mutual higher expected value.

    While donation-based is ideal, real-world constraints 
necessitate a more continuous stream of funding, especially in 
environments with disjointed demand and a difficult path to 
profitability. Equity-based funding is simply a much more 
reliable model because there is a higher tangible monetary 
benefit for both the venture and the investor.

    Different levels of funding are required for different 

    One of the greatest challenges entrepreneurs face with 
funding is dilution. If they are forced to sell shares when 
their company is worth less, they give up more shares. If I 
need to raise $200,000, but my company is worth only $40,000, I 
would be forced to give up half of my company that I can't get 
back. This not only impacts founders, but also all future 

    When companies have to pursue angel funding in a less 
robust market, as we did with our interest in consumer 
products, they are subject to often-difficult negotiations with 
potential investors. There is now less of the pie to be shared. 
Crowd investing would allow for a smoothing effect here, 
balancing the playing field.

    The timing of the JOBS Act and the global stage

    The startup community is very excited about the JOBS Act. 
Colleagues of mine are eager to test out models that will allow 
them to work on their projects. Crowd investing would allow 
entrepreneurs to take on projects with greater ease.

    MassChallenge, a Boston-based startup competition, has been 
recognized by the White House as a key partner in the Startup 
America initiative. Last year, 1,237 companies applied for 125 
finalist spots, garnering free office space and a summer 
program with mentors with several companies receiving a cut of 
$1,000,000 in prize money. They received applications from 35 
countries. MassChallenge, like the marketplace, is judged 
solely based on traction and market adoption. Competition is 
now a highly global democracy. America must stay competitive.

    Supporting a culture of entrepreneurship and innovation

    America holds a nearly unparalleled legacy of 
entrepreneurship and innovation. My grandfather, Merton Purvis, 
was one of over 1,200 PhDs at Bell Labs at its peak in the 
1960s--widely considered to be one of the most innovative 
organizations in modern history. Since then, startups have 
taken its place as America's innovation engine. Support for 
startups must match the speed of global competition.

    Programs like Startup Chile provide funding to startups 
willing to locate in Chile for 7 months, demonstrating the rest 
of the world's desire for the latest new high-tech and high-
growth jobs. Other nations are at the forefront, while America 
demurs. Sound regulation for the JOBS Act will change that.

    Would crowd investing be used?

    In short, yes. Angel investing's limitations are 
connections and the liquid market. In venture capital, it is 
the idea of being `proven.' In crowd-donation, too long before 
or after a certain stage of development, and the donation 
community may not accept your story. Moreover, crowd investing 
provides a unique tool. The entrepreneurs I have met over the 
past 6 years are extremely resourceful and, if given effective 
new crowd-funding tools, would make quick use of them.


    Crowd investing within the JOBS Act demonstrates America's 
continued commitment to developing the next generation of small 
businesses and startups. It will provide a real opportunity to 
strengthen the economy from the ground up. It remains vital to 
consider all elements of this, including items that are still 
caught up in legislation, especially the Startup Visa.

    New businesses are difficult ventures to undertake, and 
anything that safely and effectively puts the advantage in the 
hands of the innovator is greatly desired and beneficial to the 
economy. Crowd investing through the JOBS Act will be a unique 
and exciting way to promote new businesses.

    As I've noted, I have used a variety of tools in creating 
new ventures, both for product design and business development. 
My hope is that my colleagues and I can continue to create new 
ventures in a way that leads and inspires the world. I eagerly 
await the day that I can fully utilize crowd funding and crowd 
investing to help create successful new ventures.

    I thank you for this opportunity to explain relevant 
concerns of the startup community surrounding the JOBS Act and 
crowd investing.