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



 
                    LEGISLATIVE PROPOSALS TO ENHANCE

                    CAPITAL FORMATION FOR SMALL AND

                       EMERGING GROWTH COMPANIES

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


                                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

                             SECOND SESSION

                               __________

                             APRIL 9, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-74




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

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 9, 2014................................................     1
Appendix:
    April 9, 2014................................................    41

                               WITNESSES
                        Wednesday, April 9, 2014

Burton, David R., Senior Fellow in Economic Policy, The Heritage 
  Foundation.....................................................     9
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia 
  University Law School, and Director of the Center on Corporate 
  Governance, Columbia University Law School.....................    11
Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on 
  behalf of the Biotechnology Industry Organization (BIO)........    13
Quaadman, Tom, Vice President, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................    15

                                APPENDIX

Prepared statements:
    Burton, David R..............................................    42
    Coffee, John C., Jr..........................................    58
    Hahn, Brian..................................................    72
    Quaadman, Tom................................................    79

              Additional Material Submitted for the Record

Fitzpatrick, Hon. Michael:
    Written responses to questions submitted to Brian Hahn.......    97
Luetkemeyer, Hon. Blaine:
    Law360 article entitled, ``SBIC Relief Act Will Be Good For 
      Advisers--And Business,'' dated April 7, 2014..............   101
    Written statement of the Small Business Investor Alliance 
      (SBIA).....................................................   104
    Article from The Wall Street Journal entitled, ``Dodd-Frank 
      Interfering With Small Business Investment,'' dated April 
      9, 2014....................................................   107
Wagner, Hon. Ann:
    Written statement of Protea Bioscienes Group, Inc............   109
    Written statement of Richardson Patel LLP, dated April 4, 
      2014.......................................................   111


                    LEGISLATIVE PROPOSALS TO ENHANCE


                    CAPITAL FORMATION FOR SMALL AND


                       EMERGING GROWTH COMPANIES

                              ----------                              


                        Wednesday, April 9, 2014

             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 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Neugebauer, 
Huizenga, Stivers, Fincher, Mulvaney, Hultgren, Wagner; 
Maloney, Sherman, Lynch, Scott, Himes, Peters, Foster, and 
Kildee.
    Ex officio present: Representative Hensarling.
    Also present: Representatives Luetkemeyer and Fitzpatrick.
    Chairman Garrett. Good morning. Today's Subcommittee on 
Capital Markets and Government Sponsored Enterprises hearing 
entitled, ``Legislative Proposals to Enhance Capital Formation 
for Small and Emerging Growth Companies,'' is hereby called to 
order.
    We thank the panel for being with us for this important 
hearing. And, as we always do, we will start with our opening 
statements, and then look to the panel, so you can sit back and 
relax for a few more minutes, and listen to the words of wisdom 
from up here. I now yield myself 4 minutes for an opening 
statement.
    Today's hearing will examine a variety of legislative 
proposals to enhance capital formation for small and emerging 
growth companies (EGCs). I want to thank all of our Members 
today, especially those who are sponsors of the legislation 
that will be coming before the subcommittee.
    The United States has the most fair, most efficient, and 
the deepest capital markets in the world. Now, the primary 
function of this market is to what? To help facilitate the 
appropriate flow of capital from investors to companies that 
need funds to create jobs and to grow their businesses. Today, 
America's startups and small businesses continue to encounter 
difficulties accessing U.S. capital markets to finance their 
operation. Moreover, the costs to these companies of going and 
staying public remains unacceptably high.
    In an effort to continue to help small businesses raise 
much-needed capital, we have the legislative package that is 
before us today. These measures seek to help companies raise 
capital, and comply with regulations in three specific areas: 
first, some of the bills help small businesses go public, so we 
call them pre-IPO; second, some of the bills help small 
businesses be more competitive after they have gone public, so 
we call them post-IPO; and third, some of the bills help small 
businesses attract more investment in the private market, so we 
call them no-IPO.
    By focusing on the pre-IPO, the post-IPO, and the no-IPO 
markets, these legislative proposals span the main areas where 
companies raise capital from investors. These proposals hope to 
strike a delicate balance of lowering the overly burdensome 
cost of capital for some companies, while retaining the 
important safeguard for the investors. Specifically, this 
package includes a number of other reforms to the securities 
laws that will make it easier for small companies to attract 
much-needed capital.
    First, the post-IPO. The gentleman from Pennsylvania, Mr. 
Fitzpatrick--I think he is here--has introduced H.R. 2629, the 
Fostering Innovation Act. It broadens the number of companies 
that can qualify under SEC rules as nonaccelerated filers, 
which are subject to certain exemptions under the securities 
laws and under the Sarbanes-Oxley Act (SOX).
    Second, the gentleman from Illinois, Mr. Hultgren, has 
circulated a discussion draft to enhance utility of SEC Rule 
701, which exempts the SEC from registration of certain 
securities offerings by companies to its employees as part of a 
written compensation agreement.
    Third, the gentleman from Missouri, Mr. Luetkemeyer--who 
will be back later on--has introduced H.R. 4200, the SBIC 
Advisers Relief Act, to include small business investment 
companies in the class of venture capital funds and private 
funds that are exempt from SEC registration.
    Fourth, we have the gentleman from California--who will be 
joining us later--Mr. McCarthy. He has circulated a discussion 
draft to broaden the number of companies that can qualify as 
well-known seasoned issuers (WKSIs). This is a class of issuers 
created by the SEC, which are able to take advantage of certain 
regulatory benefits.
    Fifth, we have the gentlemen from South Carolina, Mr. 
Mulvaney. He has circulated a discussion draft to enhance the 
liquidity of restricted securities sold to the public in other 
qualified institutions through SEC Rules 144 and 144A, 
respectively.
    Sixth, the gentlelady who is making the last bit of 
introductions this morning, the gentlelady from Missouri, Mrs. 
Wagner, has circulated a discussion draft of the Small Business 
Freedom to Grow Act, and that would do what? It would reduce 
the burdens on smaller reporting companies seeking to register 
securities offerings with the SEC.
    And, finally, me. I have circulated a discussion draft of 
the Disclosure Modernization and Simplification Act. What would 
it do? It would direct the SEC to tailor regulations, S-K 
disclosures rules as they apply to emerging growth companies 
and smaller issuers to eliminate other duplicative, outdated, 
and/or unnecessary disclosure rules.
    So, in all this it is important to remember that capital 
formation and investor protection is not an either/or 
proposition. When investors have additional investment options 
to earn a return, and invest their money, that additional 
choice is significant protection.
    Again, I want to thank all the Members for their hard work 
on these important pieces of legislation, and I again urge our 
colleagues in the Senate, who have so far completely ignored 
the important capital formation efforts that have been done in 
a bipartisan manner here in the House, to quickly consider 
these measures in the interest of small business, and the 
interest of investors, and of hard-working Americans across the 
country. And I look forward to the testimony of all of our 
witnesses today.
    With that, I yield back, and at this point I yield to the 
ranking member of the subcommittee, the gentlelady from New 
York, Mrs. Maloney, for 5 minutes.
    Mrs. Maloney. I thank the chairman for holding this 
hearing. The U.S. capital markets are the envy of the world. 
They offer investors liquidity, transparency, and flexibility, 
and they offer companies access to capital in the form of a 
deep pool of investors who stand by and are willing to invest 
in promising businesses. While the ecosystem of financial 
regulations in the United States is complex, the central 
tension underlying the entire system is simple: investors want 
as much information as possible on the companies they are 
investing in, as quickly and as accurately as possible.
    The issuing companies, on the other hand, want to keep as 
much information as possible about their business practices 
confidential. Companies also want to spend as little time as 
possible preparing the disclosures that their investors crave. 
It is the job of public policy to strike the right balance 
between these two competing desires. Whether public policy 
should favor the investors or the issuers often depends on the 
specific situation. Sometimes, more disclosure is appropriate. 
Other times, the burden on the company of the additional 
disclosure outweighs the benefits.
    I am concerned, however, that we are in danger of tipping 
the scales too far in favor of the issuing companies, and away 
from the investors. No one disputes that preparing audited 
financial statements is a time-consuming, labor-intensive 
process. But that by itself does not mean that preparing 
audited financial statements is overly ``burdensome.'' So, I 
think it is important to remember that reducing ``burdens'' for 
public companies can sometimes come at the expense of 
investors, the very investors we need to keep our capital 
markets strong and competitive. We would do well to remember 
that it is, after all, the investors' money that is on the 
line.
    Of course, there are situations where the benefits of 
reducing the burdens on issuing companies outweigh the costs to 
investors, and in those situations I would wholeheartedly 
support eliminating those burdens. But, we need to engage in a 
careful, balancing test with all of the bills that we are 
considering today. And I have always said that our markets run 
more on trust than on capital, and really these regulations are 
there to build the trust of the American people so they 
continue investing, and I would say the world, in our capital 
markets, which are the strongest in the world.
    One of the bills, which I am pleased to co-sponsor along 
with Mr. Luetkemeyer, easily passes that test, in my view. H.R. 
4200, the SBIC Advisers Relief Act fixes an unintended 
consequence of the Dodd-Frank Act. Under Dodd-Frank, an 
investment adviser that only advises a venture capital fund is 
exempt from SEC regulation. Similarly, an investment adviser 
that only advises small business investment companies (SBICs) 
is also exempt, but an investment adviser that advises both a 
venture capital fund and an SBIC is, for some reason, not 
exempt.
    This makes little sense and it provides no additional 
protections to investors. And it encourages sophisticated 
investment advisers who have experience advising successful 
venture capital funds from bringing that expertise to small 
business investment companies, which restricts small businesses 
access to sophisticated investment advice. Our bill fixes this 
problem by clarifying that investment advisers that advise both 
venture funds and SBICs are also exempt from SEC registration.
    I look forward to hearing from all of our distinguished 
witnesses today, and I would note that one, Professor Coffee, 
is from the great City of New York. He has testified before 
Congress at least 25 times. That may be close to a record. We 
are very happy to see him. He also is from New Jersey, so he is 
from both, and we welcome him. Columbia is one of the great 
universities in the district and city that I am privileged to 
represent. So welcome, Professor Coffee, and everyone else.
    Chairman Garrett. Thank you, and I share the gentlelady's 
comment: At the end of the day, it is the investors' money that 
is on the line. I think that is a good takeaway from however we 
address these points. It is a very good point.
    I now yield 2 minutes to the vice chairman of the 
subcommittee, Mr. Hurt.
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank you for 
holding today's hearing on the legislative proposals to further 
enhance capital formation. I thank all of the witnesses for 
being here as well.
    This subcommittee's work on the issue of capital access for 
small and emerging growth companies has resulted in the 
bipartisan passage of numerous bills in the full Financial 
Services Committee and in the House. I look forward to their 
enactment so we can continue to expand upon the successes of 
the Jobs Act that we have witnessed over the last 2 years.
    Even with those successes, I continue to hear from 
companies--both public and private--in my district about the 
impacts of outdated and burdensome regulations on their ability 
to access capital. As our markets and the needs of participants 
continue to evolve, it is necessary for our regulatory 
structure to reflect those new realities.
    Today, I especially look forward to testimony from our 
witnesses regarding Chairman Garrett's Disclosure Modernization 
and Simplification Act, and reforming our corporate disclosure 
regime. I am encouraged by the comments of a majority of the 
Commissioners at the SEC, including Chair Mary Jo White, about 
the need for the SEC to engage in a comprehensive review of our 
disclosure requirements. They have noted that disclosure 
overload is having negative impacts on investors, public 
companies, and the SEC itself.
    Fostering capital formation in our capital markets requires 
consistently reliable information on public companies, however, 
too much information, for the sake of information itself, can 
create inefficiencies and confusion, especially among investors 
unable to make informed decisions. Streamlining our disclosure 
regime to better reflect the SEC's three missions will lead to 
benefits for both businesses and investors.
    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 our local communities need. I look forward to 
the testimony of our witnesses and thank you, again, for your 
appearance before this subcommittee. Thank you, Mr. Chairman, I 
yield back the balance of my time.
    Chairman Garrett. Thank you. At this point, I yield 2 
minutes to Mr. Peters.
    Mr. Peters. Thank you, Mr. Chairman, and thank you to our 
witnesses for being here today. During my time in Congress, my 
top priority has been ensuring that small businesses have the 
tools they need to grow, especially access to capital. I 
appreciate the efforts of my colleagues who have put forward 
the bills that we will be discussing today, and I hope that our 
witnesses will help us balance the potential improvements in 
capital formation that these proposed changes would yield 
against any decrease in the quality or the availability of 
information investors need to make decisions about where to 
invest.
    Michigan, my home State, has some of the fastest growing 
venture capital communities in the Nation. Both Detroit and 
Grand Rapids have become hubs of innovation with flourishing 
start-up communities. I look forward to our witnesses' 
discussion of how H.R. 4200, the SBIC Advisers Relief Act, 
introduced by my colleague, Representative Luetkemeyer, 
addresses the interactions between venture capital advisers and 
small business investment company advisers.
    I hope our witnesses will touch on how this legislation 
could improve advice available to small businesses and fast-
growing startups, and whether any potential conflicts could 
arise from these proposed changes. Thank you, and I yield back 
my time.
    Chairman Garrett. The gentleman yields back. Thank you very 
much. Mrs. Wagner for 2 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman, and thank you for 
this hearing. I appreciate you all being here today. Small 
businesses are the primary engine of job growth in America. The 
tightening of credit, as a result of the financial crisis and 
Dodd-Frank reforms, has made access to capital in the public 
securities all the more important. Yet, even in one of the 
strongest stock markets in years, small companies struggle to 
raise money because of overburdensome regulation.
    Today, we will discuss a number of proposed bills, 
including my bill, the Small Business Freedom to Grow Act of 
2013, which is based on recommendations by the SEC Government-
Business Forum on Small Business Capital, which included 
participants such as Staples, from St. Louis in my home State 
of Missouri, and also another great Missouri company, CrowdIt, 
LLC.
    My bill would allow smaller reporting companies to access 
the public securities markets more efficiently, by allowing 
them to use the shorter form of registration, form S-3, thus 
reducing costly compliance. The SEC said that the proposed 
expansion of Form S-3 should not adversely impact investors. In 
addition, my bill would allow smaller reporting firms, who have 
registered using an S-1 form, to use forward incorporation to 
automatically update their registration statement. According to 
the SEC, this change would allow companies to avoid additional 
delays in the offering process, and could reduce or even 
eliminate costs associated with filing amendments to the 
registration statement.
    Lastly, my bill would preempt all securities issued by 
smaller reporting companies, and emerging growth companies, 
lessening the burden of having to comply with 50 different sets 
of States' securities laws that require considerable compliance 
costs. These smart reforms are an important follow-up to the 
Jobs Act, and will improve the environment for small business 
capital formation, consistent with other public policy goals, 
including investor protection. I thank you, and I yield back.
    Chairman Garrett. I thank the gentlelady. We now yield 2 
minutes to Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. I thank the ranking 
member, and I thank the witnesses for offering their assistance 
with the subcommittee's work. Mr. Chairman, I just wanted to 
give you a heads up, well, I would ask unanimous consent within 
the next 48 hours to submit a letter to the chairman, but I 
would like to circulate it to the Members on both sides of the 
aisle here, regarding our ability to hold a hearing on high 
frequency trading, and especially how that high frequency 
trading operates within dock pools.
    As you know, there has been considerable concern in the 
last week or so about whether or not high frequency trading has 
rigged the system. So, just to let you know that letter is 
coming, and I appreciate any consideration you might give to 
that. I would also like to thank the witnesses here today.
    Today's hearing has seven bills that are intended to reduce 
barriers to capital formation for businesses. Unfortunately, I 
am concerned that the bills before the committee do not fully 
strike the right balance and may do serious damage to investor 
protection. It is important to remember that the SEC rules that 
these bills seek to roll back serve important investor 
protection purposes that could be thwarted by restricting or 
repealing those rules.
    What we are talking about here is a zero-sum game. Reducing 
regulatory requirements for businesses seeking to access the 
capital markets generally means that investors will have less 
information on which to base investment decisions. Less 
information also increases the likelihood of securities fraud 
and abuse. We have to be careful to strike the right balance 
between the burden on issuers and the need to protect 
investors.
    I am concerned that the subcommittee is moving too quickly 
to reduce so-called burdens without fully understanding the 
effect of these reductions and what effect they have on the 
burdens on investor protections. I am particularly troubled 
that several of the bills before the subcommittee today 
completely exempt securities from State registration 
requirements. A blanket State law preemption is something that 
this Congress has rejected over and over, and yet these 
provisions continue to find their way into legislation before 
this committee.
    Last Congress, we passed the Jobs Act, which significantly 
reduced limitations on capital formation for all companies. I 
agree with the testimony of Professor Coffee that this 
committee seems to be rushing from the first Jobs Act to kind 
of a ``Jobs Act II,'' without fully understanding the 
consequences of the first law. Reducing unnecessary burdens is 
good, and where we can make the securities law simpler and 
easier to comply with, I think we should. But we should not do 
so regardless of the cost. I look forward to hearing from the 
witnesses about whether these bills before us today strike the 
right balance. I thank you for your indulgence, Mr. Chairman, 
and I yield back.
    Chairman Garrett. The gentleman yields back, and I thank 
the gentleman for his recommendation with regard to having 
hearings on this very important topic. I do wish to remind the 
gentleman that actually over the last 2 years, we have had 3 
hearings and events so far. The gentlelady from New York and I 
had a field event, to which the gentleman was invited. We have 
had two other hearings, the last of which was about a month 
ago. I know the gentleman was obviously invited to all three of 
these things.
    Mr. Lynch. We have gotten a lot of new information in the 
last couple of weeks, though.
    Chairman Garrett. Right. So, the gentleman was at the last 
one, which was just shy of a month ago, and we will continue to 
have hearings on this topic. And, as the gentleman knows from 
the hearings that we have held so far, what we have begun to 
hear is the question being raised and the facts coming out as 
to whether some of the problems that have come out of late are 
in fact being driven by, and behavior is a response to, the 
amount and content of the regulations that are in place right 
now. So, that is some of the information that has been coming 
out so far, but to the gentleman's request, yes, we will be 
having additional hearings on this very important topic.
    Mr. Lynch. I thank the chairman.
    Chairman Garrett. Next, we will be looking to Mr. Mulvaney 
for 1 minute.
    Mr. Mulvaney. Thank you, Mr. Chairman. I will be very 
brief. I know that many of us here supported the Jobs Act a 
couple of years ago. I know it passed on a bipartisan basis. I 
was happy that we had a chance to make SEC registrations a 
little bit easier, reduce excessive filing, and encourage 
crowdfunding, which I think has been a tremendous success, and 
also allow some broader advertising.
    I have a discussion draft of a bill today that will make 
additional changes which would try and do a little bit more. 
Proposed changes to Section 144 of the SEC rules, to reduce 
holding periods, provide what we call shell company relief. I 
am hopeful that as a result of the hearing, we will be able to 
add to the list of bipartisan bills that will come out of this 
committee. I don't know if Mr. Lynch had my particular 
discussion draft in mind when he said it's one of the ones he 
was concerned about, but I look forward to the discussion, I 
look forward to the input that the witnesses have here today, 
as we try and move towards another round of bipartisan changes 
that would make access to capital easier.
    And with that, I yield back.
    Chairman Garrett. The gentleman from Connecticut is 
recognized for 1 minute.
    Mr. Himes. Thank you, Mr. Chairman. I just wanted a minute 
to say thanks very much for holding these hearings. I wanted to 
thank the panel in advance for their participation. And, in 
thanking the chairman, I just want to make the observation that 
like the Jobs Act, I think this is a really important exercise 
in making our capital markets more efficient, and better at 
allocating capital, and I encourage my colleagues here to think 
of this, and perhaps to avoid the all-too-often scenario we 
fall into of making this partisan, or of making this an 
argument between the absolute virtues of regulation or the 
absolute absence of virtue in any regulation.
    What we are talking about here with most of these bills, of 
course, is shifting risk between issuers and investors. Most of 
these bills do that, and that is a perfectly sane exercise, but 
we should remember, particularly at a moment in time when 
investors are wary of the markets--most recently, thank you 
Michael Lewis and high frequency trading--that we need to 
preserve the confidence of investors in these markets.
    So, Mr. Chairman, thank you very much for holding this 
hearing. I look forward to hopefully having nice, bipartisan 
support for some of these bills, and I appreciate your efforts. 
I yield back the balance of my time.
    Chairman Garrett. I thank the gentleman. We will go now to 
Mr. Hultgren for 1 minute.
    Mr. Hultgren. Thank you, Mr. Chairman. And thank you, 
witnesses, for being here to discuss these proposals regarding 
capital formation for small and emerging growth companies, 
which are absolutely a key engine for economic growth.
    The bill that I have sponsored, the Encouraging Employee 
Ownership Act of 2014, amends SEC Rule 701, which mandates 
various disclosures of information for privately held companies 
selling more than $5 million worth of securities for employee 
compensation. We raised this threshold from $5 million to $20 
million, but still require all issuers to comply with antifraud 
and civil liabilities requirements.
    This bill is a simple update to the bipartisan Jobs Act 
reforms that exempted employee compensation securities from the 
requirements for when companies must register with the SEC. 
Companies that used to only offer employee ownership to top 
executives because of cost, or because they wanted to avoid 
distributing confidential information, will now find it easier 
to provide employee ownership to nonexecutive employees. This 
will help them attract talented employees by giving these 
employees a stake in their company, and the large upside that 
may bring. I urge this committee to support this legislation. I 
look forward to this hearing. I thank the chairman again, and I 
yield back.
    Chairman Garrett. Thank you. The gentleman yields back. 
And, finally, 1 minute to the gentleman from Pennsylvania, Mr. 
Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Chairman Garrett, for allowing 
me to participate in the hearing. A subject I am interested in 
is the Fostering Innovation Act, which is a bill I introduced 
in the last Congress, the 112th, and again in the 113th, 
responding to concerns of constituent businesses that I 
represent back home in Bucks County. This is legislation that 
would update the definition of what is called a nonaccelerated 
filer. It is important for small companies, because it frees 
these businesses from extremely burdensome regulations, and as 
we know, money not spent on questionable regulation is used 
then for investment and for hiring.
    The Jobs Act was the result of a realization that one-size-
fits-all regulation hurts the economy. We should be working to 
reduce job killing regulations across our economy, and even in 
this divided government there is bipartisan support for lifting 
burdens from small business and emerging companies. That is 
what I believe my bill does, and I hope that we get bipartisan 
support on this committee for it.
    All the bills we are going to discuss today are very 
important for job creation. I would like to take a moment to 
applaud my colleague, Mr. Hultgren, for his bill, which will 
update Rule 701, as we just heard. I have heard from 
constituent businesses in my district that would like to reward 
their employees by permitting them to invest or have investment 
opportunities in their companies. These businesses have been 
constrained from doing so by the current rules, and so I think 
that the goals of the bill are very worthy, and I hope that we 
get support for that bill as well. With that, I yield back.
    Chairman Garrett. Thank you. The gentleman yields back, and 
now we turn to our panel of esteemed witnesses.
    So, for those of you who have not testified before, I will 
just run through this. As always, you will be recognized for 5 
minutes, and your complete written statements will be made a 
part of the record.
    I always remind you each time to bring your microphone as 
close to you as you can, so Mr. Burton, yours looks a little 
bit far away already. Please remember to turn it on when you 
begin, and remember to go by the 5-minute rule. The lights are 
in front of you. Green is 5 minutes, yellow is your 1-minute 
warning, and red is when time is up and I will be banging the 
gavel, because the person next to you desperately wants to have 
their say.
    So thank you, Mr. Burton for being with us today, and you 
are now recognized for 5 minutes.

STATEMENT OF DAVID R. BURTON, SENIOR FELLOW IN ECONOMIC POLICY, 
                    THE HERITAGE FOUNDATION

    Mr. Burton. My name is David Burton. I am the senior fellow 
at The Heritage Foundation, and I would like to express my 
thanks to you, Chairman Garrett, and Ranking Member Maloney, 
and members of the subcommittee for the opportunity to be here 
this morning.
    The 2012 Jobs Act was a bipartisan achievement of 
consequence. Republican and Democratic members of the 
committee, and your counterparts in the Senate, put aside 
partisan differences and legislated in the public interest. 
These reforms will help small business entrepreneurial capital 
formation, innovation, and job creation.
    I had the good fortune to attend the rose garden signing 
ceremony, when President Obama signed the Jobs Act into law. It 
was a reminder that important constructive change can still be 
accomplished when policymakers resolve to craft genuine 
solutions to the problems that face the American people.
    There remains, however, much to be done. SEC implementation 
of the Jobs Act is much too slow, in some cases nearly a year 
and a half behind the pace required by Congress. And the rules 
being proposed by the Commission are often so voluminous and 
complex that they will undermine the laudable purposes of the 
Jobs Act. There are also significant statutory reforms which 
are still required if we are to give genuine rebirth to the 
spirit of enterprise, innovation, and dynamism necessary for a 
lasting and widespread prosperity, providing opportunity and 
better incomes for all Americans.
    I have been asked to provide my perspective on a number of 
legislative proposals to enhance capital formation for small 
and emerging companies. In my written testimony, I also address 
the Commission's implementation of the Jobs Act, and suggest 
about a dozen specific policy changes that would promote small 
business capital formation and entrepreneurship.
    Regulation S-K is the regulation governing nonfinancial 
statement disclosures of registered companies. Along, with 
Regulation S-X, it imposes the vast majority of the costs 
incurred by public companies. The SEC has estimated that the 
average cost of achieving initial regulatory compliance in an 
IPO is $2.5 million, and following on about $1.5 million a year 
in annual compliance costs. For small and medium-sized firms, 
seeking to raise capital, these costs make access to the public 
capital markets prohibitively expensive.
    In my written testimony, I show on a table that these costs 
are likely to reduce a small company's return on equity by 20 
to 100 percent, depending on the firm's size and return on 
equity. Another way of looking at this is to capitalize the 
$1.5 million annual costs using a discount rate of 10 percent; 
this is the equivalent of erasing $15 million in shareholder's 
equity. Using a discount rate of 15 percent, it would be the 
equivalent of erasing $10 million in shareholder's equity. This 
kind of shareholder's equity erasure simply cannot be justified 
by the higher price earnings ratio that a public company 
commands, until the expected risks to adjusted earnings are 
quite high.
    Chairman Garrett has drafted very constructive legislation 
designed to address this important problem, and there is reason 
to believe that the Commission itself is serious about 
addressing the problem. And the legislation may well launch a 
process that would substantially reduce unneeded impediments to 
smaller firms being able to access public capital markets.
    I have three suggested improvements. The legislation should 
require an SEC survey of smaller reporting companies. It should 
seek to determine which aspect of Regulations S-K and S-X are 
major cost drivers, and seek input about what should be 
changed. In addition, the Commission should begin to collect 
and publish data regarding its enforcement actions, and I have 
specific recommendations about how to go about that.
    Commissioners, Congress, and this committee need actual 
information, not anecdotes, about what type of disclosures, 
misrepresentations or omissions are the source of enforcement 
actions and other problems. I will move on to some other 
things.
    I support the SBIC Advisers Relief Act. They are, in 
effect, venture capital funds and it is appropriate to treat 
them as such. I support the legislation increasing the 
threshold to $20 million with respect to Rule 701 in 
compensatory benefit plans. That will help them compete with 
larger companies. I support, particularly, Section 4 of the 
Small Business Freedom to Grow Act; it is laudatory. These 
companies are already public companies making full reporting, 
so it is not reasonable to require them to comply with 51 
different sets of blue sky laws. I support, also, the Fostering 
Innovation Act, and in particular, exempting these companies 
from Sarbanes-Oxley 404(b), and that was in the bipartisan act 
during the last Congress.
    Thank you very much.
    [The prepared statement of Mr. Burton can be found on page 
42 of the appendix.]
    Chairman Garrett. And I thank you, very much. Professor 
Coffee, good morning, and welcome.

 STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF 
LAW, COLUMBIA UNIVERSITY LAW SCHOOL, AND DIRECTOR OF THE CENTER 
    ON CORPORATE GOVERNANCE, COLUMBIA UNIVERSITY LAW SCHOOL

    Mr. Coffee. Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee, I am honored to be here. Thank you 
for inviting me.
    I have been specifically asked to review seven bills. These 
seven bills range in my judgment from ones that are entirely 
reasonable, to ones that are debatable, reasonable people could 
disagree, and some that I think have unintended consequences 
that are dangerously overbroad. I will focus more on the 
latter. That doesn't mean that I am opposed to everything that 
is before you.
    Chairman Garrett. Why don't you just start with the good 
stuff, maybe?
    Mr. Coffee. I have to focus on--I only have 5 minutes.
    Chairman Garrett. Okay, I'm sorry. I will give you an extra 
15 seconds for that.
    [laughter]
    Mr. Coffee. Among the good ones, of course, the simplest 
and the most unobjectionable one has been proposed by Chairman 
Garrett, who says we should put a facing page on the Form 10-K 
that would allow you to cross-reference the rest of the 
documents with electronic links. I don't see how anyone could 
be opposed to that, although I think you probably can do it 
under existing law.
    In any event, I have one other comment. These seven bills 
sort of tweak very small parts of our total Federal security 
system. They are not terribly coordinated, there is a certain 
ad hocery here. I would suggest that if you are really 
concerned about what I think seems to be the underlying theme 
that you are most concerned about, the integration of our 33 
act disclosure system and our 34 act disclosure system, which 
are not perfectly integrated or coordinated. Then, if that is 
your concern, and if your concern is also about public 
offerings and private placements, you really should ask the SEC 
to conduct a serious study that maps the entire terrain, rather 
than sort of looking around the edges. There is a certain 
quality here of the seven blind men, roaming around the 
elephant, and reporting little problems. There should be a 
mapping of the entire terrain, to have a fuller look at all 
this.
    Now, with that statement, let me talk about the specific 
areas where I have problems. First of all, I have a problem 
with the downsizing of the definition of the well-known 
seasoned issuer, called the WKSI in the parlance. It is going 
to be reduced under this bill to what I will call down to the 
level of a slightly known, modestly sized issuer, what I will 
call an ``SKMI.'' I am not sure that you understand all the 
consequences.
    Reasonable people can debate whether it is desirable to 
lower this level, so you can test the waters, whether you want 
to end the quiet period for a larger group of companies, but 
there is another consequence that you don't seem to have 
realized.
    Once you say that small companies with only a $250 million 
public float can be WKSIs, then they are automatically entitled 
to use something called Automatic Shelf Registration. What is 
that? That is a system under which the minute you file with the 
SEC, you can sell to the public with no SEC prior review.
    It means that the SEC is cut out of the process of 
reviewing the registration statement, and also that the board 
of directors, underwriters, counsel, auditors, and accountants 
do not have any opportunity to conduct a meaningful due 
diligence inquiry. Both of those things are disadvantageous to 
the interests of investors.
    It really is amazing to me that probably the largest 
division at the SEC is Corporation Finance, which is full of 
hundreds of people who review registration statements. They are 
about to lose two-thirds of the companies they review, if you 
move WKSI down this far, without changing some of the 
consequences of being a WKSI. That is point one.
    Let me move on to H.R. 2629, the Fostering Innovation Act. 
This is another attempt to cut back on Section 404 of Sarbanes-
Oxley. I understand that Section 404 is not popular, and that 
its requirement of an annual audit of internal controls is 
costly. But at least when you passed the Jobs Act, there was a 
rationale here, and there was a limited period of the 
suspension of Section 404. Emerging growth companies were 
exempted for an up to 5 year period, under the rationale that 
they were going to be accommodated and put on this learning 
curve, this onramp. That I can understand.
    H.R. 2629 exempts not emerging growth companies, but 
basically old and stale companies. Companies that have never 
gotten to $100 million in revenues, even if they have been 
around for 50 years, and it also exempts companies that have a 
public float below $250 million. You have to meet both of those 
standards. That means there will be a lot of companies out 
there that will be exempted from the internal controls, and the 
other companies that may need exactly that.
    I can understand trying to shorten Rule 144, but I don't 
think you understand that what will probably happen, because we 
had this experience with Regulation S, is if it is only a 3-
month holding period, the arbs will come in. They will buy the 
privately placed stock, which will be sold at a discount to the 
public offering price, and they will lock in the difference 
through hedging. And once they lock it in, they will then dump 
the stock once the 3-month period is expired, and it is free 
for the public market.
    I think that will produce volatility and it had such 
adverse consequences that the SEC barred hedging when there was 
a 3-month period under Regulation S, which is a similar 
problem. All I am saying is we had experience with this, and it 
has had more adverse consequences.
    I will close now, but I want to say again, what Congressman 
Lynch said, ``I don't think preempting the blue sky laws 
creates jobs.'' Preempting State regulation, which is focused 
on local companies with local problems, I think exposes 
investors to local scandals. The SEC is resource-constrained. 
The SEC doesn't have the funds it needs and it tends not to 
focus on the smaller companies.
    Those companies that fly under the SEC's radar screen are 
still subject to the blue sky regulators and these bills, 
several of them, would preempt that. I have other things that I 
would say, but, again, I think a number of other ideas here are 
quite sensible. Thank you.
    [The prepared statement of Professor Coffee can be found on 
page 58 of the appendix.]
    Chairman Garrett. I thank you, professor. Good morning, Mr. 
Hahn. You are recognized for 5 minutes, and welcome.

       STATEMENT OF BRIAN HAHN, CHIEF FINANCIAL OFFICER, 
 GLYCOMIMETICS, INC., ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY 
                       ORGANIZATION (BIO)

    Mr. Hahn. Good morning, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. My name is Brian 
Hahn, and I am the CFO at GlycoMinetics, a 30-employee biotech 
company in Gaithersburg, Maryland. GlycoMinetics raised $64 
million through an IPO in January, the first public offering in 
2014, and one of many enriched by the Jobs Act.
    I am here today representing BIO and the biotech industry. 
Roughly 90 percent of BIO's 1,100 members are pre-revenue 
emerging businesses. Product sales do not fund their research, 
which can cost upwards of $1 billion. Instead, companies turn 
to external investors to finance drug development. The capital 
markets play an important role in biotech capital formation, 
and it is vital that small public companies are given the 
opportunity to succeed on the market.
    In 2003, I was part of the management team that took 
Advance Pharmaceutical public. We had only 40 employees and no 
product revenue, but 2003 was well before the Jobs Act 
instituted the IPO onramp. From day one on the market, Advance 
was hit with a full-blown reporting burden. We faced the same 
compliance requirements as the rest of our IPO brethren from 
2003, including Colonial Bank, TempurPedic, and Orbitz. 
Compliance with Sarbanes-Oxley (SOX) became my full-time job.
    Because small biotechs do not have product revenue, 
burdensome regulations like SOX have an outsized effect on 
them. One-size-fits-all compliance requirements divert funds 
from the lab and slow down the development process. The Jobs 
Acts has led to a sea change in the regulatory landscape and 
has shown that a commonsense reporting standard can support 
capital formation. Nearly 80 biotechs have gone public in the 
last 2 years, compared to just 30 in the 2 years before the 
Jobs Act.
    I strongly support transparency for investors. Jobs Act 
testing-the-waters meetings have been universally praised by my 
biotech colleagues, largely because the additional time with 
investors allows for increased dialogue and greater information 
flow. But the key is to share the right information that 
investors want to know.
    Congressman Fitzpatrick's Fostering Innovation Act will 
help emerging innovators strike that balance. GlycoMimetics 
will likely still be in the lab, in the clinic when the 5 year 
onramp in SOX exemption expires. When the ECG clock runs out, 
small biotechs will still be relying on investor capital, but 
will face a full-blown compliance burden identical to that 
faced by commercial leaders.
    Investors would be better served by analyzing clinical 
trial results, but pre-revenue biotechs will instead be forced 
to issue costly reports that do not tell the true story of 
their business. The Fostering Innovation Act would provide the 
SEC with more accurate company classifications in order to 
institute a commonsense regulatory burden outside of the EGC 
onramp. The bill recognizes the pre-revenue reality of many 
small businesses by incorporating a revenue test into SEC Rule 
12B2, which is used to determine a public company's regulatory 
burden, including SOX compliance. This bill will allow small 
biotech companies to focus on delivering medicines to patients 
rather than time-consuming and costly reporting.
    I am encouraged that the subcommittee is considering 
legislation today to further enhance the capital formation 
potential of the markets, which is key to financing the search 
for breakthrough treatments. Expanded WKSI and Form S-3 
eligibility will increase access to capital through cost-
effective follow-on and shelf offerings. Meanwhile, reforms to 
Reg S-K, Rule 701, and conflict minerals reporting will move 
capital market regulation away from one-size-fits-all 
standards.
    Improving the secondary market liquidity for private 
offerings will build on another success of the Jobs Act, the 
expansion of Reg D and Reg A. Overly burdensome regulatory 
standards present a unique challenge for pre-revenue biotechs. 
Their investors stress the importance of resource efficiency, 
because spending capital on compliance diverts funds from the 
lab and could delay drug development.
    The Jobs Act allowed enhanced access to investors, 
increasing the capital potential of an offering. And it then 
instituted relaxed regulatory burden, decreasing the amount of 
capital diverted from research. This one-two punch is critical 
for biotech innovators, and has increased the viability of the 
public market. I am thankful that the legislation being 
considered by the subcommittee today mirrors this approach.
    If the smaller issuer is having increased access to 
investors and is not forced to siphon off innovation capital to 
spend on costly compliance burdens, they will be able to fund 
their growth, and in the biotech industry, further research 
that will change the lives of patients and their families. 
Thank you for your time and I look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Hahn can be found on page 72 
of the appendix.]
    Chairman Garrett. And I thank you.
    Last, but not least, Mr. Quaadman, welcome again. You are 
recognized for 5 minutes.

 STATEMENT OF TOM QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL 
       MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairman Garrett, and thank you, 
Ranking Member Maloney. I would like to thank all the members 
of the subcommittee for your continued leadership on issues 
important to capital formation.
    What this subcommittee realizes is that the opportunity to 
succeed includes the opportunity of small businesses to grow 
into large businesses. However, not all companies are going to 
make it, but with that opportunity to succeed, along with the 
right to fail, those are the important ingredients for our 
economy to grow for the long term and create jobs.
    With the success of the Jobs Act, we are beginning to see a 
rise in IPOs, and for the first time last year since 1998, we 
actually saw a rise in the number of public companies in the 
United States. However, the long-term trends are not good. For 
young entrepreneurs, the public company model is not the 
preferred business structure for them for the long term. 
Additionally, while we have concentrated on the IPO issues, we 
continue to have an outflow problem, where we have mature 
public companies that are restructuring themselves into 
different business formations.
    The bills that are before us today are important. The SEC 
has not acted on the issues that are before us today, despite 
numerous recommendations from the Small Business Committee, 
under the leadership of both Democratic and Republican SECs, as 
well as the fact that many of the issues that are before us 
today could have been taken care of independently by the SEC in 
terms of trying to modernize our regulatory systems.
    We welcome the new emphasis on these issues by Chair White, 
however we believe that the passage of this legislation will 
set forth public policy directives that the SEC will have to 
follow by statue. I think one example that was a positive one 
was the proxy advisery firm hearing that this subcommittee held 
last June, which led to a roundtable by the SEC in December, 
and then, just last week, their recommendations that the SEC 
staff has given to Chair White for further action.
    Let me talk about some of the bills that are before us 
today. The draft Disclosure Modernization and Simplification 
Act by Chairman Garrett, which is also in the same vein as the 
XBRL bill that Congressman Hurt has championed, would change 
our 1930s disclosure model and update it and create one for the 
21st Century. This will allow for easier access of information 
for investors and their ability to make decisions and enter the 
capital markets.
    The modernization study for all businesses is an important 
means of overhauling our corporate governance disclosure 
process to allow American businesses to be competitive in a 
global economy. The draft compensatory benefit program by 
Congressman Hultgren is an important change because Rule 701 
needs to be changed in order for the 12G Jobs Act changes to be 
effective. This is important for employee retention that allows 
small businesses to grow into larger ones.
    H.R. 4200, the bipartisan SBIC Advisers Relief Act by 
Congressman Luetkemeyer, is a commonsense reform that codifies 
congressional intent. The draft Small Business Freedom to Grow 
Act by Congresswoman Wagner, the draft bill to improve private 
market offerings by Congressman Mulvaney, and the draft bill on 
definitions of well-known seasoned issuers by Mr. McCarthy--I 
think if you look at them together in a package, each of them 
remove barriers to capital formation, because investors have 
more access to information with more disclosure and 
transparency, they will be able to make more informed decisions 
on a quicker basis.
    Businesses will have easier access to capital, as well as 
scalable costs for regulatory burdens. And what is important to 
note here, too, is that these businesses that can avail 
themselves of these changes, the SEC has a track record, they 
will have continued oversight of these businesses, and they 
will have tools for investor protection. I believe that the 
Wagner change in terms of preemption is an important one, as we 
are talking about a small number of businesses that are 
accessing the national capital markets, and I think we need to 
look at this as the Garrett bill as the key that is unlocking 
the door, and that these three bills are then opening that 
door.
    And one thing I would just like to also point out with some 
of the statements that have been said here today is that we do 
have an unbalanced system today. We have more inefficient 
capital markets than we had 15 years ago, but we also have a 
situation where retail shareholders or investors are 
effectively disenfranchised from the proxy system. And they are 
disenfranchised from their ability to access the capital 
markets, and that runs to counter to the democratization of our 
capital markets that started with President Kennedy's efforts 
to do away with the financial transactions tax in the 1970s.
    So, with that, Mr. Chairman, I would like to conclude my 
remarks. I am happy to answer any questions you may have.
    [The prepared statement of Mr. Quaadman can be found on 
page 79 of the appendix.]
    Chairman Garrett. Great. I thank all of the panel members 
for your testimony, and I will now recognize myself for 5 
minutes for questions and comments. And, thank you, Mr. 
Quaadman. I think that was overstating the case that my bill is 
the one that is the key to opening the door and the rest 
follow. I appreciate the comment, though.
    Okay. Mr. Hahn, you made a couple of comments that I noted 
down from your testimony, and maybe they sort of jibe together. 
One, could you elaborate a little bit on the revenue component, 
and the effect on industry by the costs of this current system 
and how it affects your industry? You use the expression, 
``diverting from the labs,'' is the language I just picked up 
now, but also the language I just picked up now is that your 
task and your role, your responsibilities have now changed, 
that this is now a full-time job, was what I wrote down, as far 
as compliance. Do you want to jibe those two, connect those two 
together maybe?
    Mr. Hahn. The full-time SOX issue was with Advance back in 
2003. So, we were a 40-person company. We had a finance staff 
of two and a half FTE, and when we had to do a full blown SOX 
implementation, we had to increase our staff to seven, and that 
diverted FTEs away from the lab.
    When we talk about costs, currently at GlycoMimetics, it is 
still--we have to comply with 404(a), but not 404(b). Our costs 
now, annual costs to be a public company have increased by $1.6 
million a year, just in auditors' fees, legal fees, and other 
fees by being a public company. To put that into perspective, 
our current payroll, base payroll for 2014 will be $4 million. 
So, that $1.6 million in additional annual costs could be 10 
additional R&D folks who could be working in the lab to help 
advance our programs.
    Chairman Garrett. That is significant. Thank you.
    Mr. Burton, can you--and you touched on this a little bit 
in your testimony--provide us with a few more thoughts on the 
Jobs Act that we already have in place, as implemented, are 
there other things that should be done, as far as 
implementation goes, to maximize job creation through it?
    Mr. Burton. There are a number of issues. First, is 
actually implementing the regulation so that certain aspects of 
the Jobs Act like crowdfunding can take place. Second, to make 
the rules appropriate in complexity for smaller firms. The Jobs 
Act proposed rules, an example of that, Regulation A Rule, 
while it has very positive aspects, also has some aspects that 
are very troubling. And then lastly, the proposed Regulation D 
Rules, as a follow on to the general solicitation and 
verification regulations, are extraordinarily problematic and 
are unnecessary in almost all of their respects.
    Chairman Garrett. I guess this will jump around to Mr. 
Quaadman. So, in Professor Coffee's testimony he sort of 
indicated, and we see this in some of the economic activity in 
that and capital allocation is going through the private less 
to slows market than it is through the public. Can you say, is 
that happening because of any bad or nefarious reasons? Or is 
that happening largely because of what the other two witnesses 
have stated, because of the regulatory costs or other reasons 
as well?
    Mr. Quaadman. In our view, it is primarily the regulatory 
costs and burdens that are a part of it. If you take a look at 
any one regulation or any one burden, they are not necessarily 
going to cause somebody to leave the public company space. But 
when you take them all together, they make the more efficient, 
inefficient, and less likely for businesses to want to become 
public. So, when you take a look a the public company model in 
a different way, if you have an investment dollar, you have a 
whole array of different places to put it, and increasingly 
investors are going away from public company investments, and 
that also is why businesses are also beginning to move away 
from that as the preferred business structure.
    Chairman Garrett. And I just saw something in the paper 
this morning, I am not going to name the company, but one of 
the larger institutions is saying that they may be closing some 
of their dark pool type of arrangements. Would you like to 
respond to that?
    Mr. Quaadman. Yes, I do think we are beginning to see that 
some of the financial institutions are beginning to move away 
from certain forms of financing. We have seen that, we have had 
a discussion here in this room about CLOs as an example of that 
as well.
    Chairman Garrett. Okay.
    Mr. Quaadman. While we need a diverse financial structure, 
some of the burdens that we have here in terms of regulation 
are impeding that.
    Chairman Garrett. All right. And I was going to, my time is 
almost up, I was going to say press a copy. I think we are on 
the same page on some of this. Your very opening comment was 
regarding a--you didn't use the word, but I will use the word--
holistic or broad approach, as far as looking back to the 1933 
Act, and looking at the whole thing. I will close my time with, 
we agree on that, and we have asked for the SEC, this 
Administration, and the last Administration to do the same 
thing, so there is no question there. But I think we are on the 
same page, just what we should be doing in the meantime, I 
guess, is why we have some of this legislation. But, thank you 
for that comment on that point.
    We now yield to the gentlelady from New York, Mrs. Maloney, 
for 5 minutes.
    Mrs. Maloney. Thank you so much, Mr. Chairman, and I thank 
all of the panelists today. I would like to start with 
Professor Coffee. Some of these bills are aimed at allowing 
more companies to take advantage of the so-called shelf 
registration. Can you describe the benefits of shelf 
registration? And are there major drawbacks for investors when 
companies use shelf registration? You pointed out in your 
testimony that the proposed legislation, the $700 million 
standard would be reduced to $250 million, at which point the 
majority of the issuers from both the New York Stock Exchange 
and NASDAQ would become WKSIs, and could use an automated shelf 
registration. Can you elaborate on what that means for investor 
protections?
    Mr. Coffee. Let me begin with the irony here. Under these 
bills, many companies could be both emerging growth companies 
and well-known seasoned issuers. And, it is really hard to see 
how you are both young and immature and old and seasoned at the 
same time. Language is being tortured a bit.
    I understand that there are high costs for many companies, 
particularly because of Section 404, but we keep talking about 
an all or nothing choice. You are covered or you are not 
covered. I believe it is possible to scale this requirement.
    You could tell certain kinds of companies whether they are 
emerging growth companies or slightly larger that they only had 
to do a 404 audit once every 3 years. But if you don't do it at 
all, sooner or later you are going to get burned, because if a 
company doesn't examine its internal controls with outside 
auditors, something is going to go wrong, in many cases, sooner 
or later. So, I think there should be a search for scaling this 
obligation.
    In terms of shelf registration, when it was originally 
adopted the level was $150 million because that was the level 
that the SEC thought was the beginning of the efficient market. 
Now, we have gone down to $75 million for shelf registration, 
that is probably below the efficient market, and there are 
proposals that some of the bills would say, any company that is 
a reporting company can use shelf registration.
    That would include some companies now traded on what are 
called the pink sheets, or companies that are traded in the 
over-the-counter bulletin boards. I don't think those companies 
have an adequate following, even among secure--either among 
securities analysts or other informed commentators that the 
public knows what is going on.
    And if you permit universal shelf registration to these 
companies, it would also be possible for them to do secondary 
offerings as well as primary offerings. That is, the insiders 
could dump their stock without any prior disclosure.
    When the insiders are dumping their stock under a new 
exemption, that is not creating jobs; that is creating 
bailouts. So I think we should be a little more focused. I am 
not saying that you cannot expand the scope of Form S-3, or 
that you cannot facilitate more shelf registration, but I think 
the over-breadth is when you let very small companies do 
secondary offerings, and when you go well below the level of 
the lowest possible level of the efficient market, that is when 
I think you need the more formal procedures of ordinary 
registration.
    Mrs. Maloney. Thank you. You also mention in your testimony 
that shortening the holding period in Rule 144 from 6 months to 
3 months could invite abuses. It would allow investors to 
quickly resell securities that they bought in private 
transactions, usually at prices that are well below the public 
trading price. And, as you know, the minimum holding period in 
Rule 144 used to be 2 years, and was only recently shortened to 
6 months. So my question is, do you think that a 6-month 
holding period is sufficient to deter investors? And what do 
you feel about this shortening period?
    Mr. Coffee. Maybe I didn't explain it adequately. But in my 
time, if I was going from 3 years to 2 years to 1 year to 6 
months for reporting companies, if we would go to 3 months, 
that greatly reduces the cost of hedging. It is very expensive 
to try to hedge something for 6 months or 1 year. Three months 
is more possible. What I think we would see happen is that 
companies would do an initial IPO, and then would do no more 
public offerings, they would do all private placements, and 
they would do private placements to investors in what are 
called pipe transactions. Pipe transactions are private 
investment and public equity. You sell to the investor in a 
private transaction at a price somewhat below the public market 
price.
    So, if the market price were $20 a share, you might sell in 
a private placement to $19 a share, because the private 
placement is so much cheaper, with so much less liability, and 
so much advance planning. You would do it that way. The 
investor would buy at $19 and immediately hedge to lock in the 
spread between $19 and $20, and at the end of the 3 months, the 
arbs would dump into the market, which would produce 
volatility, and I think we would be pretty much ending public 
registry offering by seasoned companies. I don't think you want 
to do that without mapping the total train. I think there 
should be ways that we--
    Mrs. Maloney. Thank you. So, it would increase pumping and 
dumping. My time is up, but maybe you could get back to me in 
writing. Ideally, what do you think the holding period should 
be, if you would create a holding period?
    Mr. Coffee. I think 6 months was probably a reasonable 
compromise as it is now. If you were to go lower, what I would 
say to minimum is that you forbid hedging, because hedging is, 
right now--
    Chairman Garrett. I think we will leave it at that answer 
right there.
    Mr. Coffee. Okay.
    Mrs. Maloney. Thank you.
    Chairman Garrett. Thank you. The vice chairman of the 
subcommittee, Mr. Hurt, is now recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. And I thank each of you 
for being here. Obviously, one of the parts of the Jobs Acts 
required that the SEC study Reg S-K, and how that can be 
improved to reduce unnecessary costs to companies that wish to 
go public, and that are public. I guess my question is for Mr. 
Burton, to begin with, I am interested in the chart that you 
have included in your testimony relating to the percentage 
decrease in return on equity by going public. Can you talk 
about that? Is that data that is reflected there, based on 
information that is pre-Jobs Act?
    Mr. Burton. The cost data is from the SEC and it would be 
pre-Jobs Act. It was included in the economic analysis 
discussion of the crowdfunding rule, I suppose. The Jobs Act 
did a lot of very positive things, but it didn't dramatically 
reduce the cost of being a smaller public company.
    Mr. Hurt. What is the best way to describe the 
disproportionate effect, assuming that there is, and I believe 
that there is, a disproportionate effect that these disclosure 
requirements have on emerging growth companies? Can you talk 
about that?
    Mr. Burton. Absolutely. And there is--some of these bills 
address that question, particularly backing off the costs 
related to Sarbanes-Oxley 404B, the internal control reporting 
for smaller companies, I think that is genuine; it is 
extraordinarily expensive. And it is also genuinely misguided 
in that, in a small company, with a small C-suite, it is not 
going to have a meaningful, positive impact or at least a 
significant positive impact on the ability of those people to 
abscond with company money if they want to. The fact is a nice 
fancy internal control loose-leaf binder on the shelf isn't 
going to stop them from ripping off investors. It will be other 
things that stop them.
    But the long and short of it is, there is a need to 
fundamentally rethink the way we do disclosure, the way we 
scale disclosure. Whether some disclosure is having a positive 
impact on protecting investors, or it is just a waste of money, 
and we have very little information to go on. And there is a 
need for the SEC to review this.
    I think the chairman's legislation would be a very positive 
step. I think the SEC acknowledges a need to review this, but 
there is also the need to collect information, and by that I 
mean two things. First, what is causing the most cost? And 
second, what areas are causing the most problems with respect 
to enforcement, with respect to fraud? And we don't really have 
that information, nor, for that matter, does the SEC. They 
don't collect it, they don't collate it, they don't report it 
to the Commissioners. I know for a fact that the Commissioners 
are frustrated themselves that they don't have that 
information. And, it is very difficult to make policy in a data 
vacuum, and that is where we are right now.
    Mr. Hurt. Do you think, are you able to say because the SEC 
has indicated that it wants to study the issue relating to reg 
S-K more, are there areas that you think they can focus on 
immediately? And what would those areas be? And then, second, 
what areas do you think, specifically, they can look at long-
term?
    Mr. Burton. I think that right now I am not in a position 
to give you much more feedback on that other than 404 is the 
biggest single problem. I have put together a securities 
regulation working group at The Heritage Foundation, which 
includes people from all over the country, in many different 
professions, and we are developing a solution and an answer to 
that question. And I hope to be in a position to provide that 
to the committee in 6 to 9 months.
    Mr. Hurt. Professor Coffee or Mr. Quaadman, do you all have 
any thoughts on that question, about what the SEC can focus on 
immediately--what areas the SEC could focus on immediately in 
terms of trying to reform some of these disclosure 
requirements?
    Mr. Coffee. One of the proposals was that they should focus 
on regulation S-K. I think it was a little unrealistic to ask 
them to do that in, I think, it was something like 180 days, I 
think they would need a little bit more time than that. But I 
think that is perfectly reasonable to ask them to focus on 
scaling Regulation S-K. I think too often we are talking about 
all or nothing here, and I do understand that scaling some of 
these requirements can be justifiable.
    Chairman Garrett. All right.
    Mr. Hurt. I think my time has expired, unless, Mr. 
Quaadman?
    Chairman Garrett. Ten seconds.
    Mr. Hurt. Ten seconds.
    Mr. Quaadman. Yes, Mr. Hurt, just, I think the delivery of 
information is important, because we are currently trying to 
deliver information in booklets like this, whereas we actually 
use something like this. So, just one example, companies have 
to publish historical stock price, which was fine in its day, 
but, you know what? Alcoa's stock price on July 7, 1972, was 
$49.25. I found that not in an SEC filing, but by going on 
Yahoo! Finance in about 30 seconds.
    Chairman Garrett. Here you go. Thank you. Mr. Lynch is 
recognized for 5 minutes.
    Mr. Lynch. Thank you very much. And, again, I thank the 
witnesses. Professor Coffee, the premise of some of these bills 
seems to be that we need to assist some of these companies in 
capital formation, in raising money, and that we can accomplish 
that by providing less information to investors.
    But I can note several examples--WorldCom, Enron, AIG, 
Lehman Brothers--where in times of uncertainty, people actually 
fled from those companies where it was more opaque, and there 
was less information available and fled to companies where they 
felt they knew about the internal controls within those 
companies. And so, I don't buy that. I don't buy that we need 
to help companies by providing investors with less information. 
And I just want to get your sense on that.
    Mr. Coffee. The first thing I would say is there is a lot 
of evidence, empirical evidence that the more you reduce 
informational asymmetries, the more you reduce the company's 
cost of capital. If investors aren't sure, you report the share 
at $10 a share, but if they are not really sure whether it was 
$5 to $20 or where it was, that company is going to have a much 
higher cost of capital than a company where they are fairly 
certain it was $10 a share. Plus, there are costs, of course, 
to disclosure but there are benefits.
    And we have the capital markets that have the deepest 
liquidity and the greatest efficiency in the world because we 
have gone far in reducing informational efficiencies. It may 
cost $1.5 million a year for the average company, as Mr. 
Burton's evidence suggests, but I think there are probably 
benefits that are greater than that when we look at how 
distinctive our capital markets are and how uniquely well they 
do in financing startups. The rest of the world cannot finance 
startups. They are dependent upon bank capital. And I think 
that is partly the success of our securities markets.
    Mr. Lynch. Thank you. I want to talk to you about, there 
are a couple of bills here that actually take State regulators 
out of the business of regulating these small companies. I know 
that across our country, a lot of governors are doing great 
work on job creation and we are all competing. In my district 
we have an innovation district, which tries to bring in biotech 
companies and other high tech companies. We provide 
infrastructure, and we provide, in some cases, financing bond 
assistance so there is a local risk in, especially workers; 
obviously, I have a lot of universities and hospitals in my 
district, so the workers there are all local.
    There is a tremendous local interest and a local risk that 
is far beyond what the general market faces. And my problem is 
that now, under Mr. Mulvaney's bill and under another bill--and 
I have great respect for my colleagues--it takes the State 
regulator, ironically the person who knows the company best, 
out of the regulatory regime, and really puts the local 
economy, and the State economy at greater risk than would 
otherwise be the case. And, by the way, we have Bill Galvin in 
our State, he is my Secretary of State, and he does a great job 
on this. He is all over these local companies, and it has 
actually enhanced our ability to attract these small start-up 
companies. But I just want to hear your opinions on the effect 
of boxing out the State regulator.
    Mr. Coffee. I think there is some unexplained suspicion of 
the State regulators, who are typically the State attorneys 
general. The State attorney general does not dislike, and is 
not hostile or suspicious of small businesses. The attorneys 
general have the same attitudes as the governors of the States, 
typically. I think that the State and the local regulators know 
the most about local companies, and as long as the SEC is very 
resource-constrained, those will be the companies they give the 
least attention to, because they can barely handle, if they can 
at all, their current assignment, their current docket. So, we 
are removing the only sentry that looks at the smaller and 
local company. I think that is ill-advised.
    Mr. Lynch. I appreciate that. Thank you. I only have 25 
seconds left, so I will yield back. Thank you.
    Chairman Garrett. I thank the gentleman for yielding back. 
Mr. Huizenga for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate this 
opportunity to ask a few questions, and Professor Coffee, I do 
have a couple of things that you have brought up, some of the 
more problematic elements that you have with some of these 
bills. I am curious on Mr. Mulvaney's bill, the 6 months going 
to 3 months, what is so magical about the 6 months versus the 3 
months?
    Mr. Coffee. I don't say that there is anything magical 
about it. I say two things. First, the consequence, again, will 
be that we will see only private placements done by public 
companies. They will not go to the SEC. They will simply do 
private placements, and there will be some loss of transparency 
in the system if there are very few public offerings in the 
future by seasoned companies.
    Second, the difference between 6 and 3 months, as I tried 
to say, is that it is much more feasible to finance hedging for 
3 months than for 6 months. It is quite expensive. Now, it may 
well be that you can solve that problem by barring hedging for 
a 3-month holding period, which is what has been done under 
Regulation S, which is quite analogous.
    I would suggest again, that rather than just tinker and 
play with these, we should ask either the SEC or some blue 
ribbon group to give us their map of what the future should 
look like in terms of the relationships between public and 
private offerings. It might be that you would want to tell some 
company that it could not go to the private placement market 
again, because it had done it for 10 straight years, until it 
went to the public market one more time. I do want there to be 
some continuing transparency, which going to the public market 
does enhance.
    Mr. Huizenga. Okay. So, having an organization like the 
SEC's Government-Business Forum on Small Business Capital 
Formation is beneficial?
    Mr. Coffee. I have no hostility towards that body. I point 
out that one body you should also talk in this process is the 
securities analysts. They have views about what they want. You 
should also talk to the State regulators. I don't think they 
have been consulted about some of the bills, and the blue sky 
preemption. All of those people have a view.
    Mr. Huizenga. My concern is--and I have some personal 
experience with this because I have a bill dealing with mergers 
and acquisitions which passed this committee and passed the 
House unanimously--in the same situation as I am looking at Mr. 
Mulvaney's bill, and Mrs. Wagner's bill, these are all 
recommendations from the SEC's own working group that had been 
put forward multiple times, yet the SEC doesn't do anything 
about it. And, it is this constant drip, drip, drip of people 
saying we have to handle this, and the SEC says, yes, we will 
get to it, yes, we will get to it, yes, we will get to it. And 
then in my case, with my mergers and acquisitions bill, the SEC 
says, we don't need to do that.
    We don't need a law to do that, which was one of the 
arguments I am not sure that we need do this, and codify it, 
but the problem is we can't get the SEC to move on some of 
these issues, and it seems to me that one of the only ways is 
possibly through this legislative process. Professor Coffee, 
you put forward the notion about your concerns about the WKSIs, 
and a company being both an emerging company as well as a WKSI, 
does anybody else have that same concern? Mr. Quaadman, you are 
shaking your head, so, if you don't mind addressing that?
    Mr. Quaadman. Sure, Mr. Huizenga, I think the question, 
first off with the Small Business Committee, is a process the 
Chamber has participated in, and it is a process investors have 
participated in. So, that is just not the business community 
saying that; it is a well-rounded group.
    What we are looking at here, and I think this is also what 
the WKSIs are looking at, as well, is that our capital markets 
are different, and they are out of balance, right? So, if we 
can lower some of the thresholds, we live in an age where there 
is more information that is available, we need to fix those 
delivery systems so that there is more information that 
investors have, and that they can actually act in a decision-
useful way in their own interests. I think we are sort of 
losing sight of that fact.
    This is not an us-or-them proposition. This is a two-way 
street. Businesses need to disseminate that information into 
the marketplace to raise capital. If investors are burned 
unnecessarily, it is going to be more difficult for businesses 
to raise that capital. So, we need to make sure that delivery 
systems are in place. This is also something where the SEC has 
a track record with these businesses, and they have continuing 
oversight over them, so this is just not going to be the wild, 
wild west out there. Not by any stretch of the imagination.
    Mr. Huizenga. Mr. Burton or anybody else? 15 seconds?
    Mr. Burton. Professor Coffee's point shows the need to 
integrate and rationally re-think how we do scaled disclosure. 
Because he is right. You can't be, in concept, an emerging 
growth company and a well-known seasoned issuer simultaneously. 
So there is a need to re-think that, and I think that we all 
need be part of that process.
    Mr. Huizenga. I am just concerned that we are going to let 
this grind on and on here. We have to address it, and I think 
we need to do that legislatively. So, thank you, Mr. Chairman.
    Mr. Coffee. Congressman, I understand your frustration. You 
might suggest that you give the SEC a specific grant to do this 
study, and put a 1-year time limit on it. They are a very 
resource-constrained body, and they are overworked, but if you 
gave them the funds for doing that kind of study, I don't think 
they would hesitate to take it on, and meet your deadline, 
because they would be embarrassed otherwise.
    Chairman Garrett. I guess they would be embarrassed in a 
lot of ways because we have given them deadlines by law, and 
the money has been given them to under law to do things, and 
they have failed to make deadlines on numerous occasions. So, I 
guess they must be one embarrassed organization.
    With that, I will look to the gentleman from California for 
5 minutes.
    Mr. Sherman. Mr. Chairman, I look forward to the SEC 
finally implementing the Frank and Sherman Amendment, so that 
we have the bond rating agencies selected by a system other 
than the current system, which is that the issuer selects and 
pays the bond rating agency. If I could have selected the 
umpires for every little league game I was in, I would be in 
the major leagues right now.
    Mr. Chairman, these have been good hearings, but I think 
they lack the excitement that we would have if we focused the 
next 5 minutes on accounting issues. And so, that is the 
excitement I am going to try to provide.
    Mr. Coffee, there has been a proposal to increase the 
exemption from Section 404 audits of internal control, in spite 
of the fact that investor advocates, State regulators, State 
pension plans, and the Chair of the SEC think that we shouldn't 
relax those standards any further. Now, of course, there are 
costs to an audit of internal control, but you also get more 
assurance that the financial statements are accurate. Should we 
be relaxing further? We already exempt 60 percent of the 
publicly traded companies from this standard. Should we relax 
it even more?
    Mr. Coffee. I share your concerns. I would point out one 
compromise that rather than doing it all or nothing, the 
proposal here would say any company that earns less than $100 
million annually would not have to do a 40(b) internal audit. I 
would suggest you could scale this. You might say some smaller 
companies could do such an audit once every 3 years. That means 
you are at least occasionally looking at your internal 
controls, and it would reduce the cost by two thirds. That is 
the better than the all-or-nothing approach.
    Mr. Sherman. I might disagree with you on the cost savings 
there. Once you get the internal controls up to snuff, and you 
get the audit done, the cost the second year should be a lot 
less. But, I want to move on to another issue. Mr. Hahn, I 
don't know if you have come here to talk about FASB-2, but if 
you build a building, you capitalize it. If you spend money on 
research, which a lot of your companies do, you have to write 
it off immediately, even if the research is tremendously 
successful. Are your companies hurt because they are paying to 
build an asset, and instead they have to show it as an expense?
    Mr. Hahn. I would like to make two comments here about the 
404 compliance, also. So, thanks to the Jobs Act, we were 
actually able to perform test-the-waters meetings on our IPO 
process, and it gave us the ability to reach out to almost 90 
investors.
    Mr. Sherman. Mr. Hahn, if you could just focus on the 
question I addressed to you, because I am going to try and get 
one more response from Mr. Quaadman. He knows what I am going 
to ask him. And if you are not prepared here to talk about 
that, I will just move on.
    Mr. Hahn. I'm sorry, could you repeat the question, please?
    Mr. Sherman. It was about the immediate write-off of 
research expenses, even if the research project was successful.
    Mr. Hahn. In our business, as an emerging growth in an 
early stage company, it is all about the cash burn. So the 
biggest question was, what is your cash runway with this IPO 
proceeds? Whether we capitalized those costs right now, or 
expense--
    Mr. Sherman. So, your focus is on cash burn rather than on 
earnings per share. Mr. Quaadman, what would it do to the 
ability to raise capital if we suddenly put $2 trillion of 
liabilities on the balance sheet of American corporations as is 
being proposed by the Financial Accounting Standards Board, in 
their view that we should depart from hundreds of years of 
accounting principles, and treat every lease as if you had 
purchased an interest in the building?
    Mr. Quaadman. No, Mr. Sherman, thank you for continued 
focus on this very important issue. That change would have a 
significant, adverse impact on American businesses, as well as 
on the commercial real estate industry. We are currently in a 
position where both the International Accounting Standards 
Board and the Financial Accounting Standards board here in the 
United States are at loggerheads and are at an impasse. We have 
recently met with both boards, as well as the SEC, to try and 
come up with a rational solution. If, at the end of the day, 
the solution is to do nothing, and that we keep the status quo 
in place, we would at least avoid the adverse consequences that 
the proposals which are out there now would have.
    Mr. Sherman. And the status quo, everything that could be 
disclosed is disclosed, either in the financial statements or 
in the footnotes? So there is no lack of transparency here? It 
is simply a matter of whether you actually put $2 trillion on 
the balance sheet of all the American businesses?
    Mr. Quaadman. Correct. And with those proposals, it is 
important to note that the investor community has specifically 
said this would not give them any more information than they 
currently have today.
    Mr. Sherman. Thank you.
    Chairman Garrett. Mr. Mulvaney is now recognized for 5 
minutes.
    Mr. Mulvaney. Thank you. Professor Coffee, before we 
start--and this is not going to be adversarial--I really want 
to talk about my bill, but I couldn't help but hear what you 
said about the SEC and how dedicated they are to the work, and 
if they just had enough money, they could get all their work 
done and so forth. On this committee, we are very familiar with 
that, and we remember intimately how, when faced with Dodd-
Frank, it seemed like for some reason conflict minerals took 
priority over the Volker Rule. I am not sure how that happened 
at the SEC, but I would suggest to you, sir, that maybe, maybe, 
just maybe the SEC is susceptible to political pressure, just 
like other institutions.
    Mr. Coffee. One area on which we can totally agree is 
conflict minerals, and I am surprised that provision is still 
in the law today.
    Mr. Mulvaney. So, thank you. That is good. Let's move on, 
because you had some comments on my discussion draft, and, 
again, this is one of those, I think, very productive meetings, 
where we can actually ask questions, because we want to know 
the answers. We are not trying to bait witnesses; we are 
actually trying to get information about the bills.
    You had some criticisms of, I think, one section of the 
discussion draft that I offered on SEC Rule 144. You said that 
by lowering the date--as Mr. Huizenga mentioned to you, by 
lowering the holding period from 6 months to 3 months, it would 
create this arbitrage opportunity. I think Mrs. Maloney, before 
she left, said it would create a bunch of froth in the market 
and so forth. Let me just ask the question this way: what is 
magic about 6 months? Why doesn't that same risk, as you 
perceive it, exist now, just with a 6-month holding period, 
instead of with a 3-month holding period?
    Mr. Coffee. It is very costly to arbitrage for 6 months. If 
you are looking at a spread of a dollar, that is going to be 
used up by the cost of that additional 3 months of hedging.
    Mr. Mulvaney. Didn't this rule used to be a year?
    Mr. Coffee. The rule still is a year--
    Mr. Mulvaney. Right.
    Mr. Coffee. --for nonreporting companies. It is 6 months 
for reporting companies.
    Mr. Mulvaney. Okay. Was it ever a year for the nonreporting 
companies?
    Mr. Coffee. It was, yes, it was once a year for 
nonreporting. Right now, it is a year for nonreporting 
companies.
    Mr. Mulvaney. I guess my question is, if we have made 
changes in the past, did we see the type of concerns you have 
come to fruition or not?
    Mr. Coffee. I can't answer that question without 
investigating. I can tell you that we saw it over in the 
context of Regulation S. Regulation S invites you to sell 
securities abroad, and then after a period of time, bring them 
back. It is the same arbitrage potential, and when it got down 
to 3 months, we saw a huge arbitrage, and eventually the SEC 
had to amend the rule to prevent that.
    So, I am not telling you this prevents doing what you are 
saying. I am saying if you do it, you should really think about 
the arbitrage potential.
    Mr. Mulvaney. But let's talk about the good, Mr. Quaadman, 
because I think your organization had commented on that holding 
period. Tell me why you think it would be helpful to do this?
    Mr. Quaadman. We think it would be helpful to do, because 
you are actually going to provide more opportunities for 
businesses to raise capital, and you are actually going to 
provide more liquidity for smaller businesses and that has been 
something that this subcommittee has looked at very closely.
    I understand where Professor Coffee's concerns are. If we 
are concerned about market manipulation, that is something the 
SEC has the tools to fight and combat now, and that is 
something I think, if this bill were to pass, we can ask for 
increased disclosure, we can ask for the SEC to report back on 
that, and then determine if further action is needed.
    But, clearly, if we provide the information to investors, 
and provide them with the opportunities to invest in 
businesses, they are more apt to do that. Part of the reason 
why we also had longer holding periods was that it was more 
difficult to deliver that information to investors than what we 
currently have today. So, I think we are in this position where 
the SEC is sort of looking at the elephant and deciding, well, 
the elephant is just too big to eat. Whereas, we should be 
taking the position of, you have to do it one chew at a time. I 
think this is a good place to start.
    Mr. Mulvaney. And no one has mentioned the other two or 
three parts of the bill. Professor Coffee, since you seem to be 
the most interested in, at least, criticizing it in a positive 
kind of way, not a negative kind of way, do you have any 
difficulties, sir? Or does anybody with the proposed changes to 
the shell company relief that we are talking about?
    Mr. Coffee. I thought that was reasonable. I would want to 
hear the SEC's views, but as I say in my statement, I did not 
have an objection to that.
    Mr. Mulvaney. What about the changes to the exemptions from 
State laws? Does anybody see any difficulties with that?
    Mr. Coffee. That is the blue sky preemption; you have 
already heard me say that I am doubtful about blue sky 
preemption.
    Mr. Mulvaney. That was your point--
    Mr. Coffee. Although I did accept it with regard to, I 
think, preemption of venture capital fund advisers.
    Mr. Mulvaney. Got it. Thank you, gentlemen, very much. I 
yield back the balance of my time.
    Chairman Garrett. The gentleman yields back. Moving down 
the row, I guess, Mr. Scott is recognized next.
    Mr. Scott. Thank you very much, Mr. Chairman. Professor 
Coffee, each of the pieces of the seven pieces of legislation 
before us today seeks to ease the ability of smaller companies 
to raise capital. However, Congress just recently passed the 
Jumpstart Our Business Startups Act of 2012, and that piece of 
legislation also sought to encourage capital formation for the 
same businesses. How have the reforms of that legislation, the 
Jobs Act of 2012, that we passed, changed the capital-raising 
landscape for small businesses? And have we effectively 
evaluated that Jobs Act?
    Mr. Coffee. I can give you some anecdotal answers, but I do 
think that we do need a thorough evaluation of what the impact 
has been, and I don't think we have enough data. We can't just 
look at the number of IPOs, because IPOs are very volatile.
    What has changed is the following: almost every issuer is 
now using the confidential filing provisions so they can work 
things out with the SEC before they disclose it to the public. 
That may be good. That may be bad. But that is clearly 
happening.
    With regard to the emerging growth company being able to 
use only 2-years' financial rather than 3-years' financial, 
about half of those companies are being advised by their 
underwriters that they should still give 3 years, because the 
market wants it. So, it has been partially used, but not 
entirely used.
    The other provisions, certainly any company that can escape 
404 is escaping 404, which emerging growth companies permit. 
Underwriters are actually not using the provisions to free them 
up from observing the quiet period. The major underwriters have 
agreed to a procedure under which they will observe a quiet 
period for basically, I think it is 40 days, after the time of 
the IPO.
    That suggests that the underwriters decided it looked a 
little dangerous to have underwriters put out their own 
analysts' reports days after they did the offering. So, some of 
these rules look like the market thought they made sense. 
Others, we are definitely seeing some changes. I think it takes 
a little bit more, and I don't want to shoot from the hip to 
say what the overall impact of the Jobs Act has been.
    Mr. Scott. So, with that, does it make sense for us to pass 
a Jobs Act II? Point zero, which is this collection of bills we 
are looking at today, before we have had substantive analysis 
of the impact of the first Jobs Act that we passed last year.
    Mr. Coffee. I agree with you. And I say that even more 
about crowdfunding, because there is apparently going to be a 
bill coming in on crowdfunding, and we have not yet had a 
single crowdfunding offer, and I think it would be wise to see 
how that works before we expand the crowdfunding exemption.
    Mr. Scott. And then, finally, Mr. Coffee, how reasonable 
and appropriate is it to expect the Securities and Exchange 
Commission to effectuate all of these rule changes, given their 
inadequate funding today, and the fact that they are still 
finalizing rules under the Dodd-Frank Act, and the Jobs Act?
    Mr. Coffee. I have to say that they are an overworked, 
understaffed, resource-constrained agency, which is probably as 
frustrated as is this committee. I understand that no one is 
happy with this process. I think there is also some 
demoralization in some portions of the SEC. So, I think that 
you can't expect them to do more without giving them more 
resources.
    Mr. Scott. Thank you, very much. I yield back the balance 
of my time, sir.
    Chairman Garrett. Mrs. Wagner is recognized for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman. Mr. Quaadman, my 
proposed legislation would allow smaller reporting firms who 
have registered on an S1 to use forward incorporation to 
automatically update their registration statement. The SEC has 
recently taken other steps to update rules, given that the 
widespread accessibility of filings, as you have displayed, has 
increased investor information, access, and protection. Mr. 
Quaadman, how would this change help smaller reporting 
companies which are seeking to raise money in the capital 
markets?
    Mr. Quaadman. It would have a significant impact, because 
the smaller companies that have to use S1, when they use S1, 
they have to go back and have the SEC approve it. So, that 
affects their ability to go into the capital markets. It almost 
puts them on a slow treadmill, rather than putting them on a 
fast track. So, this actually would be very beneficial to 
short-circuiting it, and to also make it less costly.
    Mrs. Wagner. Will investors in smaller reporting companies 
be just as protected as investors in large companies?
    Mr. Quaadman. Yes, because, again, this is a situation 
where the SEC has a track record with this company that the 
information here and the company is known to the investor 
community as well. So, the investor protections are all in 
place as is the SEC's continued oversight.
    Mrs. Wagner. Thank you. Mr. Hahn, I received a letter from 
a small biotech company, Protea Biosciences Group, Inc. It is 
now a world leader in molecular analysis technology. They 
basically save lives. He has 48 employees, including 10 Ph.D. 
scientists, and is helping to bring high-paying jobs to rural 
parts of America. They have been fully reporting for 2 years, 
and their SEC filings have always been on time.
    The CEO of Protea wrote to me, ``If a small company is 
complying with SEC reporting requirements at the same quality 
as a large company, then in the spirit of fairness,'' he 
believes, ``the company deserves the same options for raising 
capital. Specifically, the availability of SEC Form S3.'' Mr. 
Chairman, I ask unanimous consent to submit this letter for the 
record?
    Chairman Garrett. Without objection, it is so ordered.
    Mrs. Wagner. Mr. Hahn, have you heard stories like this 
before? And how do think expanding Form S3 to allow smaller 
reporting companies under $75 million in market cap will help 
small biotech companies across America, like Protea?
    Mr. Hahn. I fully support increasing access to capital 
markets for smaller reporting companies. There is actually a 
company in Maryland right now, a biotech company that is in the 
same exact situation, where they are having difficulty trying 
to access capital, and with some of these changes, I think it 
would make it much easier for those companies to raise capital 
and advance their programs.
    Mrs. Wagner. Thank you very much, Mr. Hahn.
    Mr. Burton, in 1996 Congress preempted State regulation of 
most offerings on the national securities exchange, and in 
2012, Congress further preempted State regulation of public 
offerings of up to $50 million under SEC Regulation A. Mr. 
Burton, why is it important that we expand preemptions to 
smaller reporting companies and emerging growth companies?
    Mr. Burton. The primary reason is that they are already 
making full reports because they are public companies. So, it 
is really fundamentally unreasonable to expect them to also 
have to comply with 51 different State securities laws, the 
blue sky laws, particularly in the States that are merit 
review. It makes the offerings extraordinarily expensive, 
because you are literally increasing by a factor of 50 the 
number of people with whom you have to deal. And, we see that 
in other areas as well, with Regulation A; blue sky laws killed 
Regulation A. That is the reason that nobody uses them. They 
use Rule 506. So, there are a whole series of areas where it 
has become clear.
    Now, nobody is talking about eliminating the ability of 
State regulators to police fraud. We are just--
    Mrs. Wagner. Right.
    Mr. Burton. --talking about the registration requirements 
and the qualification requirements depending on the State. So, 
it is an extraordinarily important issue in terms of reducing 
the cost of raising capital in a national marketplace.
    Mrs. Wagner. Thank you very much, Mr. Burton. I couldn't 
agree more. And, Mr. Quaadman, I would like your input on this 
also, why it makes more sense to allow Federal regulations to 
have this patchwork of an additional 50 State laws?
    Mr. Quaadman. Sure. First off, there are 28 million 
businesses in the United States, and we fully support the 
State-based business formation system. However, what we are 
talking about here is we are talking about taking a small 
number of those several thousand businesses and helping them 
access either the national or international capital markets.
    So, that clearly is a system where they are trying to get 
in to bigger capital markets, where you need to have one set of 
rules. What I think your bill does, is you leave in place the 
ability of States to regulate those other 28 million 
businesses, as well as the intermediaries. So I think this is a 
partial preemption that makes sense and helps facilitate the 
capital formation abilities of these businesses to grow from 
small ones into large ones.
    Mrs. Wagner. Thank you, Mr. Quaadman. I believe I have used 
all of my time. Thank you, Mr. Chairman.
    Chairman Garrett. Your time has expired. And the gentlelady 
yields back?
    Mrs. Wagner. Yes.
    Chairman Garrett. Yes. Mr. Kildee is recognized for 5 
minutes.
    Mr. Kildee. Thank you, Mr. Chairman. In looking at the 
legislation that is the subject of this hearing, it is obvious 
that the principal intent here is to increase, provide more 
access to capital for companies potentially engaged in 
significant growth. Obviously, that is something with which we 
are all very concerned. But the notion, or the premise would be 
that the barrier to that would be accomplished or would be 
overcome, I should say, by reducing or eliminating requirements 
for information.
    Just sort of thinking about the context of some of the more 
recent, in the last several years, say a decade, significant 
financial calamities that this country has faced, it seems to 
me it that it was not based on an overabundance of information.
    I would just like to, perhaps have Dr. Coffee make some 
comments, but let me just premise the question by saying this: 
Sort of stepping back from these proposals, from my 
perspective, I would like to take a look at this from a 
slightly higher elevation, because when it comes to Congress, 
one of the things I have learned in the 15 months that I have 
been here is that there are a couple of overriding themes. One 
has to do with regulatory reform, which has evolved into a term 
of art, which really, for the most part, means creating greater 
exemptions for existing regulations. Reform has its own 
definition here, I have learned.
    And the other continuing theme is, when we deal with the 
development of regulations, with the lack of a cost-benefit 
analysis, to look at the effect of a regulation and its cost 
and implementation versus the public value that it would 
generate.
    Yesterday's hearing in the full Financial Services 
Committee was focused mostly on the cost-benefit question, and 
today we are talking more about this notion of reform. But, in 
thinking about this, in areas that are in need of capital 
formation, it would seem to me that the committee would focus, 
and it has somewhat, but focus more attention on areas like the 
mortgage market is a good place to start, and if we are 
thinking about capital for small and emerging companies we 
might think more aggressively about reauthorization of the 
Export Import Bank, since the notion here is that somehow the 
government is crowding out the capital that could be available 
through the private sector.
    But, since today we are focused on the SEC, and these 
various legislative initiatives, and as I stated, some which 
cause some concern for State regulation, my question would be 
this to Dr. Coffee, specifically: To what extent are these 
regulations, these proposed new legislative initiatives 
necessary? Is there a significant problem with small companies 
being able to access capital? Or if it is a problem that needs 
a solution, are these legislative initiatives the solution that 
you would prescribe? Or would you come up with some other 
initiatives that might be more helpful in dealing with that 
underlying problem if it exists?
    Mr. Coffee. I think there have been two very significant 
reforms that greatly increased the ability of smaller issuers 
to access the capital markets. First of all, there is a general 
solicitation, private placement under Rule 506, which we have 
only had now for about 3 or 4 months, that the rules have been 
effective. That is going to be available to small issuers as 
well as large issuers. Second, we have Regulation A Plus--it is 
colloquially called Regulation A Plus--which has a $50 million 
ceiling on it, but $50 million is real money to a smaller 
issuer, and that allows you to reach even the retail investor 
who doesn't qualify for a Prop 4A private placement.
    So, you can go to accredited investors under 506, with a 
general solicitation. You can go to retail investors under the 
Regulation A Plus. Neither of those has had much experience 
yet--6 months, 2 months, I think those will be developed. It 
takes a while for industry to adapt to these things, but I 
think both of those will significantly enhance the ability of 
issuers to access the capital markets.
    I understand there are some costs, there some problems 
about the continuing costs of compliance, a different issue. 
But I think, again, we should be searching for scaling these 
requirements, and there are lots of ways you can do that and 
not go into this complete exemption mode that some of these 
bills do. I hope that is helpful.
    Mr. Kildee. It does. And if I could just quickly ask Mr. 
Quaadman a question, you mentioned that there is a lot of data 
out there, and, of course, you and I both access most of our 
information through these devices. In that the presence of data 
is not the issue, but it is the delivery system of that data, 
the question I would have for you is if that is the case, who 
would determine what data is required to be out there? We are 
fixing delivery systems, but how do we determine what data 
would have to be provided, under what intervals, and to what 
extent, if it is not through regulations that are adopted by 
some entity of the government, the SEC or others?
    Mr. Quaadman. Sure. The corporate secretary of Ryder 
Systems was at the Chamber a month ago at an event where we 
were discussing corporate governance issues, and he was 
actually talking about the fact that with an over 100-page 
proxy, that makes it more difficult for them, Ryder, to 
communicate with their shareholders or potential investors to 
get capital.
    So, the question I think we are all faced with, and this is 
something that I think we all know, and the SEC has actually 
been looking at it for several years, and this is actually what 
the genesis of XBRL was, that different investors want to look 
at different data that they feel is more important to them, 
right? And where I think where Mr. Garrett's bill is going is, 
you can come up with that summary page, and then you could sort 
that information, and determine what is best for you. But, more 
importantly, I think we need to do that study in the Garrett 
bill, because that is what is going to make it, it is what is 
going to inform all of us, to determine what is the data that 
is needed? How should it be delivered? And what is the best way 
to do that? And we don't disagree that it shouldn't be done 
through regulation, but the problem is we are dealing with 
regulations that are rooted in 1930s legislation.
    Chairman Garrett. Thanks. Yes, so, it was pointed out to 
me, two points. One is, we had a study in there, and that is in 
legislation because, as you probably all know, this is not 
information that we haven't already sought from them in the 
past, and we just don't get it. So, now we have do it through 
legislation.
    And, to Mr. Kildee's comment, before I yield over, 
actually, we came up with a simpler solution so maybe what we 
need to do is just provide a total government guarantee for the 
entire securitization process there, and then there will be 
complete investor confidence regardless of the information that 
is provided and then we can ensure a robust securitization 
market. So, let's think about that for a little while. And with 
that, I will yield to Mr. Hultgren.
    Mr. Hultgren. Thank you, Mr. Chairman. And thank you, 
again, to all of the witnesses for being here. I want to 
address my first question to Mr. Quaadman. The U.S. Chamber of 
Commerce, I know, represents more than 3 million businesses of 
all shapes and sizes. Do your interactions with member 
businesses lead you to believe that some companies would 
consider increasing employee ownership beyond their top 
executives if we passed this type of legislation, which makes 
it cheaper and less risky to do so?
    Mr. Quaadman. Yes, and first of all, thank you for 
introducing this legislation. I have heard from companies 
during the Jobs Act, actually before the Jobs Act debate, that 
they were very worried that 12G was inhibiting their ability to 
retain employees. And these were small businesses, private 
businesses that are trying to grow. What happened after the 
Jobs Act passed is they said they effectively called in and 
said 12G is fine, but 12G doesn't work unless Rule 701 is 
lifted, and that the dollar level is raised, and it hasn't been 
raised since 1976. So, this is a device that, unless we get 
this Rule 701 changed, that your bill is looking to do, it will 
be exceedingly difficult for these businesses to retain 
important employees in order for them to succeed.
    Mr. Hultgren. I would open this up to anyone. I wonder if 
anyone could elaborate on the danger that confidential 
information could pose to a privately held companies?
    Mr. Quaadman. Mr. Hultgren, there is a reason why private 
companies are private. If they wanted to enter the public 
markets and disseminate that information in such a way that 
they felt was beneficial to them, they would. They have made a 
decision that they feel they would rather not have certain 
confidential information be displayed, and that is something 
they have made that value judgment on.
    It is something also, when you take a look at the Facebook, 
when you take a look at the Facebook capital raising issues 
from several years ago, they specifically tried to evade the 
American capital markets, because they didn't want to have some 
information disseminated. And, that is, if that is a value 
judgment they make, they are doing so in what they feel is in 
the best interest of that business.
    Mr. Hultgren. Let me offer this out, if anyone has any 
thoughts, if anyone could elaborate on how increased employee 
ownership could benefit the market performance of privately 
held companies. Mr. Burton?
    Mr. Burton. I think it is clear that for some medium-sized 
companies, the current threshold makes it difficult for them to 
compete with larger companies that can offer stock options, 
ISOs, and stock that has sold at a discount into the pensions 
and so on and so forth. In other words, compensatory benefit 
plans.
    The long and short of it is that by raising the threshold 
to $20 million, a lot of companies are currently running up 
against these restrictions, will be able to compete with the 
Microsofts or the Apples or the Googles or what have you as 
they are trying to develop new technologies, create jobs, and 
provide better products to the American people, and we don't 
want to set up the world so that the only people who can 
provide these kind of employee benefits are the largest 
corporations in America. We want there to be parity between the 
small firms and the large firms, in terms of how the employee 
benefit programs work, and this is by no means the only case 
where that goes on.
    Mr. Hahn. We are a 30-person--
    Mr. Burton. It needs to be fixed.
    Mr. Hahn. We are a 30-person emerging growth biotech 
company. So, we compete for talent against the large 
pharmaceutical companies. We can't always compete with the 
salaries, so it is important for us to be able to give equity 
stakes, compensation to those employees to help attract the top 
talent.
    Mr. Hultgren. I have visited in my district--I have a 
couple of ESOP companies, and it is just a noticeable 
difference when you walk in there, of a sense of ownership, a 
sense of pride of every single person there feeling like this 
is their business, from the top to every single level, it is 
just amazing.
    Do you feel like that is similar as well, of certainly 
impacting and incentivizing employees to come to a business, 
but also to work more diligently, and ultimately what have you 
seen? What would be the benefit for some of your employees to 
have access to this?
    Mr. Hahn. Like you said, ultimately, they have a stake in 
the company if it does well. If the company grows, their 
ownership in the company grows. Their stock value goes up. 
Interestingly, we have had a lot of investor meetings where 
investors were actually happy that we provide stock options to 
all of our employees, and some of the investors liked that 
because, as you said, it gives them more of a stake in the 
company. It makes the employees actually work harder and feel 
more ownership to what we are doing.
    Mr. Hultgren. Really quickly, I wondered, has the SEC 
articulated any reason as to why they have not promulgated a 
rule since 1998 to update Rule 701? Does anyone know? Okay, 
thank you, Mr. Chairman. My time has expired. I yield back.
    Chairman Garrett. The gentleman's time has expired. The 
gentleman from Connecticut is now recognized.
    Mr. Himes. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I am looking at a number of pieces of 
this legislation, including some related to the SBICs, which I 
think are a very effective mechanism for financing smaller 
companies.
    I have two questions, though, for the panel. Thank you for 
being here. My first question relates to the nature and 
intensity of the problem that we face. Mr. Burton, and Mr. 
Quaadman, in particular, you speak in pretty dire terms about 
the current state of the IPO market. Mr. Burton, in your 
testimony you say that it is prohibitively expensive for small 
and medium-sized companies to access the public markets. That 
is somewhat belied by the IPO volume that was saw in 2013, 
which was a record in about the last 15 years or so, so I am 
trying to get at what is really going on.
    Mr. Quaadman, you put this in terms of declining 
competitive, saying that there is a steady decline of public 
companies in the United States and new businesses are eschewing 
public markets for more private forms of financing. So the 
question is, and by the way this comes from, I was a supporter 
of the Jobs Act, and I was just--it was hard to get at what was 
really going on. I was regularly shown charts of the IPO market 
in 2008 and 2009, as evidence about how tough Sarbanes-Oxley 
was, this while the financial markets were, of course, in ashes 
around our feet.
    So, my question is this, and Mr. Quaadman, maybe you can 
just give us a little bit more information. You frame this in 
terms of competitiveness, saying there is both less public 
market financing happening and less in the United States. When 
I got into IPOs 25 years ago, there was Japan, New York, and 
London, and that was it. Today, it is a very different world. 
You have all sorts of markets in Asia, and all over Europe.
    I have two questions for you, really. What is the optimal 
distribution internationally that allows you to say that it is 
too little here in the United States? Number one, can you show 
us that we have deviated from what you see as internationally 
appropriately distributed? And number two, your statement that 
we are doing too much private and nontraditional, as opposed to 
public. What is the right split between young companies going 
public, seeking private sources of financing or seeking 
strategic exits? It is hard to know if there is a problem if we 
don't know what the optimal steady state is. So, what do you 
have for us in that regard?
    Mr. Quaadman. Thank you for the thoughtful question and 
thank you for your continued leadership on these issues. Last 
year was the first time we saw a rise--a significant rise with 
the IPOs, and it was also the first time, as I said in my 
opening statement, in 15 years that we actually saw a rise in 
public companies in the United States. I think what we did see 
in 1999 and 2000, at the same time we were going through 
Sarbanes-Oxley and the Enron scandal and all of that, we 
actually had for the first time since World War II, 
increasingly competitive global financial markets, right? So, 
our markets now have to compete in a way that they didn't have 
to compete for 70 years, and from our vantage point, that is 
not a bad thing, because if we have to go out and compete, 
let's go and do it because the American business community does 
that best.
    What I think is problematic, and this is where the Chamber 
has had a concern since before the financial crisis, is that 
our regulatory structures haven't kept up with the course of 
time, which is what I think we are seeing with some of the 
bills here, is that we are actually updating things that 
haven't been updated in a while. And, at the same time, our 
regulatory systems are sort of holding back the ability of 
these businesses to compete.
    Mr. Himes. But, let me stop you. I got that.
    Mr. Quaadman. Yes.
    Mr. Himes. My question is, can you assert with confidence, 
based on some view of what is optimal, that we are not doing 
enough public financing here in the United States relative to 
Asia and Europe? And can you assert with confidence that we are 
doing too many private and strategic take outs, rather than 
IPOs?
    Mr. Quaadman. I spoke before a group of 100 top 
entrepreneurs under 35. And I asked them a question, ``Who here 
wants to go public, and who wants to stay private? Who wants to 
be acquired?'' That split up a third, a third and a third. Had 
I asked that question 10 years ago, 90 percent of the hands 
would have gone public. So, what we have done, and this is why 
I think you are right, I think it is difficult to see where the 
trends are right now, but what we have seen is that the mindset 
of our younger business people, and our business people is 
changing, because one thing that is true is that the wealth 
effects of a company going public and the job creation effects 
of a company going public, are established, and that we are 
seeing less of that happening, or have up until last year.
    Mr. Himes. Thank you. I appreciate that answer, and I want 
to follow up. I am almost out of time, but I really am 
interested in this question of what is optimal, because, again, 
it is just not obvious that--
    Mr. Quaadman. Yes.
    Mr. Himes. --we have a problem, unless we look at numbers. 
I am almost out of time, but Mr. Burton, you talked about $1.5 
million in costs. I want to talk to you afterwards about gross 
spreads. The average gross spread for an IPO has been 7.5 
percent for about, well, for forever. The average IPO is $200 
million in size, a little bit of math tells you that is $15 
million in capital that goes away for public companies, and for 
some reason I hear a lot about the $1.5 million, but I don't 
hear anybody talking about that $15 million in the gross 
spread. I am out of time, but I would really--I am going to 
approach you afterwards to kind of get a sense of why that is 
happening, and what you think about it. And with that, I will 
yield back the balance of my time.
    Chairman Garrett. The gentleman yields back.
    The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman, and thank you for 
holding this hearing. Mr. Hahn, I think there is a lot of 
perception out there, that, basically, the securities laws in 
this country kind of assume that everybody is a big corporation 
and are flush with money, and that the large, sophisticated 
multinational companies, and that kind of discriminates against 
smaller companies, because of the way those laws are imposed. 
Would you agree with that?
    Mr. Hahn. I agree completely with that. As I was stating 
earlier, with the 30-person company, and with the Jobs Act, we 
reached out to 90 investors during our road show, and test-the-
waters meetings, and when we talk about 404(b) and the internal 
controls, I can tell you that in not one of those meetings did 
anybody ask about our internal controls, our financials. They 
wanted to dig into the science, and understand where were 
coming from. The only financial question we ever received was, 
how long is this cash going to last?
    Mr. Neugebauer. Yes, I think one of the things, 
particularly, and maybe it discriminates against biotech 
companies and research companies a little bit more, but the 
life bread for those companies is to pour as much money back, I 
guess, into research and development as you possibly can 
because that, ultimately, is going to create value for your 
company. Is that a fair assessment?
    Mr. Hahn. That is very fair. As we were saying earlier, the 
cost of our IPO was $2.5 million. And then, $1.5 million a year 
just to be a public company. And, with a base salary expense, 
annual salary expense of $4 million, that additional $1.5 
million could be put toward research and development, hiring 
more scientists.
    Mr. Neugebauer. Creating more jobs, right?
    Mr. Hahn. Creating more jobs.
    Mr. Neugebauer. And creating more value for shareholders, 
and creating more jobs. I think, Mr. Burton, we heard Professor 
Coffee say that the SEC is overworked and underpaid, or 
underfunded. Do you agree with that?
    Mr. Burton. I think that is maybe true with respect to 
enforcement, but it definitely is not true on the regulatory 
side. The SEC budget, and I have these numbers in a paper I put 
together about 3 months ago, has grown approximately--this is 
from memory--10 percent a year for nearly 30 years, which is a 
pretty high rate of growth. And if you look at the regulations, 
even the relatively simple regulations have, perhaps, a dozen 
lawyers involved in it. So, the bottom line is I don't think 
they are under resourced in the regulation area. In fact, I 
think to some degree, they may have too many people involved in 
each project, and that impedes your ability to get done what we 
would all like to see them get done.
    Mr. Neugebauer. Yes, in fact, the numbers are this: the 
operating budget for 2013, I believe, is $1.26 billion. That is 
20, 22 percent higher than the highest level of funding 
approved by the Democratic-controlled Congress from the period 
of 2007 to 2010.
    Mr. Burton. I think they have a management problem, not a 
financing problem. And that requires a different kind of 
solution.
    Mr. Neugebauer. Mr. Quaadman, I think you picked up on 
something that I wanted to talk about a little bit, and this is 
about when these small to medium-sized companies can access the 
capital markets, can go public, it provides a lot more capital 
for them to accelerate the growth of a lot of those companies, 
and creates quite a few jobs. Is that a fair assessment?
    Mr. Quaadman. Yes, there are numerous academic studies 
which show that the job impacts and the wealth creation that 
goes along with that, and that is where I was getting to, 
something that I think we have lost, and I also think we are 
seeing the mindset changing.
    But also, to go back to your earlier question, as well, we 
came out with two separate studies that have 51 recommendations 
for how the SEC can better manage itself, and I think you see 
that with some of, even the prioritization of rulemakings, that 
the SEC has done, where they have put conflict minerals ahead 
of other rulemakings that are of more consequence to investors 
and businesses.
    Mr. Neugebauer. Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. The gentleman yields back. I guess last, 
but certainly not least, Mr. Luetkemeyer is recognized for 5 
minutes for the last word.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, I will be brief. 
Thank you very much, I appreciate your allowing me to 
participate this morning in your subcommittee, as I don't 
normally sit on your subcommittee, but I think it is an honor 
to be here, and I appreciate your indulgence.
    Also, this morning, I would like to ask for unanimous 
consent to add to the record two op-eds: one that appeared this 
morning in The Wall Street Journal regarding to my bill; and 
one that appeared in Law360 regarding my bill.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Luetkemeyer. They are such glowing and supportive tomes 
that I could not resist putting them in the record, so I 
certainly appreciate your willingness to do that. Thank you, 
sir.
    With regards to H.R. 4200, I assume that most of the 
Members here this morning are familiar with the bill, and what 
it does, I can just briefly say that it allows advisers that 
have jointly advised only SBICs and venture funds to exempt 
from SEC registration.
    Combining the two separate extensions that currently exist, 
one for advisers that solely advise SBICs and one for advisers 
that solely advise venture capital funds as well as exclude 
SBIC S. That is from SEC registration, threshold calculation, 
and exempt from State regulation advisers of SBIC funds with 
less than 90-man assets under management, leading those to be 
regulated by the SBA as they are they are today, which I think 
is an important point. So I would just like to get some 
acknowledgement of what a wonderful bill this is, Mr. Quaadman, 
from the Chamber. How do you appreciate that effort by myself 
and other colleagues of mine, with tremendous bipartisan 
support on this bill?
    Mr. Quaadman. Yes, sir, we support your bill, and we 
appreciate the bipartisan manner in which it is moving forward, 
and I look forward to working with you for its passage.
    Mr. Luetkemeyer. Do you have any advice or do you like 
everything in it? Do you think it is going to address a need, a 
concern?
    Mr. Quaadman. We think it actually addresses a very 
significant problem in that we have seen where we don't have 
the exemptions normally lining up as they should, so I think 
you are correcting a problem here. I think it makes the markets 
more efficient and will help business who use both SBICs and 
venture capital, and we appreciate your work on this.
    Mr. Luetkemeyer. Mr. Burton, do you have any comments about 
the bills?
    Mr. Burton. As outlined in my written statement, I think 
the bill is very constructive and addresses a significant 
problem, and the bottom line is that SBICs should not be 
treated less favorably than other venture capital firms. And 
they are a form of venture capital firms.
    Mr. Luetkemeyer. I appreciate your remarks, and I also want 
to give kudos to Ranking Member Maloney for her welcome 
support, and again it is a bipartisan effort, and her efforts 
to support the bill are greatly appreciated.
    Mr. Chairman, there is an old saying that you want to quit 
while you are ahead, and understanding that, I certainly 
appreciate the support and all the fine words from our panel 
this morning, and I yield back.
    Chairman Garrett. So, now we understand why you wanted to 
come to the panel here at the meeting today. Great. While 
taking that under advisement for the next time that you come 
into our subcommittee hearing, great. So, again, I appreciate 
the testimony, information, and responses from each and every 
member of the panel. It is always helpful, and as somebody here 
said--I think it was Mick Mulvaney--that this type of hearing 
is a good hearing because we are, honestly, each one is trying 
from both sides of the aisle just to try to get to the root 
issues, on the problems, and to try to elicit what we can do in 
the best case on these very complicated topics. So, I do thank 
you for that.
    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.

    This hearing is now adjourned. Thank you again.

    [Whereupon, at 12:04 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             April 9, 2014



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