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



 
                 REDUCING BARRIERS TO CAPITAL FORMATION
=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 12, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-29


[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]




                    U.S. GOVERNMENT PRINTING OFFICE
81-764 PDF                    WASHINGTON : 2013
___________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail : Stop IDCC, Washington, DC 20402-001










                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York           MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 12, 2013................................................     1
Appendix:
    June 12, 2013................................................    35

                               WITNESSES
                        Wednesday, June 12, 2013

Coulson, R. Cromwell, President and Chief Executive Officer, OTC 
  Markets Group..................................................     4
Ferraro, Joseph, General Counsel, Prospect Capital Corporation...     6
Hansen, Shane B., Partner, Warner Norcross & Judd LLP............     8
Langevoort, Donald C., Thomas Aquinas Reynolds Professor of Law, 
  Georgetown University Law Center...............................    11
Weild, David, Senior Advisor, Grant Thornton LLP.................    10

                                APPENDIX

Prepared statements:
    Huizenga, Hon. Bill..........................................    36
    Coulson, R. Cromwell.........................................    37
    Ferraro, Joseph..............................................    67
    Hansen, Shane B..............................................    75
    Langevoort, Donald C.........................................    93
    Weild, David.................................................    97


                          REDUCING BARRIERS TO



                           CAPITAL FORMATION

                              ----------                              


                        Wednesday, June 12, 2013

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 1:10 p.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Huizenga, 
Grimm, Stivers, Fincher, Mulvaney, Hultgren, Ross; Maloney, 
Sherman, Himes, and Carney.
    Ex officio present: Representative Hensarling.
    Also present: Representative Duffy.
    Chairman Garrett. This hearing of the Subcommittee on 
Capital Markets and Government Sponsored Enterprises will come 
to order. The hearing is entitled, ``Reducing Barriers to 
Capital Formation.''
    I welcome the esteemed panelists for your testimony. But 
before we do that, I will recognize myself for 5 minutes.
    Today, we are here to discuss the important topic of 
reducing barriers to capital formation for America's small 
businesses. Startup companies and small businesses are 
literally the backbone of our economy, generating literally 
millions of jobs in the United States every year. Yet, these 
companies often find it difficult to raise the capital they 
need to successfully launch and grow their businesses.
    So last spring, Congress passed the bipartisan Jumpstart 
Our Business Startups Act, the JOBS Act, for short, to enhance 
capital formation and reduce regulatory burdens for American 
startups and small businesses. And although it is far too early 
to judge the ultimate success of the JOBS Act, early 
indications are that the law is working.
    First, since April 2012, around 600 companies have elected 
Emerging Growth Company (EGC) status under the Act, with about 
a third of these companies listed or pending a listing on 
NASDAQ or the New York Stock Exchange market. IPOs got a strong 
start in 2013.
    Second, more than 90 percent of EGCs that publicly filed 
their first registration statements since 2012 elected to use 
at least one accommodation under the JOBS Act, with certain IPO 
on-ramp accommodations being particularly popular.
    Third, according to an April 2012, Small Business Access to 
Capital Survey, one in five respondents indicated that they are 
more likely to seek outside investors as a result of the JOBS 
Act.
    And, fourth, with the short-term interest rates near zero, 
the JOBS Act has benefited investors, providing more options to 
put their money to work. Many companies have gone public under 
the JOBS Act to outperform peer companies that did not.
    But notwithstanding these positive trends, the full 
potential of the JOBS Act remains largely unrealized today, as 
the SEC continues, unfortunately, to delay mandatory rulemaking 
to implement many of the law's most important and beneficial 
provisions. Of course, this delay really comes as no surprise 
to those of us who have followed the SEC's priorities in the 
past. Indeed, year after year, the SEC seems to place promoting 
capital formation, which is a key component of the agency's 
mission, near the bottom of its agenda.
    For example, last year the SEC tabled the JOBS Act 
rulemaking to prioritize issues and rules under the Dodd-Frank 
Act for companies to disclose their use of conflict minerals as 
well as rules requiring the disclosure of payment of government 
entities by companies engaged in resource extraction. While 
these rules may have commendable goals, they fall outside of 
the SEC's core expertise, and they appear to do very little, if 
anything, to protect investors, make the U.S. markets more fair 
and efficient, and promote capital formation. At worst, they do 
the opposite.
    While the SEC has for years received valuable 
recommendations on how to promote access to capital for small 
businesses from its own Government-Business Forum on Small 
Business Capital Formation, and its Advisory Committee, the 
agency so far has acted on only a small number of these 
recommendations.
    So with all this in mind, I was pleased to hear Chairman 
White reaffirm to this committee last month that she is 
committed to prioritizing the completion of mandatory JOBS Act 
rulemaking as soon as possible, and I hope that her commitment 
carries over to other efforts to facilitate small business 
capital formation.
    Today, America's startups and small businesses continue to 
encounter difficulties accessing U.S. capital markets to 
finance their business, and the cost of these companies going 
and staying public remains very high.
    On top of this, over the past 5 years the Obama 
Administration has unleashed a record amount of burdensome red 
tape that has disproportionately increased the cost of doing 
business for smaller companies compared to their larger peers. 
As a result, many small businesses have been forced to do what? 
Cut back on hiring and employee benefits at a time when our 
economy and those employees can least support it.
    And so as our country continues to go down a path of slow 
economic growth and persistently high unemployment, it is more 
important than ever that we continue to reduce burdensome 
government regulations on small businesses and enhance our 
ability to obtain capital at a reasonable cost.
    So I look forward to hearing from our panel this afternoon 
on ways that Congress and the regulators, as well as market 
participants, can continue to build on the JOBS Act, including, 
among other things, efforts to modernize the regulatory regime 
governing business development companies, to increase liquidity 
in the shares of publicly traded small and mid-cap companies, 
and to promote more research analyst coverage for small cap 
companies.
    With that, I yield back my time, and I recognize the 
gentleman from California for 5 minutes.
    Mr. Sherman. Mr. Chairman, thanks for holding these 
hearings.
    For most of what the average American would call a small 
business, getting expansion capital means getting a loan. And 
that is the purview, chiefly, of another subcommittee, but I 
should address it for a minute.
    First, we should commend the Fed for keeping interest rates 
low at this critical time in our economy. Because if you are 
trying to get enough money to open a second restaurant, you are 
trying to get a loan, and if you are able to get the loan, it 
will be a lower interest rate than it would be otherwise, and 
your customers now think that their home is worth more than 
their mortgage, and they are actually able to come to that 
restaurant. Whereas, a few years ago, my constituents wouldn't 
go to a restaurant unless there were golden arches in front of 
it.
    Second, we ought to pass the bill to allow credit unions to 
make small business loans, and we ought to be pushing the 
regulators of commercial banks to not turn up their noses at 
small business loans.
    We had, in this room, Jamie Dimon come in and say he had to 
send tens of billions of dollars to London where, as you will 
remember, it was eaten by a whale, because he couldn't find 
businesses here in the United States to lend it to. One of the 
very few things just about all sides of all aisles agree on 
here is that we all know of 100 small businesses which need 
capital. I am talking about the really small businesses that 
aren't even thinking of going public.
    As to those thinking of who are going public, a key thing 
is whatever we can do to minimize legal and accounting fees and 
the other costs of going public, one of those things would be 
not to require audit rotation beyond the standards already 
found in the accounting profession because that can, in some 
cases, double the audit fee, which is a significant portion of 
the cost of being a small publicly traded company.
    Finally, as to the SEC prioritization of regulations, I 
think we ought to give the regulators a break here. They cannot 
look at one statute and say, ``That is a good one, I will do 
that one first,'' and look at another statute and say, ``That 
is a bad one.''
    It is possible the Chair believes that minimizing legal and 
accounting fees for businesses going public is more important 
than saving lives in Eastern Africa, where they are beset with 
conflict mineral issues. Others would reach the other 
conclusion. And the regulators simply have to follow the laws 
we pass. I don't think the SEC should refuse to enact 
regulations to implement laws just because the chairman voted 
for them and I voted against them or vice versa.
    With that, I yield back.
    Chairman Garrett. The gentleman from Virginia is recognized 
for 2 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    Thank you for holding today's hearing on Reducing Barriers 
to Capital Formation. One of the most important functions of 
this committee is to promote initiatives to increase access to 
capital for our small businesses and startups. Last Congress, 
this subcommittee led the way in the enactment of the JOBS Act. 
Among other things, the JOBS Act allowed emerging companies to 
tap capital in the public markets without enduring some of the 
most burdensome regulations which inhibit their ability to 
grow.
    Despite the SEC's ability to fully implement the JOBS Act 
in a timely fashion, we are already seeing the positive impact 
of the law, as 83 percent of IPOs after the JOBS Act's passage 
were emerging growth companies. We, however, can still do more 
to remove costly and unnecessary regulatory impediments that 
are restricting companies from accessing capital in the public 
and private markets.
    I have heard from innovative biotech companies in my 
district, Virginia's Fifth District, that the overall 
regulatory burden which disproportionately impacts small or 
public companies is the primary motivator in their decision to 
stay private. We must look at solutions to eliminate and 
streamline regulations to create an environment that is more 
efficient and conducive for long-term economic growth.
    I appreciate this committee's continued focus on ensuring 
that our small businesses and startups have the ability to 
access the necessary capital in order to innovate, expand, and 
create the jobs that our local communities need, that my 
Virginia's Fifth District needs. I look forward to the 
testimony of our distinguished witnesses, and I thank them for 
their appearance today.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Garrett. The gentleman yields back.
    In looking around, I think that is the end of opening 
statements, which is great, because it means we can talk to the 
experts now and hear your opinions.
    Without objection your full written statements will be made 
a part of the record. You will be recognized for 5 minutes for 
a summary. The lights in front of you, of course, advise you as 
to 5 minutes, 1 minute, and your time is up.
    With that, I will begin on the left here.
    Mr. Coulson, you are recognized for 5 minutes.

STATEMENT OF R. CROMWELL COULSON, PRESIDENT AND CHIEF EXECUTIVE 
                   OFFICER, OTC MARKETS GROUP

    Mr. Coulson. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. My name is Cromwell 
Coulson, and I am CEO of OTC Markets Group. I appreciate the 
opportunity to testify.
    As an operator of public marketplaces for smaller 
companies, and being a smaller publicly traded company 
ourselves, in our own right, I hope I can provide the committee 
with greater insights into barriers to capital formation that 
should be removed.
    We are all here because we recognize the value of public 
trading to small growing companies and the U.S. economy. The 
visibility, valuation, liquidity, capital, and trust that 
public trading provides can create some of the most successful 
and sustainable companies in the capitalist system.
    We have provided 15 concrete suggestions in our written 
testimony that together will make our public markets more open, 
more transparent, and more connected for smaller public 
companies, while reducing the complexity and cost.
    Our marketplaces, like all public markets, are better 
informed and more efficient when there is transparency of 
trading activity and availability of company information. We 
work with broker-dealers in the trading process, and we have 
completely changed what was once an opaque marketplace. Now, 
the broker-dealers trading out of our markets are the same 
electronic broker-dealers trading NASDAQ and New York Stock 
Exchange Securities.
    But we also work with a wide range of companies. We need to 
engage them to provide better information for investors. And we 
have designed a system of tiered marketplaces to separate the 
highest quality companies from the lowest, and also to clearly 
warn investors when there is less information.
    The JOBS Act, particularly through ending the ban on 
general solicitation and new, more inclusive capital raising, 
takes great strides towards achieving the type of transparency 
our markets need to thrive. We can do more, though, to reduce 
barriers to capital formation by thoughtfully enhancing our 
public secondary markets.
    Capital has greater value if it is liquid and transferable. 
A carefully crafted tick size pilot program applicable to 
quotes and orders but not trades could provide a much-needed 
improvement to small company liquidity and value. Equity 
markets in the United States are the most regulated of all our 
financial markets. Our antifraud provisions already give 
regulators a broad sword when they see wrongdoing. But 
regulators should think like investors. Give investors the 
information they need to make intelligent decisions, but let 
them make choices.
    Our limited resources should be used to protect investors 
by driving transparency and smartly targeting the biggest 
problems, not just creating the longest regulatory filings or 
the largest number of enforcement cases. We urgently need more 
transparency of the people behind SEC reporting companies that 
are being widely promoted on the Internet. These advertisements 
of penny stocks, without any information about the people 
promoting them, makes a mockery of our regulatory system.
    Our promotion disclosure regulations were written for an 
era when promotion was done through the mail. It needs to be 
updated, because we have interesting biotech companies, smaller 
manufacturing companies, and community banks that are traded on 
our markets which are drowned out by these other companies.
    We want equality of regulation. There should be margin 
eligibility for all higher quality public companies, not just 
exchange-traded companies. This will help the community banks, 
giving them greater access to capital. We also want consistent 
disclosure of institutional holdings and insider trading in 
non-exchange-listed securities.
    With market structure, we should be careful not to be 
governed by fear. Markets, like all U.S. industries, need 
diverse choice and healthy competition to promote growth and 
innovation. Some use the term ``fragmentation'' to paint a 
picture of a broken marketplace in need of repair. 
``Fragmentation'' may sound dark and dangerous, but it is just 
a spin doctor's word used by those losing market share to more 
dynamic competitors.
    When NASDAQ was a market for small companies, it was not a 
centralized stock exchange, but an automated quotation system 
with fragmented trading connected by transparency. Promoting 
competition efficiency is what drives a successful small 
company marketplace. It would be a step in the wrong direction 
to create monopoly stock exchanges or any attempt to create a 
trade-out rule or regulation that would mandate centralized 
trading on stock exchanges.
    Thank you, again, for inviting me to testify. While the 
issues I discuss may seem diverse, each is a vital component to 
reducing barriers to capital formation by creating better 
informed and more efficient financial marketplaces. I look 
forward to discussing these and other ideas with you.
    [The prepared statement of Mr. Coulson can be found on page 
37 of the appendix.]
    Chairman Garrett. Likewise. Thank you.
    Next, Mr. Ferraro is recognized for 5 minutes.

STATEMENT OF JOSEPH FERRARO, GENERAL COUNSEL, PROSPECT CAPITAL 
                          CORPORATION

    Mr. Ferraro. Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee, thank you for the opportunity to 
testify today.
    My name is Joseph Ferraro, and I am general counsel to 
Prospect Capital, a leading provider of capital to job-creating 
small and medium-sized companies in the United States. Prospect 
is a publicly traded business development company, or BDC. Our 
company completed its initial public offering in July 2004, and 
since then we have invested more than $5.5 billion in over 175 
small and medium-sized companies to expand their businesses, 
hire workers, construct factories, and achieve other important 
objectives.
    Our capital has helped create thousands of American jobs 
over the years, and our capital is much needed in this critical 
period of high unemployment and economic uncertainty.
    In 1980, Congress enacted amendments to the Investment 
Company Act of 1940, authorizing BDCs to facilitate financing 
of small and medium-sized businesses. Financing these companies 
requires significant and time-consuming due diligence 
activities and rigorous credit analysis that has become 
uneconomical for traditional banks, and involves transaction 
sizes too small for many other capital providers. Put simply, a 
BDC is a lender to, and an investor in, small and medium-sized 
businesses that might not otherwise receive financing.
    Today, our industry is composed of about 40 publicly traded 
BDCs, collectively managing $39.1 billion in assets. Our 
industry believes that modest changes to our securities laws 
can greatly enhance the ability of BDCs to serve the capital 
needs of small and medium-sized companies without undermining 
investor protections. These changes have been recommended by 
bills introduced by Representatives Mulvaney, Velazquez, and 
Grimm.
    First, a BDC must invest at least 70 percent of its assets 
in so-called eligible assets, namely public micro-cap and 
private companies. But current law excludes financial services 
companies from qualifying as eligible portfolio companies. 
Thus, no more than 30 percent of a BDC's assets can be invested 
in financial services companies.
    This outdated limitation makes no sense. Financial services 
is a sector that encompasses a wide array of companies, 
including community banks, leasing companies, factoring firms, 
and automobile financing companies. These companies have a 
capital magnifying effect that results in more capital flowing 
into small and medium-sized businesses. How? Because such 
companies themselves frequently serve the needs of other 
smaller companies.
    Further, BDC investments in small to medium-sized American 
financial services businesses are consistent with the principal 
purpose for which Congress created BDCs--to provide capital and 
assistance to small, developing businesses that are seeking to 
expand and create American jobs. The law should not 
artificially limit a BDC's ability to provide capital to such 
companies.
    Second, current law limits a BDC's investment in investment 
advisors. Although the SEC routinely provides administrative 
relief from this prohibition though exemptive relief orders, 
the process is very time-consuming and expensive. The pending 
bills would repeal this prohibition, in essence codifying 
existing practice and ending the needless spending of 
shareholder resources to seek administrative relief.
    Third, BDCs, like other companies that regularly raise 
capital through security issuances, rely on pre-filed shelf 
registrations--filings that allow a company to be pre-
positioned to issue additional securities. Because shelf 
registrations contain financial information that becomes 
outdated, companies are allowed to incorporate by reference in 
their shelf registrations subsequent financial reports. 
However, BDCs are not allowed to take advantage of this 
commonsense approach and instead must annually update shelf 
registrations each time new quarterly information is reported. 
This should be changed.
    Fourth, in 2005 the SEC modernized the issuance process 
especially for frequent securities issuers, reducing costs and 
making the process more efficient. However, BDCs were excluded 
from these commonsense reforms. Our industry is a frequent 
issuer of securities. For example, Prospect has raised some 
$2.5 billion since our IPO in 2004 through more than 26 public 
offerings. There is no public policy justification for BDCs 
being left behind when the SEC modernized these rules.
    Fifth, the pending bills offer other reforms that can 
assist BDCs in raising and deploying capital. For example, 
these bills allow some easing of the leverage limits imposed by 
current law on BDCs to allow more flexibility on how a BDC 
constructs its own balance sheet.
    In conclusion, business development companies are an 
important source of capital for small and medium-sized 
companies. With some commonsense reforms, it is possible to 
increase the capacity of BDCs to support job-creating American 
businesses without in any way undermining the strong investor 
protections or costing taxpayers a dime. We applaud the efforts 
of Representatives Mulvaney, Grimm, and Velazquez, and urge the 
committee to act favorably on BDC reform legislation.
    I would be pleased to answer any questions you may have.
    [The prepared statement of Mr. Ferraro can be found on page 
67 of the appendix.]
    Chairman Garrett. I thank you.
    Next, from Warner Norcross, Mr. Hansen, you are recognized 
for 5 minutes. Good afternoon.

 STATEMENT OF SHANE B. HANSEN, PARTNER, WARNER NORCROSS & JUDD 
                              LLP

    Mr. Hansen. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the Capital Markets Subcommittee. Thank 
you for this opportunity to explain how and why today's one-
size-fits-all system of securities broker-dealer regulation 
adversely impacts and unnecessarily increases the costs 
incurred by business owners for professional and business 
brokerage services to sell, buy, or grow their small and 
medium-sized businesses in privately negotiated transactions.
    My comments today are primarily focused on H.R. 2274, the 
Small Business Mergers, Acquisition, Sales, and Brokerage 
Simplification Act of 2013, a bipartisan bill introduced by 
Congressman Huizenga, with Congressmen Higgins and Posey.
    The public policy considerations supporting this 
legislation go back to 2005, with the publication by the 
American Bar Association of a report and recommendations of the 
Private Placement Broker-Dealer Task Force which is available 
on the SEC's Web site. A similar recommendation was made by the 
final report of the SEC Advisory Committee on Smaller Public 
Companies in 2006, which is also available on the SEC's Web 
site.
    Appropriately scaling Federal regulation of merger and 
acquisition brokers has been among the top recommendations in 
the 2006, 2007, 2008, 2009, 2010, and 2011 SEC Government-
Business Forums on Small Business Capital Formation. Indeed, in 
January 2012, then-SEC Chairman Mary Schapiro acknowledged 
these concerns in a response to a bipartisan congressional 
letter and a Senate committee's question for the record, both 
attached to my written statement. Despite this, in more than 6 
years the SEC has not made this small business issue a 
rulemaking priority and is unlikely to do so in the absence of 
a congressional directive.
    Let me describe for you the business context of this issue. 
Each of you has in your districts likely hundreds, perhaps 
thousands, of small and medium-sized business owners who sooner 
or later will want to prepare for and sell their business. They 
will want professional business brokerage services to help 
them. Similarly, back in your districts you likely have 
hundreds, perhaps thousands, of entrepreneurs committed to 
owning their own businesses, or larger companies wanting to 
grow their businesses through acquisitions. These potential 
buyers want professional assistance finding and screening 
potential sellers. These buyers and sellers are represented by 
counsel and often assisted by accountants. They rely upon 
written representations, warranties, covenants, and remedies in 
their negotiated contracts for their protection.
    Capital formation, business growth, jobs creation, and 
preservation by small and medium-sized businesses are all 
facilitated with business brokerage services. For example, the 
acquisition of one business by another enables the combined 
business to expand and to accumulate investor capital in more 
diversified, often financially stronger business enterprises. 
Small business sellers and buyers simply cannot afford to hire 
a registered investment banking firm, whose fees typically 
start at $500,000. And there are no registered investment 
bankers in most small communities.
    So today, Federal securities laws and rules regulate Main 
Street M&A brokers the same way as they regulate Wall Street 
investment banks handling public company transactions. 
Compliance costs are necessarily passed on to the business 
buyers and sellers in order for the M&A broker to stay in 
business, and small firms only handle a few transactions each 
year but must maintain ongoing regulatory compliance at all 
times.
    H.R. 2274 would direct the SEC to create a simplified 
system of M&A broker registration through a public notice 
filing, and would require delivery to clients of disclosures 
about M&A brokers similar to those requirements applicable 
today to investment advisors. The bill would direct the SEC to 
review and tailor applicable rules to fit this smaller business 
context.
    In conclusion, regulatory reengineering is urgently needed, 
even as recognized by the SEC. The perception of public 
protection through today's broker-dealer regulation is illusory 
because in fact thousands of small, unregistered M&A firms do 
business across the country. The rules are simply not clear in 
how they apply to them and do not fit. Today's one-size-fits-
all broker-dealer regulation is simply too costly for small and 
medium-sized businesses to afford, so they either go without 
professional advice or hire cheaper unregistered firms. This 
congressional directive to adopt a regulatory solution will 
ultimately free up the SEC's resources to better protect our 
public markets and passive investors.
    I urge you to support H.R. 2274, and I look forward to your 
questions.
    [The prepared statement of Mr. Hansen can be found on page 
75 of the appendix.]
    Chairman Garrett. Thank you.
    At this point, I will yield to Mr. Huizenga.
    Mr. Huizenga. Thank you, Mr. Chairman.
    I appreciate that. I came in from the House Floor--where we 
were moving along our package of derivatives bills--just as Mr. 
Shane Hansen was starting. Important things are happening here 
in the Financial Services Committee.
    But I want to thank Shane for bringing this issue to my 
attention a while ago, now, and it was a great meeting and a 
great opportunity for us to begin to work together. I think, as 
he has aptly pointed out, the proposal that is before us is 
going to significantly reduce the regulatory compliance costs, 
which currently exceed $150,000 initially and $75,000 annually. 
The SEC has not taken this recommendation in the past. And I 
think it is time that we do this legislatively.
    As we know, approximately $10 trillion of privately owned 
Main Street, mom-and-pop type businesses will be sold or closed 
as Baby Boomers age. That is a tremendous amount of transfer of 
wealth that is going to be happening. I think how we handle 
that is very important for our future generations. I appreciate 
everything that this committee is doing to help ease that.
    So thank you, Mr. Chairman.
    With that, I yield back.
    Chairman Garrett. Thank you. I appreciate that.
    Mr. Weild, you are now recognized for 5 minutes. Thank you 
for being with us this afternoon.

  STATEMENT OF DAVID WEILD, SENIOR ADVISOR, GRANT THORNTON LLP

    Mr. Weild. Thank you. Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee, thank you for 
inviting me to speak today about an issue of great importance 
to America, how to reduce barriers to capital formation, 
particularly for small companies, which are the growth engine 
of the U.S. economy.
    My name is David Weild. I oversee Capital Markets at Grant 
Thornton, LLP, one of the six global audit, tax, and advisory 
organizations. I was formally vice chairman of the NASDAQ stock 
market, with responsibility for all of the listed companies. I 
also ran the equity new issues business of a major investment 
bank for many years.
    U.S. capital markets, once the envy of the rest of the 
world, have undergone a profound transformation in less than a 
generation, leaving small business investors and the U.S. 
economy much worse off. I will quickly share several shocking 
statistics confirmed by a study that I recently coauthored for 
the Organization for Economic Cooperation and Development 
(OECD). U.S. markets have lost nearly half of all listed 
companies from their peak in 1997. The United States has 
suffered 15 years of consecutive lost listings from the U.S. 
stock markets. The U.S. small IPO market has suffered a 
catastrophic failure, falling from first place in small IPOs to 
12th among the 26 largest IPO markets. On a GDP-weighted basis, 
we are now 24th, ahead of only Mexico and Brazil.
    The U.S. IPO market should be producing 5 to 10 times the 
number of IPOs it has produced over the past 13 years. We 
estimate 10 million additional U.S. jobs would have been 
created during this timeframe. Notably, in our work for the 
OECD comparing the top 26 IPO markets, low-cost electronic 
markets with inadequate tick sizes are harming IPO markets in 
other areas of the world as well.
    After-market support is the biggest single obstacle to 
resurgence in the U.S. IPO market for small companies. The 
collapse in tick sizes from 25 cents to 1 cent, a result of 
regulatory and structural changes since 1997, is gutting the 
infrastructure of smaller broker-dealers, research analysts, 
and capital support that is essential to take small companies 
public and support them in the aftermarket once they are 
public.
    Ultimately, while lower tick sizes have benefited short-
term, high-turnover traders through lower transaction costs, 
long-term fundamental investors in small cap stocks have lost 
liquidity and investment opportunities and are thus much worse 
off today. The U.S. stock markets are now essentially governed 
by a one-size-fits-all framework, with 1 cent tick sizes for 
every stock, regardless of share price, market capitalization, 
or liquidity. Only big brands and large companies can sustain 
adequate visibility with investors in today's market. Small cap 
stocks need broker-dealers to support their liquidity, sales, 
and equity research in order to sustain active markets.
    U.S. capital markets have lost their way, but as my written 
testimony elaborates, we can take proactive and immediate steps 
to overcome the structural challenges faced by the U.S. stock 
markets and promote capital formation for small companies.
    First, we applaud passage of H.R. 701 by an overwhelming 
vote of 416-6, and we encourage swift Senate adoption of this 
bipartisan bill that requires the SEC to finalize Regulation A-
plus rulemaking by October 31, 2013. Reg A-plus will provide a 
less complex registration process, a higher offering limit of 
$50 million, and increase investor protections. This is an 
important catalyst by which small companies can now go public, 
grow, and contribute to job creation. However, we urge Congress 
to also consider the need for Blue Sky exemptions, or we fear 
this Regulation A-plus will not be utilized.
    Second, we strongly urge an immediate SEC pilot program of 
at least 5 years in length to let emerging growth companies and 
small cap companies trade with higher tick size increments. 
Higher tick size increments will increase liquidity and capital 
formation for small companies by increasing the incentives 
required to fuel investments in equity distribution sales and 
aftermarket support. As markets realign, share performance and 
returns on investment will improve, all while laying the 
foundation for increased IPOs, economic growth, and job 
creation.
    Third, we encourage the creation of a new parallel stock 
market exempt from Regulation NMS for public companies under $2 
billion in value. Adequate aftermarket support is a continuing 
challenge for small companies. This new market would give 
issuers a choice in markets, proper balance between 
intermediaries, issuers, and their investors, and usher in a 
return to the business of underwriting and supporting small cap 
companies.
    Thank you for the opportunity to present information on 
such an essential topic. I am pleased to answer any questions. 
Thank you.
    [The prepared statement of Mr. Weild can be found on page 
97 of the appendix.]
    Chairman Garrett. Thank you very much.
    Finally, from Georgetown University Law Center, Professor 
Langevoort, you are recognized for 5 minutes.

  STATEMENT OF DONALD C. LANGEVOORT, THOMAS AQUINAS REYNOLDS 
       PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW CENTER

    Mr. Langevoort. Chairman Garrett, Ranking Member Maloney, I 
am pleased to testify today on the vitally important topic of 
capital formation and investor protection. With the JOBS Act 
more than a year old, we still await rulemaking by the SEC on 
many of its key provisions.
    However, the JOBS Act does not exhaust the possibilities 
for innovations in capital raising and secondary trading that 
can make our financial markets more robust and opportunities 
for honest entrepreneurship more compelling.
    The SEC's Advisory Committee on Small and Emerging 
Companies has made a number of recommendations for additional 
changes that, if appropriately crafted, could be a positive 
step forward, including a more sensible disclosure regime for 
small and emerging issuers, those companies with a smaller 
footprint in our markets, our economy, and our society.
    While I do not agree with all of their suggested 
exemptions, there is much room for adjustment. As the Advisory 
Committee also recommends, we can also do more to facilitate 
the evolution of fair and efficient secondary trading markets 
for both nonpublic companies and smaller public companies, 
recognizing, however, that if that evolution turns sharply in 
the direction of larger and more robust accredited investor-
only markets, the adverse implication for our public markets 
could be profound.
    Regulatory reform efforts should continue, but it is 
essential that this be done with due regard for investment 
protection. No amount of regulatory reform can eliminate the 
uncomfortable truth that small business capital formation is 
difficult because small business is very risky and the cost of 
capital high.
    While inefficient regulation raises the cost of capital, 
good regulation lowers it. Investor trust is closely tied to 
capital formation and economic growth. Although that trust has 
proven resilient over time, it is not something that can be 
taken for granted. If it hits some tipping point and recedes 
because there is too much perceived risk of opportunism and 
abuse, capital formation will be damaged by poorly crafted 
innovations, not enhanced.
    For all the honest entrepreneurs who deserve a better shot 
at marketplace funding, there are opportunists who not only 
threaten the financial well-being of targeted, sometimes 
vulnerable investors but take funds away from legitimate 
enterprise, pollute the reputation of our markets generally, 
and create no jobs except for perhaps in boiler room 
operations. No innovations in capital raising will work unless 
the help investors tell the difference between good promoters 
and bad, as well as between good business plans and dubious 
business plans. Otherwise, this is just gambling, from which 
smart investors know to stay away.
    I would commend to you the SEC's Investor Advisory 
Committee as another bipartisan voice worth listening to as its 
members reach consensus. Although there are many imperatives in 
crafting good rules to promote entrepreneurship and capital 
formation, two are paramount. One is that we recognize the role 
of retirement savings as an at-risk target, the threat to which 
neither aging Americans nor our economy generally can afford. 
The other imperative is the need for greater transparency in 
so-called private markets so that there can be better oversight 
and surveillance in the otherwise dark spaces where investments 
are aggressively promoted and sold.
    I commend members of the subcommittee for their attention 
to these important challenges.
    Thank you.
    [The prepared statement of Professor Langevoort can be 
found on page 93 of the appendix.]
    Chairman Garrett. Thank you.
    Again, I thank the panel for their testimony. At this time, 
we will go to questioning, and I will recognize myself for 5 
minutes.
    Let's begin with one area, and that is the area of research 
analysts. I will throw it out to maybe Mr. Weild and Mr. 
Coulson, I guess.
    First of all, would you agree on the basic premise that 
when it comes to research analysts--I think you will agree, 
there is less availability of research analysts for small 
businesses than there are for large businesses.
    Mr. Weild. Absolutely.
    Mr. Coulson. Yes.
    Chairman Garrett. If that is the case, it makes it harder 
for smaller cap companies to grow and be able to sell and get 
into the equity markets and sell their shares.
    Mr. Weild. Yes.
    Mr. Coulson. Absolutely.
    Chairman Garrett. I will set the premise here, and maybe I 
will give you the answer. Do you think this came about due to 
the SEC's 2003 global research analyst settlement agreement?
    Mr. Weild. I believe that it was already in process, dating 
back to the Order-Handling Rules and Reg-ATS and the collapse 
of the economic incentives to support small cap companies and 
have a way to pay for that research.
    Chairman Garrett. Give me a date, then.
    Mr. Weild. That was 1997 and 1998. But I think it was 
obfuscated by the bubble. The dot.com bubble was in full form 
at that point in time. When you fast-forward to decimalization 
in 2001, people were already starting to shed research 
analysts, research compensation.
    Chairman Garrett. Mr. Coulson?
    Mr. Coulson. From what I hear from investment bankers, they 
are very nervous about having banking related to the research 
process. And it creates a dynamic, even for big companies, 
because we have some of the largest ADRs in our marketplace, 
globally, and they say the large banks, because equity trading 
is funding research now, restrict which institutions they send 
it to. So tier two and tier three institutions don't even see 
some research from big banks because you have to send it to the 
ones who pay for the trading. And if it is driven by investment 
banking, paid for or equally funded with proper oversight and 
controls, it is used more broadly to support the knowledge of 
the firm in that space. I think on Wall Street, we have always 
had conflicts. We have ways of dealing with conflicts, rather 
than just ban an activity and cut off the funding for it.
    Chairman Garrett. I am getting slightly different things 
here.
    Mr. Weild. They are both accurate. Excuse me. When we study 
actually--about 80 percent of commissions are generated by the 
top 100 institutional investors in the market, which are skewed 
very large cap and high turnovers. So, consequently, that small 
cap research product really doesn't have a home because it 
tends to be consumed by smaller and smaller institutions that 
don't have the liquidity constraints of the big firms. That is 
all a product of this hyper-efficient, low-cost penny tick size 
market, which means there is really no way to make money as an 
investment bank from supporting specialists in investment in 
small cap companies.
    Mr. Coulson. The smaller investment banks do not have the 
trading business today. It has gone to the more electronic, 
larger transaction firms. So the business relationship they 
have with smaller companies is based on investment banking.
    Chairman Garrett. So, even if we solve the conflict issue 
somehow or other--you used words like ``proper regulation'' or 
something like that--that the settlement agreement tried to 
address or did address, are both of you saying that in and of 
itself--I hear your points on the tick size and what have you. 
Is that not enough to try to address this problem?
    Mr. Coulson. No.
    Chairman Garrett. Okay.
    Mr. Coulson. I think it is a great start, but I also think 
we need to solve the liquidity issue for smaller companies by--
the tick study is one approach.
    Chairman Garrett. So maybe the question should be this, 
then: Is this conflict issue in addressing the settlement issue 
an essential part of it? In other words, we have to address the 
tick size, and there are a couple of other things we are going 
to pull out of this panel, although all my time is focused on 
this one issue. This, though, has to be addressed as part of 
that process, is that correct?
    Mr. Weild. It is an important part of that process, yes.
    Mr. Coulson. It is one of the key things that needs to be 
done.
    Mr. Weild. Chairman Garrett, I believe that the key part is 
liquidity. It is not necessarily even research. It is capital 
commitment to small cap stocks to facilitate liquidity and 
having a mechanism whereby brokers can actually earn a return 
on facilitating institutional liquidity. Because institutions 
have increasingly cut allocations to small cap stocks because 
of the loss of liquidity. And that is not necessarily related 
to the research problem. It is related to market making.
    Chairman Garrett. I get that. I will close on this: That is 
why we had the panel up in New York to try to begin the overall 
discussion on market structure reform similar to what this 
panel has talked about there. So, that goes to the larger 
issue.
    Thank you for your testimony.
    The gentleman from Connecticut is recognized for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman, and thank you to all 
the witnesses for coming in front of this robust committee 
today to talk about this topic, which clearly has drawn the 
interest, at least on my side of the aisle.
    I, for one, have been following the IPO market pretty 
closely prior to the creation of the JOBS Act. And I think it 
is a really important topic of conversation.
    Of course, over the last couple of years, people have made 
every argument conceivable for why the IPO market over the 
years has declined. Some people say it is Sarbanes-Oxley. Some 
people say it is NMS. Other people say it is order handling 
rules. Other people point to the economy.
    There is actually some pretty dramatic data coming out 
about the U.S. IPO market in the year 2012. IPOs--this is by 
dollar volume--in the Asia-Pacific were down 40 percent. In 
Europe, they were down 64 percent. In the United States, they 
were up by 17 percent, such that the United States IPO volume 
represented just less than half--43 percent--of global IPO 
issuance. That would suggest perhaps that the story we hear 
from the other side of the aisle that overwhelming U.S. 
regulation is going to crush our markets is perhaps not 
entirely factual. But it is also intriguing. What drove that? 
Was this in fact a difference of regulation relative to Europe 
and Asia Pacific? Was this in fact different order handling 
rules? Can somebody explain to me the incredible sort of 
volatility in issuance volumes and the out-performance of the 
United States IPO market?
    Mr. Weild. Yes, sir. We interact with international 
companies because we have 1,500 ADRs on our marketplace. So we 
see the largest and the smallest. In Europe, the economy is 
what is driving that dynamic right now. The financial markets 
there are very depressed. We talked to the IROs of the largest 
companies. That said, the dynamic when I meet an interesting 
small public company, it is most likely listed in Toronto or 
London or on the Australian stock exchange because they have 
created processes which are a lot more friendly. And that is 
what I keep hearing from companies--from smaller companies 
especially--and we will see U.S. companies. We had a company 
that is in the payment business that went public on the Aim to 
Raise Capital, came back to our marketplace to re-enter the 
U.S. markets, and then they upgraded to NASDAQ at the turn of 
the year. Small companies find it friendlier to go overseas 
from the United States. And international companies--
    Mr. Himes. Let me stop you there, because I have limited 
time, and I have two other categories of questions. One is, as 
public policymakers, how do we know when we have that balance 
right? I used to do IPOs many, many years ago, and I know they 
are darn expensive things to do. Gross spread is still 7.5 
percent. By the way, I would like to talk about that. For 20 
years, I have been paying attention, and gross spread for an 
IPO is 7.5 percent. I am sort of fascinated by that 
consistency. But it is an expensive thing to do. That doesn't 
include lawyers' fees. Pretty soon, you are getting up to 10 
percent of your volume of issuance.
    How do we know that our system is set up such that the 
companies that go public via IPO, set aside these are risky 
companies we are talking about and what that implies for retail 
investors, how do we know when we have struck the right optimal 
balance? Do we just look at Canada and Europe and say, we are 
doing less $50 million IPOs than they are? How do we know?
    Mr. Weild. Congressman Himes, those markets--I am going to 
recommend to you the paper that we wrote for the OECD. I think 
it is entitled, ``Making Stock Markets Work for Economic 
Growth.'' But we looked at, say, 26 IPO markets. The ones that 
Cromwell ticked off all have higher tick sizes to the 
percentage of share price for smaller capitalization stocks. 
There are aftermarket incentives. And the multiple regression 
that we ran actually explains, based on economic incentives, 
about 70 percent of IPO production globally.
    Mr. Himes. Can I stop you there? Because I am going to run 
out of time. That was my third category of questions. Maybe I 
will have a chance to come back for some others.
    Can you, in the 45 seconds remaining, give us a sense for 
why increasing the tick size would in fact promote more smaller 
IPOs? This is not a regulatory thing. This would essentially be 
moving money from one group of third parties to the other. Can 
you sort of explain that and why that would be helpful?
    Mr. Coulson. Market-structured penny tick size creates a 
market structure that competes almost exclusively on cost of 
trading. And in microcap markets, you need value creation, 
which is sales, promotion, marketing of stories, telling of the 
stories. You need to capital to facilitate institutional-size 
liquidity. Those are primary ingredients. You need research. 
That is value creation. There is no economic model to support 
value creation. So, as a consequence, we go to the lowest 
common denominator and compete on price alone. That is 
catastrophic for stocks that trade episodically: big buyer, no 
seller. It works fine for large cap stocks. So this is the 
reason we take this model and we apply it to everything, and it 
disenfranchises the entire small company ecosystem.
    Mr. Himes. Thank you. I note my time is up. Maybe I will 
get a chance to ask more questions later. But I appreciate the 
answer. Thank you.
    And thank you, Mr. Chairman.
    Mr. Coulson. Just one quick point is, because talking about 
the structure of what, hopefully, tick size would incentivize 
is more displayed liquidity by intermediaries. If you have a 
small company stock that trades 30 times a day--that is once 
every 1,000 seconds--you need intermediaries.
    We have a world where, yes, we have displayed prices. And 
the average community bank in my marketplace has a spread of 19 
cents, trades at $17. But it is kind of like stores in Cuba. 
The prices are low, but you can't buy anything. How do we fill 
the shelves up with liquidity again? How do we reignite 
liquidity, so an inventor says, ``Hey, I can buy something in 
here.'' Instead of, ``If I buy something, the price yo-yos up. 
When I am filled, it goes back down.''
    And the tick study is a good start. But I can't explain it 
to you in 15 seconds because I need to sit down with you and 
your staff and go through the market structures and go through 
some of the things we have seen. We used to have increments in 
our market. We saw more displayed liquidity by intermediaries. 
I think it is a great experiment.
    Chairman Garrett. Thank you.
    Mr. Fincher is recognized for 5 minutes.
    Mr. Fincher. Thank you, Mr. Chairman.
    I thank the panel for being with us today. Something we 
have been focused on in my short time of being here in the 
second term is jobs, jobs, jobs--trying to get more people into 
the workplace to get our economy moving. Mr. Carney and I, last 
year or I guess the year before, sponsored the JOBS Act. And 
this was something that has been very good.
    I have a couple of questions, but I am going to read a 
statement first: ``Since April 2012, shares of U.S. companies 
that have gone public under the JOBS Act are generally 
outperforming those that did not; a 28.9 percent average stock 
price appreciation from offered price for JOBS Act companies 
compared to 13.1 percent for non-JOBS Act companies. From April 
2012, to January 2013, U.S. companies that have gone public 
under the JOBS Act have outperformed the Russell 2000 Growth 
Index, which is up 11 percent over that period.''
    Just a couple of questions, and I will end with a simple 
one: Why have small company IPOs, under the $250 million market 
cap, declined since 2004? And the second question, aside from 
the SEC's failure to fully implement the JOBS Act, what do you 
believe are the largest factors explaining why many companies 
are still sitting on the sidelines and not going public? If you 
could answer the second one first?
    Mr. Coulson, I will start with you.
    Mr. Coulson. So on why are companies sitting on the 
sidelines? Because they are scared of the cost and complexity. 
It is not just when you go in today. They think it gets raised 
every time you are a public company and some big company does 
something wrong from corporate governance, you need to hire 
more consultants.
    There is a dynamic. Big companies are owned by index funds. 
We have to have a different corporate governance system for 
them. Small companies, we should design our markets to fit 
intelligent investors, so there is information availability, 
because investors aren't forced to own them. They get to buy 
and sell them. And how do we get that efficient information 
out, but not creating this compliance?
    One of our recommendations is that we wait on XBRL for 
smaller public companies because we are hearing from SEC 
reporting companies it is going to $35,000 to a vendor every 
year and take up their finance committee time. So, those are 
things we can do reduce the complexity. And XBRL is a great 
idea. Everybody thought it was smart. But we have created this 
cost on smaller companies.
    Number two, why are we seeing fewer IPO's and smaller 
companies? One, we have a very successful private capital-
raising marketplace. And the JOBS Act, when the SEC votes--and 
I have heard they are going to vote rather soon on removing 
general solicitation--we are going to really change this wall 
between private capital raising and public capital raising. We 
are changing the check-at-point-of-sale rather than blocking 
out all this transparency about capital-raising activity in the 
markets. And this is going to make going public be more of a 
continuum. Companies suddenly aren't dark everything because 
they are scared of breaking their capital raising because they 
put their annual report on their Web site, and that we start 
seeing more disclosure and companies start trading. That is how 
it used to be, but our markets got broken up.
    The second piece, which I am not sure we can fix that 
easily, is some of the numbers from when the IPOs were higher, 
were smaller, riskier IPOs on NASDAQ; the Stratton Oakmont, the 
boiler room movie guys. Those were NASDAQ securities, which 
most people don't remember. But those raised the numbers. What 
happened was, the firms got overloaded with regulation on sales 
practices. So they said, ``We don't really want to sell to 
individual investors anymore. We just want to sell privately to 
accrediteds who are more sophisticated.'' And that dynamic is 
even if you do a private placement, those securities, if you 
make them tradeable after they have come to rest, after they 
have been seasoned for a year, that capital becomes more 
valuable and thus companies will have a lower cost of capital 
if you make a security tradable. Because securities are based. 
They are property.
    Mr. Fincher. One final question, Mr. Hansen, for you and 
anybody else who wants to respond in 40 seconds, in your 
opinion, what regulation or law has inhibited capital formation 
for businesses the most? What one?
    Mr. Hansen. I would say, in the context of raising capital, 
it would be limitations on the ability to generally solicit 
investments, but which needs to be carefully constructed to 
protect investors. On the M&A side, I would tell you that 
formation of capital comes from mergers and acquisitions of 
businesses, and the broker-dealer regulation inhibits that by 
forcing very small firms into a very expensive system of 
regulation.
    Mr. Fincher. Thank you very much.
    I yield back, Mr. Chairman.
    Chairman Garrett. I now recognize Mr. Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    I appreciate that.
    Back when the Advisory Committee on Small and Emerging 
Companies did their recommendations, on January 6, 2012, they 
recommended the Commission take immediate action to relax or 
modify the restrictions on general solicitation, as you 
referred to, Mr. Coulson. We passed the JOBS Act and required 
it to be done by July 4th. Unfortunately, the SEC missed that 
deadline. Unfortunately, this becomes endemic, not only with 
the SEC but with any agency under the jurisdiction of Dodd-
Frank, that we are having these deadlines just lapse.
    I guess my question is, to what extent has this impacted 
not only capital markets but also just some sense of certainty 
in business planning for the business environment out there, 
when the JOBS Act, under the Regulation D of general 
solicitation restrictions being removed, not being done?
    Mr. Coulson?
    Mr. Coulson. I was speaking to a CEO who has a publicly 
traded company. They are not SEC-reporting, but they have $100 
million in revenues and they own restaurants. And he was 
reaching out to me, saying, ``I have been raising capital 
privately from friends and family. We have been growing the 
business. But we have an opportunity to expand. When is the 
JOBS Act going to take place? When is Reg A-plus going to come? 
Because I want to use that.''
    I keep hearing about it. That is the story I keep hearing, 
that this is going to change capital raising for small 
companies.
    Mr. Ross. So, they are sitting on the sidelines. In other 
words, investment capital is waiting.
    Mr. Coulson. They are constrained.
    Mr. Ross. Let me ask you this, then. Do you feel that there 
is sufficient capacity of investment capital out there to meet 
what hopefully is a pent-up demand for those who are 
entrepreneurs or businesses that want to put it to use?
    Mr. Coulson. It is going to change and open up capital 
raising because now the rules of privacy for private capital 
raises, you can only talk to pre-existing relationships. You 
can't have any publicity around it. So much capital is stuck, 
sitting there. There will be some dumb ideas financed because 
of the transparency.
    Mr. Ross. But isn't that what the market does?
    Mr. Coulson. And it will be so much better if we, not only 
investors, but the press and the public see what is going on in 
capital markets. If we stop having this one tier of markets, 
where things take place publicly, and then you have everything 
else taking place in private. Unless you are Dr. Evil, you 
would really like to finance your company publicly.
    Mr. Ross. I am going to poll each one of you on this, 
because I only have 2 minutes left. Mr. Sherman from California 
referred to this. Put it down on my level. When I go back home 
and I see mom-and-pop investors, and see my developers that are 
looking for investment capital in order to expand their 
business or to start their development, and they go to the 
banks and because of their restrictions, there is nothing in 
the equity markets. So, they go to a credit union.
    What is your opinion, if I would just poll you, we have 
this issue of whether we should raise the commercial lending 
capacity for credit unions. How do I tell my people back home, 
``Just wait, the JOBS Act will pass? We will have more 
investment capital out there for you. You don't need to go to a 
credit union.'' But in the meantime, they are waiting. So what 
is your opinion on expanding the commercial credit limit for 
credit unions?
    Mr. Coulson. It is another great access to capital. But 
debt is different than equity. And they should all be there and 
companies should decide. Equity has a lot of advantages because 
it is perpetual. You don't go bankrupt issuing equity.
    Mr. Ross. But entrepreneurs have to act. They don't have 
the luxury of waiting for equity financing. And they need the 
liquidity so they will go to debt financing.
    Mr. Coulson. The JOBS Act was filled with great ideas for 
all levels of creating equity. But it just hasn't happened. We 
are all waiting.
    Mr. Ross. Mr. Ferraro, anything to add?
    Mr. Ferraro. Congressman, I look at that issue in the 
context of my own company because business development 
companies are in the business of providing that debt. We do 
both debt and equity. But really, being a lender is the bread 
and butter. We are here today promoting legislation that is all 
about increasing opportunity, increasing the category of 
investments in financial services companies that we can freely 
invest in. Some of the legislation concerns leverage limits, a 
lot of registration parity and reform. So getting to your 
question, essentially, those kinds of reforms that we are in 
favor of, that is the other avenue. I hope you tell them to 
visit a BDC.
    Mr. Ross. Message delivered. I believe my time has expired, 
so I will yield back.
    Chairman Garrett. Mr. Stivers is recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    My first question is for Mr. Coulson. You listed 15 
recommendations in your testimony. Do you know, are there 
proposals out there for--I know for several of them, there are, 
but there were a bunch that I wrote question marks next to. Are 
there folks working on many of these ideas or any of these 
ideas that you know of? I know a couple of folks who are 
working on some of these ideas.
    Mr. Coulson. They are working on some of the proposals. The 
SEC has a draft rule filing--I haven't seen it, so I don't know 
if it is good or bad--to better regulate SEC transfer agents. 
We proposed that the SEC have better disclosure around 
promotion on the Internet, which hurts all capital raisers. We 
did it 7 years ago. There were 200 comments in favor of it, but 
there has been nothing but silence.
    So these are areas where getting them to act--and I am a 
plumber of electronic markets. My goal is to connect broker-
dealers so they trade things efficiently. My goal is to connect 
companies to putting information on the Internet so it is 
freely available and the market can make informed choices. But 
I can't if these pieces of plumbing from broad ranges of the 
JOBS Act to small things such as marginability for a community 
bank shares--we have 600 community banks. When one of them 
leaves NASDAQ, there is no change in that company. Why 
shouldn't that security be marginable? It is an asset in our 
economy.
    Mr. Stivers. That makes a lot of sense. I did appreciate in 
your testimony where you talked about benefits of publicly 
traded markets, visibility liquidity, valuation capital and 
trust. And the fact that now we are basically encouraging, by 
how complicated we are making things, capital to go other 
directions. And I think that is the gist of this hearing.
    Mr. Weild, I wanted to talk about your proposal for the 
change in the tick size. I believe Mr. Duffy may be working on 
something like that. I don't want to preempt him. But it seems 
like that would help a lot of small companies.
    Mr. Weild. It will help not just public companies, 
companies going public, but it will help the private markets as 
well because this is the equity food chain or the supply chain, 
if you will. And by having a hole blown out of the IPO market, 
we don't have capital then coming back into the private markets 
and then reinforcing itself. All of these rules which allow us 
to get out and promote or, if you will, market stocks, what 
they will do is they will help with the reallocation of assets 
from larger capitalization companies into smaller 
capitalization companies, which is where the job formation 
lives. And innovation lives. So it is a very healthy thing in 
the aggregate if you look at it in macro terms.
    Mr. Stivers. I used to work for a securities firm, and one 
of the things I did was IPOs. I worked there for 5 years. The 
IPO market is very cyclical. And when somebody comes out and 
has a successful offering, either two or three lookalikes come 
out after it. I also know in the conversation with Mr. Himes 
earlier, he was trying to get at that issue. That seems to me 
to be part of the issue as well. But clearly, you need a few 
successful offerings for other people to then come behind them. 
And I think that is part of the problem with some of the 
smaller companies right now, too, because somebody has to be 
first. And nobody--a lot of people don't want to be first in 
the marketplace.
    Mr. Weild. And IPO markets are always cyclical. They still 
are. They always were. But the new cycles, the new highs--
    Mr. Stivers. Are not as high.
    Mr. Weild. --are lower than the old lows. That should tell 
you something. Banks are losing money in the aftermarket for 
small companies, so they don't support the companies. The deals 
break issue price at higher rates because they are not getting 
supported, which shuts the IPO window. And somebody had asked 
the question before, why do these sub-$250 million market value 
companies not go public? And they are rational. It is because 
the success rates of IPOs have gone lower and lower, even for 
larger capitalization companies that been cut in half over the 
last 15 years, because of the lack of support.
    Mr. Stivers. So your proposal for a secondary market system 
for some of those smaller companies that serve as alternative 
exchange, would that be similar to kind of what the pink sheets 
have been? Or tell me how you--
    Mr. Weild. No. I think actually increasingly everything has 
been subject to the same sort of trading regulation. And what 
we were really encouraging was a governance structure that put 
investment banks, institutional investors, and issuers, they 
gave them all a seat at the table and actually focused 
exclusively on the needs of small cap markets and small cap 
investors, small cap issuers, just so that you created that 
core discipline, which I think is generally lacking, because if 
you go to the SEC and you listen to a lot of the debate, it is 
totally overwhelmed by large cap data, S&P 500 data. And that I 
think is really leading us astray.
    Mr. Stivers. It overwhelms the small companies for sure.
    Mr. Weild. Absolutely.
    Mr. Coulson. And just a point, we bought and killed the 
pink sheets with technology and transparency. So that old 
opaque phone-base is--and we have changed that. So it is not a 
pink sheets type market. Our marketplace looks a lot more like 
NASDAQ.
    Mr. Stivers. I understand it is a lot more transparent, and 
it is realtime.
    Mr. Coulson. Like NASDAQ, when it was a marketplace for 
small companies.
    Mr. Stivers. I am out of time.
    Thank you, Mr. Chairman, for your indulgence.
    Chairman Garrett. The gentleman is welcome. And the 
gentleman yields back.
    The gentleman from California.
    Mr. Sherman. I think, Mr. Weild, it was you talking about 
the greater tick sizes. A company could decide to make sure 
that its shares were worth $5 rather than $50, just by issuing 
10 times as many. Would that in effect give them a higher tick, 
because the 1 cent would be on a $5 rather than a $50 per share 
basis?
    Mr. Weild. It is an excellent point. And the answer is it 
would, except that in the United States, because the practice 
of Wall Street is to prohibit solicitation on stocks under $5 a 
share and keeping those stocks on margin, every issuer wants to 
keep their stock above $5 a share. So, unlike other foreign 
markets where people will actually trade their stocks or split 
them down to 50 cents or $1 so that 1 penny on a dollar share 
price would be 1 percent incentive, in the United States, that 
option is effectively eliminated by the practice of the market 
from issuers. So, it doesn't work in the United States.
    Mr. Sherman. So you could do it at $10 a share, but you 
have to keep your shares at well above $5, because they could 
always go down. You could do a stock split to go from 50 down 
to about 10 as long as you are confident--
    Mr. Weild. Right. And that has why a 10 cent tick size on a 
$10 share price would be the equivalent of what we see in 
foreign markets that makes them work with a dollar share price 
with a penny tick size. That is why having higher tick sizes is 
the easiest way to fix this problem in the United States.
    Mr. Coulson. So if you are the CEO of a community bank, are 
you going to say, ``Oh, I need a higher tick size, so I am 
going to have my stock be at $3, and then my depositors will 
think I am economically distressed?'' We should have proper 
tick sizes based--
    Mr. Sherman. I realize there is some belief that if the 
share is selling for $50 per share, the company is stronger 
than if it is selling for $8 or $5 per share. That is just 
psychological. There is no basis for it. But we all can't have 
shares with the value of Berkshire Hathaway.
    Is there anyone here on the panel who thinks that the 
greater tick size would be harmful to investors? At first 
blush, it would seem to, since it is in effect, more cost. Jack 
wants to sell the shares. Bob wants to buy them. And the 
transactions cost is greater.
    Yes?
    Mr. Coulson. If you are looking at cost based on where was 
the inside quote at the time of trade, it would look like it is 
more cost, because the way markets work now is intermediaries 
use what is called a tail trading strategy. They move the price 
the bid offer up and down as investors come in and out. So if 
you thicken it up a little bit--and we don't agree with having 
tick sizes as widely spread as they are today. We just think 
you should organize them. If a community bank has a 19 cent 
spread today at $17, the debate is whether it is a nickel or 
dime increment, not a 25 cent increment. I have seen when we 
had increments--we used to have increments of below a dollar of 
half a penny--we saw much more proprietary liquidity stack up. 
And, that was a good thing for investors.
    Mr. Sherman. So, it is counterintuitive. But you think 
investors do better with a 5 or 10 cent tick rather than a 1 
cent tick--minimally, or incrementally?
    Mr. Coulson. It is based on price and velocity. We really 
shouldn't care if it is a $1 stock or a $100 stock, just to 
have increments that organize. They don't sell Picassos at 
Sotheby's in penny increments--
    Mr. Sherman. Let me try to get in one more question, 
because we are all focused here on publicly traded companies, 
which most businesses aren't and don't even aspire to be.
    Mr. Ferraro, you are investing in companies that are 
smaller. What is missing, in my area at least, are loans that 
yield 6 to 12 percent. In other words, if you are creditworthy 
enough to get yourself a 5 percent loan, I have four bankers 
out there in the hallway who will make a loan to you right now. 
But if you are not quite that creditworthy, nobody will make 
you the loan. What is the typical rate of interest that you 
charge when you are not getting an equity kicker?
    Mr. Ferraro. Typical rates of interest--our rates can range 
anywhere from 8 to 12 to 14 percent. It really all depends on 
the opportunity at hand, the health of the company involved.
    Mr. Sherman. Do you insist on full collateralization?
    Mr. Ferraro. I'm sorry?
    Mr. Sherman. Do you have to have as much collateral as you 
borrow? Or do you borrow against A, it is a good company or 
here is the hard asset?
    Mr. Ferraro. All different levels. Collateralized loans. 
Whatever is appropriate in the situation.
    Mr. Sherman. If you set up an office in the San Fernando 
Valley, make sure it is in the west or southern portion of that 
valley. I yield back.
    Mr. Ferraro. That is what we like to do.
    Chairman Garrett. Mr. Huizenga is now recognized.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Mr. Hansen, I do appreciate you for staying on message 
about H.R. 2274, when my colleague Mr. Fincher had asked what 
your one thing is. And I do want to get to that. I want to ask 
everybody. But if you could, really quickly, this has been a 
recommendation from the SEC working group and forum for a 
number of years. I think 2006 was the first time it came up. 
Why has the SEC not taken this recommendation? Why do we find 
ourselves at a point now where we need to use a legislative 
tool?
    Mr. Hansen. I think that is a great question. I think the 
answer is essentially that the SEC has a long to-do list that 
is directed by Congress. And so, it is focused on those types 
of priorities, which to some extent reflect national crises 
with which they have had to deal. In the area of M&A brokers, 
small businesses, medium-sized businesses, this is not an area 
where there have historically been issues. There haven't been 
frauds. The parties rely upon their lawyers. They negotiate 
transactions. And they are not relying upon Federal securities 
laws for those protections.
    So I think it is not perceived as an urgent issue, except 
it is because there are estimated to be $10 trillion of 
privately held companies in the process of being sold as Baby 
Boomers retire. And as a result of that, these sellers and 
buyers each need professional advice. It is an urgent issue. 
So, I think it does necessitate Congress stepping in to say, 
``We need to simplify this.''
    Mr. Huizenga. All right. Thank you. Here is what I would 
like to do in the remaining 3 minutes. I would like to quickly 
hear from each one of you. What do we need to do next? We have 
one piece of legislation that we are talking about. I think, 
Mr. Ferraro, you have talked about a couple of other pieces.
    And I know, Professor Langevoort--it takes a Dutch guy to 
know a Dutch name--you had said in your testimony that the JOBS 
Act, we need to have some more patience, we don't want to rush 
this, is kind of how I am interpreting what was there. But I am 
curious, what can we do next, to have a next step so that we 
can continue some momentum here? And I would like to have 
everybody try to give us a quick--
    Mr. Langevoort. Sure. I think you have heard actually from 
a number of people. We need to transition to a much more open 
and efficient market for small companies, which is going to 
take a large number of steps, much longer than we have today; 
that we are going to have to rearticulate what disclosure 
demands be put on smaller and medium-sized companies. I think 
if we can get competing platforms for smaller companies, get it 
fair and open so that investors are attracted to it, it is 
probably the next best step. I think we have to see what the 
JOBS Act will bring when the SEC acts. I think that will be 
soon. But I think that new market is our next--
    Mr. Huizenga. There are a lot of us hoping they will act 
soon on that.
    Mr. Weild?
    Mr. Weild. It is essential to get tick sizes up, and it is 
essential to get the JOBS Act implemented and to worry about 
what can go right and come back and fix it around the edges if 
you have to course-correct. But the paralysis is just killing 
people. We have 20 percent of kids in the United States living 
below the poverty line. And if you read Professor--I am trying 
to think of his name--Moretti's book, ``The New Geography of 
Jobs,'' there are five service sector jobs created for every 
technology job. There is a multiplier effect at stake here. So, 
we have to get moving.
    Mr. Hansen. I would add that while you were looking at 
issuer-related questions on capital formation, you should not 
overlook the fact that the service providers, the broker-
dealers, the M&A brokers, the private placement type brokers or 
finders who are raising capital or need to raise capital, would 
want to be compensated for raising capital. They don't enjoy 
any type of exemption that the issuers do. An issuer may have 
an exempted registration, but it is still a security. It still 
takes a registered broker-dealer, if they are going to get 
paid, to raise the capital or to sell the business. So I think 
that what you need to look at is the fact that the service 
providers in this marketplace, private as well as public, also 
have concerns that need to be addressed.
    Mr. Ferraro. Congressman, I think you need to bring BDCs 
from 1980 into 2013. And the suite of legislation that is 
currently on the table does that. Predominantly, we are 
removing arbitrary barriers to investment in certain kinds of 
investment areas to financial services. It is a much different 
universe today than it was back then. On top of that, I would 
also highlight from our legislative agenda the offering reform. 
Items, simple items such as incorporation by reference, which 
most every other public company in America can do, saving money 
on attorneys, money on accountants, all costs that get passed 
on either in the form of the percentage on the loans that we 
are charging or less of a dividend that can be distributed to 
our shareholders. There is no need for any of that. And it is 
an area where I think having legislation is the most effective 
and efficient means forward.
    Mr. Huizenga. I know my time has expired, so it is up to 
the chairman here.
    Chairman Garrett. The gentleman yields back.
    I now recognize the gentlelady from New York.
    Mrs. Maloney. I thank the chairman for yielding, and I 
apologize to my colleagues and the chairman; there were three 
bills out of the Financial Services Committee that were on the 
Floor being debated, and I wanted to be part of that debate.
    Chairman Garrett. So, you wanted to be down there to 
support those?
    Mrs. Maloney. I was. I did support them. I want to welcome 
all the panelists today, particularly Joe Ferraro, who is from 
the great City of New York. And my colleague, Mr. Sherman, said 
he wanted him to open up an office in California. I am very 
pleased that Mr. Grimm and I have him in the great City of New 
York.
    Welcome, and thank you for being here.
    Mr. Ferraro. Thank you.
    Mrs. Maloney. Regarding the business development companies, 
has the BDC community asked the SEC to modify any of its rules 
to accommodate the concerns that you have expressed here today? 
And if so, which ones?
    Mr. Ferraro. It has. Colleagues at Ares and Apollo have 
already talked to the SEC about some of their legislation. Our 
legislation is relatively new, and we are planning to talk to 
the SEC in the next couple of weeks about those pieces. And 
there is a lot in there where--going back to comments I had 
made previously, there is much that would benefit by 
congressional action versus anything like the SEC rulemaking. 
For example, the reforms that we are proposing to open up what 
is called the 30 percent basket in the business and basically 
make investments in financial services not captive to that 
limitation is something that really needs congressional action 
more than SEC action.
    On the SEC action side, there have been in particular 
offering reform ideas on the table. Incorporation by reference, 
electronic road shows, just simple things from which many other 
companies in the public space already benefit. And there is 
something where the rulemaking hasn't happened, and if we are 
at the table now to further reform BDCs both in those areas and 
others that are mentioned in the written testimony, it just 
makes sense and it is more efficient to get it all done now in 
this process.
    Mrs. Maloney. Some of the changes that you have mentioned 
can be done by SEC action, correct?
    Mr. Ferraro. They can. I point to the offering reform for 
that. I think the SEC has always been very responsive to us. I 
think what happens is the particular division of the SEC that 
deals with business development companies also oversees 
hundreds of mutual funds. And there are just constraints on 
resources and time. So it just makes more sense to do it this 
way.
    Mrs. Maloney. And is it necessary--aside from the time 
constraints on the SEC--for Congress to legislate these 
changes?
    Mr. Ferraro. I believe it is, yes.
    Mrs. Maloney. So they cannot be done by the SEC? They have 
to be done by Congress?
    Mr. Ferraro. Many of them cannot be done by the SEC alone.
    Mrs. Maloney. Would anybody else like to comment on some of 
the really salient barriers to small business growth that you 
feel are there?
    Mr. Coulson. Just two quick points. The promotion proposal 
of transparency of the people behind it; if we don't fix this, 
the JOBS Act, the advertising general solicitation of 
securities under the JOBS Act, these same people will be hiding 
out and doing that. So transparency of who are the people 
behind offerings is really one of the most important things for 
investors, knowing who it is.
    Second, it is not this committee but taxes for smaller 
public companies, the easiest way to attract investors is to 
pay a dividend on your shares. But small corporate companies 
don't have the efficiency of the REIT structure. And if we did 
that, it would be the silver bullet to bringing more profitable 
public companies and ones where investors could track by income 
rather than just future potential. And that is something to 
talk to your colleagues about because that really would change 
the dynamics for smaller public companies because they are 
squeezed between the debt bias for interest with private equity 
firms. And larger global companies having much lower tax rates. 
My company pays a 39 percent tax rate.
    We also pay more for our tax accountants like Grant 
Thornton than we do for our auditor at Deloitte. We don't get a 
great rate, and that is something that needs to be worked on, 
because the New York Times says large, large S&P 500 companies 
pay a 29 percent rate. And IT companies pay a 22 percent rate, 
so we are at a capital disadvantage. And we are also at a 
disadvantage of providing returns to our investors.
    Mrs. Maloney. So why are you paying 39 percent when larger 
companies are only paying 29 percent? Why is that happening?
    Mr. Coulson. Sadly, we are in New York State. And I love 
New York. It has a great community of people. We are also--
unlike the New York Stock Exchange, which developed software in 
Ireland, we develop our software in our offices in New York 
City, and our office is in Washington, D.C. So we are at a 
disadvantage for capital. And that is a point. It is like the 
REIT business has been hugely successful in bringing income-
producing companies public. So why aren't we taking that known 
process to smaller public companies and having a process to 
bring in, not only companies that are needing a lot of capital 
for growth, but companies which are creating income, because it 
flows through to the other side of the equation. If investors 
own dividend-paying securities in their retirement, they beat 
inflation. Debt eventually gets beat by inflation. So we should 
be incentivizing equity. It makes our system more stable. It 
makes our financial statements more true because you can tell 
the income a company is paying. It makes our marketplaces more 
efficient. And it opens the door for smaller companies being 
public.
    Mrs. Maloney. Thank you.
    My time has expired.
    Chairman Garrett. Thank you.
    The other Representative from New York, Mr. Grimm.
    Mr. Grimm. Thank you, Mr. Chairman. I appreciate it. Thanks 
for holding this hearing.
    I want to thank everyone on the panel today for your 
testimony.
    Welcome to the committee. We appreciate your input.
    I would like to try to keep it a little bit cogent. We were 
discussing BDCs, so, Mr. Ferraro, if I could go to you to 
discuss a little bit more. I have legislation, H.R. 1800, the 
Small Business Credit Availability Act--fancy terminology--to 
somewhat modernize the way small development companies with 
BDCs are regulated. I believe BDCs provide an important service 
for providing financing to the small and medium-sized firms 
that we just spoke about. And they often have difficulty 
obtaining traditional bank financing. So I see the value in 
that. And these are the exact kinds of firms that are 
responsible for a lot of the new job creation.
    So it is apropos, since we have discussed so much about the 
unemployment rate. This bill would allow BDCs to borrow more 
than they do now: $2 for every $1 of assets that they hold 
versus the current one-to-one structure. In addition, it would 
streamline the forms of procedures by the BDCs for securities 
offerings. I think you are familiar with that. And bringing 
them more in line with some of the publicly traded companies. 
As the VP of a BDC, what kind of an impact do you think that 
would have if implemented on job creation just as a whole?
    Mr. Ferraro. I think it would have a tremendous impact. 
Everything that you are talking about I think the entire suite 
of BDC legislation essentially says to business investment 
companies, go out, raise capital, pass that capital on to small 
and medium-sized businesses. And when you do that, not only a 
lot of times are you helping those businesses to grow when you 
are talking about, in my estimation, financial services 
businesses in particular, they then go on and help additional 
businesses to grow. The typical company that comes to us is 
looking for that level of investment that results in the 
creation of a factory, a new expansion of a warehouse, a new 
line of business. And because of that and the rigorous due 
diligence process that we have, we kick the tires. We say, 
okay, is this the kind of company that we believe can get 
there, that we would put our shareholders' money behind and in 
turn earn our shareholders a good return?
    Mr. Grimm. On that exact point, could I just expand on 
another question, since you brought it up, the companies that 
your company finances, what is their ability in general to 
access capital to grow their business via bank loans or capital 
markets?
    Mr. Ferraro. It is generally limited. I think as a lot of 
my colleagues have mentioned, when you are talking about small 
and medium-sized businesses, your traditional banks can be more 
hesitant to lend, and the sad fact is, after what we have 
experienced in the past few years, a lot of the banks just 
aren't there and lined up to provide that kind of capital. So 
we service a very critical and important area of financing for 
these companies because they really can't get the money 
elsewhere.
    Mr. Grimm. I feel that a two-to-one leverage ratio is 
conservative by any standard. But can you just tell us, how 
does that compare with ratios used by other financial firms?
    Mr. Ferraro. Oh, it is very, very low. When you talk about 
a traditional bank, you might see a 12-to-1 leverage. I know 
people at different times in this hearing have talked about 
multiples way beyond that, that are just stunning. Anything we 
are talking about in the reform is still highly, highly 
conservative.
    Mr. Grimm. And on that note, for those who think, wow it 
seems like you are doubling. It seems like a lot of leverage, 
in comparison, I would say it is not even close to what other 
financial institutions have. It is extremely conservative. But 
for those naysayers, what level of losses would a BDC need to 
experience to wipe out its equity at these ratios?
    Mr. Ferraro. At those ratios, I don't really have the 
numbers with me.
    Mr. Grimm. Just ballpark, though, just to give an idea.
    Mr. Ferraro. I don't want to guesstimate, but at the same 
time, it would have to be a substantial degradation of the book 
to quite a significant level.
    Mr. Grimm. As far as you know, have we ever seen losses 
like that--
    Mr. Ferraro. No.
    Mr. Grimm. --experienced by BDCs, even during the height of 
the financial crisis?
    Mr. Ferraro. Not to that extent, no.
    Mr. Grimm. Okay. I see my time is just about out. Thank you 
very, very much. And thank you all on the panel.
    I yield back.
    Chairman Garrett. Thank you.
    The gentleman yields back.
    Mr. Carney, you are recognized for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman. And thank you for 
having this hearing today. I apologize for arriving late. I 
realize I may have missed your opening statements and a lot of 
the discussion and debate. Professor Langevoort, if I am 
pronouncing your name correctly or at least close enough, I 
have just a couple of questions. You mentioned at the beginning 
of your testimony a reference to the JOBS Act, and that some of 
the rules are still being completed. You also say in the first 
paragraph that all good policymaking takes time and can't be 
rushed if it is to be done well. So it may be a little bit 
premature to ask this question.
    But I was one of the sponsors of the IPO onramp part of the 
JOBS Act. And I wonder if you could comment on what you have 
seen on that aspect of the Act itself, and whether we have any 
results there, recognizing that it may be too early to judge.
    Mr. Langevoort. Yes. Obviously, that was self-executing, so 
we saw the first effects right away. Ernst & Young just issued 
a report on the first 12 months of onramp. So we have seen 
data. Perhaps due to our economy, factors that have nothing to 
do with the JOBS Act, you are not seeing a larger number of 
IPOs than you saw previously. The growth is not necessarily in 
emerging growth companies, even though 80-some odd percent of 
all of the IPOs are emerging growth companies. So I am going to 
play right into your hands. We will know a lot more.
    Mr. Carney. It is too early to tell. Sir, are you familiar 
with some of the discussion that led up to some of the 
provisions in that Act? It is my understanding, again, as part 
of the team that with my colleague, the prime sponsor, Mr. 
Fincher from Tennessee, it started out of a conference that the 
Treasury Department had of people in the high-tech, primarily 
Silicon Valley world, Silicon Valley bank. From that, interest 
was generated, and there was a working group that met several 
times. And they came up with a list of ideas. What do you 
think, are there other ideas that didn't become part of the IPO 
Act that we might think about now? Or what do you think about 
the ideas that became the provisions in that Act?
    Mr. Langevoort. As I indicate in my testimony, I think with 
more time--and this is not, by any means, pointing any 
fingers--there could be a much more rational, comprehensive 
articulation of what we should expect in terms of governance 
and disclosure from emerging companies. I have a list of things 
I would have added to the exemptions that aren't there. There 
are a couple on the list.
    Mr. Carney. Could we get that list? It is not in your 
testimony. Could we get a list of those?
    Mr. Langevoort. I would be happy to give you a list, but I 
think they are fairly predictable.
    Mr. Carney. You referenced the SEC's Advisory Committee on 
Small and Emerging Companies and a number of recommendations. I 
haven't seen that. I assume that we could get our hands on that 
as well. Are they similar kinds of recommendations to what you 
have on your list?
    Mr. Langevoort. There are a number of recommendations. One 
is to conform the disclosures for relatively smaller companies 
to the list that was put in the JOBS Act for emerging growth 
companies. So to some extent, it piggybacks on what you all 
wrote. But there is also a call for a more comprehensive look 
at what we ask for from smaller companies, and that goes beyond 
the JOBS Act.
    Mr. Carney. And one last question: Is there anything that 
gives you pause? At the end of your testimony, you talk about 
investor protections that give you pause in terms of--there is 
a balance to be struck here, but for sure in terms of what is 
required and reporting and the like as we move forward.
    Mr. Langevoort. We are waiting for the rules on general 
solicitation. I think it was 25 years ago that I first wrote 
calling for the end on the ban on general solicitation. So, I 
completely support the effort. It is, however, going to be new 
territory. And there are going to be abuses. So we are going to 
find out whether the SEC has the capacity, the resources, 
whether FINRA has the capacity, the resources, to be watching 
this space, because for all the good that is going to be done, 
there are going to be people at risk.
    Mr. Carney. Thank you very much. My time has expired. I 
apologize that I don't have enough time for questions for the 
rest of the panel, but thank you all for coming, and for your 
ideas and advice.
    Chairman Garrett. Mr. Mulvaney, you are recognized for 5 
minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Mr. Ferraro, I want to go back to some of your original 
testimony and expand a little bit on that, and some of your 
written testimony and talk about H.R. 1973, not the least of 
which because it is my piece of legislation. But I know you and 
I have talked about it. I have spoken with folks in your 
industry about it. Very briefly, if we set the stage here, you 
go back to the current rules, you go back a couple of decades, 
and you are limited in your ability to invest in financial 
services companies, small banks, community banks, those types 
of things. My bill would seek to remove that restriction. Tell 
me why that is important. Tell me what that means to the BDC 
industry. Tell me what opportunities that creates. Tell me what 
you could do in the future that you can't do now. If you have 
examples of things that you have tried to do in the past, but 
you can't do because of that rule. Help us understand the 
practical realities of why those rules need to be changed.
    Mr. Ferraro. Sure. It will be my pleasure. What has 
happened over the past 33 years in the existence of BDCs is 
that the area of potential investment in financial services 
type businesses has itself expanded. When the BDC rules were 
originally enacted, there was just an arbitrary line put that 
said 30 percent of your assets can only be invested in certain 
kinds of companies. Typically, they are foreign or they are 
other types of investment companies, and we are not interested 
in changing that. But there is one area where there is 
limitation on financial services companies. I still can't find 
the policy justifications or reasons behind it, even if you go 
back to the legislative history. The practical reality for 
businesses in the BDC space is that we have these kinds of 
companies that come to us.
    A good example is Nationwide Acceptance out of Chicago. It 
is an auto lender. A wonderful company. It creates jobs. It 
helps families get autos. They can take their kids to school. 
They can go to work and so on. We would like to invest in more 
companies like that. Depending upon our asset balance at a 
particular time, if we had another attractive Nationwide come 
to us, we may not be able to do that simply because that 
investment may be slightly over 30 percent of our assets. And 
so when I have that valuable company, when I have that 
potential great investment before me, and I am being asked by 
that company, why can't you provide capital to us, all I can 
say is, well, there is a line set that tells me that I can't. 
And beyond that, I don't have a great explanation as to why.
    Mr. Mulvaney. Mr. Coulson, do you want to comment on that? 
You look like you have a comment.
    Mr. Coulson. No. It is the constant regulation away of 
capital, which is frustrating, because I hear it from the 
community banks that they are always constrained on going to 
their best markets for capital, their best seekers and it is a 
more personal frustration that--
    Mr. Mulvaney. So the strong argument actually helps the 
community-based financial institutions as well?
    Mr. Coulson. Yes.
    Mr. Mulvaney. Does anybody know, by the way, why the rule 
was there? Does anybody have any insight? I think you are 
right. It sounds like it is random. It sounds like it is just 
an arbitrary number. Does anybody have any background on why 
that is? In fact, it strikes me--and to get back to the bill--
Mr. Sherman was here a while ago and he wants you to come to 
California into his district and start offering your services. 
And knowing the little bit I know about his district, that 
might be the best way to get there.
    Mr. Ferraro. It absolutely would be, yes.
    Mr. Mulvaney. Thank you. I will yield back the balance of 
my time to the chairman. Thank you.
    Chairman Garrett. Okay. On that note, we will now turn to 
Mr. Duffy for maybe the last word.
    Mr. Duffy. Thank you, Mr. Chairman.
    Unemployment right now stands at 7.6 percent. This has been 
one of the longest and toughest recoveries since the Great 
Depression. We are having a jobs issue in America, and it is 
affecting our families. Many of them want to get back to work. 
They want to make a better living. They want to get more 
dollars into their family coffers.
    The greatest way to generate jobs in America is to make 
sure that our small businesses and our startups are growing and 
expanding and creating those jobs, the small businesses that 
are the best generators. If our small businesses don't grow, 
neither do our American jobs. Recently, our small cap companies 
have had a difficult time accessing capital and, therefore, 
growing their businesses. Capital issues for small cap 
companies, I would argue, have coincided with decimalization. 
If we want a vibrant job market and job growth, we need to have 
a vibrant market for our small cap companies.
    So, I want to ask the panel as a whole kind of a two-part 
question. One, do you all agree with the SEC Chairman that one 
tick size doesn't fit all? And do you agree that we should 
implement a tick size pilot program to determine if wider 
trading spreads would improve liquidity for small cap companies 
and increase economic incentive for investors? We have held a 
long conversation about this. But I would like everyone to 
weigh in on what you think about those issues. Mr. Coulson?
    Mr. Coulson. I completely agree. We need liquidity. We have 
changed our marketplace into a series of orders instead of 
intermediaries. And the idea that marketplaces should just be 
these nice investors lining up and matching and never have a 
liquidity provider is a mistake. We need broker-dealer 
participation in the marketplace providing liquidity, and we 
need to incentivize it, but we also need to make sure that the 
tick sizes are not too wide. We can't artificially widen 
spreads. That would be a step backwards. But if we organize the 
marketplace, and we have increments that reflect the trading 
velocity.
    We have Fannie Mae and Freddie Mac trades on our 
marketplace. Fannie Mae trades 78,000 times in one day. It 
doesn't need tick sizes. That would be bad. But for companies 
that trade 100 times a day, they need organization. They need 
liquidity. And if we start seeing--because we also have a 
little different viewpoint. With tick sizes, because it will 
give a little more profitability to market makers, we should 
have them show larger sizes. And that way, we get a multiplier 
effect of more liquidity displayed. And if we do that, we are 
guaranteed the tick sizes will succeed. FINRA lowered our 
displayed sizes in our marketplace. And we saw liquidity go 
away.
    Mr. Duffy. I want to make sure I get to everyone. So, I 
will go down the line.
    Mr. Ferraro. Congressman, I will respectfully defer to my 
colleagues. I don't believe the BDC community has established 
an opinion on this one.
    Mr. Duffy. Fair enough.
    Mr. Hansen. I would generally defer to them, too, except to 
observe the fact that small business issuers as well as small 
investors rely upon there being available research about these 
companies. And you would need have a way of funding that. I 
think the unintended consequence, as described by the other 
witnesses, has been--
    Mr. Duffy. Do you believe that the tick size would address 
that issue?
    Mr. Hansen. It could. And on that, I will defer to the 
other experts in the markets.
    Mr. Duffy. Mr. Weild, I think I know where you stand on 
this, but--
    Mr. Weild. Clearly. But I will tell you that everybody 
understands that at zero tick size, the entire stock market 
implodes. So at a penny tick size, one size fits all is 
idiotic. When we had quarter points for large cap stocks, it 
charged investors too much money. Now we have 1 penny tick 
sizes, one-size-fits-all. It is a disaster. It is catastrophic 
for the small cap markets. So I couldn't agree more with the 
Chairman of the SEC or with your views on getting higher tick 
sizes into smaller capitalization companies to jump-start the 
U.S. economy.
    Mr. Duffy. Mr. Langevoort?
    Mr. Langevoort. Yes. Interference with free market is to be 
preferred, again. But we do need to incentivize this activity. 
Finding the right balance is the key, and a pilot program is 
the right way to do that.
    Mr. Duffy. Thank you all for the answers. I want to go to 
an issue that the gentleman from California brought up, Mr. 
Sherman. He was talking about how the higher cost of these 
transactions might affect our investors and traders. But isn't 
it fair to say that if there is no liquidity, these trades 
aren't happening, and therefore, there are no investors to be 
heard? And illiquid stocks don't help investors. They don't 
help the companies. They don't help the economy, and therefore, 
if we can improve the liquidity, we are improving the market 
for our investors' companies and the economy.
    Mr. Coulson. Liquidity is a virtuous circle, and we now 
have an incentive for--if you are a liquidity provider and 
intermediary, you don't provide the liquidity on the bid offer. 
You provide the liquidity at the tail end of an investor coming 
into the market. So we would be changing the liquidity provider 
model so there is more displayed liquidity on the bid offer. 
And what you would see is, if you see a bid offer with 
liquidity on both sizes, you are much more likely to take the 
offer or hit the bid, because you see enough liquidity to do 
what you want to do. And that creates the virtuous circle. And 
also, if there is displayed liquidity in my marketplaces, other 
broker-dealers, if there are 2,000 shared offered, other 
broker-dealers will compete and sell 5,000 shares at that price 
point. So we have competition with displayed liquidity, which 
again multiplies the liquidity. So if we only have 100 shares 
there, there is nothing to multiply.
    Mr. Duffy. My time has expired. But just quickly, stay 
tuned. We are going to draw up a bipartisan bill that will 
provide us a pilot program to expand our tick sizes. And 
hopefully, we will see the end result as an end positive. I 
yield back the remainder of my time.
    Chairman Garrett. On that bipartisan note, we bring this 
hearing to an end. I want to thank all the witnesses once again 
for not only your testimony today, but for your written 
testimony as well, which has already been reviewed by our 
staff.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, this hearing is adjourned.
    [Whereupon, at 2:55 p.m., the hearing was adjourned.]
                            A P P E N D I X



                             June 12, 2013
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

