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

                        LEGISLATIVE PROPOSALS TO ENHANCE
                             CAPITAL FORMATION FOR
                           SMALL AND EMERGING GROWTH
                               COMPANIES, PART II

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

                                    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

                                   __________

                                  MAY 1, 2014

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 113-77

                                     ______

                       U.S. GOVERNMENT PRINTING OFFICE
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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
    STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
    STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
    MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
    MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
    RANDY HULTGREN, Illinois             DENNY HECK, Washington
    DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
    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
    STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ANN WAGNER, Missouri

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 1, 2014..................................................     1
    Appendix:
        May 1, 2014..................................................    31

                                   WITNESSES
                             Thursday, May 1, 2014

    Beatty, William, Director of Securities, Securities Division,
      Washington State Department of Financial Institutions, and
      President-Elect, the North American Securities Administrators
      Association, Inc...............................................    11
    Lynn, Jeff, Chief Executive Officer, Seedrs Limited..............    13
    Miller, Benjamin, Cofounder, Fundrise, Rise Companies Corporation     7
    Tierney, Annemarie, Executive Vice President--Legal and
      Regulatory, and General Counsel, SecondMarket Holdings, Inc....     9

                                    APPENDIX

    Prepared statements:
        Beatty, William..............................................    32
        Lynn, Jeff...................................................    59
        Miller, Benjamin.............................................    66
        Tierney, Annemarie...........................................    69

                        LEGISLATIVE PROPOSALS TO ENHANCE
                          CAPITAL FORMATION FOR SMALL
                         AND EMERGING GROWTH COMPANIES,
                                    PART II

                                  ----------

                             Thursday, May 1, 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 9:35 a.m., in
    room 2128, Rayburn House Office Building, Hon. Scott Garrett
    [chairman of the subcommittee] presiding.
        Members present: Representatives Garrett, Hurt, Neugebauer,
    Fincher, Mulvaney, Hultgren; Maloney, Scott, Carney, and
    Kildee.
        Also present: Representatives McHenry and Heck.
        Chairman Garrett. Good morning, all. The Subcommittee on
    Capital Markets and Government Sponsored Enterprises is called
    to order. Today's hearing is entitled, ``Legislative Proposals
    to Enhance Capital Formation for Small and Emerging Growth
    Companies, Part II.''
        We welcome all of the panelists. We will now go to opening
    statements. I yield myself 6 minutes for an opening statement.
        So, good morning, once again, and welcome to today's
    hearing. Thanks in large part to the JOBS Act, 2013 was the
    best year for initial public offerings (IPOs) since 2000, with
    more than 175 IPOs raising more than $40 billion in much-needed
    growth capital, and at least 80 percent of these companies
    qualify as emerging growth companies (EGCs) under the JOBS Act.
    And while this is a very positive development, we believe that
    more work needs to be done.
        For example, according to one small business survey,
    government regulation red tape remains at the very top of the
    list of the most important problems facing American job
    creators. Another survey shows that small business demand for
    private capital continued to outpace access in 2013, while at
    least 60 percent of the respondents found it difficult to raise
    new external financing.
        And so, building on the early success of the JOBS Act, this
    hearing--the 5th hearing we have had during this Congress--
    represents another opportunity to explore ways to further
    reduce unnecessary regulatory burdens and to enhance access to
    capital for small American businesses.
        While the bills we have considered during this Congress
    address a variety of capital formation issues, they are
    designed to target regulatory problems in three overarching
    areas. Let me go through them.
        First, some of the bills continue to help small businesses
    access capital by going public. We call that pre-IPO. Second,
    some of the bills improve the ability of small companies to
    access capital and compete after they have gone public. We call
    them post-IPO. And third, some of the bills help small
    businesses attract more investment in the private market. We
    just call them no-IPO.
        These three legislative proposals we will be discussing
    today fit within the third category I just talked about. And
    the gentleman from North Carolina down at the end here, Mr.
    McHenry, he has circulated a discussion draft to fix the
    Senate's burdensome statutory missteps in the crowdfunding
    title of the JOBS Act by restoring a bipartisan policy authored
    in this committee last Congress.
        Mr. McHenry has also offered a discussion draft to
    modernize the regulation A section for small companies by
    updating issuing caps, while striking the right balance between
    preserving State enforcement and lifting burdensome regulation
    requirements.
        The discussion draft also codifies language that
    effectively and efficiently facilitates liquidity in the
    secondary trading of what is called the ``restricted
    securities'' among sophisticated investors. So I thank Mr.
    McHenry for his hard work and thoughtful proposals to make the
    crowdfunding and Reg A provisions of the JOBS Act more cost-
    effective and efficient options for issuers and the investors
    alike.
        Finally, I have circulated a discussion draft to ensure
    that issuers and investors in certain private offerings under
    Reg D do not face overly complex and burdensome regulatory
    obstacles. As you all know, last year the SEC adopted a rule
    lifting the ban on general solicitation and advertising of
    private offerings under Rule 506 of Reg D, as mandated by Title
    II of the JOBS Act. Unfortunately, the SEC didn't stop there.
    Instead of simply removing the ban and opening up this market
    to new potential investors, the SEC decided to issue a separate
    rule proposal, not called for by this Congress, that would
    impose a number of new burdensome regulatory requirements on
    issuers seeking to use Rule 506, the exemption.
        The SEC's selective judgment in deciding when and how to
    follow clear congressional directives and when not to is, of
    course, disturbing and disconcerting to me. When members of
    this committee, outside stakeholders, and even other SEC
    Commissioners pleaded with the Commission to issue a more
    pragmatic rule regarding conflict minerals, the Commission
    refused, stating, ``Well, if Congress had intended that a
    mandate be limited further, we think Congress would have done
    so explicitly.''
        Unfortunately, the Commission did not apply this same
    rationale in a consistent manner when it came to the removal of
    the ban on general solicitation. As one comment put it, ``The
    JOBS Act on its face does not authorize the Commission to
    attach new and additional conditions to the use of the
    exemption. It is not for the Commission to rely on its general
    rulemaking authority to bring Congress and the President back
    into line by adding conditions that it believes may enhance
    investor protection.''
        However, that is exactly what the Commission did. That the
    SEC believes it has the authority to alter a clear mandate in
    the JOBS Act, but not in the Dodd-Frank Act, certainly
    suggests, as SEC Commissioner Dan Gallagher said, ``In the face
    of a statutory mandate, the SEC only thinks outside the box and
    uses its expertise when it means adding regulations, no matter
    the cost.''
        Indeed, I believe that many of the additional requirements
    in the SEC's Reg D proposal will, if ultimately adopted, make
    Rule 506 a less attractive avenue for small business capital
    formation and, at the same time, harm investors' choice. And
    this, of course, is clearly at odds with the goals, let alone
    the text of the JOBS Act.
        And so my discussion draft would address some of the more
    burdensome red tape portions contained in the SEC rule
    proposal, including, certainly, costly filing requirements and
    disqualification provisions.
        Before I conclude, I want to be clear on a few points
    regarding what this discussion draft would not do. It would not
    remove the SEC's existing Form D filing requirements. It would
    not remove the SEC's existing requirement that issuers take
    reasonable steps to verify that investors in Rule 506 offerings
    are accredited. It would not reduce the SEC's existing rules
    requiring disclosure to investors. And it would not limit the
    SEC's existing authority to prevent and punish fraud and other
    misconduct under the Federal securities laws.
        I believe this discussion draft will ultimately strike the
    right balance between helping America's job creators raise
    much-needed capital and protecting Americans who invest their
    hard-earned money in these companies at the same time.
        I thank you very much for your attention. And at this
    point, I recognize the ranking member of the subcommittee, Mrs.
    Maloney from New York, for 4 minutes for her opening statement.
        Mrs. Maloney. Thank you, Mr. Chairman. And welcome to all
    of the witnesses. I would like to particularly welcome Ms.
    Tierney, who is from the great State of New York, and I have
    the privilege of representing you. Thank you for being here
    today.
        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 ready and willing to invest in
    promising businesses.
        In short, the United States is where companies come to
    raise money. While the system of securities laws in the United
    States is complex, the central tension underlying our
    securities law is very simple: Investors want as much
    information as possible on the companies they are investing in,
    as quickly and as accurately as possible.
        Often 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 competing desires.
        But public policy does not run on autopilot. In the
    securities market, we often entrust the job of properly
    balancing these competing goals to the regulator, the U.S.
    Securities and Exchange Commission. I would like to say that in
    the securities market especially, we need an active and
    informed regulator to write, enforce, and when appropriate,
    change the regulations to keep pace with innovation and the
    market.
        Of course, the SEC isn't the only securities regulator in
    the United States, nor should they be. The State securities
    regulators play a very important role, as well. And we have one
    of those State regulators on our panel today, Mr. Bill Beatty
    from Washington State. Welcome.
        State securities regulators are in the best position to
    provide on-the-ground protection for retail investors who are
    investing in securities offerings and are too small to merit
    the SEC's attention, especially given the SEC's lack of
    resources. The State regulators are also well-positioned to
    provide investor's education to mom-and-pop retail investors
    who don't have a fortune to invest, who never worked on Wall
    Street, and who are most vulnerable to fraud.
        Sometimes, of course, Congress has decided that it is
    necessary to preempt State securities laws in order to reduce
    the compliance burden for companies seeking to raise capital.
    But I think that those decisions should be made on a case-by-
    case basis. Sometimes it will be appropriate to preempt State
    law, and sometimes it will not.
        I hope that we can use this opportunity to have a robust
    discussion about the proper role of State securities regulators
    so that we can inform our own thinking about how to maintain
    and improve our country's capital markets.
        I look forward to the hearing today, and thank you very
    much, Mr. Chairman.
        Chairman Garrett. Thank you, gentlelady. And the gentlelady
    yields back. We now turn to the vice chairman of the
    subcommittee, Mr. Hurt from Virginia.
        Mr. Hurt. Thank you, Mr. Chairman.
        Mr. Chairman, thank you for holding today's hearing on
    these three legislative proposals to further enhance capital
    formation. I also want to thank our witnesses for being here
    today.
        While we have witnessed the successes of the JOBS Act in
    the 2 years since it was enacted, more still needs to be done,
    starting with the SEC completing implementation of the JOBS
    Act. Additionally, Congress and the SEC must expand on those
    successes and find practical solutions to increase access to
    capital for small businesses without sacrificing key investor
    protections.
        Our securities laws are riddled with outdated and
    burdensome regulations that are hindering small businesses in
    Virginia's Fifth District, my district, from accessing the
    capital they need to grow. As our markets and the needs of the
    participants continue to evolve, it is necessary for our
    regulatory structure to reflect those new realities.
        Chairmen Garrett and McHenry's bills will provide important
    modifications to key sections of the JOBS Act that enhance the
    ability of small businesses and start-ups to raise capital. For
    many of the companies that would take advantage of these
    improvements, the public markets are not a viable option, and
    they would otherwise face increased costs and complexity to
    meet their goals.
        I appreciate this committee's continued focus on ensuring
    that our small businesses and start-ups have the ability to
    access the necessary capital in order to innovate, expand, and
    create the jobs that we need.
        I look forward to working with my colleagues to advance
    these proposals and others that will provide growth and
    opportunity for our constituents in our communities. I look
    forward to your testimony, and I thank you for your appearance.
        And thank you, Mr. Chairman. I yield back the balance of my
    time.
        Chairman Garrett. The gentleman yields back.
        Mr. Scott is recognized for 4 minutes.
        Mr. Scott. Thank you, Mr. Chairman.
        First of all, let me say that I agree with both Chairman
    Garrett's and Ranking Member Maloney's very thoughtful opening
    statements. However, we have to look at the big picture. First,
    we do have to reduce the barriers to capital formation. But
    most importantly, we have to really identify exactly what these
    barriers are, be very truthful as to what these barriers are.
        Then, we have to increase opportunities to raise that
    capital. And then, yes, we must address any regulatory
    impediments or burdens that make it difficult to raise
    additional capital.
        As we know, the Securities and Exchange Commission has a
    three-part mission: to protect investors; to maintain fair,
    orderly, and efficient markets; and to facilitate capital
    formation. And nowhere is that needed more than our small
    businesses. Small businesses are still the heart and the soul
    of our economy. They produce most of the jobs, especially new
    jobs.
        Recently, the Securities and Exchange Commission's Advisory
    Committee on Small and Emerging Companies put forth a series of
    recommendations that we, and ultimately the Securities and
    Exchange Commission, should provide due consideration, and I
    believe that this committee will, jointly with the SEC.
        Now, whether it is allowing for larger size of increments
    and bids, or tick sizes, for smaller companies, an option that
    is currently under consideration by the Securities and Exchange
    Commission, or more controversial options some of us may not
    initially care for, but we have to look at the big picture and
    recognize that we must be open for debate, like, for example,
    increasing the size of companies exempted from Sarbanes-Oxley's
    auditor attestment requirements or, another, exempting smaller
    companies from shareholder advisory votes, yes, on executive
    pay and compensation, if we have that clear evidence that these
    are impediments to capital formation. Capital formation must be
    first. And, of course, we first have to look at it with a very
    jaundiced eye.
        We must also ascertain what significant evidence on small
    business capital formation exists measuring the impact of the
    JOBS Act. The JOBS Act is successful. It was signed into law
    just a little more than a year ago. The fundamental first
    question is, are we moving too soon? Have we in Congress been
    given enough to fully implement and evaluate the effects of the
    JOBS Act before pushing for additional, experimental small
    business capital formation proposals?
        That is the big picture to me. I think we need to look at
    that. This is a very serious issue. And our small business
    community certainly deserves that.
        And with that, I yield back the balance of my time.
        Chairman Garrett. The gentleman yields back.
        Mr. McHenry for 3 minutes.
        Mr. McHenry. I want to thank the chairman for holding this
    hearing, and for his leadership on improving our capital
    markets.
        And 3 years ago, this committee undertook a bipartisan,
    committed effort to update our outdated securities laws. It
    created new partnerships on this committee and resulted in
    significant bipartisan votes. With a little luck, our
    committee's solidarity led to the advancement and passage of
    the JOBS Act, which President Obama signed into law just over 2
    years ago. The Act was arguably the most significant piece of
    legislation in the last Congress.
        Congresswoman Maloney and I authored Title III of the Jobs
    Act, also known as the equity crowdfunding title. What
    motivated us was a pledge to cut red tape, as well as
    strengthen and ensure investor protections and allow start-ups
    to employ the Internet as a means to solicit small equity
    investors from everyday investors without triggering costly SEC
    registration.
        Our original bill, passed by voice vote in this committee
    and by over 400 votes on the House Floor, was the only title
    within the JOBS Act to get the full and public endorsement from
    President Obama. That is significant.
        But then, the Senate happened. An ill-advised and 11th-hour
    move resulted in the Senate striking a broadly supported title
    of the JOBS Act that Congresswoman Maloney and I authored, and
    hastily substituting an arduous amendment that neutered the
    promise of equity crowdfunding.
        After patiently waiting for the Commission to reveal a
    crowdfunding rule proposal, and academics and market leaders
    submitting hundreds of comments, it is now clear that the
    current statute has failed.
        But that does not mean that equity crowdfunding is destined
    for failure. Today's equity crowdfunding discussion draft not
    only restores what Carolyn Maloney and I started 3 years ago,
    this committee's commission to democratizing capital is front-
    and-center in that. But it also incorporates thoughtful
    suggestions by commenters who aspire to strengthen the vitality
    of equity crowdfunding.
        Separately, the discussion draft on Regulation A in the
    resale of restricted securities simply codifies the spirited
    intent of Title IV of the JOBS Act, reviving the exemption to
    connect small enterprises and everyday investors. Furthermore,
    the draft amendment to the 1933 Act also codifies policy that
    efficiently cultivates liquidity in secondary trading of
    restricted securities among sophisticated investors. So, we do
    a lot for both the everyday investor and the more sophisticated
    investors.
        I believe democratizing finance and extending access to
    America's start-ups are not partisan ideas. In fact, they are
    anything but. But what motivates each member of this committee
    is to ensure that we have a bipartisan achievement that helps
    entrepreneurs and everyday investors. That is what this is all
    about.
        Thank you, Mr. Chairman.
        Chairman Garrett. I thank the gentleman, and I thank the
    gentleman for his work on these bills. The gentleman yields
    back.
        And for the last word, Mr. Heck is recognized for 2
    minutes.
        Mr. Heck. Thank you, Mr. Chairman, and Ranking Member
    Maloney.
        It is my privilege, while not a member of this
    subcommittee, to welcome on its behalf Mr. Bill Beatty from
    Washington State, who is a constituent of mine. Mr. Beatty is,
    in fact, the securities administrator for the Washington State
    Department of Financial Institutions. More importantly, for
    purposes of today's discussion, he is the president of the
    North American Securities Administrators Association, and we
    are so very, very pleased, honored, and grateful that you would
    come all the way across the country, a trip I know well, to
    share your insights.
        Mr. Beatty is a graduate of the University of Puget Sound
    and Seattle University's School of Law. There probably is
    literally nobody in the United States with more expertise in
    securities law. And I am looking forward to receiving
    information from him about how it is State securities
    administrators can play a role in protecting investors, while
    at the same time helping capital markets perform as efficiently
    as is possible.
        Thank you very much for allowing me to stop by, Mr.
    Chairman. Mr. Beatty, welcome to Washington, D.C.
        Chairman Garrett. Okay. Thank you. The gentleman yields
    back.
        And now, we will turn to the panel. Again, we thank all the
    members of the panel, regardless of how far across the country
    they have flown, for being with us, and we thank you for flying
    so far. And so we will--for those of you who have not testified
    before this committee, just a few simple reminders. The little
    machine in front of you shows your time: green means you have 5
    minutes; yellow means you are supposed to be summing up; and
    red means you are supposed to be done.
        Also, we always remind you to pull the microphone closer
    than it looks like now for each one of you, because it doesn't
    pick up that well. So when you do speak, pull it close.
        You are going to be recognized for 5 minutes to give a
    summation of your remarks. And without objection, your entire
    written statements will be made a part of the record.
        So with that said, we turn to our first witness, Mr.
    Miller, cofounder of Fundrise. Mr. Miller, welcome. And you are
    recognized for 5 minutes.

       STATEMENT OF BENJAMIN MILLER, CO-FOUNDER, FUNDRISE, RISE
                         COMPANIES CORPORATION

        Mr. Miller. Chairman Garrett, Ranking Member Maloney, and
    members of the subcommittee, my name is Ben Miller, and I am
    the cofounder of Rise Companies Corporation, which owns and
    operates Fundrise, a real estate crowdfunding platform based
    here in Washington, D.C. I am honored to be here to testify on
    my experience using Regulation A to crowdfund the development
    of local real estate here in the District of Columbia.
        Let me spend a moment on my background so you understand
    how I came to run Fundrise, one of the only companies in the
    country currently raising equity online from the public, both
    from accredited and unaccredited investors, in Washington,
    D.C., Maryland, and Virginia, prior to implementation of Title
    III of the JOBS Act.
        Before starting Fundrise, I ran a real estate company. In
    that capacity, I led the acquisition and development of more
    than 2 million square feet of property, such as Gallery Place
    on 7th and H Streets, NW, a 750,000-square-foot mixed-use
    development.
        As a real estate entrepreneur, I have partnered with some
    of the largest institutional investment companies in the
    country, such as MassMutual; Angelo, Gordon, & Co.; and the
    AFL-CIO. So I understand what it means to raise debt and equity
    in the capital markets.
        But one day, we asked ourselves, why are we raising money
    from institutions which have no real relationship with the
    places in which we are investing? What if we raised the money
    from the people who live there, who care, who are part of the
    neighborhood? So that is what we are doing and it explains why
    I am sitting here. We have been raising real investment in
    increments as affordable as $100 per share from the people who
    live near our real estate projects.
        Since the JOBS Act did not exist when we started our
    endeavor, we had to work within the existing regulatory
    framework. Thanks to our outstanding and expensive legal team,
    we found a way through Regulation A. Our initial Regulation A
    filings with the Securities and Exchange Commission totaled
    more than 350 pages, but eventually allowed us to sell equity
    online at $100 per share to the local public.
        To my knowledge, over the past 2 years we are the only ones
    who have successfully qualified more than one Regulation A
    offering, having climbed the regulatory mountain associated
    with Regulation A no less than 3 times. Each Regulation A
    offering was a serious undertaking, one that did not generally
    get easier over time.
        For example, despite many similarities among our prior
    offerings, our third regulation offering took us more than 6
    months to get through the regulators, which included hundreds
    of pounds of physical paper--actually, approximately 25 pounds
    per filing, 8 separate attorneys, more than $50,000 in legal
    fees, and 2 sets of reviewed accounting and financial
    statements, all of this to raise $350,000 from the residents of
    only 3 States.
        Yet, we view ourselves as fortunate. Our local regulators
    in D.C., Virginia, and Maryland understood that we were working
    to build local places and create a new capital source for local
    job development and knew that less inclined regulators could
    have and potentially would have made it impossible for us to
    move forward.
        In our experience, the likelihood that a Regulation A
    offering becomes effective is primarily dependent upon the
    jurisdictions in which the offering has to be registered. Given
    the great uncertainty that places upon an endeavor that
    requires tens of thousands of dollars and many months to begin,
    without regard to whether the issuer will actually be
    successful in its Regulation A offering, we support any
    proposal that lessens the regulatory burden of Regulation A
    offerings while simultaneously increasing the regulatory
    certainty faced by small businesses seeking to raise capital.
        In addition, like many in the industry, we have reviewed
    the proposed Regulation A+, and we support the exclusion of
    investors in Regulation A+ offerings from the number of holders
    of record counted under Section 12(g) of the Exchange Act. We
    do not believe that, given the ongoing reporting requirements
    already proposed in Regulation A+, requiring small issuers to
    become subject to the onerous and expensive reporting
    requirements of the Exchange Act serves either investors or the
    small business community.
        However, we would note that we found the wording contained
    in the draft bill to be slightly confusing and ask the
    subcommittee to consider whether there are clearer and simpler
    ways to accomplish the goal.
        We at Fundrise take very seriously our ongoing mission to
    open up real estate investment to the general population beyond
    institutional and accredited investors that have predominantly
    held sway in the market. We believe that the proposals
    contained in these bills provide substantial, positive steps
    towards democratizing real estate investment, and we encourage
    the subcommittee to consider each of these proposals seriously.
        I am happy to take any questions that you may have at this
    time.
        [The prepared statement of Mr. Miller can be found on page
    66 of the appendix.]
        Chairman Garrett. And I thank you, Mr. Miller.
        Next, Ms. Tierney, executive VP and general counsel of
    SecondMarket. Welcome. And you are recognized for 5 minutes.

    STATEMENT OF ANNEMARIE TIERNEY, EXECUTIVE VICE PRESIDENT--LEGAL
      AND REGULATORY, AND GENERAL COUNSEL, SECONDMARKET HOLDINGS,
                                  INC.

        Ms. Tierney. Good morning, Chairman Garrett, Ranking Member
    Maloney, and members of the subcommittee. My name is Annemarie
    Tierney, and I am the general counsel of SecondMarket. I am
    very grateful to be able to testify this morning.
        I have been in the securities industry for almost 25 years
    and have worked in a number of legal roles, including at the
    SEC, the law firm of Skadden Arps, and NYSE Euronext, before
    joining SecondMarket in 2010. For those of you not familiar
    with our company, SecondMarket was founded in New York City in
    2004. We are a registered broker-dealer and the leading
    provider of services to facilitate transactions at private
    company stock. We have also advocated for regulatory change to
    help private companies raise capital and facilitate job
    creation, including changes to the 500-shareholder threshold
    and the elimination of the ban on general solicitation and
    advertising included in the JOBS Act.
        Today, I would like to express our support for the adoption
    of proposed Section 4(a)(7) set out in Section 5 of the draft
    bill to amend securities laws to improve the small business
    capital formation provisions. I will also share insights on how
    the current regulatory framework for resales of private company
    shares imposes significant and unnecessary challenges to
    private company capital formation and job growth.
        Under current laws, the only federally codified safe harbor
    for resales of private shares is Rule 144. The safe harbor,
    however, is only available to shareholders who are not
    affiliates of the company and who have held their common and
    preferred stock for at least 12 months. This means that Rule
    144 is not available to private company founders, many angel
    investors, and officers and directors. It is also unavailable
    to employees who own equity in the form of stock options.
        Instead, resales by these types of shareholders occur in
    reliance on a longstanding legal construct referred to as
    4(a)(1-1/2), which is a mouthful, and are subject to State blue
    sky regulations that must be satisfied in every State where
    potential buyers are located. I would like to provide two
    examples of the challenges that this legal framework poses for
    private companies.
        In 2012, SecondMarket expanded our business to include
    private community banks. These banks were looking to provide
    liquidity to their employees and shareholders. The benefits of
    that were obvious: Providing community bank shareholders a
    clear path to liquidity once or twice a year made it easier for
    the bank to raise capital and attract talented employees. And
    greater access to capital meant more loans to community and job
    creation.
        The reality, however, is that almost every State other than
    New York State prohibits broker-dealers from reaching out to
    their accredited investor clients to identify potential
    interest in private company stock, a prohibition inconsistent
    with SEC and FINRA rules which allow broker-dealers to discuss
    opportunities with clients if there is a preexisting
    relationship. This restriction ultimately made it impossible
    for us to create successful liquidity events for these
    important businesses.
        In addition, the other exemptions that are available for
    resales in the State level are interpreted inconsistently
    across the States and create a patchwork of regulation that is
    almost impossible to navigate, even for a registered broker-
    dealer. It is almost as though you are trying to put together a
    Rubik's Cube and you are missing one piece. It is almost
    impossible to make it work across multiple States.
        This inconsistent legal framework also creates significant
    challenges for private company employees seeking to exercise
    their options and monetize a significant component of equity
    compensation. Every option has an exercise price that must be
    paid by the employee in order to convert the option of common
    stock. In addition, option exercise creates an income tax event
    for the employee.
        Since most rank-and-file employees of private companies
    don't have sufficient funds to pay these costs out-of-pocket,
    they often need to simultaneously sell a portion of the common
    stock underlying their options to cover these costs, so they
    can't satisfy any hold period, much less a 12-month hold
    period.
        As in the case of community banks, State law restrictions
    make it extremely difficult for employees or broker-dealers
    acting on their behalf to find buyers for these shares. As a
    result, a significant amount of equity of employee options
    expires every year, resulting in a real economic loss of
    private company employees.
        In my view, proposed Section 4(a)(7) merely codifies a
    longstanding Federal construct applicable to resales of private
    company securities by shareholders who cannot rely on Rule 144.
    In addition, I would note that all of the securities eligible
    to be resold under proposed Section 4(a)(7) are securities that
    were originally issued to shareholders in transactions that
    were themselves exempt from Federal and State registration such
    as Rule 506 and Rule 701, which provides an exemption for
    shares issued under certain equity compensation plans.
        I would like to note that the proposed legislation also
    includes important protections, such as that the shares may
    only be resold to accredited investors and remain restricted
    after the resale. The proposed legislation also requires
    verification of accreditation if general solicitation or
    advertisement is utilized.
        Under the current outdated and inconsistent regulatory
    regime, founders, large angel investors, officers, and a large
    percentage of start-up employees are put at a legal and
    economic disadvantage in the post-JOBS Act world. In light of
    the fact that start-ups are estimated to create an average of 3
    million new jobs annually, it is essential that the Federal and
    State regulatory framework continue to evolve to create an
    environment in which start-ups can flourish. And providing
    founders and angel investors greater facility to sell their
    shares means that more capital will become available to start
    new companies and create more jobs.
        I would also like to note that we agree strongly with
    Chairman Garrett and support the goals of the draft on the
    proposed Reg D changes. And in summary, I would like to state
    that it is absolutely critical that we continue to address
    regulatory impediments around capital formation and job
    creation, such as those addressed by the proposed legislation.
        Thank you again for the opportunity to participate this
    morning. I would be happy to answer any questions.
        [The prepared statement of Ms. Tierney can be found on page
    69 of the appendix.]
        Chairman Garrett. And I thank the gentlelady.
        Next, Mr. Beatty from the State of Washington, who was
    already introduced by Mr. Heck. Welcome, and you are recognized
    for 5 minutes. Thank you.

    STATEMENT OF WILLIAM BEATTY, DIRECTOR OF SECURITIES, SECURITIES
          DIVISION, WASHINGTON STATE DEPARTMENT OF FINANCIAL
         INSTITUTIONS, AND PRESIDENT-ELECT, THE NORTH AMERICAN
              SECURITIES ADMINISTRATORS ASSOCIATION, INC.

        Mr. Beatty. Thank you, Mr. Chairman.
        Good morning, Chairman Garrett, Ranking Member Maloney, and
    members of the subcommittee. My name is Bill Beatty. I am the
    director of the Washington State Securities Division, and for
    the past 28 years have served as an attorney in the Division. I
    am also president-elect of the North American Securities
    Administrators Association (NASAA), the Association of State
    Securities Regulators. I have also served as chairman of
    NASAA's corporation finance section and as a member of the
    Special Committee on Small Business Capital Formation.
        I am honored to testify to you today about proposals to
    enhance capital formation for small and emerging growth
    companies. NASAA has two mandates: promoting grassroots
    investor protection; and promoting efficient capital formation.
    In fact, promoting capital formation is also a core mission of
    my securities department in Washington. We regularly meet with
    and assist small businesses to help them raise capital in our
    State.
        NASAA shares Congress' goal to improve the economy by
    encouraging investment in small business. However, we believe
    this is best achieved through restoring investor confidence in
    the market. We want to bring investors back to the market, and
    we want to work with Congress to do so.
        My written testimony discusses how States protect retail
    investors, assist local businesses to raise capital, and
    oversee small offerings. At the outset today, I want to address
    an apparent theme running through many of the bills we will
    discuss today. This is the myth that Federal preemption of
    State law is the most efficient and quickest way to promote
    capital formation.
        As many of you may recall, on September 13, 2011, NASAA
    testified that States should play a leading role in
    establishing a new crowdfunding marketplace. Congress
    disagreed, and in April 2012 enacted a crowdfunding bill that
    broadly preempted State authority. At the time, NASAA was
    already developing a model crowdfunding exemption. This model
    rule would have been adopted by the third quarter of 2012.
        When Congress preempted our authority in this area, our
    work on this model rule was deferred. Nevertheless, as I appear
    before you today, seven States have adopted intrastate
    crowdfunding exemptions, including my own State, and more than
    a dozen other States are considering similar exemptions. These
    actions decisively demonstrate that had Congress allowed the
    States to proceed, there could be a vibrant functioning
    crowdfunding market today.
        Today, we are discussing a draft bill that may once again
    preempt States from playing a key role in another emerging area
    that encourages capital formation for small local businesses:
    Regulation A+. During the JOBS Act debate, we urged Congress to
    preserve our role as the primary regulator of regulation
    offerings. Congress agreed, and NASAA supported a GAO study of
    the factors that affected the use of Regulation A. We committed
    to address any factor that dealt with State blue sky laws.
        Consistent with our goal of capital formation and our
    pledge to Congress, we undertook a thorough self-assessment of
    our Regulation A processes and examined blue sky concerns
    addressed by the GAO. We also solicited public comments and
    consulted numerous stakeholders, including the American Bar
    Association.
        The culmination of this effort is the NASAA coordinated
    review protocol, a modernized, efficient system for Regulation
    A review. Filings are made with one program coordinator and
    distributed to the other participating States. Only lead
    examiners communicate with the applicant. Our process is
    complete 21 business days after the initial filing, assuming no
    deficiencies in the application and any delay in clearing an
    application is directly tied to the issuers' response time.
    Once lead examiners clear the application, the decision is
    binding on the other States. Our membership approved the new
    protocol, and as of today, 49 of 53 jurisdictions have
    implemented it by signing a memorandum of understanding.
        We are excited about its potential to help small businesses
    in our communities. In short, the States are ready to go with
    Regulation A, provided Congress and the SEC don't short-circuit
    our efforts through preemption.
        You requested that we comment on three draft bills. We are
    concerned about the overarching deregulatory nature of these
    bills. As I said, we wholeheartedly share your goal of
    assisting small businesses and spurring economic growth, but we
    believe that many of these bills move the goals in the opposite
    direction. Overregulation did not cause the collapse of our
    financial markets. America's capital markets are viewed as the
    gold standard because they are free, transparent, and
    responsibly regulated. This is the formula for economic growth
    and job creation.
        My detailed comments on these bills are included in my
    written testimony, along with suggestions for how they might be
    improved. Some members of this committee requested our comments
    on related bills discussed in an April 9th hearing, and my
    written testimony offers brief comments on those, as well.
        In conclusion, State securities regulators share your
    goals, and we appreciate your interest in our perspective. My
    hope, and NASAA's hope, is to work with Congress to pursue
    policy reforms that reflect smart regulation.
        Thank you. I will be happy to answer any questions you may
    have.
        [The prepared statement of Mr. Beatty can be found on page
    32 of the appendix.]
        Chairman Garrett. Thank you very much.
        Finally, last but not least, Mr. Lynn, CEO of Seedrs
    Limited. Good morning. Welcome. And you are recognized for 5
    minutes.

    STATEMENT OF JEFF LYNN, CHIEF EXECUTIVE OFFICER, SEEDRS LIMITED

        Mr. Lynn. Good morning, Chairman Garrett, Ranking Member
    Maloney, and honorable members of this subcommittee. My name is
    Jeff Lynn, and I am the chief executive officer and cofounder
    of Seedrs.
        I want to thank you for inviting me to testify today in
    connection with the discussion draft of the Equity Crowdfunding
    Improvement Act of 2014, which I will refer to as the
    ``Improvement Act.''
        By way of background, Seedrs is one of the leading equity
    crowdfunding platforms in Europe. We launched in the United
    Kingdom in July 2012, and we opened to investors and
    entrepreneurs across Europe in November 2013. Since our launch,
    we have completed 92 financing rounds, with a total of
    approximately 8.4 million pounds, or $14.1 million, invested.
    We have financed businesses ranging from mobile app developers
    to theater productions to traditional manufacturers to
    financial services firms to a cheesemaker.
        Seedrs is authorized and regulated by the U.K. Financial
    Conduct Authority. When we received our authorization 2 years
    ago, to our knowledge, we were the first equity crowdfunding
    platform anywhere in the world to obtain regulatory approval.
        My own background is as a U.S. securities and corporate
    lawyer. I practiced with the international law firm of Sullivan
    and Cromwell in New York and London before founding Seedrs.
        Seedrs conducts its activities under the laws of the United
    Kingdom. I have detailed in my written testimony how U.K. law
    applies to equity crowdfunding. And in the interest of time, I
    will say here simply that there is general consensus that the
    British approach represents a reasonable and workable balance
    between investor protection and commercial viability and that
    it is probably the best equity crowdfunding regime in the world
    today.
        Turning to the United States, Title III of the JOBS Act
    provides the legislative framework for an equity crowdfunding
    regime here. I have come before you today because I believe,
    based on the extensive experience I have gained in the equity
    crowdfunding space, that Title III as enacted is an unworkable
    law that will stifle equity crowdfunding in the United States
    before it ever begins.
        At the time the legislation which turned into Title III was
    first being discussed and introduced by Congressman McHenry and
    Congresswoman Maloney, my team and I actively considered
    bringing Seedrs into the U.S. market. As Title III emerged into
    its final form in the Senate, however, we decided not to enter
    the United States because we did not think it would be possible
    to conduct a viable equity crowdfunding business under the
    regime.
        We would very much like to provide American entrepreneurs
    and investors with the opportunity to participate in this
    important and effective new form of finance, but we simply
    cannot do so under Title III as it now stands.
        There are I believe five core problems with Title III, and
    the Improvement Act goes a long way toward addressing each of
    them. I do not have time to address all five of these issues in
    detail here, and for my views on the fundraising caps, the
    financial statement requirements, the maximum amounts that
    investors can invest, and curation, I would respectfully ask
    you to refer to my written testimony.
        However, I do want to take this opportunity to address the
    final issue, which I believe is the most profound. Title III
    provides an exemption from the registration requirements of
    Section 5 of the Securities Act of 1933, but it does not
    address the equivalent provisions of the Investment Company Act
    of 1940. This means that while a platform may facilitate the
    direct issuance of shares by an issuer to investors under Title
    III, there is no scope for the platform to aggregate those
    investors into a special purpose vehicle or nominee structure.
        While this may seem a technical point at first glance, it
    is actually one of the most important issues in equity
    crowdfunding. If a small, growing company issues shares
    directly to hundreds of individual shareholders, that poses
    significant risks both for the issuer and for investors. Such a
    structure can kill a company by preventing it from raising
    additional capital or being sold and it can deprive investors
    of the entirety of the appreciation to which they are entitled
    due to lack of critical contractual protections.
        The solution to this problem is the use of aggregation,
    allowing all investors to be grouped together in one SPV or
    nominee structure. The Improvement Act proposes to include
    aggregation structures used for crowdfunding under the list of
    exemptions in Section 3(c) of the Investment Company Act. I
    believe this is a hugely important provision and is essential
    to making equity crowdfunding work.
        To conclude, Mr. Chairman, equity crowdfunding has the
    potential to be a transformative tool for small businesses and
    for investors. If implemented correctly, it can create some of
    the most productive flows of capital an economy can ever see,
    bringing willing investors together to finance the businesses
    that will create the most jobs, wealth, and productivity.
        However, this cannot happen if the regulatory regime is not
    fit for the purpose, which Title III simply is not. The
    Improvement Act makes significant strides in addressing the
    problems with Title III, and I believe that if this legislation
    is enacted in the form proposed, there is a substantially
    greater likelihood that equity crowdfunding will be able to
    flourish in the United States.
        Mr. Chairman and members of the subcommittee, thank you for
    the opportunity to appear before you today, and I would welcome
    the chance to respond to your questions or to amplify or
    clarify these statements at any time.
        [The prepared statement of Mr. Lynn can be found on page 59
    of the appendix.]
        Chairman Garrett. I thank you, Mr. Lynn. And I thank the
    entire panel. We will now turn to questioning, so I recognize
    myself for 5 minutes.
        I guess I will start with Ms. Tierney. Some of you folks
    got into this a little bit, but maybe you can dig a little bit
    deeper for me. Reg D, can you run down, however you want to
    explain it, some of the most troublesome, some of the most
    burdensome aspects of complying with the additional reg
    requirements that SEC is proposing with regard to Reg D?
        Ms. Tierney. Of course. SecondMarket, as I noted at the
    beginning of my comments, is very active in the private company
    space. And we actually support a significant number of private
    companies raising capital under 506(b) and 506(c).
        We know from our own experience as an issuer of an
    investment trust that is utilizing 506(c) that the facility to
    generally solicit has made it much simpler for us to get access
    to investors to whom we would not otherwise have access. So we
    think that the rules as currently in place work really well,
    but the proposed rules--I can tell you from experience--have
    created a real overhang on the market for other companies that
    want to utilize 506(c). And I think the most significant issues
    with the proposed rules, in my mind, are the multiple
    requirements to file Form Ds, an advanced Form D, the current
    Form D, and a final Form D.
        An advanced Form D, as proposed currently 15 days in
    advance of filing, is completely unworkable for private
    companies. We raise money on a continuous basis. There is no
    start or stop. I think the proposed rules were really drafted
    for a Wall Street investment opportunity model, not the way
    that private companies in Silicon Valley--
        Chairman Garrett. Isn't there a--there has to be a start
    period, right, when you start doing it?
        Ms. Tierney. My CEO, when we were a start-up, was
    constantly raising capital. He could be at a cocktail party--
    and I am sure you know this, as well--you are at a conference,
    you are anywhere and needing every single day looking for
    investors in your offering.
        Chairman Garrett. Okay.
        Ms. Tierney. So it is continuous. To have to stop that for
    15 full days and potentially trip it up is just unworkable. And
    I know that NASAA wrote a very good comment letter to the SEC,
    noting--I think, Bill, you didn't support the 15-day advanced
    filing. I think you came out at, if I recall, 2 to 3 days in
    advance. Is that right? But I know that the idea of any stop in
    capital raising is problematic for private companies.
        I think also the concept of having to file a final Form D,
    whether or not you have raised capital, can be a death knell
    for private companies. Nobody wants to go out and tell people
    that they failed to raise capital. That is not a good message
    to send if you are a start-up.
        And Form Ds are difficult to file. You have to file one
    with the SEC, and you have to file one in every State where you
    actually sell securities. And I know the States are working
    very hard to get a uniform Form D filing system in place, but
    that doesn't exist right now. And every State has a different
    approach to Form D.
        Chairman Garrett. Can you just go on to what Mr. Beatty was
    talking about as far as what they are trying to do in this
    area? Is that a solution to the problem or is the legislation a
    solution to the problem? Why is one better than the other, if
    it is, in your opinion?
        Ms. Tierney. I think that a concept of filing one Form D in
    a consistent manner that would apply to every State in which
    you sell would be a massive step forward for Reg D filings. But
    having to do three of those--
        Chairman Garrett. Yes, I get that.
        Ms. Tierney. --and having to file, I would assume, if the
    SEC adopts the proposed rules, that the States will follow and
    require that those additional forms be filed in every State, as
    well. So that is expensive. We have to pay our outside counsel
    to file these Form Ds for us--
        Chairman Garrett. So, in other words, even if the States do
    what Mr. Beatty was talking about and come up with a, sort of
    like a common multi-State arrangement is what you were
    suggesting there, that doesn't solve the problem, is what you
    are saying?
        Ms. Tierney. I think it makes--it lessens the impact of the
    problem, but I think that my proposal and SecondMarket's
    proposal would be one Form D filing at the time that you
    commence capital-raising--
        Chairman Garrett. Okay.
        Ms. Tierney. --not the form--not the 15-day after, not a
    final--
        Chairman Garrett. Got you.
        Ms. Tierney. --so we would support one filing. I would
    support a filing that had to be done at the State level if it
    is consistent and a one-stop shop kind of approach.
        Chairman Garrett. We took all this time on this one
    question. So what about the 1-year suspension that--I will let
    you start, and then we will get--
        Ms. Tierney. I think that is a death knell for private
    companies.
        Chairman Garrett. Why is that?
        Ms. Tierney. Because people make mistakes. So if the rules
    were adopted as proposed, say you have a cease conversation for
    15 days, but maybe your CEO says something by accident, and now
    you haven't filed your Form D 15 days in advance or you forget
    to file your final--there is a lot of--these are small
    companies. They don't have expensive outside legal counsel.
    They are trying to do this themselves, and people make
    mistakes.
        The current requirements for Form D filings specifically
    state that the failure to file a Form D does not preclude you
    from relying on the exemption. To go from a structure where
    that is not a necessary item in order to comply with the
    requirement to you are out of the market for 12 months if you
    fail to file seems--I just don't understand how that is
    justifiable or how that helps the market.
        Chairman Garrett. Got it. My time has expired, but thank
    you for answering those couple of questions.
        The gentlelady from New York is recognized for 5 minutes.
        Mrs. Maloney. Thank you to all of the panelists for your
    statements today.
        Mr. Beatty, during the time that we debated the passage of
    the JOBS Act, there was a great deal of debate over the State
    securities laws, and should they be exempted for offerings
    under Regulation A? Some people argued that the burdens of
    complying with State regulations was one of the reasons why
    companies didn't use Regulation A anymore. And as many of us
    recall, we reached a deal on the Floor to remove most of the
    State preemption, although we allowed it in some circumstances.
        Can you describe the work that the State securities
    regulators have done since the JOBS Act was passed to
    streamline their compliance for Reg A+ offerings?
        Mr. Beatty. Thank you, Congresswoman Maloney. Yes, we have
    done a fair deal of work--as some of it was highlighted in my
    oral comments--what we have done--we recognized, I think, that
    with the GAO study that we could be better at doing these types
    of offerings. We could be more consistent, we could be more
    timely.
        We put in place a coordinated review system that, as I
    said, would result in the initial determination of clearance or
    need for additional work within 21 business days. This is
    something that we have signed an MOU on. We are committed to
    this. We believe this provides excellent service to the
    companies in our State and other States that want to raise
    capital.
        I think that what has been described here by Mr. Miller and
    the fact that he had jurisdictions that understood what he was
    trying to do is an important concept. We understand what
    companies are trying to do when they raise capital in our
    States. We want them to succeed. We think it is very important.
        The days of a regulator trying to find a way to deny
    offerings are over. We don't do that. We need these companies
    in our State. The system that we propose is very timely, it is
    a one-stop filing, and it is a filing that will be made via e-
    mail with our State initially. Eventually, it will go up on our
    electronic filing system that we are developing and will be
    available for Form D filings in November of this year.
        This is something that, given the timelines--and I would
    note that at the back of my written testimony, we have the
    timeline laid out in a table that I think is pretty easily
    understandable. But quick decisions, decisions that are based
    on one set of guidelines, this results in certainty, I think,
    for the filers and is a good thing for the filers and is a good
    thing for the States.
        Mrs. Maloney. Can you discuss the areas where you think
    State security regulators can play a role that the SEC can't
    play? Is it mostly protecting the mom-and-pop retail investors
    or regulating small securities offerings?
        Mr. Beatty. I think we do both.
        Mrs. Maloney. What do you think you offer that the SEC does
    not offer?
        Mr. Beatty. I think we do--as the initial question--I think
    we do both. As I said, the mandate that I think most States
    have is to protect investors and foster capital formation in
    our States. I think the role that we can play that the SEC
    doesn't play is that we are local and we are available.
        We understand that if somebody has a problem with an
    offering in our State, an investor, that the call was going to
    come to us, whether it is a Federal offering or a State
    offering, it is not going to Washington, D.C. We also
    understand that from the standpoint of an issuer, if there is a
    problem and we are deemed to be intransigent or otherwise not
    responsive to an issuer, that we are going to hear about it not
    only from the issuer, but probably from our governor, as well.
    So we are very responsive, and we understand the needs of these
    small companies.
        Mrs. Maloney. Okay. Ms. Tierney, could you talk about your
    company's experience in verifying that investors are, in fact,
    accredited investors? There was a lot of debate over accredited
    investors when we debated this earlier. And do you think it is
    important to require verification that an investor is
    sophisticated or an accredited investor before selling them an
    unregistered security?
        Ms. Tierney. I apologize to Chairman Garrett for having to
    disagree on this point, but we do this for a business, so I
    have to be objective--or not objective. We have done a
    verification, I think, on about 1,200 to 1,500 investors,
    mostly in the context of angel companies raising company
    through 506(c) offerings.
        There are some points of friction in the existing rules
    that create problems. For example, they are drafted for U.S.
    investors and don't anticipate foreign investors who can't
    provide a credit report. So there are some frictions that the
    securities bar is working through right now.
        But I can tell you, from our experience, people have been
    generally willing to provide the information. We try to be
    rational and reasonable. We are a registered broker-dealer, so
    people know that their information is going to be safe.
        Mrs. Maloney. Very quickly, do you find that investors
    claim to be accredited investors when they are not? Do you have
    examples like that--
        Ms. Tierney. We have found that, Representative Maloney. We
    have found that people--not a large percentage, I would say a
    very small percentage of angel investors who had done multiple
    angel investments based on checking a box on their
    accreditation questionnaire, when having to provide actual
    documentation weren't able to show that they had made $200,000.
    They weren't far off, but they weren't over the requisite
    threshold.
        But I would say that the vast majority easily satisfy the
    rules. We have very few investors who come through who make
    $201,000 a year, so it is--but I know that a lot of investors
    that we are not seeing are saying that it is problematic for
    them to provide confidential personal information. So I think
    there are arguments on both sides.
        Chairman Garrett. Thank you.
        Mr. Hurt, the vice chairman of the subcommittee, is
    recognized for 5 minutes.
        Mr. Hurt. Thank you, Mr. Chairman. Thank you all again for
    your appearance and testimony today.
        My question is for Mr. Miller and for Mr. Beatty. In
    talking about Reg A, I think the evidence is clear that
    historically only a limited number of issuers have taken
    advantage of the Reg A exemption for public offering stacks,
    that is public markets.
        Mr. Miller, and then Mr. Beatty, why do you think it is
    that issuers have avoided using the Reg A exemption in the
    past? And do you believe--what do you think the effect would be
    of raising the exemption proffering from $5 million to $10
    million? What benefit would that give to small companies
    looking to raise capital? And then from Mr. Beatty's
    standpoint, what are the investor protection concerns that are
    posed, if any?
        Mr. Miller. I think that the primary challenge with
    Regulation A is actually the speed. The first offering we did
    took us 9 months, and I had O'Melveny & Myers, former General
    Counsel of the SEC, actually leading the process with us. And
    that is--partly as a result of the fact that it is not
    frequently used, it is a very human process. People--the
    regulators aren't familiar with Regulation A. The regulators
    aren't familiar with real estate investment. And so, you have a
    learning curve.
        And I do think that when you think about the process, the
    SEC spent 6 months, 9 months, 8 months in each one of our
    offerings, and I do sometimes wonder--the SEC obviously is
    sophisticated, knows what they are doing, has to do it multiple
    times. We did it basically 4 times, because each State is
    sovereign, although coordinated, and so there is a question of
    what does the additional--sort of basically repeating of the
    process--how does that benefit the investor? It doesn't
    necessarily benefit the fundraiser, even though the States are
    sophisticated in many cases.
        The other issue is that we--it is not just--everybody
    focuses on preemption, but there are other requirements State
    by State. In Maryland, we had to file as an exempt broker-
    dealer. Each State has--there are a lot of rules beyond the
    ones we are focused on that each State requires. And so it is a
    patchwork quilt. It is very--and the Internet now makes it
    possible to raise nationally--so there is an efficiency that is
    possible nationally in order to get to scale that--I can
    imagine interfacing with--we had hundreds, we had hundreds of
    questions from the States, hundreds, about our offering, and if
    I were potentially getting questions from 50 State regulators,
    I can only imagine we would get more.
        So I think that the question is, is the SEC, as a
    sophisticated body, not sufficient? Why would I need to do it
    twice, essentially? That is the question that I think needs to
    be addressed in this Regulation A preemption issue.
        Mr. Hurt. Thank you. Mr. Beatty?
        Mr. Beatty. I think, to answer your first question about
    why it wasn't--while Reg A was not used widely, I think it had
    to do partially with the offering amount. I think it had to do
    with--as Mr. Miller said--the speed associated or lack of speed
    associated with the review of the offering, particularly at the
    Federal level. I think that it was not used widely, at least in
    our area, in multi-State offerings, again, because it was not
    that large.
        Also, at least in our area with our local bar, there was a
    perception essentially that perhaps because it wasn't used
    widely, that good companies didn't use Regulation A. And so
    they were reluctant to try and do a Regulation A offering. I
    don't know if that is pervasive throughout the country, but
    that is what our local bar told me when I asked them about it.
        As far as the--I would note that the system that we have
    put in place would address many of the concerns addressed by
    Mr. Miller in terms of inconsistent State comments and those
    types of things. As far as the investor protection element, I
    think what States bring to the table is that, particularly for
    local companies, we know these people, we know what the issues
    are going to be, we are familiar with these companies, and we
    are better able to, perhaps, address some of the questions.
        I see my time is running out, so I will conclude my remarks
    there. Thank you.
        Mr. Hurt. And then I guess my question--just going back to
    Mr. Miller for a second, so the JOBS Act, of course, increases
    the cumulative Reg A offerings by an issuer from $5 million to
    $50 million. Do you have a sense of what an appropriate
    threshold would be? And how--would increasing that further,
    would that aid a small business?
        Chairman Garrett. Very briefly.
        Mr. Miller. Yes, absolutely. I think that you will see
    small, regional investment banks actually enter the space of
    Regulation A where--and also start seeing real institutional
    block sales, if Regulation A becomes available at larger
    amounts.
        Mr. Hurt. Thank you. Thank you, Mr. Chairman.
        Chairman Garrett. I now recognize Mr. Scott.
        Mr. Scott. Thank you very much. Thank you very much, Mr.
    Chairman.
        I said in my opening statement that we need to look at the
    big picture of this, and where there are regulatory
    impediments, we need to really examine it. And, Ms. Tierney, I
    really think you have hit on something here with the 506(c) and
    the Form D. And I do notice, Mr. Chairman, on our memo, we do
    have a mention of that, but we don't have any sponsorship on
    it. I don't know if that could be incorporated in that.
        But if so, I would be delighted to work with you on that,
    because, Ms. Tierney, I would like for you to go into a little
    more detail of exactly what we need to do, because I agree with
    you. If one form can do, and if these repeat forms of Form D is
    causing very difficult--a difficult obstacle to capital
    formation, then obviously we certainly need to address that.
    Mr. Chairman, I would like to work with you on that.
        And with that, Ms. Tierney, can you just share with the
    committee what you actually would like to see us do,
    succinctly?
        Ms. Tierney. I think that the absolute best outcome, in my
    mind, would be that every private company that is raising
    capital under 506 would file one Form D at the commencement of
    the offering to put the States on notice on which--whether they
    are using B or C, so that the States have the information they
    need to regulate fraudulent activity. Those forms will be filed
    one time, be available across all 50 States, say how much the
    intent was to raise, and potentially what the use of--the
    expected use of proceeds will be, but that would be it. And
    they would file that at the commencement of the offering. And
    then the States and the Federal Government would have the
    information they need.
        Right now, you have to file a Form D at the point in time
    that you sell your first--from the first time you have somebody
    invest, you have to file a Form D 15 days after the sale with
    the Federal Government, with the SEC. Then you have to file a
    Form D in every single State where you sell. So you may sell
    one week to somebody in Utah and the next week to somebody in
    Washington State, so you have to file a form in every single
    State the first time you sell. That doesn't seem sensible to
    me. I don't understand why that is beneficial to the States,
    the SEC, or to investors.
        Mr. Scott. And what does that cost the small business? What
    is the hardship there? Is there a cost?
        Ms. Tierney. It is the cost of preparation. Not every
    State--it is a patchwork, as Ben and I have been saying. And I
    know the States are working hard to address that, but under the
    current regime, there are States that allow you to file a Form
    D electronically. There are States that require you to file in
    hard copy. There are States that require a fee that is
    significant. There are States with a minor fee. There is a fee
    in every State, I would note, so this is a cash-generating
    business for the State.
        Mr. Scott. Could you share with us what that fee might be,
    if you have that knowledge?
        Ms. Tierney. I am so sorry, Representative. I don't know
    off the top of my head.
        Mr. Scott. Okay.
        Ms. Tierney. I think it is as high as $2,000 in some States
    and as low as $100 in others, but you have to have--you really
    have to have either a registered broker-dealer or a law firm do
    this for you, or else you are going to get it wrong.
        And the implications for doing it wrong under the proposed
    rules are that you can't rely on Reg D 506 for an entire 12-
    month period, which for a start-up means you are going to shut
    your doors and lay off all of your employees. That is just the
    reality of it.
        Mr. Scott. That is something very reasonable I think that
    we could really look at, Mr. Chairman. The other point I wanted
    to raise with you, Ms. Tierney, in your testimony, you
    mentioned safe harbor. Could you share with us what--I was
    trying to follow you on that, but you were going very rapidly
    there. Tell us about the safe harbor.
        Ms. Tierney. Of course. And I'm sorry I talk so rapidly,
    but I only get 5 minutes and I was watching the clock.
        Mr. Scott. No, it is fine. It is more my not being able to
    keep up with you.
        Ms. Tierney. Okay, thank you. So the way that the
    securities laws work around resales of private company stock
    under the current regime are there is a clear safe harbor under
    Section 41 of the 1933 Act, if you have held your common stock
    for 12 months. At the end of the 12-month period, you can sell
    into the market, you can sell to anyone, you can generally
    solicit. There are no restrictions whatsoever.
        That exemption, however, is only available to shareholders
    who have held the stock for 12 months, and it is not available
    to offices or directors, founders, or large angel investors who
    have made sizable investments in the company, so more than a 10
    percent ownership stake.
        Then, you have publicly registered securities where people
    can sell as they will on the NYSE or on Nasdaq. So you have, in
    between those two events, this delta of shareholders and
    employees. Most of us working for private companies get a
    significant amount of our compensation in the form of options.
        Mr. Scott. And so, tell us, how would you like to see
    this--what would be the best way of seeing this exemption
    applied?
        Ms. Tierney. I think it would be a transaction exemption
    for resales of securities or founders, angel investors,
    employees who hold options. When we were working with the
    community banks, it is the officers and directors of community
    banks. They are middle-income Americans who just happen to work
    for a private company. They couldn't sell their securities
    without worrying about the State law.
        And we have been working with NASAA on this issue. They are
    very well aware of our position. And I think we all have the
    goal of making capital formation and job creation simpler, and
    I think having to deal with the patchwork of blue sky law every
    time you go to sell securities in this delta shareholder group
    makes it extremely unworkable.
        Mr. Scott. Thank you.
        Ms. Tierney. And the implications are significant for
    private company shareholders.
        Mr. Scott. Thank you very much.
        Chairman Garrett. Thank you. The gentleman yields back.
        Mr. Mulvaney?
        Mr. Mulvaney. With the permission of the Chair, I would
    like to yield my time to the gentleman from North Carolina.
        Mr. McHenry. I certainly appreciate my colleague yielding.
        And, Mr. Lynn, I wanted to talk to you about crowdfunding.
    As I stated in my opening statement, Carolyn Maloney and I
    worked diligently to make sure we had investor protection and
    the ability of folks to raise equity online.
        You said that before the regulations were written, you
    viewed the law as ``unworkable.'' Is that correct?
        Mr. Lynn. That is absolutely correct.
        Mr. McHenry. Okay, so describe to me how crowdfunding
    leaders around the world view the American crowdfunding equity
    law?
        Mr. Lynn. I think that my view represents the consensus
    view, both outside the United States and inside, that Title
    III, no matter how it had been implemented by the SEC, simply
    wasn't going to work. I know many of my colleagues in Europe
    have made the same decision that we have not to look at the
    U.S. market as a result of it, and I know that many platforms
    in the United States that have relied solely on 506(c) or other
    forms of accredited investor only rules had initially
    considered using Title III, but upon seeing its final form,
    decided not to do so.
        Mr. McHenry. Okay. So you mention also about the need for a
    special purpose vehicle. Explain how that actually lessens
    crowdfunding remorse, if you will, with investors and issuers.
        Mr. Lynn. Absolutely. So one of the often misunderstood,
    but absolutely essential aspects of investing in a private
    company as opposed to a fully publicly traded company is that
    there are complexities around minority shareholder protections
    and other issues that get addressed by contract.
        So when an angel or a venture capitalist invests in a
    start-up, they uniformly enter what is called either a
    shareholders' agreement or a subscription agreement, which sets
    out a series of protections for investors. That works perfectly
    fine when there are 2, 3, 5, or even 10 investors. When you
    have hundreds, though, the whole process falls apart, and you
    wind up with essentially the following scenario: No contract is
    entered into, the result of which is investors have effectively
    no protection against the various things that can happen to a
    minority shareholder in a privately held company, while at the
    same time the company is forced to deal with the administrative
    overhead and the liabilities that come from having hundreds of
    direct shareholders, making it significantly less likely that
    later, State investors will want to deal with them.
        Mr. McHenry. Okay. So this idea of a special purpose
    vehicle is for investor protection?
        Mr. Lynn. It is absolutely for investor protection.
        Mr. McHenry. Okay. Now, the ability--the other question is
    for portals--the question of liability, sound liability
    provisions. I saw hundreds of comments about this with the SEC.
    Can you address that?
        Mr. Lynn. I think that there are a number of issues around
    liability, the most important of which is that there needs to
    be a very, very clear delineation of where liability sits as
    between an issuer and a portal. One of the very frank aspects
    that makes working in European markets advantageous over the
    United States in many aspects of securities law is the lack of
    strike suits and the lack of frivolous litigation. When you are
    dealing with very small businesses, that becomes even more
    profound. That can be minimized significantly by making very,
    very clear what actions and what omissions a platform or an
    issuer can be liable for--
        Mr. McHenry. But this is twofold. So the portal--if they
    remove someone because they believe they are fraudsters, would
    they be subjected to liability under the current law?
        Mr. Lynn. Yes, sorry. That is right.
        Mr. McHenry. Okay, so if they remove someone, they perhaps
    could be sued, right?
        Mr. Lynn. Yes, sir.
        Mr. McHenry. So it is a twofold, those coming and going,
    the liability provisions, right?
        Mr. Lynn. It is. And that particular issue, which I have
    called curation, is one that comes up under the fact that
    portals are not allowed under the current law to provide
    investment advice, but that can very easily be construed and
    has been construed as preventing them from taking down
    businesses or refusing to deal with businesses that they feel
    may be fraudsters or otherwise inappropriate for their
    platforms.
        Mr. McHenry. Thank you for your comments. Mr. Miller, we
    view you as the lone wolf of Reg A offerings in the United
    States. How many Reg A offerings were there in the United
    States in the year 2010?
        Mr. Miller. 2010?
        Mr. McHenry. How about 2011?
        Mr. Miller. I think that over the last 3 years, there have
    been approximately 19.
        Mr. McHenry. And how many of those are you responsible for?
        Mr. Miller. Three of them, approximately 20 percent.
        Mr. McHenry. Okay. And what year were you the only Reg A
    offering in the United States?
        Mr. Miller. I believe in 2012, we were--
        Mr. McHenry. 2012, okay. So prior to--it has been basically
    viewed as a dead letter of the law. Is that correct?
        Mr. Miller. Effectively.
        Mr. McHenry. Okay. So thank you for mentioning that, but I
    do want to mention that in our view, you are the lone wolf in
    terms of your boldness for this. So, thank you, Mr. Chairman.
    And thank you.
        Mr. Mulvaney. I yield back the balance of my time.
        Chairman Garrett. Thank you.
        Mr. Carney is recognized for 5 minutes.
        Mr. Carney. Thank you, Mr. Chairman, and thank you to each
    of the witnesses for coming today.
        I just have a couple of really quick questions. Just
    following up on Mr. Scott's line of questioning about the need
    to file in multiple States, Mr. Beatty, I thought there was an
    effort going on by the North American Securities Administrators
    Association to develop kind of a one-stop filing process. Is
    that not accurate?
        Mr. Beatty. That is completely accurate, Congressman. The
    States have been working diligently to establish what we call
    an electronic Form D filing system. It is in development right
    now. It is scheduled to go live in November of this year. It
    will allow one-stop filing. It will allow the payment of fees
    at one place. So I think the question about--or the concern
    about having to send paper filings to all 50 States will soon
    be a thing of the past.
        I would also note that the Form D itself, it is an eight-
    page form. I think it has like 16 items on it. It is not a big
    form. I think--I heard Annemarie say that one filing as the
    commencement of the offering and why the States maybe need to
    see the filing. These forms are incredibly important for us to
    see early on, because we are the ones who get the questions
    from potential investors such as, ``I got pitched this
    offering, and what do you know about it?''
        And if we don't get the filing shortly before the offering
    starts, as we proposed in our comment letter, then what happens
    is, we are forced to say something like, we don't have any
    record of this filing. You should be careful and ask a lot of
    questions.
        We don't know, quite frankly, whether the offering is a
    legitimate exercise by a company to try and raise capital
    privately or, God forbid, some scam artist out there trying to
    take somebody's money. So it is an incredibly important piece
    of information. It is a relatively small form. And we certainly
    would appreciate the opportunity to do that.
        Mr. Carney. Do you have any sense of what--in this world we
    live in, it is kind of amazing that we wouldn't have that now.
    Do you have a sense as to what the timing of that is?
        Mr. Beatty. I am not sure I completely follow you, but--
        Mr. Carney. The timing of the development of the one-stop--
    when will it happen?
        Mr. Beatty. Oh, in November of this year, it goes live. We
    have been working on it for a while, but in November of this
    year, it is scheduled to go live. It is on schedule to go live.
        Mr. Carney. Okay. Let me use the remainder of my time to
    get any feedback from any of you. As you may know, I worked
    with Mr. Fincher, who was here a few minutes ago--he has since
    left--on the IPO onramp part of the JOBS Act. And I don't know
    if any of you have had any experience with that, but I would be
    interested in any comments that you might have about how the
    IPO onramp has worked in practice, whether you are aware of any
    intended or unintended consequences.
        We know that the data shows that IPOs are up quite a bit.
    Now, Mr. Fincher and I are taking full credit for that, and
    everybody else who supported it, of course. Whether that is the
    reason, I am sure there are lots of different reasons, but just
    any thoughts that anybody might have on that?
        And I guess, Mr. Beatty, if you think there are problems
    with that from your perspective. Ms. Tierney, I know you have
    some Blue Hen connections, so why don't we start with you?
        Ms. Tierney. I am a proud Blue Hen. We are not a public
    company, but we work with a lot of private companies that go
    public. And almost every single one of them is utilizing the
    IPO onramp bill in order to facilitate becoming a public
    company.
        Mr. Carney. Any feedback about which provision in
    particular has been most helpful?
        Ms. Tierney. Again, not out of my own experience, but I
    think the ability to file confidentially is a huge benefit to
    private companies.
        Mr. Carney. I have heard that from a lot of people.
        Ms. Tierney. Yes--
        Mr. Carney. There was a lot of--and, by the way, there was
    a lot of difference of opinion on that particular aspect of it,
    but that is the one thing that keeps coming back that has been
    really helpful.
        Mr. Miller, you are shaking your head. Would you like to
    share some thoughts, as well?
        Mr. Miller. There is no doubt that is true. I have heard
    that from--I work with some public real estate companies and
    small public real estate investment trusts. And across-the-
    board, to be able to file confidentially, you can withdraw
    without basically having a punitive result in the market, it is
    very, very material to the consideration of going to the public
    markets.
        Mr. Carney. Great. Mr. Beatty, any comments from the other
    side?
        Mr. Beatty. I think I would agree with my co-panelists
    about the feature, the confidentiality feature. It is the one
    that I hear about the most, as well. I think from a regulatory
    standpoint, we have some concerns, not just with that
    particular feature, but the trend for less transparency in the
    markets. We believe that--as mentioned in my opening remarks--
    the transparency is an important feature for our public markets
    and it is just one of the several things that we have seen that
    have kind of decreased that transparency.
        How that will play out--we certainly haven't gotten any
    complaints about it or anything like that, but how that will
    play out long term does give me some concern.
        Mr. Carney. All right. Thank you all very much for what you
    do. And thanks for being here today.
        Chairman Garrett. The gentleman yields back.
        The gentleman from Texas, Mr. Neugebauer, is recognized.
        Mr. Neugebauer. Thank you, Mr. Chairman, for holding this
    important hearing.
        Mr. Lynn, what I heard you saying is that basically, with
    Title III the way it is now, the crowdfunding is difficult. And
    I think you used the word ``impossible.''
        Mr. Lynn. ``Impossible'' is the word I would use, sir.
        Mr. Neugebauer. And so the question is--a lot of times, we
    have good ideas that we get, really, from the private sector,
    and we massage them up here, and we try to codify them, and
    then we send them over to the Executive Branch and the
    Executive Branch massages them. And then when they come out the
    other end, they don't always end up being like we thought they
    were going to be.
        So I think one of the questions I wanted to ask you is,
    when it comes to that section, was the structure of the law
    flawed? Or are the rules the problem? Or is it a little of
    both?
        Mr. Lynn. I believe it was primarily the structure of the
    law in the form adopted by the Senate. While the version
    adopted initially by the House I think has been improved upon
    by Congressman McHenry's proposed draft, the core structure was
    there. By the time it came out of the Senate and went to
    committee, I think that was where the main failure was--the SEC
    rules could not have been saved, no matter what they said.
        Mr. Neugebauer. And so, basically what you think is that it
    is going to take a legislative fix and not necessarily an
    administrative fix?
        Mr. Lynn. I think that is absolutely the case, and I can
    tell you, sir, that I have spoken with a number of staff
    members at the SEC who have, on an off-the-record or
    nonattribution basis, at least, acknowledged that they felt
    that their hands were tied in trying to address many of the
    concerns, because the legislation was written the way it was.
        Mr. Neugebauer. What would you say are the one or two most
    burdensome pieces of it, that really would have an impact?
        Mr. Lynn. I think if I can identify the three top ones, it
    is the levels--the thresholds for financial statements.
    Financial statements are something of a red herring when you
    are dealing with very early-stage businesses. They don't say
    anything, because the company hasn't done anything yet. And
    requiring an audit or even an accountant review for very, very
    small businesses is hugely disproportionate and simply makes it
    impossible or virtually impossible for businesses to rely on.
        I think the issue I addressed in Mr. McHenry's question
    regarding curation and the inability to select which businesses
    go on the platform in a subjective way is a huge flaw. And the
    points around the lack of ability to use an SPV or nominee
    structure is the third.
        Mr. Neugebauer. One of the things that I understand in the
    proposed rule is that, for example, if you own 20 percent of
    the company, you are subject to a look-back of 3 years of your
    personal tax returns. Is that necessary? And if I am part of a
    start-up, does that keep me from participating?
        Mr. Lynn. I think it is one of a number of perhaps
    secondary-level burdens that is unnecessary. I think it is an
    example of the type of rule that was designed with much larger
    publicly traded companies in mind that simply does not apply or
    does not have a whole lot of utility when you are dealing with
    a ``two man in a garage'' start-up.
        Mr. Neugebauer. And, Mr. Miller, I was amused by your
    comment about the legal fees that small businesses are having
    to pay in order to come into compliance. Is that just because
    there is so much risk out there of--if you don't comply with
    all of the--if you don't check all of the boxes, is it the
    complexity? Or what do you think is driving most of that?
        Mr. Miller. I think it is primarily driven by complexity.
    You can be a software engineer or a bioscientist, but the
    regulatory knowledge to make sure that you maintain
    compliance--and in particular, if you want to grow--the
    compliance is critical to your next round, right? If you raised
    $500,000 and you violated securities law, your business is
    dead, even if it is successful in the underlying merits.
        So the complexity is outside the knowledge base of a normal
    entrepreneur, and so you have to rely on legal counsel, and
    that basically--the complexity of the law and the number of
    regulators involved drives the amount of legal fees.
        Mr. Neugebauer. One of the things we hear from people all
    across the broad spectrum now about--in their businesses is the
    term regulatory risk, that--whether it is compliance or other
    areas of government--one of the things that is really stifling
    a lot of businesses is regulatory risk that is out there and
    how to price it into your product. Does anybody disagree that
    there are regulatory risks that have increased over the last
    few years?
        Ms. Tierney. I would completely agree. For a long period of
    my career, I was involved in taking companies public in the
    United States. This is the first job I have had where I worked
    for a private company and worked with private companies. And in
    the time that I have been a securities lawyer, the scales have
    tipped. There are not a lot of good reasons to be a public
    company in the United States of America right now when you do a
    cost-benefit analysis around the risk, the costs, and the
    burdens of being a public company.
        There are a lot of good reasons to go public that will
    always be there, but I think for a lot of private companies,
    with the facility now offered with the 2,000 registration
    threshold and the ability to more easily raise capital under
    Reg D, under 506, they are really going to be deferring those
    IPOs for a very long time. And I think that is the right
    regime, but it is sad to me as a former SEC attorney and an
    NYSE attorney just to see companies not want to go public.
        Chairman Garrett. We are going to have to--
        Mr. Neugebauer. Thank you.
        Chairman Garrett. We are going to have to cut it there. And
    we will have, I think, our last word on it. Mr. Kildee, you are
    recognized for 5 minutes.
        Mr. Kildee. Thank you, Mr. Chairman.
        I will be brief. I was talking to Mr. Carney, and I just
    want to say, I don't know what a Blue Hen is, except that I
    know that I have never been served one. I assume that they are
    very good.
        Ms. Tierney. You are missing out.
        Mr. Kildee. I will just have one question. If it is
    redundant, if it has already been asked, I apologize for that.
    But I would just like to follow up on some of the comments that
    I made in part I one of this hearing that was held earlier this
    month, that while these proposals ostensibly are intended to
    increase capital formation for small and emerging companies, we
    have yet to fully realize the impact of the JOBS Act. Trends in
    the future may prove that there are some shortcomings in the
    JOBS Act, for which a cohesive legislative fix might be
    required, but now the House would have to address this with a
    legislative solution.
        Specifically, though, I am interested in the area of
    capital formation. It seems like to me, anyway, the mortgage
    market, in ensuring that people have the ability to purchase a
    home, might be a better place to start this conversation. And
    if we are looking to have additional sources of capital for
    small and emerging companies, we might focus on reauthorization
    of the Ex-Im Bank, which I know in my State has been a really
    significant player in helping to get small companies moving and
    to reach additional markets.
        But my main concern with these proposals and the ones from
    today and earlier this month is that they specifically, in some
    cases, preempt State regulator oversight. And specifically,
    just the other day, we had SEC Chair White here and we had, I
    think, a good exchange. But one of the questions that I posed
    to her and that I am concerned about is that we have the SEC
    that is already fairly thinly stretched.
        And with increasing obligations continuing, we could have a
    debate about whether those obligations are appropriate, and we
    have had a substantial debate on that subject, but I don't
    think we should try to dial back on whether the regulations in
    place should be enforced by limiting the resources. But I am
    concerned about the sort of combined effect of reducing State
    regulatory responsibility or roles in this particular space
    while we have an SEC that seems already challenged in meeting
    its obligations.
        Starting with Mr. Beatty, I would certainly like to get
    your observations, but if the rest of you could also make a
    comment, I would certainly appreciate it. And that would be the
    only question I would have today.
        Mr. Beatty. I share similar concerns. I note that there was
    a recent BNA article that talked about Regulation A+, and it
    noted that the--I am sure I have the number wrong--but the
    average review time for a Reg A offering before the SEC was
    something in the--over 100 days, anyway.
        We are proposing with our Reg A coordinated review proposal
    to have an initial decision back to the issuer within 21
    business days. So I think we share your concern about
    diminishing resources. A strong and healthy SEC is important,
    but we also think that we have something to bring to the table,
    and that this is not the time to take regulators off the table
    in terms of providing services.
        Mr. Miller. We have proposed to the SEC that for the
    offerings below $5 million, they actually would leave it to the
    States, rather than requiring the SEC and the States for an
    offering that is less than $5 million under Regulation A. And
    as a proposal, it would lessen the burdens on the SEC, while
    giving the States a purview to succeed inside, I think, what
    would be more likely a smaller local offering of less than $5
    million.
        Mr. Lynn. I think--if I could just take a slightly
    different view, I have no doubt that in many ways individual
    State regulators may be more efficient or more effective than
    the SEC. The problem is that a majority of offerings,
    particularly--I appreciate real estate may be a bit different--
    for small and growing businesses, the fact that they are small
    does not correlate with them being local. They tend to have
    Internet-based offerings, supporters, and people who want to
    invest in them from across the country, and often
    internationally.
        And I think that the more barriers you put up and the more
    differentials you put up across borders, the more difficult
    that becomes. Whether the locus of regulation sits in one or
    the other, I think, is less of an important question than
    whether we are dealing with potentially 50 different, slightly
    altered regulatory regimes versus a unified one, and I think
    that if we get into that situation, that is the real problem.
        Chairman Garrett. And having had the last word, Mr. Lynn, I
    thank you, and I thank the entire panel for all your very good
    testimony. It was very helpful, both your written testimony and
    the testimony today. And I thank the members of the
    subcommittee.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        With that, again, I thank the panel and wish you a good
    day. And this hearing is adjourned.
        [Whereupon, at 11:05 a.m., the hearing was adjourned.]

                                A P P E N D I X

                                  May 1, 2014

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