[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 
88-539                     WASHINGTON : 2014
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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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