[Senate Hearing 113-178]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 113-178


    THE JOBS ACT AT A YEAR AND A HALF: ASSESSING PROGRESS AND UNMET 
                             OPPORTUNITIES

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                 SECURITIES, INSURANCE, AND INVESTMENT

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE IMPLEMENTATION OF THE JOBS ACT AND THE OPPORTUNITIES THAT 
                   THE ONGOING RULEMAKING MAY CREATE

                               __________

                            OCTOBER 30, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

         Subcommittee on Securities, Insurance, and Investment

                     JON TESTER, Montana, Chairman

           MIKE JOHANNS, Nebraska, Ranking Republican Member

JACK REED, Rhode Island              BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          DAVID VITTER, Louisiana
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
KAY HAGAN, North Carolina            MARK KIRK, Illinois
ELIZABETH WARREN, Massachusetts      TOM COBURN, Oklahoma
HEIDI HEITKAMP, North Dakota

             Alison O'Donnell, Subcommittee Staff Director

          Bryan Blom, Republican Subcommittee Staff Directorr

                     Kellin Clark, Legislative Aide

                                  (ii)


















                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, OCTOBER 30, 2013

                                                                   Page

Opening statement of Chairman Tester.............................     1

Opening statements, comments, or prepared statements of:
    Senator Johanns..............................................     2

                               WITNESSES

Keith Higgins, Director, Division of Corporation Finance, 
  Securities and Exchange Commission.............................     4
    Prepared statement...........................................    32
    Responses to written questions of:
        Senator Hagan............................................    72
        Senator Toomey...........................................    72
Alan Lewis, Director of Special Projects, Natural Grocers by 
  Vitamin Cottage, Inc...........................................    13
    Prepared statement...........................................    40
Robert R. Kaplan, Jr., Managing Partner, Practices, Kaplan 
  Voekler Cunningham and Frank, PLC..............................    15
    Prepared statement...........................................    45
Rick Fleming, Deputy General Counsel, North American Securities 
  Administrators Association, Inc................................    17
    Prepared statement...........................................    55
Sherwood Neiss, Principal, Crowdfund Capital Advisors LLC........    19
    Prepared statement...........................................    62

                                 (iii)

 
    THE JOBS ACT AT A YEAR AND A HALF: ASSESSING PROGRESS AND UNMET 
                             OPPORTUNITIES

                              ----------                              


                      WEDNESDAY, OCTOBER 30, 2013

                                       U.S. Senate,
     Subcommittee on Securities, Insurance, and Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 10 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jon Tester, Chairman of the 
Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN JON TESTER

    Chairman Tester. I will call to order this hearing of the 
Securities, Insurance, and Investment Subcommittee, a hearing 
titled ``The JOBS Act at a Year and a Half: Assessing Progress 
and Unmet Opportunities''. I am glad we are having this hearing 
this morning. I look forward to hearing from our witnesses 
about the challenges and opportunities associated with 
implementing the JOBS Act.
    Since arriving in the Senate, I have held several small 
business opportunity workshops across the State of Montana, and 
without fail, during every one of those workshops, capital was 
always at the forefront of issues that I would hear from 
entrepreneurs. Capital allows business to grow, take calculated 
risks, and create more jobs.
    In 2011 the Economic Policy Subcommittee, which I chaired, 
held a hearing to examine the challenges and opportunities that 
are facing innovative small businesses, many of which present 
the greatest opportunity for job creation in this country. What 
came out of that hearing was a plea from businesses for better 
access to capital, particularly for firms based across this 
country, small startup firms.
    In response to that hearing, Senator Toomey and I 
introduced a piece of legislation that has become known as 
``Regulation A Plus,'' which ultimately was included in the 
JOBS Act. The opportunity for growth within businesses across 
America is enormous, and we need to do all we can to empower 
them with the tools they need to bring innovative products and 
ideas to the marketplace.
    Entrepreneurs are incredibly important to our economy, 
particularly in a frontier State like Montana, because they 
embody the spirit of self-reliance that keeps rural America 
strong and the economy competitive. Without access to capital, 
the next-generation idea may not become a reality, and that is 
why I worked so hard last year to get the JOBS Act to the 
President's desk, because I believe the JOBS Act will provide 
new opportunities for startups to raise capital and will 
democratize access to capital for smaller firms.
    The idea behind the bill is to provide firms with more 
access, more choice when it comes to raising capital in a 
manner most appropriate for different firms at different stages 
of their development, whether that means going public or 
remaining private, because what is right for one firm may not 
be right for another. And from my perspective, it was very 
important to ensure that this bill works for all entrepreneurs, 
regardless of where they live.
    During the financial crisis, we saw traditional forms of 
business lending freeze, dried up, and businesses across this 
country were forced to become more creative when it came to 
raising capital. I believe the JOBS Act has and will continue 
to provide access as it continues to be implemented. The 
opportunities will continue to grow.
    I do have some concerns about the pace of implementation of 
the JOBS Act. After nearly a year and a half, there is 
rulemaking that has still yet to be proposed. I understand that 
we have some new folks in place who were not at the SEC when 
this legislation was signed into law, but when we have so many 
businesses desperately in need of access to capital, every week 
counts. And within that context, the pace of progress that we 
have seen from my perspective is not acceptable.
    I am optimistic that we can get this done sooner rather 
than later, and through my conversations with Chairman White, I 
am confident that this is on the SEC's front burner. The JOBS 
Act is truly bipartisan, and I think all of us up here today 
want to see this done in the right way, as it was intended to 
work for entrepreneurs and small businesses that need it.
    In a place that often gets stuck in politics, I was 
extremely pleased that we were able to pass a strong, 
bipartisan piece of legislation that ensures that businesses 
have access to capital that they desperately need, but now is 
the time to ensure that this vision becomes a reality.
    We have some great witnesses with us here today, and I look 
forward to hearing from all of them. We will drill down on this 
important topic.
    With that, I welcome Senator Reed, but turn it over to my 
Ranking Member, Senator Johanns.

               STATEMENT OF SENATOR MIKE JOHANNS

    Senator Johanns. Thank you, Mr. Chairman, for calling this 
hearing today, and I also look forward to hearing from the 
witnesses.
    The JOBS Act, which is the topic today, is a law that truly 
had bipartisan support. As the Chairman indicates, it did take 
a lot of work to get there, but think about these numbers. It 
was supported by roughly 90 percent of the House. These days 
that is remarkable. It was supported by 73 percent of the U.S. 
Senate, and it was endorsed by the President of the United 
States.
    You do not see those numbers very often associated with a 
significant piece of legislation, so it is very important to 
all of us that it is carried out as directed and as intended.
    The purpose of the JOBS Act, or at least one of the 
purposes, is pretty straightforward. It makes it easier for 
small companies to access capital markets and grow. This 
includes small companies from across the country that want to 
hire, expand, move their businesses to another level.
    For instance, a representative from Natural Grocers will 
testify today, a company that utilized the JOBS Act to expand. 
The company actually just opened a new store in Omaha, 
Nebraska, just this summer. That makes three stores overall in 
Nebraska--two in Omaha, one in Lincoln. We hope there are more 
coming.
    New stores mean more jobs in Nebraska for Nebraskans. This 
is the type of economic growth that was intended by the JOBS 
Act.
    While I am encouraged that implementation of the JOBS Act 
has helped many companies and implementation continues to move 
along, I would be less than candid if I did not say I am not 
terribly pleased with the pace of the rulemaking. We are 1\1/2\ 
years removed from the enactment of the law, and many rules are 
yet to be finalized. For instance, as the Chairman noted, 
Regulation A Plus in Title IV of the bill remains to be 
implemented. This provision increases the cap on how much money 
companies can raise in an IPO without having to register with 
the SEC.
    The old cap was $5 million, which was outdated. It had been 
in place for over two decades, and it just simply was not 
helpful. It would be lifted to $50 million if the SEC would 
act. This relief allows smaller companies to focus more on 
building the company in the early stages as opposed to jumping 
through all sorts of hoops and being weighed down with 
mountains of paperwork from the get-go.
    Like most of the JOBS Act, this section garnered a lot of 
bipartisan support. Unfortunately, it has been over 18 months 
since the Act's passage, and the SEC has not established the 
rules that will enable businesses to access the benefits and, 
therefore, create the jobs.
    But I am hopeful that the SEC can move quickly in 
finalizing Regulation A Plus, and I am pleased that we have 
finally seen progress on Title II and Title III, the general 
solicitation and overcrowding provisions.
    I remember Mary Jo White testifying before the Banking 
Committee in March on the importance of finalizing the JOBS 
Act. She said in reference to the act, and I am quoting: 
``Completing these legislative mandates expeditiously must be 
an immediate imperative for the SEC.'' I agree.
    I look forward to hearing from the witnesses today to find 
out where progress has occurred, where work remains to be done 
in regard to the JOBS Act, and how we get it to the finish 
line. There are many job creators who eagerly await full 
implementation, and we are all keenly interested in moving this 
forward.
    With that, again, I welcome the witnesses, and I thank the 
Chairman for bringing this hearing together. Thank you.
    Chairman Tester. Yes, thank you, Senator Johanns.
    We were going to have a vote at 10:30, so what I hope to 
happen is we will have your testimony, Mr. Higgins, and then 
the questions, and then we will probably go vote and come back 
for the second panel.
    So with that, I want to welcome our first witness, Keith 
Higgins, joining us from the SEC. I want to thank you for your 
willingness to testify before us today.
    Mr. Higgins is Director of the Division of Corporation 
Finance at the Securities and Exchange Commission. Prior to his 
current role, Mr. Higgins was a lawyer with Ropes and Gray LLP 
where he was a partner in its Boston office for 30 years. At 
Ropes and Gray he advised public companies about security 
offerings, mergers and acquisitions, compliance, and corporate 
governance.
    Welcome, Mr. Higgins. You have 5 minutes for your oral 
remarks, but remember your full written remarks will be a part 
of the record. You may proceed.

 STATEMENT OF KEITH HIGGINS, DIRECTOR, DIVISION OF CORPORATION 
          FINANCE, SECURITIES AND EXCHANGE COMMISSION

    Mr. Higgins. Thank you, Senator. Chairman Tester, Ranking 
Member Johanns, Senator Reed, and Members of the Subcommittee, 
as the Senator said, my name is Keith Higgins, and I am the 
Director of the Division of Corporation Finance at the 
Securities and Exchange Commission. I appreciate the 
opportunity to testify today on behalf of the Commission to 
discuss our implementation of the JOBS Act, which, as the 
Senator noted, the Chairman has said is one of the Commission's 
top priorities.
    The JOBS Act made significant changes to the Federal 
securities laws. Some of the provisions were effective 
immediately upon enactment, while others required Commission 
rulemaking.
    Immediately upon enactment, the SEC staff took steps to 
inform the industry about the operations of the act. Among 
other things, we provided guidance about the IPO on-ramp 
provisions, and we provided guidance about changes to the 
requirements for registration and deregistration of securities 
under Exchange Act Section 12(g).
    At the same time, teams from across the agency, including 
economists from our Division of Economic and Risk Analysis, 
began working on rulemaking recommendations for the 
Commission's consideration, including the assessment of the 
potential economic impact of these rules. To increase the 
opportunity for public comment, we put a page on our Web site 
so that interested parties could provide comments in advance of 
the rulemaking. The Commission and staff met with industry 
participants and others to come in to talk about the JOBS Act 
and the impending rulemaking. And the rulemaking teams have 
used this input in putting together proposals for the 
Commission's consideration.
    In July of this year, as the Chairman noted, the Commission 
implemented Title II by amending Rule 506 to permit issuers to 
use general solicitation to offer securities, provided that all 
investors in the offering were accredited investors and that 
the issuer took reasonable steps to verify that accredited 
investor status. The Commission also amended Rule 144A to 
permit general solicitation in offerings to qualified 
institutional buyers.
    In addition to amending these rules, on the very same day 
the Commission adopted rule amendments implementing provisions 
of the Dodd-Frank Act to disqualify felons and other bad actors 
from participating in Rule 506 offerings. We also proposed 
additional rule and form amendments related to offerings that 
are conducted under Rule 506.
    Earlier this month, the Commission took yet another step 
and proposed rules to implement the crowdfunding exemption in 
Title III of the act. Under the proposed rules, an issuer could 
use this exemption to raise up to $1 million in any 12-month 
period. Investors would be permitted during a 12-month period 
to invest a maximum amount based on their annual income or net 
worth. Issuers would be required to conduct these crowdfunding 
transactions through either a broker-dealer or a new type of 
intermediary called a ``funding portal,'' and the proposed 
rules would set up a registration and regulatory framework for 
these funding portals. Eligible issuers would be required to 
file specified disclosures with the Commission and to provide 
those disclosures both to the intermediary and to investors. We 
look forward to receiving and considering the public comment on 
these proposals.
    Title IV of the JOBS Act, as noted, also required the 
Commission rulemaking to create a new exemption similar to 
Regulation A, Regulation A Plus, for certain offerings up to 
$50 million in any 12-month period. The staff has met with 
market participants, industry groups, State securities 
regulators, and other interested parties, and we are working 
hard to finalize recommendations on that rule.
    The JOBS Act required the Commission to conduct several 
studies and to prepare reports to Congress. In July of last 
year, the staff submitted a report on decimalization and its 
impact on the number of initial public offerings. The staff 
currently is working with the exchanges to develop and, if 
possible, to present to the Commission a plan that would 
implement a pilot program to allow smaller companies to use 
wider tick sizes.
    In October of 2012, the staff submitted a report that 
examined the Commission's authority to enforce the anti-evasion 
provisions of 12g5-1, which deals with the record holders under 
12g.
    And, finally, the staff is finalizing a report on 
Regulation S-K looking at determining how we can modernize that 
rule and make it less burdensome and costly for emerging growth 
companies and really for all issuers, and we expect to make 
that study public very soon.
    Finally, the JOBS Act mandated that the Commission provide 
online information and conduct an outreach program for small 
and medium-size businesses and for women-, veteran-, and 
minority-owned businesses about changes that were brought about 
by the statute, and we are working on an implementation plan to 
tailor to these constituencies.
    The Commission and the staff continue to work diligently to 
implement the JOBS Act rulemaking as well as those remaining 
under the Dodd-Frank Act, and we look forward to completing the 
remaining provisions as soon as practicable.
    Thank you again for inviting me to testify, and I would be 
happy to answer any questions you may have.
    Chairman Tester. Well, thank you, Mr. Higgins. Right down 
to the second.
    Mr. Higgins. I know.
    Chairman Tester. That is pretty darn good.
    [Laughter.]
    Chairman Tester. I think we have got about 21 minutes. I 
think we will put 7 minutes on the clock, and if we do not run 
over, everybody will get a chance to ask a fair number of 
questions.
    Once again, I want to thank you for being here today, 
Keith. In my opening statement, I indicated that I was not 
happy with the pace of implementation of the JOBS Act. I think 
the Ranking Member talked about the same thing.
    But I am also aware of the fact that most of the movement 
that we have seen, not including staff work behind the scenes, 
has occurred since you arrived at the SEC back in July, so I am 
going to view you as my lucky charm key to getting this bill 
fully implemented.
    In terms of finalizing all of the existing rules and having 
them fully operational for use by entrepreneurs, when can we 
expect to have the JOBS Act fully off the ground?
    Mr. Higgins. Senator, as Chair White, who sets the agenda 
for the Commission, has said to you personally and has 
testified, completion of the JOBS Act rulemakings and the Dodd-
Frank rulemakings are the Commission's top priority. And if it 
is a priority for her, I can assure you it is a priority for 
me.
    It is really impossible for me to say with any certainty 
when all the rules will be completed, but what I can say with 
absolute certainty is we understand the importance of them, we 
recognize the mandates, and we are working diligently to get 
them done. So we will get proposals done that we--we will put 
them out for comment, and we hope to get them done just as 
diligently as possible. But I cannot promise a particular date.
    Chairman Tester. Not to push you, but I am going to a 
little bit.
    Mr. Higgins. Sure.
    Chairman Tester. By the end of the first quarter next year?
    Mr. Higgins. Again, I think it is really impossible. There 
are a lot of factors that go into it: the extent of the public 
comment--I mean, we had a lot of control over the proposals, 
and I can tell you we will get the proposals out in relatively 
short order. We have got a couple remaining.
    Chairman Tester. OK.
    Mr. Higgins. Look, I would love to get it next year.
    Chairman Tester. Right. If you give me a date certain, I 
would hold you to it.
    Mr. Higgins. Right. I have heard, right.
    Chairman Tester. Yes, exactly. Well, let us just talk about 
the rulemaking for just a second. It seems to me the A Plus 
rulemaking would be a little more straightforward than the 
other provisions of the JOBS bill. Correct me if I am wrong on 
that. Do you envision a lengthy comment period with the 
rulemaking after they are proposed?
    Mr. Higgins. I would not expect a lengthy comment period. I 
think typically comment periods are 60 days. I think with 
crowdfunding we wound up with 90 days because with crowdfunding 
we are really proposing, in addition to the exemption, a whole 
new regulatory structure for crowdfunding portals, and I think 
it really deserves a little bit more time. But a 60-day comment 
period I think would be a reasonable thing, but we have not 
really determined that yet, Senator.
    Chairman Tester. OK. My biggest interest with respect to 
the JOBS Act implementation, A Plus is unfinished. The 
legislation very clearly contemplates and, in fact, envisions 
the SEC developing as a part of this rule a definition of 
``qualified purchasers,'' a class of sophisticated investors to 
be defined by the SEC that would qualify for an exemption from 
State security laws. While some have questioned whether an 
issuer would utilize this QP exemption over Regulation D, for 
example, there are clear benefits in terms of transparency, 
disclosure, and liquidity.
    Is the staff considering how to structure this definition?
    Mr. Higgins. We are, Senator. The issue of qualified 
purchaser and really the relationship to State registration and 
qualification laws, the preemption, is an important factor in 
our rulemaking. We have heard in prior comments or the comment 
letters that have come in, many commenters have suggested that 
the cost and burdens of State registration and qualification 
have been a principal reason that the existing Regulation A has 
not worked, that we only had 20-some-odd offerings in the last 
year, and I think, you know, fewer than 100 over the last 7 
years.
    Chairman Tester. OK.
    Mr. Higgins. On the other hand, there are other commenters 
who have said that State registration qualification is an 
important investor protection aspect that we should not lose 
sight of, and so we are trying to look at both sides of the 
coin and balance those views.
    Chairman Tester. Are there certain metrics or benchmarks 
that you are utilizing?
    Mr. Higgins. Well, nothing--what we do not want to do is to 
get ahead, I do not believe, of--we are working on the 
``accredited investor'' definition as we are required to work 
on by the middle of next year under the Dodd-Frank Act. And we 
are concerned about not wanting to front-run that and create 
some sort of new class of investor, so we are looking at ways 
in which we can design a system where, between a combination of 
our review of a registration, a qualification, or offering 
materials under Regulation A as well as some characteristics of 
the purchaser could work to create a qualified purchaser under 
Regulation A.
    Chairman Tester. OK. In your testimony you discussed the 
many steps that the SEC is taking to inform the industry about 
the JOBS Act. You know from your past life how critically 
important it is to reach out to entrepreneurs so that they 
fully understand the impact and implications of how they can 
access capital. How can we better educate entrepreneurs about 
opportunities for access to capital in the JOBS Act?
    Mr. Higgins. Interesting. We, meaning the SEC, the public 
generally, I mean, we put guidance out on our, you know, 
outreach. I think that once we get our rules done--and we are 
committed to getting them done as promptly as we can--the 
industry and market participants will be aware of them and that 
they will be used, and we are willing to work with any groups 
to try to make our rules more workable and usable.
    Chairman Tester. I appreciate that. I will tell you that I 
think as we get the rules out--and I am sure you will soon--I 
think it is going to be critically important to be able to do 
the kind of outreach we need, and maybe some folks on the next 
panel can talk about how we can do that, too, to make sure that 
some of their folks that they represent or that they know can 
better utilize some of the benefits out there.
    With that, I will turn it over to Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman.
    Mr. Higgins, again, thanks for being here, and thanks for 
your work on something that obviously we care about in a very 
bipartisan way. We want to see this work.
    Let me, if I might, focus a question on investors. As you 
know, in addition to trying to help small companies compete 
with larger companies, the JOBS Act also seeks to help smaller 
investors compete with larger investors. Let me, if I might, 
explain that a little bit.
    The SEC defines ``accredited investors'' as individuals 
with a net worth of at least $1 million, not including the 
value of their residence, or with an income of at least 
$200,000 each year for the last 2 years.
    I am wondering about the possibility of more flexibility in 
this idea, the pros and cons of that. Is income or net worth 
really the best indication of a quality investor? Of course, 
you do not want someone throwing away their life savings, 
putting everything at risk as if they are playing in a poker 
match. But you also want to make sure that you have a place for 
those outside the top 1 percent, if you will. Talk us through 
that. Where does the JOBS Act work here? What are the pros and 
cons? What should we be thinking about here?
    Mr. Higgins. Well, Senator, we have begun, the staff has 
begun work on a review of the accredited investor standard as 
it applies to natural persons, and the income and net worth 
test that you talked about relate to the natural persons test. 
By the middle of next year, we are required to come up with a 
report about that. That was mandated under the Dodd-Frank Act, 
and we have begun to work on it.
    The GAO put out a study fairly recently on accredited 
investors to talk about other things that might be added. It 
seems to me the Holy Grail is how do you define the 
sophistication necessary to be able to understand investment 
risks, and I do not know whether anybody has really quite yet 
found what the answer is to that question. The GAO suggested 
investor education might be--you know, we would put something 
like a Series 7 exam. You know, something like that might be a 
little difficult to administer. Participation by an investor 
adviser or a broker-dealer in the investment. There is talk 
about investment limitations, something a la the crowdfunding, 
where you are only allowed to put a certain percentage of net 
worth or annual income into--so all of those are on the table 
for natural persons, and our work has begun in trying to figure 
out the best way to attack the accredited investor. But you are 
absolutely right. It is an issue, and I do not think anybody is 
particularly happy with the current $1 million net worth and 
that $200,000----
    Senator Johanns. So your thinking is that the report that 
is called for will be out by----
    Mr. Higgins. By the middle of July.
    Senator Johanns. The middle of July of next year.
    Mr. Higgins. Next year.
    Senator Johanns. And what are you anticipating? Will that 
report indicate some strategies for Congress to look at? Or is 
it just too early to tell where the direction of that report 
might go?
    Mr. Higgins. Well, I think it is too early to tell, but I 
believe that the Commission has the necessary rulemaking 
authority to address the issue.
    Now, Congress has said in Dodd-Frank that we cannot move 
the $1 million net worth test until July of 2014. We were 
prohibited from changing that, so that needs to stay in place. 
But I think the Commission's rulemaking authority ought to be 
sufficient to address the issues. But, again, it is a little 
early to tell where we will come out.
    Senator Johanns. Looking at the totality of the JOBS Act, 
is it possible to give us a summary of what is left in terms of 
implementation? You would not necessarily have to do it today 
from memory, but a scorecard would be helpful to us.
    Mr. Higgins. Right. Well, we can certainly provide you and 
the staff with a detailed scorecard. In general terms, Title I 
was largely self-implementing with the on-ramp provisions.
    Title II, we have adopted the rules for general 
solicitation, and those are done. We had some companion 
rulemaking that was related to that, which is still ongoing and 
which we are taking comment on.
    Title III, the crowdfunding provisions were just proposed. 
There is a 90-day comment period after which we will look at 
the comments and begin to get done.
    Title IV, Regulation A Plus, again, top priority. I guess I 
would say the Chair had indicated that her front-burner items 
for the fall were pay ratio, crowdfunding, and Regulation A 
Plus, and two of those three are already out, so we are working 
hard on the third.
    Title V and Title VI relating to the registration 
provisions, there is a little bit of rulemaking to do to 
clarify some of the provisions, to provide the safe harbor for 
employees. We expect those to be out soon, but we do not yet 
have a proposal out on that.
    And then Title VII is the outreach.
    Senator Johanns. Let me ask one more question, and this may 
be a bit of a stretch but--because we are pushing you on 
getting JOBS Act rules and regulations in place, but I am 
thinking about a JOBS Act II. This had so much bipartisan 
support. I would like to challenge you, as you are seeing this 
implementing and as you are working with those who are taking 
advantage of the JOBS Act, to keep us in the loop on what might 
be next, what is working, what is not working. I think this is 
one of those rare cases where you have a bill that Congress 
would be willing to take another look at at some point, 
probably after I am gone, and see if there are other steps that 
maybe we overlooked in JOBS Act I. So I will just use the 
balance of my time to urge you to do that and keep this 
Subcommittee and the Banking Committee in mind as those are 
things that pop up and you think about.
    Mr. Higgins. Thank you, Senator. We will do that.
    Senator Johanns. Great.
    Chairman Tester. Senator Reed.
    Senator Reed. Thank you, Mr. Chairman, and thank you, Mr. 
Higgins, for your testimony.
    The JOBS Act requires the SEC to adopt rules that, in the 
legislation language, ``require the issuer to take reasonable 
steps to verify that purchasers of the securities are 
accredited investors, using such methods as determined by the 
Commission.'' Can you let us know briefly what are some of 
those methods that they can use to verify?
    Mr. Higgins. Yes, Senator. Our rules came out with--the 
principal method is a principles-based method of verification, 
which depends on the facts and circumstances of the particular 
offering. It does not prescribe a one-size-fits-all method of 
reasonable verification. It says you look at the nature of the 
offering, the nature of the purchaser, the information that you 
already know about the purchaser, the size of the investment 
limitations in the offering, to determine what steps would be 
reasonable.
    We wanted to be as flexible as possible in allowing 
companies to comply, but that was a little--it is a little 
uncertain what reasonable steps are, and commenters said to us, 
gee, we would like some certainty, we would like to have a safe 
harbor where we know for certain.
    If we are not sure that our steps were reasonable, if we do 
certain things, it will be absolutely clear that we took 
reasonable steps. So we created in the final rules four safe 
harbors. One safe harbor deals with the annual income test and 
allows you to establish it via tax returns.
    The net worth test you can do it--and, again, this is for 
natural persons. You can do it through bank statements or other 
kinds of financial records along with a consumer report about 
the debt side of that equation.
    Third, we provided registered CPAs, attorneys, registered 
broker-dealers, investment advisers could provide certification 
that a person as an accredited investor, and that would work.
    And then, finally, to address companies that had accredited 
investors before the JOBS Act was adopted, we said if you were 
an accredited investor before these new rules took effect you 
could self-certify and continue to be able to invest.
    And so that is the way we tried to balance a principles-
based approach with an approach that gave issuers certainty 
should they choose to do it.
    Senator Reed. Do you have the capacity to check or do you 
plan to check, either spot-checking or sort of significant 
checking, that this is being followed by the issuers?
    Mr. Higgins. We do indeed, Senator, in some instances. A 
couple of things. One, the proposal that we put out the same--
that the Commission proposed the same days as the general 
solicitation ban being lifted requires in the Form D that we 
would require to be filed an issuer to explain the verification 
procedures that it undertook to satisfy itself of accredited 
investors. So that is one way we can do it.
    Another way is that we have built in--we have a 
comprehensive work plan to look at how these general 
solicitation rules are going to work, and one of the things we 
have done is our Office of Compliance Inspections and 
Examinations has added to their examination report for broker-
dealers and investment advisers questions about what they are 
doing to ensure in offerings with which they are involved that 
the accredited investor--that the reasonable verification 
procedures are in place.
    So those are a couple of the things that we are doing to 
monitor the marketplace to make sure that issuers are taking 
the right steps.
    Senator Reed. But you do not have within your plan even 
sort of spot-checking going into an issuer and looking at the 
records and looking at what they have said they have done; they 
have actually done?
    Mr. Higgins. I am not sure that I--I would have to check 
with the enforcement and the OCIE folks about what they intend 
to do. Obviously the inspection function will be--they will be 
asking for records from the broker-dealers and the investment 
advisers. I would have to check to see what we are planning on 
the issuers.
    Senator Reed. But the issuers, you know, are a critical 
part of this----
    Mr. Higgins. Absolutely.
    Senator Reed. ----since you can conduct one of these 
offerings without broker-dealers.
    Mr. Higgins. That is correct, Senator.
    Senator Reed. And that would probably be an area you would 
have to pay attention to.
    Going back to the issue that Senator Johanns raised about 
the accredited investor definition, I know you are going to--
next year, next July, under Dodd-Frank Act you will have a 
formal sort of statement about your position. But just remind 
me, when was the $1 million standard and the $200,000 standard 
adopted?
    Mr. Higgins. It has been around for a pretty long time.
    Senator Reed. I think we were children then, yes.
    [Laughter.]
    Mr. Higgins. So a while ago.
    Senator Reed. But the standard really started with a 
significant amount of capital, either, you know, wealth or 
income, which today now is much, much less in terms of real 
dollars than it was back then. And, you know, the notion of 
lowering that, it seems to me to raise some interesting 
questions. I think it originally was proposed to not only sort 
of be a proxy for sophistication, but also to be a measure of 
how much you could actually absorb the entire loss of the 
investment, and that is another factor.
    Are you considering those factors as you go forward? Or I 
guess the question would be: Is the tendency to raise that 
level from the 1980s, let us say, to 2013?
    Mr. Higgins. The notion of raising is certainly something 
that is raised by commenters who have commented on the rules 
that it should be inflated to reflect current values. We have 
heard those.
    There are other folks who say that, you know, having too 
high a standard impedes capital formation. So there is 
another--you know, there are other people who come in and say, 
gee, you do not want to raise it any higher because that will 
impede our ability to go after--so I think we need to look at a 
range of different ways to come at it. I am not sure that the 
existing pure net worth and income is the right way to go.
    Senator Reed. What we are working off is a basis of the--
you know, there was a general rule of no public solicitation. 
So as soon as you saw popping up on the screen someone offering 
a security that was not registered, you sort of--you know, you 
were sort of queued up as to this could be--and the burden of 
proof really was on the other folks, not you.
    Mr. Higgins. Right.
    Senator Reed. Now you can do general solicitation, but that 
has to be to accredited investors, and yet we are looking at a 
standard which is several decades old--and as I would suggest, 
it does not just suggest or reflect sophistication, but it also 
reflects the ability to absorb the loss, and I think that has 
to be considered.
    The final point I would make a comment in response is that 
if you are considering testing people to be accredited 
investors, is that a serious proposal?
    Mr. Higgins. It has been offered as, you know, some sort of 
investor education or testing, but I think it would be a little 
difficult to implement, Senator.
    Senator Reed. I think you are right. Thank you.
    Chairman Tester. Well, thank you, Senator Reed and Ranking 
Member Johanns, and most importantly, thank you, Mr. Higgins, 
for being here. I think--it was not too bad, was it? All right. 
The key is that I think there is a tremendous effort that needs 
to be done to get these rules out, and I think there is a lot 
of attention that this Committee will be paying. We have got to 
do them right, and we have got to be thoughtful. But I think 
that time is important, especially as we are trying to get the 
economy moving forward again in a way that best addresses the 
needs of this country. So we will be watching. You may be 
coming back in again. Hopefully it will be with good news, and 
we look forward to that. We very much appreciate your work, Mr. 
Higgins, and look forward to seeing you again.
    They have called a vote, so we will recess until we get 
back, which will be in pretty short order. I apologize to the 
next panel, but we will get back here pretty darn quickly.
    [Recess.]
    Chairman Tester. We will call the Committee back to order. 
Senator Johanns is en route, but being a good Senator, he has 
already read all your testimony, and so I think we will get 
going with our second panel of witnesses.
    The first one is Mr. Alan Lewis, who currently serves as 
the director of special projects for Natural Grocers by Vitamin 
Cottage, Incorporated. Mr. Lewis also directs Government 
affairs and food and agricultural policy for Natural Grocers. 
Mr. Lewis is also active in several trade organizations and 
sits on the Boulder County, Colorado, Food and Agriculture 
Policy Council. I will tell you from a personal standpoint, 
welcome, Alan. I appreciate you making the trek out here, and I 
appreciate what you do.
    Mr. Lewis. Thank you.
    Chairman Tester. Mr. Robert Kaplan, Jr., is our second 
panelist. He is a founder and managing partner at Kaplan 
Voekler Cunningham and Frank, PLC. Mr. Kaplan's practice is 
concentrated in the area of securities, business 
representation, and real estate investment. His experience 
representing businesses is wide-ranging, including business 
formation, mergers and acquisitions, general corporate and 
commercial law, securities compliance, private offerings, tax 
and strategic partnerships, joint ventures. You have got a full 
plate. Welcome, Mr. Kaplan.
    Mr. Kaplan. Thank you, Senator.
    Chairman Tester. The third witness is Mr. Rick Fleming, who 
serves as deputy general counsel for the North American 
Securities Administrators Association, where he is active in 
developing model State rules, drafting and reviewing comment 
letters and amicus briefs, and providing assistance to State 
securities regulators. Prior to joining NASAA, Mr. Fleming was 
general counsel for the Office of the Kansas Securities 
Commissioner. Welcome, we appreciate your work.
    And last, but certainly not least, is Mr. Sherwood Neiss, 
who serves as principal of Crowdfund Capital Advisors and 
worked to develop the crowdfunding framework in the JOBS Act. 
Mr. Neiss travels the world presenting to entrepreneurs, 
professional investors, and institutions, educating them on how 
to harness emerging crowdfunding investment opportunities and 
how to build crowdfunding ecosystems to support innovation, 
strengthen business, and create thousands of jobs. And we 
appreciate the work that you do, Mr. Neiss, and we thank all 
the witnesses for being here today.
    As with the previous witness, there will be 5 minutes put 
on the clock for oral statements. Your written testimony in 
total will be a part of the record.
    We will start with you, Mr. Lewis. Please proceed.

STATEMENT OF ALAN LEWIS, DIRECTOR OF SPECIAL PROJECTS, NATURAL 
                GROCERS BY VITAMIN COTTAGE, INC.

    Mr. Lewis. Good morning, Chairman Tester, Ranking Member 
Johanns, and other Members of the Subcommittee. Thank you for 
the opportunity to testify about the impact of the JOBS Act on 
Natural Grocers and our ability to raise capital to support job 
creation and contribute to the economic growth of the Nation.
    My name is Alan Lewis, and as director of special projects 
at Natural Grocers and an active member of our IPO team, I 
participated in drafting the Registration Statement on Form S-1 
and in making decisions about using certain beneficial 
provisions found in the JOBS Act. I also continue to provide 
investor relations support to the analyst and investor 
communities on behalf of Natural Grocers. Very briefly, I would 
like to share the introduction to our company and our path to 
completing our IPO.
    Natural Grocers is in many ways the quintessential American 
business success story. Starting from humble mom-and-pop 
beginnings in the 1950s, we have grown to operate over 70 
grocery stores in 13 States while staying true to our original 
founding mission, which is helping people stay healthy through 
better food and nutrition. Of our roughly 2,000 employees, most 
are well-paying, full-time jobs and are eligible for affordable 
health care benefits.
    In 1998 Natural Grocers was acquired from its founders by 
their four children. Over the following 10 years they grew the 
business through long hours and hard work, primarily depending 
on internal cash-flow and bank loans for capital. Subsequently, 
they carefully hired additional professional staff and began 
putting in place the sophisticated accounting, technology, and 
operational infrastructure needed to support a robust expansion 
strategy.
    Beginning in 2009, in the midst of the recent economic 
downturn, our leadership team began laying the groundwork to 
raise outside capital through an initial public offering. At 
about the same time, Congress began addressing the need for 
economic stimulus by proposing a number of bills designed to 
prompt public and private investment to generate new jobs. A 
number of these initiatives were eventually passed into law in 
the form of the JOBS Act, which was signed into law just when 
Natural Grocers was preparing to submit its Registration 
Statement on Form S-1 to the SEC in anticipation of an IPO 
during the summer of 2012.
    Because we clearly qualified as an ``emerging growth 
company,'' many of the key provisions of the JOBS Act were 
anticipated by our legal, accounting, and investment banking 
advisers. So as a group, we paused to consider which 
opportunities we would take advantage of, keeping in mind we 
would likely be among the first companies to launch an IPO 
under this new regulatory regime, and that investors might be 
skeptical of some of the new relaxed rules.
    Here are just two highlights from the JOBS Act provisions 
covered in our written testimony:
    First, confidential submission of our S-1 greatly reduced 
the complexity, stress, and risk of undertaking a public 
offering within such an unsure market environment.
    And, second, the reduced requirement for audited financial 
reports lowered the expense and time needed to prepare for our 
S-1 but did not seem to impact the acceptance of our offering.
    We decided not to opt out of maintaining compliance with 
new or revised accounting standards, but we elected to fully 
disclose our executive pay.
    Chairman Tester, you have asked us to describe our 
experience filing confidentially and using some of the reduced 
compliance provisions under the JOBS Act. In the additional 
written testimony submitted to each of you, we have discussed 
in some detail our experience with these and other decisions. I 
will be happy to answer your questions, of course, within the 
constraints placed on our corporate communications by 
Regulation FD and our upcoming fiscal year end earnings 
announcement.
    And speaking of regulations, I would like to yield myself 
20 seconds to remind everyone that all statements made in this 
testimony other than statements of historical fact are forward-
looking statements. All forward-looking statements are based on 
current expectations and assumptions that are subject to risk 
and uncertainties. Actual results could differ materially from 
those described in the forward-looking statements because of 
factors such as industry, business strategy, goals and 
expectations concerning our market position, the economy, 
future operations, margins, profitability, capital 
expenditures, liquidity and capital resources, other financial 
and operating information, and other risks detailed in the Form 
10-K filed by Natural Grocers for the year ended September 30, 
2012. The information we present is accurate as of the date of 
this testimony, and we undertake no obligation to update 
forward-looking statements.
    In the final analysis, our IPO was a success on many 
levels. Our IPO priced at the high end of our range and the 
stock price held a healthy but reasonable premium on the first 
day of trading and thereafter. As one financial commentator 
stated in an article titled ``The Greedy Sit Out an IPO'', 
``[Natural Grocers] has begun its publicly traded life in an 
environment of fair and balanced trading [ . . . ] How 
refreshing.''
    So, in conclusion, we believe that the JOBS Act is a 
successful piece of legislation. Key provisions of the JOBS Act 
enabled Natural Grocers to successfully navigate the financial 
markets and do exactly what the JOBS Act intended: grow our 
company and add jobs to the American economy.
    Thank you again for all your support of American small 
business and job growth and for allowing me to be here today to 
present our experience with the JOBS Act. I am happy to answer 
any questions you might have.
    Chairman Tester. And we will have questions after the 
panelists are all done. Thank you for your testimony, Mr. 
Lewis.
    Mr. Kaplan, you may proceed.

     STATEMENT OF ROBERT R. KAPLAN, JR., MANAGING PARTNER, 
      PRACTICES, KAPLAN VOEKLER CUNNINGHAM AND FRANK, PLC

    Mr. Kaplan. Thank you, Chairman Tester, and thank you, 
Ranking Member Johanns, for allowing me the opportunity to come 
before you today to discuss the implementation of the JOBS Act 
and in particular the importance of Title IV, commonly referred 
to as ``Regulation A Plus.''
    Again, my name is Rob Kaplan, and I am managing partner for 
practices and founder of the law firm of Kaplan Voekler 
Cunningham and Frank, headquartered in Richmond, Virginia. We 
are a boutique firm with one of our areas of emphasis being on 
securities and capital formation. Our practice includes public 
and private securities, and we represent clients in various 
capacities of all sizes, from multi-billion-dollar enterprises 
to fledgling startups. But the bulk of our practice resides 
amongst what I referred to in my comments as ``Main Street 
businesses,'' companies in the lower mid-market or smaller, 
typically with revenue in the $5 million to $150 million range.
    My written testimony and your questions will provide 
greater detail, but in short, our view is that, to date, little 
movement has occurred to implement those aspects of the JOBS 
Act that we believe address most ably the needs of Main Street 
businesses where so many of America's jobs have historically 
been created.
    Main Street suffers presently from a lack of viable options 
for capital raising. Regulation A Plus presents the most 
potentially impactful piece of the JOBS Act in aiding Main 
Street businesses and providing a rational balance between 
regulatory oversight and access to publicly formed capital. And 
in turn, Regulation A Plus should provide greater investment 
options to the American public than what can be found now.
    The forms and procedures currently existing under 
Regulation A can readily be applied to Regulation A Plus, thus 
obviating the need for further delay in implementing Regulation 
A Plus. SEC's rulemaking in this context should be balanced so 
as not to make Regulation A Plus overly burdensome but foster 
issuer transparency and the efficient dissemination of 
information to support a market for these securities.
    At the same time SEC should adopt a workable definition of 
``qualified purchaser'' which affords investor protection but 
eliminates unnecessary and obstructive layers of regulatory 
procedure.
    Recently we have seen movement on the implementation of the 
JOBS Act beyond the IPO on-ramp provisions of Title I, and 
specifically I am referring to the adoption of Rule 506(c) and 
the release several days ago of the proposed rules related to 
crowdfunding. But we believe that Regulation A Plus can be 
leveraged by a greater diversity of companies who are 
responsible for much of the job growth in this country.
    Senators, Main Street businesses are not going to be, for 
the most part, in our view, likely candidates for crowdfunding 
or these 506 options. Crowdfunding addresses a capital need by 
companies that are much smaller and in an earlier stage of 
growth than the companies we typically represent. And in the 
506 context, we have seen a steady decrease in the amount of 
accredited investors that may be the potential audience for 
investment. We have also seen those investors shying away from 
restricted securities, and we have seen the regulatory 
environment, which I am not necessarily commenting to the 
wisdom or efficacy of that, but the practical reality is that 
some of the new rules that are coming into place that I discuss 
in my written testimony are really producing a chilling effect 
with brokerages and investment banks that may assist issuers in 
forming company capital in the private context.
    So what we see is the market being predominated by 
institutional investors, and those investors have return 
demands which often do not fit with the types of companies that 
could really benefit from Regulation A Plus.
    The reason we see Regulation A Plus as so important here is 
that, unlike a lot of other aspects of the JOBS Act, what it 
truly does, in concert with the intent of the Act, is create a 
balance between regulation and capital formation. It literally 
offers an exchange of access to a greater segment of the 
investing public in exchange for submission to a regulatory 
regime which ensures a standard of disclosure which allows for 
transparency, and that transparency can allow for a modest but 
workable market in these securities, which also provide risk 
mitigation for the investors. And, finally, because of that 
standard of disclosure, it can provide access to greater 
investment options that they can look at with their advisers.
    We believe it could be implemented under the current forms 
and the current rules. We urge this because, quite frankly, we 
have such a small volume of these deals that we believe the SEC 
should foster the use of it so they can have the appropriate 
rules made.
    We also believe that a ``qualified purchaser'' definition 
is absolutely necessary. As I discuss in my written testimony, 
some of our experiences we believe, looked at in the context of 
a broader market, could potentially chill or obstruct the use 
of what could be a very balanced approach to capital formation.
    We have suggested a ``qualified purchaser'' definition with 
a net worth of $500,000 or a gross annual income test of 
$150,000 with a net worth of at least $250,000, and we have 
also suggested that that definition would perhaps have an 
investment cap for natural persons where they cannot invest 
more than 20 percent of their net worth. We think this is a 
reasoned balance between the legitimate investor protection 
concerns of NASAA and Congress in enacting the act. But I think 
it is important to allow this method of capital formation to 
move forward and for a viable market to be developed.
    Thank you, and I am, of course, available to answer any 
questions you may have.
    Chairman Tester. Thank you for your testimony, Mr. Kaplan.
    Mr. Fleming, you may proceed.

   STATEMENT OF RICK FLEMING, DEPUTY GENERAL COUNSEL, NORTH 
      AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC.

    Mr. Fleming. Thank you. Good morning, Chairman Tester, 
Ranking Member Johanns, Senator Reed, and other members of the 
Subcommittee. My name is Rick Fleming, and I am an attorney for 
NASAA, the association of State securities regulators. I would 
like to note that the president of our association, Ohio 
Securities Commissioner Andrea Seidt, regrets that she is 
unable to testify today, but we are certainly appreciative of 
your willingness to allow me to testify in her place.
    Prior to joining the NASAA staff 2 years ago, I was the 
general counsel for the Office of the Kansas Securities 
Commissioner, and in that role, I spent 15 years protecting 
Main Street investors by prosecuting scam artists and by 
bringing disciplinary actions against licensed individuals who 
engaged in dishonest or unethical business practices.
    But I also during that time worked with many Main Street 
businesses and their counsel to help them understand the 
various options for raising capital under State and Federal 
law. And like my colleagues in other States, I had absolutely 
no interest in throwing up needless barriers to economic 
development in the State of Kansas.
    So drawing upon our experience with small business issuers 
who want to create jobs, the States are committed to exploring 
new and innovative ways of fostering small business capital 
formation. But our experience with investors tells us that we 
also need to create an environment in which those investors 
feel sufficiently protected. The trick is to balance the 
legitimate interests of investors with the legitimate goals of 
entrepreneurs and to adopt policies that are fair to both.
    Under President Seidt's leadership, NASAA is embarking this 
year upon a campaign for what she calls ``smarter regulation,'' 
meaning regulation that takes advantage of technology to make 
the offering process more efficient for small businesses 
without sacrificing important protections for investors. And a 
first step in this direction involves Regulation A Plus.
    Given the risky nature of investments in startups generally 
and the fact that the States have traditionally been the 
primary regulator of small business offerings, NASAA believes 
that State oversight of these offerings is essential. However, 
we also recognize the need to change some of our longstanding 
policies to make Regulation A offerings as successful as 
possible. And toward that end, a NASAA project group has 
consulted with a task force of the American Bar Association to 
develop an initial proposal that peels back some of our normal 
guidelines to accommodate this new type of offering. And as 
part of that proposal, we have designed a multistate review 
process in which one or two States will take a lead role in 
reviewing a registration application and work with the company 
that is issuing the securities to resolve any deficiencies in 
that application.
    In addition, we are developing a multistate electronic 
filing platform that will allow a one-stop filing process with 
all the States, and we intend to build out that system to 
accommodate Regulation A Plus filings.
    This past August, a draft proposal to establish this new 
multistate review program was submitted to our NASAA members, 
the State regulators, for what we call an ``internal comment 
period.'' And, in addition, the proposal was discussed during 
our last face-to-face meeting, which was actually earlier this 
month. And I am pleased to report that the comments that we 
have received from our members have been favorable and that the 
proposal will be issued for public comment later today.
    As NASAA moves through this process, we will, of course, 
continue to coordinate and communicate with the SEC in an 
effort to keep both the Federal and the State requirements in 
sync.
    With respect to Title II of the JOBS Act, NASAA remains 
deeply concerned that the lifting of the ban on general 
solicitation will attract even more con artists to the Rule 506 
marketplace, and that those persons will ultimately poison the 
well so that investors are reluctant to invest in even the most 
legitimate private companies. So to avoid this type of 
unintended consequence, NASAA asked the SEC to enhance investor 
protections in Rule 506 by adopting a number of further changes 
to that rule while it was in the process of lifting the ban on 
general solicitation. We are pleased to see that the SEC 
proposed many of our suggested changes, and we continue to urge 
their swift adoption.
    In particular, we consider it vital for the Commission to 
require the filing of Form D before a company begins to 
advertise for investors. We have also asked the Commission to 
establish meaningful consequences for issuers who fail to file 
the form because, absent the filing of a Form D, the States 
will have no information about offerings that are being 
advertised to investors in our own back yards.
    As you know, last Wednesday the SEC released its proposed 
rules on the crowdfunding portion of the act. The SEC is 
required to consult with the States about those rules, and we 
are currently doing a thorough analysis of that proposal.
    Thank you again, Mr. Chairman and members of the Committee. 
I would be pleased to answer any questions.
    Chairman Tester. Well, thank you for being here. Thank you 
for your flexibility to be here, Mr. Fleming, and thank you for 
your testimony.
    Mr. Neiss, you may proceed.

   STATEMENT OF SHERWOOD NEISS, PRINCIPAL, CROWDFUND CAPITAL 
                          ADVISORS LLC

    Mr. Neiss. Chairman Tester, Ranking Member Johanns, and 
Senator Reed, thank you for holding this hearing. My name is 
Sherwood Neiss. I am a pharmaceutical at Crowdfund Capital 
Advisors. CCA works with Governments, multilateral 
organizations, investors, and entrepreneurs on creating 
crowdfunding ecosystems. I am also an entrepreneur and one of 
the cocreators of the Startup Exemption, the framework used by 
Congress to create Title III, crowdfunding.
    If there is one thing I want to stress in my speech, it is 
that while the proposed rules are fair, we need a few more 
changes to create an efficient crowdfunding ecosystem. This law 
will allow entrepreneurs to use their social networks and 
regulated Web sites to raise capital for their endeavors from 
people who believe in them. This law allows supporters to 
pledge their support in the form of equity investments or loans 
to promising businesses. This law addresses the funding void 
faced by startups and small businesses and, if implemented 
according to the intent of the law, may result in much needed 
economic growth, innovation, and jobs.
    Last week the SEC voted unanimously in favor of the 
proposed rules related to Title III. I would like to commend 
the SEC and their staff for their incredibly hard work and 
detailed analysis of regulation crowdfunding. This legislation 
effectively solves earlier problems with easing regulations 
around capital formation by deterring the ``pumping'' of 
securities by disallowing compensation tied to the success of 
an offering unless that individual is a registered broker. And 
the legislation deters the ``dumping'' of securities by 
requiring them to be held for 1 year. It deters potential scam 
artists from entering the market by have background checks 
performed, disclosures mandated, and transactions taking place 
on regulated intermediaries. This entire process happens 
online, creates a digital footprint that can easily be 
referenced if anything goes wrong.
    Now to the proposed rules. First, I will discuss some 
positive elements and then go into areas that are less 
appealing. There are five positive components issuers should 
pay attention to.
    First, while issuers must hit 100 percent of their funding 
target or no money is exchanged, they can exceed their offering 
amount as long as they disclose what they will do with that 
extra money.
    Second, unlike Title II, investors are allowed to self-
certify their income or net worth, which will reduce the 
compliance burden on issuers.
    Third, issuers can verify product interest with a crowdfund 
campaign and not worry about triggering the feared 2,000-
investor filing cap. These are all good.
    Fourth, issuers can do a parallel offering, effectively 
allowing them to test market demand while attracting more 
sophisticated capital.
    And, fifth, the SEC added the flexibility of dynamic 
pricing which gives both issuers and investors more 
flexibility. These are all great things.
    Next are three parts of the rulemaking that could make this 
offering less appealing to prospective issuers.
    First, the biggest hurdle is compliance. There is a lot of 
reporting in the system. While such reporting will promote 
transparency and deter fraud, it may also deter the honest but 
overwhelmed issuer from deciding to crowdfund.
    Second, while the legislation mandates it, we were hopeful 
that the SEC would understand the impracticality of audited 
financials for small businesses seeking to raise in excess of 
$500,000. Audited financials are beneficial for large complex 
corporations, but crowdfunding corporations are smaller and 
more transparent by nature.
    Two years of audited financials, which are required in the 
legislation, could easily represent 10 percent of a $500,000 
raise. This might deter some issuers. We would hope the audit 
requirement would be adjusted.
    And, third, I believe the crowdfunding industry might be 
better served if it were overseen by industry participants 
itself who are solely concerned about developing an efficient, 
credible, transparent crowdfunding marketplace.
    There are two things problematic in the rules.
    First, the proposed rules do not allow funding portals much 
flexibility when determining who can list on their sites. Not 
giving them the flexibility to deny a business they believe is 
not ready for crowdfunding or will not be successful may 
increase failures. Portals should be given more leeway in 
making decisions prior to listing companies.
    Second, the proposed rules leave liability with the funding 
portals for material misstatements by issuers when the portals 
play a limited role in crowdfunding. It is the role of the 
crowd to do the diligence on the issuer and question 
disclosures on the common pages of the campaign, not the 
funding portals. Funding portals should be allowed to 
explicitly state on their Web sites that it is the job of the 
issuers to review the disclosures for nonfactual statements and 
that the portal is just providing the matching service. This 
was the intent of the legislation. Without these changes, I 
believe it will be very hard for portals to flourish.
    In sum, the potential for equity and debt crowdfunding is 
there, but will be constrained by the proposed regulations--as 
they now stand--to implement Title III of the JOBS Act. With a 
few changes, I do believe a robust and efficient crowdfund 
investing market may develop in the United States.
    I look forward to your comments.
    Chairman Tester. Thank you, Mr. Neiss. Thank you for your 
testimony, as I thank all of you for your testimony.
    I think we will put 7 minutes on the clock again and 
proceed--I think we have got plenty of time--because there is a 
vote again at noon, but I think we will be done before that 
pretty easily.
    Mr. Lewis, Natural Grocers has a great business model and 
remains, even after the public offering, a family run business. 
You need to be congratulated on that. And I would also note 
that you recently opened up a store in Kalispell, Montana. 
Thank you for that. And when Natural Grocers did go public in 
July of 2012, it was kind of guinea pig for the JOBS Act, 
filing as an emerging growth company.
    So could you talk a little bit more specifically about 
which provisions were most important to you?
    Mr. Lewis. Yes, very simply, that confidential filing 
provision is just very helpful. Specifically, we have to 
remember that it was a very difficult environment, an unsure 
environment. We had some difficulties with the Facebook IPO 
just the month before we were starting our road show. And, to 
have the S-1 submitted confidentially, and then to work through 
the SEC staff comment process--without disclosing all of the 
secrets and other trade information in the S-1 to our 
competitors--was especially helpful in case the market did not 
recover or respond initially to our expectations.
    Chairman Tester. You opted out of some of the provisions in 
the JOBS Act. Could you talk briefly about that and, 
specifically why?
    Mr. Lewis. For example, we have extensive disclosures in 
our Form S-1 regarding executive pay. For us, it was an obvious 
decision--something we are proud of--to disclose how our 
executives are paid, based on their roles and individual 
responsibilities. That was something we wanted to include.
    In regard to the financials, in the reduced requirement for 
2 years of audited financials, we had 3 years of audited 
financials prepared plus the 9 months or three quarters of 
interim financials that would eventually be audited at the end 
of the fiscal year. In 2007 and 2008, there were issues with 
changing audit firms and a change of year-end and the cost and 
complication of complying with those just seemed too high in 
relation to the benefit it would have given to the potential 
investors, those after 2 years.
    Chairman Tester. OK. What has been your experience after 
you have decided to go public? Has it fulfilled the projections 
you had hoped for? Or has it failed the projections you had 
hoped for?
    Mr. Lewis. In terms of our business, we have set the 
expectations in the market, and we have met them successfully 
quarter after quarter. And, of course, that all depended on 
having the proceeds from the IPO and using them as we did. So I 
would say it was very successful.
    Chairman Tester. Good. Thank you.
    Mr. Kaplan, I agree completely with the statement that you 
made in your testimony that Regulation A Plus was probably the 
least understood provision in the JOBS Act. We have heard from 
a number of folks about the potential of this provision to 
provide a new avenue for access. You talked about it in your 
testimony. I think the potential benefits of this could be very 
positive.
    Can you discuss the benefits of raising capital through 
Regulation A Plus versus other methods for raising capital as 
well as for the capital markets more broadly?
    Mr. Kaplan. Sure, Senator. Traditionally the dichotomy in 
capital raising in this country has been between public 
registration and private placement of securities, most commonly 
under Regulation D.
    The interesting thing about Regulation A and, in concert, 
Regulation A Plus, is, rather than being a transactional 
exemption, you are exempting the securities themselves. So now 
we move away from the accredited investor requirements. We can 
engage in general solicitation. We also have a security that is 
freely tradeable, but this is done within the construct of 
regulatory oversight that can give the market confidence in the 
securities that are being sold.
    What we have seen--and I alluded to this in my opening 
remarks--in the Regulation D marketplace is that that audience 
is shrinking, and we believe it is going to shrink 
significantly more in light of some moves that will be made 
regulatorily by the Commission based on suggestions by the GAO 
and others. We do not speak to the wisdom of that. Again, that 
is the practical reality. But what Regulation A Plus will allow 
is the ability to go to a broader audience, and we personally 
believe, because of that standardized disclosure and the size 
of the deals and companies we are dealing with, there has been 
any number of brokerages and investment banks around this 
country that have been iced out, for lack of a better term, of 
the public IPO marketplace.
    You know, there are somewhere just south of 5,000 broker-
dealers in the United States, and so if you are dealing with 
these Main Street businesses, as I have coined the phrase, you 
have the ability potentially to have placements done on a 
regional level. Being done on a regional level means an 
enhanced layer of transparency for the investor and the 
brokerage houses that work with these issuers. They are going 
to be the subject of articles in the local business section of 
the local paper every day. They are going to be on the news.
    And so, you know, I think what is really interesting about 
Title IV and really where the utility is going to be seen is 
the fact that you are creating this intermediate level of 
securities which allows for a greater diversity of professional 
vendors, brokerages, analysts, news reporters, everybody to 
come to the marketplace and create a greater variety of 
securities for individuals.
    Chairman Tester. And not to put words in your mouth because 
I think you have indicated with the words you have already 
spoken that you feel like there is solid demand for the 
Regulation A Plus once the rules get through the process.
    Mr. Kaplan. Senator, I conservatively take about 15 calls a 
week from potential issuers out there asking when Regulation A 
Plus is going to be promulgated. There is a small handful of 
brokerages that are trying to work with Regulation A right now 
to move up the learning curve. But, yes, I believe the demand 
will be there.
    Do I believe that the dollar level of these securities in 
the near future will be that of the Regulation D marketplace? 
No. That is predominated by institutional investors that put 
out lots of money. But I do believe that it will be a very 
viable and working marketplace very quickly.
    Chairman Tester. Super. Very quickly, because I am out of 
time, what is the benefit of the qualified purchaser exemption? 
Do you see a benefit, and what is it?
    Mr. Kaplan. I do. I see the qualified purchaser exemption, 
the primary benefit being is that right now we are dealing with 
a situation where we have Federal Government oversight and we 
have layered upon that the potential State oversight of 50 
States. I applaud some of the moves that NASAA has made, but 
the reality is we are dealing with 50 different State 
administrators. They apply their rules differently. We have 
seen, you know, lack of activity by administrators. We have 
seen overreaching by administrators. And so, if issuers of the 
size that I am talking about who really create the majority of 
jobs in this country are going to have the confidence to pay a 
lawyer a retainer and the costs associated with doing this deal 
and do audited financials and subject themselves to this, there 
has got to be some definition that gives them confidence they 
can go efficiently raise this capital.
    I totally acknowledge the State administrators' and NASAA's 
concern and Congress' concern about investor protections, but I 
do think we need to strike a balance here to get this market 
stimulated.
    Chairman Tester. Thank you for that. We will probably get 
to Mr. Fleming in the next round.
    Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman. In fact, Mr. 
Chairman, I am going to jump right into that.
    You know, one of the advantages of sitting up here is you 
get to watch the body language of all the witnesses, and 
sometimes you learn something from that. When Mr. Fleming was 
offering his testimony, Mr. Kaplan, Mr. Lewis, you were kind of 
sitting there wondering--and maybe I could say the same about 
Mr. Neiss. You can see that we like the idea of the JOBS Act. I 
even asked about is there a JOBS Act II. It has broad 
bipartisan support, it has Presidential support, and these days 
in Washington that is a bit of an unusual creature. And we see 
it as offering the same opportunities, Mr. Kaplan, that you are 
talking about: a pathway for that smaller operation to access 
capital, to grow and create jobs in our States and in our 
communities.
    But at the same time, we can imagine, I think, some of the 
things that Mr. Fleming is concerned about. You come from the 
State of Kansas. Much like the State of Nebraska----
    Mr. Fleming. Right.
    Senator Johanns. ----we kind of pride ourselves in not 
being overly regulatory. We try to hit the light touch and do 
it right. What I am trying to figure out here, Mr. Kaplan, to 
follow up on a statement you made, what is the right balance 
here? You have got a lot of people out there who are probably 
interested in investing. That is especially true in an 
atmosphere where that CD pays 1.5 percent or 1 percent, and 
they are trying to take that retirement money maybe and make it 
into a bigger thing.
    So I am going to start with you, Mr. Fleming. Is there 
something we are missing here? How significant a red flag are 
you raising? And how do we fix that? And then I am going to ask 
all of you to react to what Mr. Fleming is saying. I will put 
you on the spot, Mr. Fleming.
    Mr. Fleming. I do not think I am really raising a red flag 
on Regulation A Plus. We really see that as kind of a step 
forward in that it really allows the States to be the primary 
regulators of really small business offerings. And we think 
that--you know, we understand the concern with duplicative 
regulation, but we think for small business offerings it really 
should be the States that are kind of the lead of that. And so 
Regulation A creates an exemption under Federal law and kind of 
leaves it to the States to be the primary regulators, which we 
think is good thing, a good model, that if we can be successful 
in Regulation A, maybe we can expand into other areas.
    But, you know, obviously to be successful we realize that 
you have to have rules that are consistent from State to State. 
You also have to have rules that, you know, make sense in the 
context of a very small business offering and those types of 
things. You have to have a one-stop filing system. So we are 
trying to develop those things so that Regulation A Plus can be 
as successful as possible.
    Senator Johanns. When do you think you will have that in 
place? Do you think you are on the same track as Regulation A 
Plus?
    Mr. Fleming. With the SEC?
    Senator Johanns. Yes, time-wise.
    Mr. Fleming. We are probably a little ahead of them right 
now.
    Senator Johanns. OK.
    Mr. Fleming. We are getting ready to go out for public 
comment with our proposal this afternoon, actually, and we will 
have a 30-day comment period. There may be--you know, based on 
the comments that we receive, we may have to go back and tweak 
some things. It is possible we could have an additional comment 
period after that. But, you know, I suspect if things follow 
their normal course, this type of rule proposal would be 
considered at the next face-to-face meeting of our members, 
which is scheduled for next April.
    Senator Johanns. Next April.
    Mr. Neiss, let me start with you. What is your reaction to 
what Mr. Fleming is saying?
    Mr. Neiss. I personally think that the regulators play an 
important role. However, if you look at the issuer and the size 
of the issuer and what they are trying to do, there is just no 
way they can be compliant with filing with each of the 50 
States. The bureaucracy and the costs would be too overwhelming 
for a small issuer to go out there.
    I think the answer is not looking at regulators as the 
people that are policing the market, even though they play that 
important role, but looking at technology as a solution to how 
we can efficiently build markets.
    So that is the beauty about crowdfunding, is we are forcing 
people to use the Internet and technology to put their listing 
up there, and the information is stored online, so they can do 
their job, any State regulator can do their job of policing 
what is going on in the market without an individual person 
having to register in all 50 States. I think technology is 
something that we get in front of, not behind, and if we can 
enable it in this capacity, we can probably get more businesses 
going.
    Senator Johanns. Mr. Kaplan.
    Mr. Kaplan. Yes, Senator. Well, first off, I have to say, 
with all due respect, I disagree with the statement that the 
Federal Government defers to the State in regulating Regulation 
A securities. These securities actually go through a very 
thorough process of being vetted for disclosure and adequacy of 
that disclosure at the Federal level. The exemption is an 
exemption from registration. It does not exempt them from 
regulation at the Federal level.
    Second, you know, many of the State securities regulators 
defer to the review of the Federal Government in the review of 
Regulation A securities. But the biggest point of concern I 
have, given our experience, is with all the things that NASAA 
is doing, respectfully, NASAA does not police the actual 
examiner who is working with the potential issuer, and that is 
where we are seeing the breakdown here in many instances.
    In other instances, we have perfectly good experiences with 
regulators. The people in California have been great, for 
example. But in other instances, we have had absolutely, for 
lack of a better term, frustrating experiences that have, you 
know, unnecessarily--unnecessary delays in registrations. One 
we filed in December of last year we still have not heard from 
them. We have had investigations that have been instituted by 
the investigations departments of examiners against our issuers 
who are just complying with the law.
    And so, you know, the motivation for our qualified 
purchaser definition is, look, this is going through a very 
sophisticated process at the Federal level. We are layering 
more onto that in Regulation A Plus. We certainly understand 
that there has got to be a line. But at the same time, we have 
been given this qualified purchaser opportunity. Let us find a 
reasoned definition where now that we have disclosure that is 
vetted by the regulators, that is based upon a discipline that 
is analogous to registration, that is in plain language, you 
know, let us find a level of investor that can understand that; 
and perhaps with the caps on investment you still maintain, as 
Senator Reed pointed out this morning, that containing the risk 
that any given investor could have in that investment. And 
those securities can move beyond the State registration 
process. If they want to go to a broader audience, submit to 
the process.
    Senator Johanns. Mr. Lewis, I am out of time, but I have 
one thought here, if the Chairman will indulge me, or one 
additional question. With what NASAA is talking about doing and 
with Regulation A Plus making its way through the process, 
admittedly slower than we would probably like, is there a 
brewing storm out there. Is there a conflict waiting to happen 
between NASAA and what we are trying to do with the JOBS Act? I 
just get this feeling that NASAA is kind of out there doing 
what it thinks is best, and there is conflict on the horizon. 
Am I missing something here?
    Mr. Fleming. I do not see any particular conflict with the 
JOBS Act. I think obviously the intention of the JOBS Act was 
to make investment opportunities available to more people. We 
get that. Essentially the investment limit was raised from $5 
million to $50 million.
    I think a lot of the criticisms that Mr. Kaplan has are 
with existing Regulation A, as opposed to what has been 
proposed, and Regulation A Plus, and with the system that we 
are trying to create. I think a lot of his concerns will be 
ameliorated when we get this new system up and running.
    Senator Johanns. OK. Thank you, Mr. Chairman.
    Chairman Tester. Thank you, Senator Johanns.
    Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Mr. Fleming, in your testimony you make, I think, several 
very important suggestions, particularly with respect to the 
Rule D, Regulation D, Rule 506 type offerings, where you are 
suggesting that there be a prior filing of the Form D. Can you 
elaborate on why that would be critical?
    Mr. Fleming. Sure. You know, before the JOBS Act, when we 
would get a call from an investor about an offering where they 
are being solicited, you know--and we encourage people to call 
our offices to check out investments that may be, you know, not 
on a market or something like that. When we would get those 
calls, the first thing we do is determine whether it has been 
registered, and if not, whether it would qualify for an 
exemption.
    Well, prior to the JOBS Act, we could easily determine that 
it was not--it would not qualify for an exemption because they 
were making a general solicitation. We did not need a Form D to 
tell us that.
    Now when an investor calls, we will walk through that same 
process. Is it registered? No. Is it exempt from registration? 
That is where we get the hangup. We do not know--if an 
advertisement can be made to the public but the filing does not 
have to be made until later, there is no real way that we can 
tell at a glance, you know, is this an issuer that is trying to 
comply with Regulation D? And we can kind of separate the wheat 
from the chaff that way.
    The other reason it is important is that it does have some 
information on it that is helpful to investors. For example, it 
requires the disclosure of control persons of the issuer. So an 
investor that calls us and asks about an offering, we can take 
that Form D, and we can look at the control persons; we can, 
you know, look at whether we have had any prior regulatory 
problems with them, that type of thing. That is helpful to an 
investor when they are doing their due diligence.
    Senator Reed. So there is a potential, you know, if we do 
not do something like this, have the Form D filed prior to the 
offering, that you just will not know what is going on. Someone 
will call you up and say, ``I was solicited over the 
Internet,'' and you have no idea who the issuer is, really, who 
the controlling parties are, et cetera, and you will be stymied 
in terms of giving advice to potential investors and also 
enforcing the law. Is that correct?
    Mr. Fleming. That is exactly right, although I would point 
out that the rule proposal has come out with a 15-day advanced 
filing requirement before the use of a--so you would have to 
file your Form D 15 days before you advertised. We do not 
really need a 15-day advanced filing. For our purposes, it 
would be sufficient just any time prior to the advertising.
    Senator Reed. Very good. The other thing, obviously, as you 
emphasize in your testimony, is that with the lifting of the 
ban on general solicitation under Rule 506, there is an 
enhanced possibility of fraud, and you have reflected that in 
terms of the initial discussion we have had. But could you 
elaborate on other aspects of fraud that could take place?
    Mr. Fleming. In Rule 506?
    Senator Reed. The 506, the Regulation D process, with now 
the lift on general solicitation.
    Mr. Fleming. Yes, we do see--you know, we have always seen 
a lot of fraud--well, to us, a lot of fraud in this area, and 
we expect with the lifting of the ban on general solicitation 
that is just going to increase. Regulation D offerings are 
always on our top ten list of potential investor traps, and 
they are normally number one in terms of State enforcement 
actions, at least for the last few years. We would anticipate 
that with the lifting of the ban on general solicitation and 
broadening the pool of potential investors in this marketplace, 
fraud is going to increase not decrease.
    Senator Reed. Let me ask you another question, too, the 
jurisdictional one. If the offering is made out of State, in 
some cases--and I do not know if this is feasible these days, 
but with the Internet you have to think even globally of, you 
know, sites popping up offering, maybe deliberately and 
fraudulently offering securities under the new procedures that 
you can buy, is that a problem that you are anticipating in 
terms of, you know, you might have Kansans who have been 
victimized, but you cannot even--you cannot even reach, you 
know, the issuer or the sponsor or the controlling entities?
    Mr. Fleming. Yes, that is definitely a problem. I do not 
know that the JOBS Act necessarily changes that.
    Senator Reed. No, I think that is just one of the problems 
today of an Internet-based global economy.
    Mr. Fleming. Sure.
    Senator Reed. And, Mr. Lewis, again, thanks for your 
leadership. Actually, I think if--I have been in Kalispell, 
Montana.
    Chairman Tester. Yes.
    Senator Reed. And he has not been in Rhode Island, so I am 
ahead of him on this.
    [Laughter.]
    Chairman Tester. I am due.
    Senator Reed. He is due. But this whole issue of fraud, 
which I spoke to Mr. Fleming about, I think looking at--and we 
looked back at your 10-K for 2012. As an emerging growth 
company, you have highlighted the possibility that the market 
might react to the status not because of what you have done--in 
fact, I compliment you for the disclosures you have given and 
the accounting rules that you have--the rigorous path you have 
taken. But there is a fear, I suspect, in this of a spillover 
effect if we do not police this market very well, that even 
legitimate, bona fide principal issuers like yourself might 
suffer. Is that a concern?
    Mr. Lewis. I think that is a fair concern of yours, yes.
    Senator Reed. Well, I think, you know, we--this is a 
potentially very powerful tool, but if we do not put in 
reasonable controls on issuers and give the regulators the 
ability to check effectively, it could not be as powerful or as 
useful, and I think that is a point that we should make.
    The other issue that I think is important to emphasize is 
that we are in a situation where we want to encourage capital 
formation, but we also want to make sure that we protect 
investors and we protect individuals. You do, too. I mean, that 
is the essence of what you have done with your company.
    So I think we have a lot to do, and it comes back to that 
sort of often used term of balance between investor 
protections, State regulation, Federal regulation, and capital 
formation. So we are going to continue and we have to continue 
to monitor this, too, because if it takes off in the right 
direction, we want to applaud it. If it starts going the wrong 
direction, we want to be able to step effectively in and put in 
the brakes.
    Thank you, Mr. Chairman.
    Chairman Tester. Thank you, Senator Reed.
    I have got a couple more, and I am going to start with you, 
Mr. Neiss. We talked a lot about what Senator Reed was talking 
about as it relates to your perspective. You discussed some of 
your concerns that relate to the proposed crowdfunding rules, 
suggesting that without some modifications the bar would be set 
so high that some could be priced out of crowdfunding as a 
viable option. I would like you to elaborate more specifically 
on your suggestions for how to balance crowdfunding so it 
remains a reliable option yet offers protection for investors.
    Mr. Neiss. OK. There are two areas that I would talk about: 
one would be the audit requirement, and the other would be the 
cost of capital related to raising money on the portals because 
of the responsibilities the portals have.
    So when you are going out and raising capital, there are 
three tiers in crowdfunding. If you are raising under $100,000, 
it can just be self-certification by essentially an executive 
in the company. Between $100,000 and $500,000, you have to have 
a CPA review. And over $500,000, it is where you have to have 
the audited financials.
    The audited financials I think are the challenging part, 
particularly for startups, because they might have a zero 
balance sheet, and how do you audit that?
    Those type of requirements are onerous, and the cost of 
capital will come out of the money that is raised. So I do not 
think--if 10 percent of a $500,000 offering goes to an audit 
outside of what they have to pay for getting the forms together 
and hiring an attorney perhaps to help them do this, it could 
cost them up to 20 percent to do an offering. That does not 
really make sense.
    The second part of it comes down to the funding portals 
themselves. The burden of having to go through the compliance 
and registration with FINRA for them, when it was meant to be 
really a broker-dealer-light solution, a very light touch on 
them, the cost of that compliance, too, is just going to come 
out of how much investors have to pay and issuers have to pay 
the portals themselves for the use of that service.
    Now, people are talking about that could be between 7 and 
14 percent of the offering. Again, if you look at those costs, 
the more compliance that portals have to have and the more 
burden that is placed on them, they are just going to take it 
out of how much money is raised.
    The whole point of crowdfunding, if you look at what 
happens in donation and perk space, it is a very much hands-off 
approach. The crowd comes in and says, listen, let me look at 
everything that you have. Let me look at your disclosures, let 
us talk about it amongst ourselves and see if this is something 
that we want to get behind. That is the crowd wisdom, and that 
is the diligence that goes into it. They absorb a lot of the 
costs related to doing these offerings, and that is the benefit 
of crowdfunding.
    If you force the portals to do all the regulation that is 
going into it--and that is what is in the proposed rules--I 
just fear that this is going to end up costing the individuals, 
the issuers and the investors, more of their capital that they 
really want going into businesses.
    Chairman Tester. OK. So what you are saying is the balance 
really falls upon the investor. Is that fair to say?
    Mr. Neiss. Yes, I mean, the investors are--when we look at 
a constellation of trust that is built around this entire 
ecosystem, it is not the entrepreneur that is in the middle. It 
is the investor that is in the middle, because it is the 
investor's money that they are deploying into these businesses. 
Anything that we are doing that increases the burden on 
entrepreneurs or portals really affects the investor because it 
is their capital that is paying for all of this.
    Chairman Tester. I got you.
    On the previous panel we talked about outreach for 
education, and I kind of indicated that we would talk about 
that a little bit with this panel, so this question is to 
anybody who wants to talk about it. Ensuring good information 
gets out to entrepreneurs and investors about the JOBS Act I 
think is very important. From your perspective how do we better 
educate entrepreneurs and investors about the JOBS Act so that 
they are empowered to make informed decisions? And anybody can 
start.
    Mr. Neiss. Well, I will just tell you, in Title III it is 
mandated education. So investors have to essentially take an 
investor education series to understand the risks involved in 
investing in startups and small businesses, that there is no 
guarantee of return, that if they see their money, it might not 
be what they put into it. So there is a list of questions that 
they essentially have to certify that they understand. I think 
that is a really important part of Title III, and I think it is 
really beneficial for investors that are going into it that 
they understand that there is no guaranteed return on anything 
when you invest in the private capital markets.
    We are as an industry incredibly focused on education. We 
understand that it is investors and it is entrepreneurs. 
Entrepreneurs need to understand the responsibilities that they 
have when taking investors' monies. But investors need to 
understand the risks associated with this as well.
    You know, I think it would be great if other parts of the 
JOBS Act had this in there.
    Chairman Tester. OK. Anybody else want to talk about----
    Mr. Fleming. I think NASAA is--we are pretty much in 
agreement with Mr. Neiss's group as far as the importance of 
investor education. We have put out an investor alert to walk 
investors through these types of things that they need to 
consider before making an investment decision in a crowdfunded 
offering.
    In addition to that, though, we have issued what we call an 
``Issuer Alert'' that is directed to the small business and 
helping them evaluate whether crowdfunding is the right option 
for them. You know, do they want to have a whole bunch of 
people out there that think they own the business and might 
have some say in how it is run? That type of thing.
    Chairman Tester. How do the alerts get out? How broad of a 
net is this?
    Mr. Fleming. We put them on our Web site. We issue a press 
release. We encourage the States to push them out to the press. 
That type of thing.
    Chairman Tester. All right. Thanks.
    Mr. Kaplan. Senator, at the risk of sounding trite, my 
answer is get the rules out there. Get the rules for all of the 
options under the JOBS Act, because the most efficient way to 
get education out there is to have the private market, the 
brokerage community, the banking community, the legal 
community, all of these understanding the options and being 
able to provide a comparative analysis, and you will get that 
education quickly because that is how they make their money.
    Chairman Tester. OK. Mr. Lewis, would you like to respond? 
It is up to you.
    Mr. Lewis. Yes, thank you, Senator. In my world, if I need 
to find out about something, I have more than enough ability to 
find out about it, and once I start looking for it, they 
magically know I am wanting it and sending it to me endlessly. 
So I do not think it is as hard as it was 20 years ago to get 
this information out. But I would definitely recommend getting 
all the rules out because that is exactly what will happen. 
They will be promulgated in every which way.
    Senator Johanns. I am good.
    Chairman Tester. Senator Johanns is good. Well, I just want 
to thank all the witnesses here today. I want to thank Senator 
Johanns for being here. I very much appreciate his line of 
questioning. I especially want to thank you guys for what you 
had to say and being up front and frank about it. I appreciate 
that. That is what hearings should be about. It is about 
getting good information so that as policy makers we can make 
decisions that are effective and basically good.
    I think the hearing underscored it best. I think you said 
it at the very end, Mr. Kaplan. You have got to get the rules 
out. Once you get the rules out, I think we can have a positive 
impact on economic growth in this country through the JOBS 
bill, and I look forward to continued progress on this issue.
    Just a little housekeeping for the record. This record will 
remain open for 7 days for additional comments and any 
questions that can be submitted for the record at that point in 
time.
    So, with that, once again I want to thank you all for your 
time and for your testimony and for your frank answers. We are 
adjourned.
    [Whereupon, at 11:50 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                  PREPARED STATEMENT OF KEITH HIGGINS
  Director, Division of Corporation Finance, Securities and Exchange 
                               Commission
                            October 30, 2013
    Chairman Tester, Ranking Member Johanns, and Members of the 
Subcommittee, I appreciate the opportunity to testify today on behalf 
of the U.S. Securities and Exchange Commission (Commission) regarding 
the Jumpstart Our Business Startups Act (JOBS Act). Implementation of 
the JOBS Act is one of the Commission's top priorities, and my 
testimony will discuss the efforts of the Commission and staff since 
enactment of the JOBS Act last year.
    The JOBS Act made significant changes to the Federal securities 
laws, including:

    changing the initial public offering process for a new 
        category of issuer, called an ``emerging growth company,'' by, 
        among other things, permitting these companies to submit draft 
        registration statements for review on a confidential basis, 
        providing exemptions for such companies from various disclosure 
        and other requirements for up to 5 years following their 
        initial public offerings, and relaxing certain restrictions on 
        communications by issuers and their underwriters;

    requiring the Commission to modify the prohibition against 
        general solicitation and general advertising in Rule 506 of 
        Regulation D and Rule 144A under the Securities Act of 1933 
        (Securities Act);

    requiring the Commission to implement exemptions under the 
        Securities Act for crowdfunding offerings and for unregistered 
        public offerings of up to $50 million; and

    increasing the number of holders of record that triggers 
        public reporting under Section 12(g) of the Securities Exchange 
        Act of 1934 (Exchange Act) and increasing the number of holders 
        that permits deregistration and suspension of reporting under 
        the Exchange Act for banks and bank holding companies.

    The JOBS Act also required the Commission to conduct several 
studies and prepare reports to Congress. In addition, the JOBS Act 
mandated that the Commission provide online information and conduct 
outreach to small and medium-sized businesses and businesses owned by 
women, veterans, and minorities about the changes made by the new 
statute.
    As you know, certain provisions of the JOBS Act became effective 
immediately upon enactment, while others require Commission rulemaking. 
These rulemaking mandates are in addition to a significant volume of 
Commission rulemaking required by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    The Commission staff has taken steps to inform the industry about 
the operation of the JOBS Act, beginning immediately after enactment. 
On the day of enactment, for example, staff in the Division of 
Corporation Finance provided information on the Commission's Web site 
that explained how emerging growth companies could submit draft 
registration statements for confidential nonpublic review as permitted 
by the JOBS Act. \1\ On the same day, the staff received the first 
confidentially submitted registration statement from an emerging growth 
company that used these new procedures.
---------------------------------------------------------------------------
     \1\ See, http://www.sec.gov/divisions/corpfin/cfannouncements/
draftregstatements.htm.
---------------------------------------------------------------------------
    Soon after enactment, the staff prepared and posted on the 
Commission's Web site answers to what the staff anticipated would be 
interpretive and implementation questions that companies and their 
advisors would have regarding the initial public offering ``on-ramp'' 
and the changes to the requirements for Exchange Act Section 12(g) 
registration and deregistration. The staff has continued to provide 
guidance, including by providing answers to frequently asked questions 
about the JOBS Act and its effect with respect to rules relating to 
research and research analysts and about the crowdfunding and other 
provisions of the JOBS Act. \2\ In addition, the staff has discussed 
and answered questions relating to the provisions of the JOBS Act with 
companies, their advisors and other interested parties at conferences 
and seminars.
---------------------------------------------------------------------------
     \2\ See, http://www.sec.gov/divisions/corpfin/guidance/
cfjjobsactfaq-title-i-general.htm, http://www.sec.gov/divisions/
corpfin/guidance/cfjjobsactfaq-12g.htm, http://www.sec.gov/divisions/
marketreg/tmjobsact-researchanalystsfaq.htm, http://www.sec.gov/
divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm, and 
http://www.sec.gov/divisions/marketreg/exemption-broker-dealer-
registration-jobs-act-faq.htm.
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    For the JOBS Act provisions requiring Commission rulemaking, teams 
consisting of staff from across the Commission, including economists 
from the Division of Economic and Risk Analysis (DERA), have been 
working on rulemaking recommendations, including the assessment of 
their potential economic impact, for the Commission's consideration. 
The Commission has adopted rule amendments that lifted the restriction 
on general solicitation in offerings conducted pursuant to Rule 506 and 
Rule 144A, thereby implementing Title II. It also has proposed rules to 
implement a new exemption to permit crowdfunding in connection with the 
implementation of Title III.
    To aid the rulemaking process and increase the opportunity for 
public comment, the Commission established a page on its Web site 
through which, prior to the issuance of proposed rules, interested 
parties are able to submit comments on the various provisions of the 
JOBS Act. \3\ Since the Web page was established in April 2012, a wide 
range of interested parties have provided feedback and insights 
relating to the Commission's implementation of the JOBS Act, and these 
comments are publicly available on the Commission's Web site. \4\ 
Commissioners and staff also have participated in meetings with a wide 
array of interested individuals and groups regarding the implementation 
of the JOBS Act. \5\ The input the Commission and the staff have 
received through these written submissions and meetings has been very 
helpful to the rulemaking teams as they work to comply with the JOBS 
Act's mandates.
---------------------------------------------------------------------------
     \3\ See, http://www.sec.gov/spotlight/jobsactcomments.shtml.
     \4\ See, id. As of October 15, 2013, the Commission has received 
230 comment letters relating to the provisions in Title I, 84 comment 
letters relating to the provisions in Title II, 216 unique comment 
letters and 126 form letters relating to the provisions in Title III, 
25 comment letters relating to the provisions in Title IV, 27 comment 
letters relating to the provisions in Titles V and VI and 6 comment 
letters relating to Title VII.
     \5\ The comment file for each title provides information about 
JOBS Act-related meetings in which members of the Commission and the 
staff participated. See, http://www.sec.gov/spotlight/
jobsactcomments.shtml.
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    Below is a more detailed description of the efforts taken to date 
to implement the various provisions of the JOBS Act.
Title I
    Title I of the JOBS Act created a new category of issuer called an 
``emerging growth company,'' which is defined as a company with total 
annual gross revenues of less than $1 billion during its most recently 
completed fiscal year. Only companies whose first registered sale of 
common equity securities occurred after December 8, 2011, may be 
considered emerging growth companies. A company retains its status as 
an emerging growth company until the earliest of the following:

    the last day of its fiscal year during which its total 
        annual gross revenues are $1 billion or more;

    the date it is deemed to be a large accelerated filer under 
        the Commission's rules;

    the date on which it has issued more than $1 billion in 
        nonconvertible debt in the previous 3 years; or

    the last day of the fiscal year following the fifth 
        anniversary of the first registered sale of its common equity 
        securities.

    As referenced above, emerging growth companies may confidentially 
submit draft registration statements to the Commission prior to the 
company's initial public offering date. All such submissions and 
amendments to those submissions must be filed publicly no later than 21 
days before the date the issuer conducts a road show. To date, the 
Commission has received more than 300 confidentially submitted draft 
registration statements for nonpublic review as permitted under Title 
I. Of those, more than 170 have completed their initial public 
offering.
    Under Title I, emerging growth companies can take advantage of 
scaled disclosure and other requirements, including with respect to the 
Commission's financial statement and selected financial data 
requirements and certain executive compensation disclosures. Emerging 
growth companies are exempted from the audit of internal controls 
required under Section 404(b) of the Sarbanes-Oxley Act of 2002 and 
from any potential future rule the Public Company Accounting Oversight 
Board issues with respect to mandatory audit firm rotation or the 
auditor reporting model. In addition, under Title I, emerging growth 
companies cannot be required to comply with any new or revised 
financial accounting standard until the date that a nonissuer would be 
required to comply.
    Title I also made important changes with respect to communications 
around securities offerings and the provision of research and 
securities analyst communications. The law provided a Securities Act 
exemption for emerging growth companies and persons authorized to act 
on their behalf to ``test the waters'' for an offering by communicating 
with potential investors that are qualified institutional buyers or 
institutional accredited investors prior to or following the filing of 
a registration statement. In addition, Title I provided an exemption 
under the Securities Act for the issuance of research reports before, 
during and following initial public offerings and other offerings for 
emerging growth companies by underwriters engaged in such offerings. It 
also prohibited the Commission and national securities associations 
from adopting or maintaining rules:

    restricting, based on functional role, which associated 
        persons of a broker, dealer, or member of a national securities 
        association, may arrange for communications between a 
        securities analyst and a potential investor;

    restricting a securities analyst from participating in 
        communications with an emerging growth company's management 
        team that also are attended by any other associated person of a 
        broker, dealer, or member of a national securities association, 
        whose functional role is not that of a securities analyst; and

    restricting brokers, dealers, or members of a national 
        securities association, from publishing or distributing 
        research reports or making public appearances with respect to 
        the securities of an emerging growth company within a specified 
        time period after the emerging growth company's initial public 
        offering or prior to the expiration of a lock-up agreement.

    The provisions of Title I were effective upon enactment without 
Commission rulemaking. \6\ As noted above, immediately following 
enactment of the JOBS Act, the staff developed and published procedures 
for emerging growth companies to submit draft registration statements 
for confidential nonpublic review. \7\ The staff has continued to work 
to simplify that process, and, since October 2012, companies have been 
required to submit their draft registration statements electronically 
on the Commission's EDGAR system. \8\ As noted above, through the 
issuance of responses to frequently asked questions, the staff has 
provided guidance on the application of Title I in light of the 
Commission's existing rules, regulations and procedures. The staff is 
continuing to work with companies and practitioners when questions 
arise concerning the application of Title I and provides guidance when 
needed.
---------------------------------------------------------------------------
     \6\ See, http://www.sec.gov/comments/jobs-title-i/general/
general.shtml for comments on Title I.
     \7\ See, http://www.sec.gov/divisions/corpfin/cfannouncements/
draftregstatements.htm.
     \8\ See, http://www.sec.gov/divisions/corpfin/cfannouncements/
drsfilingprocedures101512.htm.
---------------------------------------------------------------------------
    Title I also required the Commission to submit two reports to 
Congress. Section 106(b) required that the Commission, within 90 days 
of enactment of the JOBS Act, conduct a study and report to Congress on 
the transition to trading and quoting securities in one penny 
increments--also known as decimalization--and the impact decimalization 
has had on the number of initial public offerings since its 
implementation. \9\ Section 106(b) also permitted the Commission, if it 
determined that the securities of emerging growth companies should be 
quoted and traded using a minimum increment of greater than $0.01 to 
designate, by rule, a minimum increment for emerging growth companies 
that is greater than $0.01 but less than $0.10.
---------------------------------------------------------------------------
     \9\ See, http://www.sec.gov/comments/jobs-title-i/tick-size-study/
tick-size-study.shtml for comments on Section 106(b) of Title I.
---------------------------------------------------------------------------
    The report to Congress on the staff's study under Section 106(b) 
was submitted on July 20, 2012. \10\ In conducting the study, the staff 
reviewed empirical studies regarding tick size and decimalization, 
considered the views expressed about market structure at a June 2012 
open meeting of the Commission's Advisory Committee on Small and 
Emerging Companies and surveyed tick size regimes in non-U.S. markets. 
Based on the review, the staff found that ``[a]lthough mandating an 
increase in tick sizes to levels greater than those that are presently 
dictated by market forces may provide more incentives to market makers 
in certain stocks, the full impact of such a change, including whether 
or not an increased tick size would indeed result in more IPOs, and 
whether there would be other significant negative or unintended 
consequences, is difficult to ascertain.'' \11\ The staff, therefore, 
recommended at that time that the Commission should not proceed with 
rulemaking to increase tick sizes, but should consider the steps needed 
to determine whether rulemaking should be undertaken in this area in 
the future. In this regard, the report noted the staff's belief that 
the Commission should solicit the views of interested parties on the 
broad topic of decimalization, how to best study its effects on initial 
public offerings, trading and liquidity for small and middle 
capitalization companies and what, if any, changes should be 
considered. The staff also recommended that a roundtable be convened to 
determine how to best structure a potential pilot program.
---------------------------------------------------------------------------
     \10\ See, http://www.sec.gov/news/studies/2012/decimalization-
072012.pdf.
     \11\ Id. at 22.
---------------------------------------------------------------------------
    In February 2013, the staff held a roundtable to discuss the impact 
of decimal-based stock trading on small and middle capitalization 
companies, market professionals, investors and U.S. securities markets. 
\12\ The staff is still considering the comments received at the 
roundtable, including those suggesting that the Commission evaluate the 
current ``one-size-fits-all'' approach to tick size through the 
implementation of a pilot program that would alter the minimum tick 
size for a control group of stocks of different types of companies. 
Although panelists expressed different views on the impact of tick 
sizes on initial public offerings, research coverage and market 
liquidity, most panelists supported the idea of a pilot program to 
empirically test the effects of increasing tick sizes to greater than 
one penny for the less-liquid stocks of smaller capitalization 
companies.
---------------------------------------------------------------------------
     \12\ For further information about the decimalization roundtable, 
see, http://www.sec.gov/spotlight/decimalization.shtml.
---------------------------------------------------------------------------
    In addition, the SEC's recently implemented Market Information and 
Data Analytics System (MIDAS) \13\ provides depth of order book detail 
beyond the publicly posted best bid and ask prices, which, in the 
context of a tick size pilot, would enable SEC staff to better 
investigate the impact of increasing tick sizes on the liquidity 
provision across the entire limit order book. Posting the results of 
these investigations online also could allow the public to examine book 
liquidity measures over the period of a pilot program.
---------------------------------------------------------------------------
     \13\ For further information about MIDAS, see, http://www.sec.gov/
marketstructure/.
---------------------------------------------------------------------------
    Currently, the staff is working with the exchanges as they develop 
and, if possible, present to the Commission for its consideration a 
plan to implement a pilot program that would allow smaller companies to 
use wider tick sizes.
    Section 108 of the JOBS Act required the Commission, within 180 
days of enactment of the JOBS Act, to conduct a review of Regulation S-
K to determine how it may be modernized and simplified to reduce the 
costs and other burdens for emerging growth companies. \14\ The 
Commission also is required to transmit a report to Congress on this 
review. The Commission's staff is finalizing this report and expects to 
make it public very soon.
---------------------------------------------------------------------------
     \14\ See, http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/
reviewreg-sk.shtml for comments on Section 108 of Title I.
---------------------------------------------------------------------------
Title II
    Title II of the JOBS Act required the Commission to revise the Rule 
506 safe harbor of Regulation D \15\ from registration to allow general 
solicitation or general advertising for offers and sales made under 
Rule 506, provided that all securities purchasers are accredited 
investors. Title II stated that ``[s]uch rules shall require the issuer 
to take reasonable steps to verify that purchasers of the securities 
are accredited investors, using such methods as determined by the 
Commission.'' Title II also stated that Rule 506 will continue to be 
treated as a regulation issued under Section 4(a)(2) of the Securities 
Act, and that offers and sales under Rule 506 as revised will not be 
deemed public offerings under the Federal securities laws as a result 
of general solicitation or advertising.
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     \15\ 17 CFR 230.506. Rule 506 of Regulation D under the Securities 
Act is a nonexclusive safe harbor under Section 4(a)(2) (formerly 
Section 4(2)) of the Securities Act, which exempts transactions by an 
issuer ``not involving any public offering'' from the registration 
requirements of Section 5 of the Securities Act. Under Rule 506 prior 
to the amendments, an issuer could offer and sell securities, without 
any limitation on the offering amount, to an unlimited number of 
``accredited investors,'' as defined in Rule 501(a) of Regulation D, 
and to no more than 35 nonaccredited investors who meet certain 
``sophistication'' requirements. The availability of the safe harbor 
was subject to a number of requirements and is conditioned on the 
issuer, or any person acting on its behalf, not offering or selling 
securities through any form of ``general solicitation or general 
advertising.'' The amendment to Rule 506 adopted by the Commission 
eliminated this prohibition on general solicitation and general 
advertising for offerings in which issuers take reasonable steps to 
verify that purchasers are accredited investors.
---------------------------------------------------------------------------
    In addition, Title II required the Commission to revise Securities 
Act Rule 144A \16\ to provide that securities sold under that rule may 
be offered to persons other than qualified institutional buyers, 
including by means of general solicitation or advertising, provided 
that the securities are sold only to persons reasonably believed to be 
qualified institutional buyers.
---------------------------------------------------------------------------
     \16\ 17 CFR 230.144A. Rule 144A is a nonexclusive safe harbor 
exemption from the registration requirements of the Securities Act for 
resales of certain ``restricted securities'' to qualified institutional 
buyers, or QIBs. Prior to the amendments adopted by the Commission, 
Rule 144A did not include an express prohibition against general 
solicitation, but did provide that offers of securities under Rule 144A 
must be limited to QIBs, which had the same practical effect. A QIB is 
defined in Rule 144A and includes specified institutions that, in the 
aggregate, own and invest on a discretionary basis at least $100 
million in securities of issuers that are not affiliated with such 
institutions. Banks and other specified financial institutions also 
must have a net worth of at least $25 million. A registered broker-
dealer qualifies as a QIB if it, in the aggregate, owns and invests on 
a discretionary basis at least $10 million in securities of issuers 
that are not affiliated with the broker-dealer. The amendment to Rule 
144A adopted by the Commission permits issuers to offer securities to 
persons other than QIBs provided that securities are sold only to 
persons the seller and any person acting on behalf of the seller 
reasonably believe are QIBs.
---------------------------------------------------------------------------
    On July 10, 2013, the Commission implemented Title II by adopting 
amendments to Rule 506 and Rule 144A. \17\ These amendments became 
effective on September 23, 2013, and issuers have begun making 
offerings under the new rules. \18\
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     \17\ Securities Act Release No. 33-9415 (Adopting Release), 78 
Fed. Reg. 44771 (July 24, 2013), available at http://www.sec.gov/rules/
final/2013/33-9415.pdf. Commissioner Luis A. Aguilar dissented from the 
Commission's action. Statements from the July 10, 2013, Open Meeting 
regarding the Adopting Release are available on the SEC's Web site at 
the following links: Chair White statement: http://www.sec.gov/News/
Speech/Detail/Speech/1370539689380; Commissioner Aguilar's dissenting 
statement: http://www.sec.gov/News/Speech/Detail/Speech/1370539684712; 
Commissioner Gallagher statement: http://www.sec.gov/News/Speech/
Detail/Speech/1370539665007; Commissioner Paredes statement: http://
www.sec.gov/News/Speech/Detail/Speech/1370539701591; and Commissioner 
Walter statement: http://www.sec.gov/News/Speech/Detail/Speech/
1370539699218.
     \18\ Based on the information reported in the initial Form D 
filings reviewed by DERA, as of October 18, 2013, there have been 170 
new offerings made in reliance on the new Rule 506 exemption that 
became effective on September 23, 2013, with approximately $911 million 
in total amount sold in these offerings. In addition, 44 offerings that 
commenced in 2013, but before the effective date of the new Rule 506 
exemption, were subsequently converted to offerings relying on the new 
exemption. Since the new rules became effective, the average offering 
size for Rule 506(c) offerings was $6.1 million, as compared to $22.8 
million for Rule 506(b) offerings; the median offering size for Rule 
506(c) offerings was $1.3 million, as compared to $1.8 million for Rule 
506(b) offerings.
---------------------------------------------------------------------------
    Specifically, the Commission adopted new paragraph (c) to Rule 506, 
which permits issuers to use general solicitation and general 
advertising to offer securities under Rule 506, provided that all 
purchasers of the securities are accredited investors and the issuer 
takes reasonable steps to verify that the purchasers of the securities 
are accredited investors. The Adopting Release explained that, in 
determining the reasonableness of the steps that an issuer has taken to 
verify that a purchaser is an accredited investor, issuers should 
consider the facts and circumstances of the transaction, such as the 
type of purchaser and the type of accredited investor that the 
purchaser claims to be, the nature of the offering, and the amount and 
type of information that the issuer has about the purchaser.
    In addition to this principles-based facts and circumstances method 
of verifying accredited investor status, the Adopting Release included 
a nonexclusive list of methods for verifying the accredited investor 
status of natural persons that issuers may rely upon to establish 
whether they have satisfied the verification requirement. The Adopting 
Release also preserved the existing portions of Rule 506 as a separate 
exemption so that issuers that wish to conduct Rule 506 offerings 
without the use of general solicitation and general advertising would 
not be subject to the new verification requirement.
    With respect to Rule 144A, the Adopting Release amended the rule to 
provide that securities sold may be offered to persons other than 
qualified institutional buyers, including by means of general 
solicitation, provided that the securities are sold only to persons 
whom the seller and any person acting on behalf of the seller 
reasonably believe are qualified institutional buyers.
    In addition to adopting these amendments to Rule 506 and Rule 144A, 
the Commission took two other actions on July 10, 2013. First, the 
Commission adopted rule amendments that disqualify felons and other 
``bad actors'' from participating in Rule 506 offerings, as required by 
the Dodd-Frank Act. \19\ Second, the Commission proposed additional 
rule and form amendments related to offerings conducted in reliance 
upon Rule 506 that ``are intended to enhance the Commission's ability 
to evaluate the development of market practices in Rule 506 offerings 
and to address concerns that may arise in connection with permitting 
issuers to engage in general solicitation and general advertising under 
new paragraph (c) of Rule 506.'' \20\ To provide the public with 
additional time to consider the matters addressed by, and comments 
submitted on, the proposal, the Commission recently re-opened the 
comment period until November 4, 2013. To date, the Commission has 
received more than 440 unique comment letters and 45 form letters on 
the proposed amendments.
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     \19\ Securities Act Release No. 33-9414, 78 Fed. Reg. 44729 (July 
24, 2013), available at http://www.sec.gov/rules/final/2013/33-
9414.pdf.
     \20\ Securities Act Release No. 33-9416, 78 Fed. Reg. 44806 (July 
24, 2013), available at http://www.sec.gov/rules/proposed/2013/33-
9416.pdf. Commissioners Daniel M. Gallagher and Troy A. Parades 
dissented from the Commission's action. Statements from the July 10, 
2013, Open Meeting regarding the proposing release are available on the 
SEC's Web site at the following links: Chair White statement: http://
www.sec.gov/News/Speech/Detail/Speech/1370539689380; Commissioner 
Aguilar statement: http://www.sec.gov/News/Speech/Detail/Speech/
1370539698546; Commissioner Gallagher's dissenting statement: http://
www.sec.gov/News/Speech/Detail/Speech/1370539665007; Commissioner 
Paredes' dissenting statement: http://www.sec.gov/News/Speech/Detail/
Speech/1370539701591; and Commissioner Walter statement: http://
www.sec.gov/News/Speech/Detail/Speech/1370539699218.
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    Finally, Title II amended Section 4 of the Securities Act to 
provide a narrow exemption from the requirement to register with the 
Commission as a broker-dealer in connection with certain limited 
activities related to Regulation D \21\ offerings. In February 2013, 
the Commission's Division of Trading and Markets posted on the 
Commission's Web site answers to frequently asked questions about these 
provisions, including confirming that the exemption does not require 
the Commission to issue or adopt any rules. \22\
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     \21\ 17 CFR 230.500 through 230.508.
     \22\ See, http://www.sec.gov/divisions/marketreg/exemption-broker-
dealer-registration-jobs-act-faq.htm.
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Title III
    Title III of the JOBS Act provided a new exemption from Section 5 
of the Securities Act for offers and sales of securities through 
crowdfunding, an evolving method to raise capital using the Internet. 
Crowdfunding using donation-based or reward-based models has been used 
by small and start-up businesses to raise capital to start a business 
or develop a product and by individuals or entities seeking financial 
contributions to support artistic and charitable projects or causes. An 
entity or individual raising funds through donation-based or reward-
based crowdfunding typically seeks relatively small, individual 
contributions from a large number of people.
    To implement Title III, the Commission must create a new regulatory 
regime for issuers seeking to engage in crowdfunding transactions, 
including ongoing reporting requirements, and for intermediaries 
seeking to facilitate crowdfunding transactions. The new exemption 
provided in Title III would allow businesses to use crowdfunding to 
offer and sell securities without registration under the Securities 
Act, subject to certain conditions. Among its conditions, Title III 
limited the maximum amount that may be raised by an issuer and the 
maximum amount that an individual investor may invest in a 12-month 
period. Title III also required that an offering made in reliance on 
the exemption be conducted through an intermediary that is either a 
registered broker or a registered ``funding portal.'' A funding portal, 
which is a new entity under the Federal securities laws, would be 
subject to an exemption from broker registration.
    Title III included other requirements for issuers and 
intermediaries, including disclosure obligations and restrictions on 
advertising the terms of the offering. The Commission also was required 
to establish disqualification provisions for certain bad actors and 
exempt securities issued in reliance on the crowdfunding exemption from 
the calculation of record holders for purposes of Section 12(g) of the 
Exchange Act.
    On October 23, 2013, the Commission proposed rules that would 
implement Title III. Under the proposed rules, an issuer could raise a 
maximum aggregate amount of $1 million pursuant to the exemption in any 
12-month period. Investors would be permitted, during a 12-month 
period, to invest up to:

    $2,000 or 5 percent of their annual income or net worth, 
        whichever is greater, if both their annual income and net worth 
        are less than $100,000; or

    10 percent of their annual income or net worth, whichever 
        is greater, if either their annual income or net worth is equal 
        to or more than $100,000. During the 12-month period, these 
        investors would not be able to purchase more than $100,000 of 
        securities through crowdfunding.

    The proposed rules would exclude certain issuers from relying on 
the exemption, including non-U.S. issuers, Exchange Act reporting 
companies, investment companies, issuers that have not complied with 
annual reporting requirements under the proposed rules, and issuers 
that have no specific business plan or that have indicated their 
business plan is to engage in a merger or acquisition with an 
unidentified company or companies.
    The proposed rules would set up a registration and regulatory 
framework for funding portals that limits their securities activities 
to acting as intermediaries in crowdfunding securities transactions and 
prohibits them from engaging in certain activities, such as offering 
investment advice or handling investor funds. Funding portals would be 
required to register with the Commission by filing a new form and to 
become a member of FINRA or any other registered national securities 
association. \23\ The proposed rules also would require the funding 
portals to, among other things:
---------------------------------------------------------------------------
     \23\ Today, FINRA is the only registered national securities 
association.

    provide investors with educational material that informs 
---------------------------------------------------------------------------
        them about the risks associated with crowdfunding securities;

    obtain information about investor income, net worth, and 
        other crowdfunding investments, for purposes of determining 
        investment limitations;

    make available on its platform the information provided by 
        the issuer;

    take steps to ensure the proper transfers of investor funds 
        and securities; and

    comply with anti-money laundering and privacy requirements.

    The proposed rules also would require eligible issuers to file 
specified disclosures with the Commission and provide the disclosures 
to both the intermediary and investors, including disclosures 
concerning the issuer's officers and directors, as well as owners of 20 
percent or more of the issuer's securities; the issuer's business; the 
intended use of proceeds; the terms of the offering; and the financial 
condition of the company.
    Consistent with Title III, issuers also would be required to 
provide financial statements. Financial statements would be required to 
be prepared in accordance with U.S. GAAP and cover the shorter of the 
two most recently completed fiscal years or the period since the 
issuer's inception. For offerings of $100,000 or less, financial 
statements would be certified by the principal executive officer and 
issuers would be required to provide income tax returns for the most 
recently completed fiscal year. For offerings of more than $100,000, 
but not more than $500,000, the financial statements would need to be 
reviewed by an independent accountant. For offerings of more than 
$500,000, the financial statements would need to be audited by an 
independent auditor.
    Issuers also would be required to file annual reports with the 
Commission. The disclosure would be similar to that required when the 
issuer is offering securities, but would not include offering-specific 
information.
    The proposed rules also contain measures intended to reduce 
conflicts of interest and the risk of fraud. Among other things, the 
proposed rules prohibit an intermediary from having any financial 
interest in an issuer using its services, and require background and 
regulatory checks on an issuer and each officer and director, and 
certain security holders. The proposed rules also contain a safe harbor 
for certain insignificant deviations from the requirements; impose 
resale restrictions on securities purchased in crowdfunding 
transactions; disqualify certain bad actors from relying on the new 
exemption; and exempt securities issued in reliance on the new 
exemption from the record holder count for purposes of Exchange Act 
Section 12(g).
    The comment period for the proposed rules will be open for 90 days 
after publication in the Federal Register. We look forward to receiving 
and considering public comment on all aspects of this proposal.
Title IV
    Title IV of the JOBS Act required Commission rulemaking to create a 
new exemption from Securities Act registration, similar to existing 
Regulation A, \24\ which would allow certain ``small issue'' offerings 
of up to $50 million in a 12-month period. \25\ Title IV specified that 
the exemption include certain terms and conditions, including, among 
others, that the securities may be offered and sold publicly, the 
securities sold under the exemption will not be restricted securities 
and issuers of the securities will be required to file audited 
financial statements annually with the Commission. The Commission may 
add other terms, conditions and requirements that it determines 
necessary in the public interest and for the protection of investors, 
which may include electronic filing of the offering documents, periodic 
disclosures by the issuer or disqualification provisions. Title IV also 
required the Commission to review the offering limit under the new 
exemption not later than 2 years after enactment of the JOBS Act and 
every 2 years thereafter. Staff have met with market participants, 
industry groups, State securities regulators and other interested 
parties about the implementation of Title IV. \26\ Staff in the 
Division of Corporation Finance and DERA are finalizing rule 
recommendations under Title IV for the Commission's consideration.
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     \24\ 17 CFR 230.251 through 230.263.
     \25\ See, http://www.sec.gov/comments/jobs-title-iv/jobs-title-
iv.shtml for comments on Title IV.
     \26\ See, http://www.sec.gov/comments/jobs-title-iv/jobs-title-
iv.shtml.
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Titles V and VI
    Titles V and VI of the JOBS Act amended Section 12(g) of the 
Exchange Act, which sets forth certain registration requirements for 
classes of securities. \27\ Prior to enactment of the JOBS Act, Section 
12(g) and the rules issued thereunder required a company to register 
its securities with the Commission within 120 days after the last day 
of its fiscal year, if, at the end of the fiscal year, the securities 
were held of record by 500 or more persons and the company had total 
assets exceeding $10 million. \28\
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     \27\ See, http://www.sec.gov/comments/jobs-title-v/jobs-title-
v.shtml and http://www.sec.gov/comments/jobs-title-vi/jobs-title-
vi.shtml for comments on Titles V and VI, respectively.
     \28\ See, 15 U.S.C. 78l(g) and 17 CFR 240.12g-1.
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    Title V amended Section 12(g) to raise the threshold for 
registration from 500 holders of record to 2,000 holders of record, of 
which no more than 500 holders of record can be investors who are not 
accredited investors. Title V also excluded from the calculation of the 
number of holders of record shares held by persons who received the 
shares pursuant to employee compensation plans, and required Commission 
rulemaking to provide a safe harbor for the determination of whether 
such a holder is to be excluded.
    Title VI applied only to banks and bank holding companies. It 
amended Section 12(g) to raise the registration threshold from 500 
holders of record to 2,000 holders of record, and also changed the 
threshold for exiting the reporting system from 300 holders of record 
to 1,200 holders of record. Title VI required the Commission to write 
rules to implement this provision within one year of enactment of the 
JOBS Act.
    Titles V and VI were effective immediately upon the enactment of 
the JOBS Act. In the days following enactment, the staff prepared and 
posted guidance on the Commission's Web site addressing anticipated 
questions related to the JOBS Act changes to the requirements for 
Section 12(g) registration and deregistration. To date, approximately 
90 bank holding companies have deregistered. \29\ The staff is 
preparing recommendations for rule proposals for the Commission's 
consideration to address the new requirements of Titles V and VI.
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     \29\ This reflects filings made with the Commission, which does 
not include deregistrations by banks that report to banking regulators.
---------------------------------------------------------------------------
    Title V also required the Commission to examine its authority to 
enforce the anti-evasion provisions of Exchange Act Rule 12g5-1 \30\ 
and submit recommendations to Congress within 120 days following 
enactment of the JOBS Act. Staff from the Division of Corporation 
Finance worked with staff from the Divisions of Enforcement, DERA and 
Trading and Markets to review the anti-evasion provision in Rule 12g5-
1(b)(3) and the Commission's related enforcement authority and tools, 
and, on October 15, 2012, submitted their report to Congress. \31\ The 
staff concluded that the current enforcement tools available to the 
Commission are adequate to enforce the anti-evasion provision of Rule 
12g5-1 and determined not to make any legislative recommendations 
regarding enforcement tools relating to Rule 12g5-1(b)(3).
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     \30\ 17 CFR 240.12g5-1.
     \31\ See, http://www.sec.gov/news/studies/2012/authority-to-
enforce-rule-12g5-1.pdf.
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Title VII
    Effective upon enactment, Title VII required the Commission to 
provide online information and conduct outreach to inform small and 
medium-sized businesses, as well as businesses owned by women, veterans 
and minorities, of the changes made by the JOBS Act. \32\ Staff from 
the Division of Corporation Finance and the Office of Minority and 
Women Inclusion (OMWI), in collaboration with other Divisions and 
Offices, is leading the Commission's efforts in developing and 
implementing an outreach plan tailored to these business communities. 
For example, OMWI has expanded the content of existing programs for 
small, minority-owned and women-owned businesses to provide information 
about the JOBS Act and its potential benefits for businesses. This 
content will continue to be updated as the Commission proposes and 
adopts further JOBS Act rules.
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     \32\ See, http://www.sec.gov/comments/jobs-title-vii/jobs-title-
vii.shtml for comments on Title VII.
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Conclusion
    While there is still much to be accomplished, the Commission and 
the staff have made significant progress on, and continue to work 
diligently in, implementing the JOBS Act mandates. It is a high 
priority to do so. The staff has either completed or is in the process 
of completing the studies mandated by the JOBS Act. The Commission and 
staff also have either completed or are moving forward expeditiously on 
the various rulemakings required by the JOBS Act. We look forward to 
completing the remaining provisions as soon as practicable.
    Thank you again for inviting me to testify today, and I am happy to 
answer any questions you may have.
                                 ______
                                 
                    PREPARED STATEMENT OF ALAN LEWIS
 Director of Special Projects, Natural Grocers by Vitamin Cottage, Inc.
                            October 30, 2013
    Chairman Tester, Ranking Member Johanns, Members of the 
Subcommittee, thank you for the opportunity to testify about the impact 
of the Jumpstart our Business Startups Act (the ``JOBS Act'') on 
Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers) and its 
ability to raise capital to support job creation and contribute to the 
economic growth of the Nation. As Director of Special Projects at 
Natural Grocers and an active member of our IPO team, I participated in 
drafting the Registration Statement on Form S-1 and in making decisions 
about using certain beneficial provisions found in the Jobs Act. I am 
also an active member of NIRI, the National Investor Relations 
Institute, and I provide ongoing investor relations support within 
Natural Grocers. I welcome this opportunity to answer your questions 
and provide you with additional information on how the JOBS Act 
affected our company's growth prospects during and after our Initial 
Public Offering in July 2012.
    Natural Grocers is in many ways the quintessential American 
business success story. Starting from humble mom-and-pop beginnings in 
the 1950s, we have grown to operate over 70 grocery stores employing 
over 2,000 people in 13 States while staying true to our original 
founding mission: helping people stay healthy through better food and 
nutrition. To support this mission, we scrupulously review every 
product before we agree to sell it. Our standards for natural groceries 
do not allow artificial ingredients such as colors, flavors, 
preservatives, or sweeteners or dangerous ingredients like hydrogenated 
fats. We are also committed to sustainable agriculture using minimal 
chemical inputs, so we only sell USDA certified organic produce in our 
stores.
    Beyond providing only clean healthy food, however, we are committed 
to help consumers become better informed about how nutrition directly 
impacts their health and wellness. To this end we staff our stores with 
full time credentialed nutritionists and offer classes, advice, and 
reference materials on various health topics. We present complex 
scientific information using accessible language to give people a basic 
understanding of the principles of good nutrition so they feel 
empowered to make proactive decisions. It is probably not an 
overstatement to say that Natural Grocers endeavors to support the 
American healthcare system by improving our customers' diets so they 
can better avoid expensive chronic diseases as well as achieve better 
outcomes from medical treatment.
    In 1998, Natural Grocers was acquired from its founders by their 
four children. Over the following 10 years they grew the business 
through long hours and hard work, depending on internal cash flow and 
bank loans for capital. Subsequently, they carefully hired additional 
professional staff and began putting in place the sophisticated 
accounting, technology and operational infrastructure needed to support 
a robust expansion strategy.
    Beginning in 2009, in the midst of the recent economic downturn, 
our leadership team began laying the groundwork to raise outside 
capital through an initial public offering. The grocery business is 
highly fragmented and competitive, and success in the industry 
partially depends on maintaining economies of scale, controlling 
administrative costs, and securing volume purchasing discounts. Our 
decision to seek additional capital was partly based on the need to 
increase our ability to capture these competitive advantages by 
expanding our store base.
    Concurrent to our own internal strategic planning process, in 2009 
(and before) Congress began addressing the need for economic stimulus 
by proposing a number of bills designed to prompt public and private 
investment to generate new jobs. A number of these initiatives were 
eventually passed into law in the form of the JOBS Act, which was 
signed into law just when Natural Grocers was preparing to submit its 
Registration Statement on Form S-1 to the SEC in anticipation of an IPO 
during the summer of 2012.
    Many of the key provisions of the JOBS Act were anticipated and 
welcomed by our legal, accounting, and investment banking advisors. We 
clearly qualified as an ``emerging growth company.'' As a group, we 
paused to consider which opportunities we would take advantage of, 
keeping in mind we would likely be among the first companies to launch 
an IPO under this new regulatory regime, and that investors might be 
skeptical of some of the new relaxed rules. We decided to take 
advantage of the confidential filing provision and, temporarily, some 
of the reduced financial reporting requirements. We decided not to 
``opt out'' of maintaining compliance with new or revised accounting 
standards. We will discuss our experience with each of these decisions 
below. We did not contemplate utilizing any methods to ``Test the 
Waters'' for the offering because the provision was simply too new.
The IPO Market Environment in 2012
    Before we start, let me remind you that all statements made in this 
testimony other than statements of historical fact are forward-looking 
statements. All forward-looking statements are based on current 
expectations and assumptions that are subject to risks and 
uncertainties. Actual results could differ materially from those 
described in the forward-looking statements because of factors such as 
industry, business strategy, goals and expectations concerning our 
market position, the economy, future operations, margins, 
profitability, capital expenditures, liquidity and capital resources, 
other financial and operating information, and other risks detailed in 
the Form 10-K filed by Natural Grocers for the year-ended September 30, 
2012. The information we present is accurate as of the date of this 
testimony. Natural Grocers undertakes no obligation to update forward-
looking statements.
    Chairman Tester has asked me to describe our experience filing 
confidentially and using some of the reduced compliance provisions 
under the JOBS Act. My testimony today will explain why we chose to do 
so and how these measures helped us in our efforts to raise capital.
    To begin, it is worth remembering that the summer of 2012 saw the 
first substantial thawing of the financial markets after four very 
difficult years. IPOs were few and far between and not always 
successful. Some registration statements had been filed publicly on 
EDGAR but later postponed indefinitely. Facebook's difficult IPO in May 
2012--just before our road show was to begin--weighed heavily on the 
markets. Still, interest rates on cash continued to be at or near zero, 
so investors were looking for quality companies to buy into.
Confidential Filing
    Within this unsure market environment, the ability to file our Form 
S-1 confidentially and proceed with the SEC staff's comment process 
before ever making our filing public was extraordinarily helpful. We 
continued to survey the strength of the market while simultaneously 
preparing our registration statement for public EDGAR filing. Because 
we were able to file confidentially, our trade practice and financial 
statement disclosures contained within the S-1 were not telegraphed to 
our competitors unnecessarily or unnecessarily early. Had the Form S-1 
not been treated confidentially, Natural Grocers could have decreased 
its competitive advantage due to a lengthy delay in our IPO because of 
a soft market. Confidential filing allowed us to better orchestrate the 
timing of the road show and IPO successfully, despite unpredictable and 
skittish financial markets.
    For our company, confidential submission greatly reduced the 
complexity, stress and risk of undertaking a public offering.
Two Years Minimum Required Audited Financial Statements
    The second opportunity provided us by the JOBS Act was to reduce 
the number of years of audited financial statements from 5 years to 2. 
After much deliberation, our team decided to disclose audited financial 
statements for fiscal years 2009, 2010, and 2011, plus interim 
unaudited financial statements for the first 9 months of fiscal year 
2012. (Our IPO took place during the last quarter of our fiscal year 
2012, which ended on September 30th, so audited year-to-date financials 
were not yet available.) After consulting with our investment bankers, 
we felt that the 2007 and 2008 financial statements did not add 
significant context, color or detail to our company growth story. Nor 
did they help communicate the viability of our future growth strategy. 
Furthermore, there were complexities around presenting the 2007 and 
2008 financial statements due to a change in fiscal year and a change 
in audit firm. Audited 2007 and 2008 financial statements could have 
been included in our S-1, but only with significant delays and 
additional costs.
    We had some concern that analysts and investors might be wary of 
the reduced reporting requirement, There were a number of inquiries by 
analysts and investors about the potential significance of the missing 
2007 and 2008 fiscal year reporting. However, the absence of those 
historical financial statements did not seem to impact the ultimate 
success of our offering.
    The following sections describe certain other optional, reduced, or 
delayed disclosure and accounting requirements offered by the Job Act 
that Natural Grocers did not implement during its IPO.
Exemption From Certain Sarbanes-Oxley Requirements
    The Sarbanes-Oxley Act of 2002 addressed numerous additional 
regulations in corporate auditing, internal controls and 
accountability. SOX Section 103 created new requirements for audits and 
auditors, and SOX Section 404 set new standards for assessment of 
internal controls. Both sections were considered controversial among 
some because of the high cost of compliance, and, in turn, the greater 
burden those costs place on smaller companies relative to their 
revenue. The JOBS Act granted an exemption to qualified emerging growth 
companies from potential future requirements to rotate audit firms and 
for audit firms to provide supplemental information about how the audit 
was conducted, among other requirements. The JOBS Act also exempted 
emerging growth companies from compliance with internal control, 
evaluation, and reporting requirements in Section 404 of Sarbanes-
Oxley. Natural Grocers determined it would continue to maintain 
compliance with Sections 103 and 404 of Sarbanes-Oxley.
Opting Out of New or Revised Accounting Standards
    Section 107 of the Jobs Act allows emerging growth companies to 
make a one-time decision to comply with all new or revised accounting 
standards or to temporarily opt out of keeping up with new and revised 
rules. The intent of this provision appears to be to reduce the cost 
and burden associated with complex accounting rule changes. We 
acknowledge that ongoing compliance with the myriad rule changes can be 
costly. It may also present a significant distraction to company 
management of an emerging growth company that is focused on key growth 
drivers rather than finicky accounting rules. Natural Grocers opted to 
not elect into this provision upon its initial filing.
Dodd-Frank Executive Pay Disclosures
    The JOBS Act also amended the Investor Protection and Securities 
Reform Act of 2010, commonly referred to as Dodd-Frank, by exempting 
emerging growth companies from the executive compensation disclosures 
required under Section 953 of Dodd-Frank. Natural Grocers did not take 
advantage of this exemption because we did not see any advantage to 
doing so. On the contrary, we believe our executives are paid fairly 
relative to our industry benchmarks and their individual roles and 
responsibilities. An extensive disclosure regarding compensation for 
our executives begins on page 93 of the prospectus contained in our 
Registration Statement on Form S-1.
A Successful IPO for Natural Grocers and Its Investors
    Our IPO was a success on many levels. Our IPO priced at the high 
end of our range and the stock price held a healthy but reasonable 
premium on the first day of trading and thereafter. As one financial 
commentator stated in an article titled ``The Greedy Sit Out an IPO'', 
``[Natural Grocers] has begun its publicly traded life in an 
environment of fair and balanced trading [ . . . ] How refreshing.'' 
\1\
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     \1\ http://www.smallcapnetwork.com/The-Greedy-Sit-Out-an-IPO-How-
Refreshing-NYSE-NGVC/s/via/14/article/view/p/mid/1/id/917/
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    The company used the proceeds from its IPO to pay off its 
outstanding term loan and pay down its credit facility while retaining 
some cash reserves to fund additional new store growth. During our last 
quarterly earnings announcement on August 7, 2013, we noted the Company 
had a total 70 Natural Grocers stores operating in 13 States, two 
additional stores planned for the fourth quarter of fiscal 2013, and 15 
new stores planned for fiscal 2014. Our revenue and unit growth, 
supported by capital provided by public shareholders, has created 
hundreds of new, well paid, full-time jobs--all which qualify for our 
401k plan and affordable health care benefits.
    There were other benefits to being a publicly traded company. As a 
company traded on the New York Stock Exchange, our stature in the 
national financial press was elevated the moment we rang The Opening 
BellTM above the floor of the Exchange. We now appear in 
news coverage on an equal footing with many of our larger peer 
competitors. Our company news is more widely circulated and referenced 
as a benchmark for the natural foods industry. Our higher profile has 
allowed us to take part in significant public policy debates at a level 
where our views and perspectives are better heard and acknowledged. We 
believe this national recognition of Natural Grocers' approach to 
product standards and dedication to consumer education and community 
outreach has provided welcome public awareness of, and affinity for, 
our brand as we enter new markets.
Success of the JOBS Act of 2012
    In conclusion, we believe that the JOBS Act is a successful piece 
of legislation. Key provisions of the JOBS Act enabled Natural Grocers 
to successfully navigate the financial markets and do exactly what the 
JOBS Act intended: grow our company and add jobs to the American 
economy.
    Thank you, again, for your support of American business and job 
growth, and for allowing me to be here today to present the perspective 
of Natural Grocers on the JOBS Act. I am happy to answer any questions 
that you might have.
Background Information
About Natural Grocers
    Natural Grocers by Vitamin Cottage (NYSE:NGVC), founded in Colorado 
by Margaret and Philip Isely in 1955, was built on the premise that 
consumers should have access to affordable, high-quality foods and 
dietary supplements, along with nutrition knowledge to help them 
support their own health. The family-run store has since grown into a 
successful national chain with locations across Colorado, Texas, Utah, 
Wyoming, Oklahoma, Missouri, New Mexico, Montana, Kansas, Idaho, 
Nebraska, Arizona, and Oregon--employing over 2,000 people. The company 
went public in July 2012; however, Isely family members continue to 
manage the company, building on the foundation of their parents' 
business. Natural Grocers' popularity and success can be traced back to 
its founding principles: providing customers with high quality products 
at every day affordable prices.
Our Competitive Strengths
    We believe we are well-positioned to capitalize on favorable 
natural and organic grocery and dietary supplement industry dynamics as 
a result of the following competitive strengths:
    Strict focus on high-quality natural and organic grocery products 
and dietary supplements. We offer high-quality products and brands, 
including an extensive selection of widely recognized natural and 
organic food, dietary supplements, body care products, pet care 
products and books. We offer our customers an average of approximately 
19,500 SKUs of natural and organic products per store, including an 
average of approximately 7,000 SKUs of dietary supplements. We believe 
this product offering enables our customers to utilize our stores for 
all of their grocery and dietary supplement purchases. In our grocery 
departments, we only sell USDA certified organic produce and do not 
approve for sale products that are known to contain artificial colors, 
flavors, preservatives, sweeteners, or partially hydrogenated or 
hydrogenated oils. Consistent with this strategy, our merchandise 
selection does not include conventional products or merchandise that 
does not meet our strict quality guidelines. Our store managers enhance 
our robust product offering by customizing their stores' selections to 
address the preferences of local customers. All products undergo a 
stringent review process to ensure the products we sell meet our strict 
quality guidelines, which helps us generate long-term relationships 
with our customers based on transparency and trust.
    Engaging customer service experience based on education and 
empowerment. We strive to consistently offer exceptional customer 
service in a shopper-friendly environment, which we believe creates a 
differentiated shopping experience and generates repeat visits from our 
loyal customer base. Our customer service model is focused on providing 
free nutrition education to our customers. This focus provides an 
engaging retail experience while also empowering our customers to make 
informed decisions about their health. We offer our science-based 
nutrition education through our trained associates, Health 
Hotline' newsletter and sales flyer, one-on-one nutrition 
health coaching and nutrition classes. Our commitment to nutrition 
education and customer empowerment is emphasized throughout our entire 
organization, from executive management to store associates. Every 
store also maintains a Nutritional Health Coach SM position. The 
Nutritional Health Coach is responsible for training our store 
associates and educating our customers in accordance with applicable 
local, State, and Federal regulations. Each Nutritional Health Coach 
must have earned a degree or certificate in nutrition, human sciences 
or a related field from an accredited school, complete continuing 
education in nutrition, and be thoroughly committed to fulfilling our 
mission. Substantially all of our Nutritional Health Coaches are full-
time employees. We believe our Nutritional Health Coach position is 
unique within our industry and represents a key element of our customer 
service model.
    Scalable operations and replicable, cost-effective store model. We 
believe our scalable operating structure, attractive new store model, 
flexible real estate strategy and disciplined approach to new store 
development allow us to maximize store performance and quickly grow our 
store base. Our store model is successful in highly competitive markets 
and has supported significant growth outside of our original Colorado 
geography. We believe our supply chain and infrastructure are scalable 
and will accommodate significant growth based on the ability of our 
primary distribution relationships to effectively service our planned 
store locations. Our investments in overhead and information technology 
infrastructure, including purchasing, receiving, inventory, point of 
sale, warehousing, distribution, accounting, reporting, and financial 
systems support this growth. In addition, we have established effective 
site selection guidelines, as well as scalable procedures, to enable us 
to open a new store within approximately 9 months from the time of site 
selection. Our limited offering of prepared foods also reduces real 
estate costs, labor costs, and perishable inventory shrink and allows 
us to quickly leverage our new store opening costs.
    Experienced and committed team with proven track record. Our 
executive management team has an average of 35 years of experience in 
the natural grocery industry, while our entire management team has an 
average of over 27 years of relevant experience. Since the second 
generation of the Isely family assumed control of the business in 1998, 
we have grown our store count from 11 to 59 stores as of September 30, 
2012, while remaining dedicated to our founding principles. Over their 
tenure, members of our executive management team have been instrumental 
in establishing a successful, scalable operating model, generating 
consistently strong financial results, and developing an effective site 
selection and store opening process. The depth of our management 
experience extends beyond our home office. As of September 30, 2012, 42 
percent of our store managers at comparable stores (stores open for 13 
months or longer) have tenures of over 4 years with us, and our store 
and department managers at these stores have average tenures of 3 to 4 
years with us. In addition, we have a track record of promoting store 
management personnel from within. We believe our management's 
experience at all levels will allow us to continue to grow our store 
base while improving operations and driving efficiencies.
Our Growth Strategies
    We are pursuing several strategies to continue our profitable 
growth, including:
    Expand our store base. We intend to continue expanding our store 
base through new store openings in existing markets, as well as 
penetrating new markets, by leveraging our core competencies of site 
selection and efficient store openings. Based upon our operating 
experience and research conducted for us by customer analytics firm The 
Buxton Company, we believe the entire U.S. market can support at least 
1,100 Natural Grocers stores, including approximately 200 additional 
Natural Grocers stores in the 13 States in which we currently operate 
or have signed leases.
    Increase sales from existing customers. We have achieved positive 
comparable store sales growth for over 40 consecutive quarters. In 
order to increase our average ticket and the number of customer 
transactions, we plan to continue offering an engaging customer 
experience through science-based nutrition education and a 
differentiated merchandising strategy of delivering affordable, high-
quality natural and organic grocery products and dietary supplements. 
We also plan to utilize targeted marketing efforts to our existing 
customers, which we anticipate will drive customer transactions and 
convert occasional, single-category customers into core, multicategory 
customers.
    Grow our customer base. We plan to continue building our brand 
awareness, which we anticipate will grow our customer base. We believe 
offering nutrition education has historically been one of our most 
effective marketing efforts to reach new customers and increase the 
demand for natural and organic groceries and dietary supplements in our 
markets. We intend to enhance potential customers' nutrition knowledge 
through targeted marketing efforts, including the distribution of our 
Health Hotline newsletter and sales flyer, the Internet and social 
media, as well as an expansion of our educational outreach efforts in 
schools, businesses and communities, offering lectures, classes, 
printed and online educational resources and publications, health 
fairs, and community wellness events. In addition to offering nutrition 
education, we intend to attract new customers with our everyday 
affordable pricing and to build community awareness through our support 
of local vendors and charities.
    Improve operating margins. We expect to continue to improve our 
operating margins as we benefit from investments we have made in fixed 
overhead and information technology, including the implementation of an 
SAP enterprise resource planning system in fiscal year 2010. We 
anticipate these investments will support our long-term growth strategy 
with only a modest amount of additional capital. We expect to achieve 
economies of scale through sourcing and distribution as we add more 
stores, and we intend to optimize performance, maintain appropriate 
store labor levels, and effectively manage product selection and 
pricing to achieve additional margin expansion.
Forward-Looking Statements
    Except for the historical information contained herein, statements 
in this document are ``forward-looking statements'' and are based on 
current expectations and assumptions that are subject to risks and 
uncertainties. All statements that are not statements of historical 
facts are forward-looking statements. Actual results could differ 
materially from those described in the forward-looking statements 
because of factors such as our industry, business strategy, goals and 
expectations concerning our market position, the economy, future 
operations, margins, profitability, capital expenditures, liquidity and 
capital resources, other financial and operating information and other 
risks detailed in the Company's Form 10-K for the year-ended September 
30, 2012, as amended by Form 10-K/A (Form 10-K) and our subsequent 
quarterly reports on Form 10-Q. The information contained herein speaks 
only as of its date and the Company undertakes no obligation to update 
forward-looking statements.
    For further information regarding risks and uncertainties 
associated with our business, please refer to the ``Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations'' and ``Risk Factors'' sections of our SEC filings, 
including, but not limited to, our Form 10-K and our subsequent 
quarterly reports on Form 10-Q, copies of which may be obtained by 
contacting investor relations or by visiting our Web site at http://
Investors.NaturalGrocers.com.
                                 ______
                                 
              PREPARED STATEMENT OF ROBERT R. KAPLAN, JR.
 Managing Partner, Practices, Kaplan Voekler Cunningham and Frank, PLC
                            October 30, 2013
    Mr. Chairman and honorable Members, thank you for your kind 
invitation to speak before you today. I am Managing Partner for 
Practices at the law Firm of Kaplan Voekler Cunningham and Frank, PLC, 
headquartered in Richmond, Virginia. I am also the Firm's founder. As 
such, I am at heart an entrepreneur, and uniquely positioned to relate 
to the concerns, challenges and issues I hear communicated by members 
of the private business community related to current state of their 
access to the capital markets.
    We are a boutique firm with one of our focuses being on securities 
and capital formation. Most of our attorneys, including myself, come 
originally from some of the largest law firms in the Nation. Our 
practice includes public and private securities, and we represent 
clients in various capacities of all sizes from multi-billion-dollar 
enterprises to fledgling start-ups, but the bulk of our practice 
resides amongst companies in the lower mid-market or smaller (clients 
with $5MM to $150MM of revenue), ``Main Street'' businesses.
    According to the Department of Labor, Bureau of Statistics, 65 
percent of all net new jobs in the U.S. created between 1993 and 2009 
were created by businesses such as my firm represents. \1\ It is VITAL 
that action be taken now to implement fully the JOBs Act.
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     \1\ U.S. Dept. of Labor, Bureau of Labor Statistics, ``Business 
Employment Dynamics''; Advocacy-funded research by Zoltan Acs, William 
Parsons, and Spencer Tracy, 2008 (archive.sba.gov/advo/research/
rs328tot.pdf).
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    The current situation can be reduced to the following:

  1.  To date, little movement has occurred to implement those aspects 
        of JOBS Act that address the needs of the lower middle market 
        and smaller ``Main Street'' businesses.

  2.  That lack of progress has resulted in a relative stagnation in 
        the ability of smaller businesses in this country to raise 
        capital and has placed further uncertainty into the broader 
        economy.

  3.  ``Main Street'' suffers presently from a lack of viable options 
        for capital raising.

  4.  Title IV of the Act, euphemistically referred to as ``Regulation 
        A+'', presents the most potentially impactful legislation to 
        aid ``Main Street'' and provides a rational balance between 
        regulatory oversight and access to publicly formed capital.

  5.  The forms and procedures currently existing under Regulation A 
        can be readily applied to A+, thus obviating the need for 
        further delay in implementing Regulation A+.

  6.  The Securities and Exchange Commission (``SEC'' or the 
        ``Commission'') should adopt a workable definition of 
        ``qualified purchaser'' which affords investor protection but 
        eliminates unnecessary and obstructive layers of regulatory 
        procedure.

  7.  SEC's rulemaking in this context should be balanced so as not to 
        make Regulation A+ overly burdensome but foster issuer 
        transparency and efficient dissemination of information to 
        support a market for these securities.

  8.  Regulation A+, in turn, should provide greater investment options 
        to the American public than what can be found now--with retail 
        investors largely relegated to mutual or hedge funds or 
        investment in private securities under Regulation D, which 
        carry risks associated with being restricted and relatively 
        nontransparent.

    For lower mid-market and smaller businesses, options to capital are 
limited at best. Public registration is not a viable option in light of 
the enormous costs associated with an initial public registration and 
the ongoing regulatory burdens associated with reporting requirements, 
Sarbanes-Oxley and Dodd-Frank. These cost and regulatory factors have 
played a considerable role in narrowing the opportunity of utilizing 
public registration to companies well beyond the size of the mid-market 
and at deal sizes far past the needs of most ``Main Street'' firms. \2\ 
That has, in turn, limited drastically opportunities for smaller 
investment banking, brokerage, legal, and accounting firms to 
participate in public securities offerings, which creates an insulated 
market where expense associated with public offerings will remain 
inflated.
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     \2\ Median deal size for initial public offerings (IPO) in 2012 
was $124MM. See, ``2012 IPO Market Annual Review'', Renaissance 
Capital, January 2, 2013. Median deal size for IPO's through 3rd 
quarter of 2013 is $101MM. See, ``United States: 03 2013 IPO Report'', 
Wilmer Hale, October 24, 2013. We consistently see issuer's legal fees 
in these transactions disclosed at greater than $1,000,000, and 
accounting between $500,000 and $1,000,000. According to a 2012 report 
of PwC, an issuer can expect on average to spend $1MM in legal and 
$600K in auditors for an offering of $50MM or less. See, ``Considering 
an IPO?: The Costs of Going and Being Public May Surprise You'', PwC, 
September 2012.
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    Alternatively, the viable audience for private securities of lower 
mid-market and smaller businesses is severely constrained presently. 
Changes to the accredited investor definition found in Rule 501 of 
Regulation D, have further narrowed the number of potential accredited 
investors available to invest in such offerings. Some estimates have 
put the reduction of the accredited investor audience as a result by at 
least twenty percent (20 percent). \3\ Currently, the Commission is 
considering increasing the $1,000,000 requirement currently found under 
the net worth test for accredited investor status for individuals. GAO 
recently suggested that this number could be revised upwards to 
$2,300,000 to account for inflation since establishment of the test. 
\4\ This is estimated to reduce the accredited investor pool by another 
60 percent. \5\
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     \3\ ``Alternative Criteria for Qualifying as an Accredited 
Investor Should Be Considered'', GAO 9-10 (July 2013), http://
www.gao.gov/assets/660/655963.pdf.
     \4\ Id.
     \5\ Id.
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    Since 2008, the accredited investor market has dramatically reduced 
in size and activity. Many accredited investors have eschewed illiquid, 
restricted securities after being unable to exit failing investments 
during the recession. That same phenomenon resulted in an influx of 
FINRA arbitration related to failed investments. Many broker-dealers 
and investment banks who would potentially work with lower mid-market 
and smaller businesses have ceased handling private placements beyond 
institutional investments as a result. Others are precluded entirely 
from placing private securities due to the unwillingness of Errors and 
Omissions insurance carriers to insure them for such activities.
    Rules promulgated by the Commission related to general solicitation 
under Rule 506(c), pursuant to Title II of the Act, and new ``bad boy'' 
prohibitions from use of Regulations D promulgated pursuant to Dodd-
Frank have further ``chilled'' any potential market beyond 
institutional investment in professionally distributed private 
placements. Instituting Title II's requirement that reasonable steps be 
taken to ensure accredited status of all investors, Rule 506(c) creates 
an uncertain ``facts and circumstances'' test as to the reasonableness 
of the method undertaken to assure accreditation, subject to limited 
SEC prescribed safe harbors. We believe, and have seen borne out in our 
market experience, that the uncertain nature of a ``facts and 
circumstances'' test will push issuers and their distributors towards 
the prescribed safe harbors which predominantly involve intrusive 
requests for the financial and tax records of potential investors. 
These information gathering requirements increase the regulatory 
burdens on issuers and their distributors, frustrate potential 
investors and, consequentially, reduce the appeal of publicly solicited 
Regulation D offerings. Further, the Commission has proposed rules 
regarding pre-filing the Form D and general solicitation materials for 
an offering relying on Rule 506(c) and instituting draconian punishment 
of failures in administrative notice filings for all Rule 506 
offerings. While these proposals have been met with significant 
negative commentary and our (and our clients) hope is that they will 
ultimately not be adopted, they have nonetheless created an environment 
of uncertainty surrounding public solicitation and the professionally 
distributed Regulation D market as a whole.
    Added to these regulatory obstacles are the new ``bad actor'' rules 
instituted as required by Dodd-Frank. While we certainly agree with the 
intent of the ``bad actor'' rules, no one wants people previously 
convicted of securities fraud selling unregistered securities, it also 
cannot be argued that these rules add risk and uncertainty to the usage 
of Rule 506, especially in the context of an offering distributed 
through retail broker-dealers to multiple individual accredited 
investors. By visiting the sins of a single participant in an issuer's 
distribution network, or even potentially a single investor, upon the 
offering as a whole, the application of the ``bad actor'' rules can 
result in the loss of the Rule 506 exemption and severe consequences 
for the sale of unregistered securities by the issuer, its management 
and its distribution network. As a result, issuers and their 
distributors are forced to institute expensive and uncertain compliance 
procedures, or narrow the scope of their capital raising to limit risk. 
This leads to a greater emphasis on institutional or very high net 
worth capital. Institutional investment generally comes with demands 
for large returns on invested capital to offset risk associated with 
longer holds in restricted securities and exacerbated by a the volume 
of competition seeking the same dollars. As a result, innumerable 
companies which might present solid investments, but cannot credibly 
show double-digit returns or exponential growth on a short term basis 
are ignored.
    Regulation A+ can give much broader variety of issuers and 
businesses the ability to offer their securities to a much broader 
segment of the population. Regulation A+ can provide the opportunity 
for many issuers who, for example, have solid fundamentals and can 
reliably produce dividends, but perhaps not the ability to achieve the 
prodigious return rates sought by institutional capital, to reach a 
much broader segment of the population with performance goals that are 
realistic and achievable.
    At the same time, however--and I should emphasize that this really 
goes to the cruxt of the opportunity under Title IV that has been 
overlooked for so long--Regulation A+ combines that opportunity for the 
issuer with a requirement that the issuer submit to a ``right-sized'' 
disclosure and reporting regime that is designed to insure standards 
for complete and illustrative disclosure and a current picture of the 
status of that issuer. Thus, the issuer is provided access to a broader 
investing audience with a more diverse set of investment priorities in 
exchange for compliance with the same conceptual regulatory discipline 
as registration, but streamlined to account for the relative size of 
the issuer and offering. This has a number of salutary effects for the 
investing public, as well as the issuers:

  1.  Transparency--standardized disclosure and reporting can insure 
        that investors and shareholders enjoy efficient dissemination 
        of material information concerning offerings and issuer 
        performance.

  2.  Liquidity--Regulation A+ securities are freely tradeable, which 
        presents a major advantage of restricted securities where no 
        market exists for most of these securities. As such, investors 
        who can no longer tolerate risk associated with their 
        investments or otherwise find themselves in a situation where 
        they need to exit the investment can. With standardized 
        disclosure and reporting, pricing can be arrived at with 
        confidence. To be clear, for the foreseeable future, we believe 
        the vast amount of any trading activity in these securities 
        will be episodic at best, given the size of most issuers and 
        deals, with the bulk occurring as trades by appointment. But 
        the critical piece will be that investors, brokers and 
        investment advisors will have information at hand to use to 
        discern amongst investments and to establish a price as 
        required, and have confidence in the same. This presents an 
        enormous leap forward from the restricted nature of most 
        Regulation D securities with no information disseminated 
        publicly and, thus, no market.

  3.  Investment Options--The average investor is relegated to public 
        fund products (hedge, mutual, money market). Regulation A+ can 
        give an investor the opportunity to invest in enterprises (such 
        as those we typically represent) with confidence based on the 
        information they can access and review with their broker or 
        investment advisors. Because of the size of the issuers that we 
        believe will utilize Regulation A+ consistently, we believe 
        most deals will be distributed regionally, and the investor 
        will see options presented in their own ``backyard'' by local 
        and regional investment banks and brokerages, providing a 
        further element of transparency as a result of local ``word of 
        mouth,'' but also those investment banks and brokerages being 
        able to maintain contact with management and monitor status 
        with relative ease.

    We urge the Commission to implement Regulation A+ as soon as 
possible. The delay associated to date with its implementation has been 
somewhat baffling to us, as Form 1-A provides a readily useable 
framework for disclosure under Regulation A+. As to ongoing reporting, 
we believe a straightforward regime of simple disclosure associated 
with the annual audited financial statements to be filed with SEC, 
supplemental provision of unaudited, GAAP-compliant quarterly 
financials and requirements to report material events (analogous to a 
stripped down 8-k) make sense. Beyond this, until there is sufficient 
volume of deals created to understand the scope and activities of this 
marketplace have the real potential to become overly burdensome and 
counter the intent of Title IV.
    The largest issues in our mind is updating some of the mechanics of 
the offering process and the interplay between the feds and the States. 
That said, we do not believe those issues would be cause for the 
implementation of Regulation A+ to have been delayed as it has.
Offering Mechanics
    Electronic filing through EDGAR is mandated by Title IV and will be 
a logical and effective means to ensure dissemination of material 
information concerning Reg A+ issuers. That said, revisions to current 
Regulation A, if the same general framework is to be used in the 
context of Reg A+, need to be made to account for public access to all 
reporting through EDGAR. Currently, Rule 251(d)(2) requires physical 
delivery of the offering circular to the prospective investor, the need 
for which is obviated by having all disclosure related to an issuer 
generally available with the click of a button through EDGAR. In short, 
a Reg A+ analog to Rule 172 will be critical to furthering the JOBS 
Act's congressional intent.
    Furthermore, it is our expectation that the vast majority of Reg A+ 
deals will be done on a continuous, best efforts basis. This will 
result in necessary updates to offering circulars. Currently Rule 
253(e) requires any updated or revised Offering Circular to be filed 
with an amended Offering Statement and requalified with the Commission. 
This requalification requirement places an unnecessary burden on 
issuers engaged in such offerings, and one not seen in the context of a 
public registration where only information tripping the requirements of 
Item 512 of Reg S-K requires a post-effective registration statement 
amendment and other updates to the prospectus may be filed under Rule 
424. For instance, in a recent offering filed by our firm the issuer 
simply desired to add another jurisdiction and update some ancillary 
business information--disclosures which would, arguably, require 
requalification with significant offering disruption but with little or 
no investor protective impact. Again, an analog for Reg A+ needs to be 
adopted.
Blue Sky and the Definition of ``Qualified Purchaser''
    In enacting Title IV, Congress did express plainly its concern that 
50 different regulatory schemes presently imposed on Regulation A would 
have a negative impact on the ability of small and midsize businesses 
to raise capital in the future under Regulation A+ or otherwise. \6\ It 
has been our firm's experience with current Regulation A to be EXACTLY 
THE CASE.
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     \6\ See, Section 402 of the JOBS Act requiring a study of the 
impact of State blue sky laws on offerings made under Regulation A.
---------------------------------------------------------------------------
    First, just conceptually speaking, the notion of up to 50 different 
regulatory regimes being applied to an offering which has just gone 
through a thorough process of review by the Commission seems excessive 
and fraught with opportunities for delay or missteps.
    Our experiences with State regulators in conducting these offerings 
have been diverse to say the least, ranging from the cooperative and 
efficient to the downright abusive, or even nonexistent. Of course, if 
the goal is to create an efficient system for ``Main Street'' firms to 
form necessary capital, then the involvement of the States in the 
offering process must be assessed by their weakest performances.
    For example, we have had multiple occasions where States have just 
simply failed to respond to filings. In one instance, a filing was made 
with the Commonwealth of Massachusetts in December of last year, and, 
to date, we have yet to hear any response. In another, an initial 
filing was made with the State of Ohio in June of this year--we have 
still heard nothing.
    And in probably the most egregious example to date, we filed this 
summer a registration in the Commonwealth of Virginia. As part of the 
filing, we submitted a copy of the Form 1-A we filed with the SEC, as 
required by Virginia law. Form 1-A requires the registrant to list all 
affiliates of the registrant as well as any securities offerings of 
affiliates in the past 12 months. It is important to note that any 
securities transactions conducted by these affiliates were conducted 
amongst all accredited investors outside of the Commonwealth under Rule 
506 of Regulation D, and, thus, specifically under applicable 
regulations, are exempt from any filing requirement in Virginia. \7\ 
There has been no allegation or any intimation of suspected wrongdoing 
in any offering by any of these entities. Nevertheless, the result of 
attempting to comply with Virginia's registration requirements in the 
context of a Regulation A offering has been for the Virginia State 
Corporation Commission to institute an investigation into a number of 
entities affiliated with the registrant through its parent and ``any 
other affiliates [undefined],'' making vague and extremely broad 
requests for information related to the entities, while at the same 
time, making no visible effort to proceed with the registration of the 
securities of the registrant. I have attached a redacted copy of the 
letter notifying of the investigation and making the informational 
requests (Exhibit A-redacted). This process will likely cost my client 
tens of thousands of dollars to comply with the Commonwealth's demands 
all because of my client's attempt to comply with the law and also use 
an offering method which subjects it to greater transparency for the 
good of the investing public.
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     \7\ See, 21 VAC5-45-20.
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    With the possibilities of such delays or the danger of arbitrary 
investigations which can be costly to an issuer, the State blue sky 
process stands right now as an enormous obstacle to the reliability of 
Regulation A+ as a credible channel for forming capital. Ironic, given 
that this fact could have the potential for issuers to remain focused 
on Regulation D, which is a largely unsupervised offering process 
presently at the State and Federal level.
    Nevertheless, I understand legislative reticence to completely 
preempt the States for a method of offering that has been largely 
underutilized in recent memory. Congress, therefore, struck a 
reasonable balance for the interim--by creating an additional class of 
``covered security,'' under NSMIA for Regulation A+ in situations where 
the securities are either listed on a National Exchange or sold 
exclusively to ``qualified purchasers.'' In the latter instance, 
Congress specifically delegated to the Commission the authority to 
define ``qualified purchasers'' recognizing the Commission's expertise 
in balancing oversight and efficiency in capital formation. \8\ To 
date, the Commission has not done so, nor have they provided the public 
any guidance as to their thinking on this.
---------------------------------------------------------------------------
     \8\ 15 U.S.C. 77r(b)(4)(D).
---------------------------------------------------------------------------
    We believe the ``qualified purchaser'' exemption, if defined 
appropriately, will be a reasonable and workable option to any number 
of small and midsize issuers over other options that might not provide 
the regulatory oversight of disclosure, transparency, and the potential 
liquidity for investors that Regulation A and A+ can provide. \9\ At 
the same time, such definition would not only provide a balanced 
approach to State investor protection issues, but also allow the 
Commission to observe a ``critical mass'' of activity within the 
Regulation A and A+ so that the Commission can have the ability to 
determine what further regulation (or changes to present regulations) 
might be necessary to accomplish Congress' intent without excessive 
risk to the investing public.
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     \9\ The GAO completed its required study in July 2012 entitled 
``SECURITIES REGULATION Factors That May Affect Trends in Regulation A 
Offerings'', (the ``GAO Study'') and found that in fiscal 2010 and 2011 
there were 8 qualified Regulation A offerings versus over 15,500 
Regulation D offerings for $5 million or under, the vast majority of 
which were under Rule 506 with very limited oversight of disclosure. 
The GAO identified State securities law compliance as a factor in 
pushing issuers towards Regulation D and indicated that the GAO's 
research and conversations with securities attorneys and a small 
business advocate identified State securities registration requirements 
as time consuming and costly for small businesses. See, p. 17 of the 
GAO Study.
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    I believe that a definition can easily be tailored that can address 
State concerns related to investor protection, while having the 
intended effect of providing a meaningfully broader audience for 
businesses to go to for capital. Specifically, we have proposed to the 
Commission a definition of ``qualified purchaser'' which combines a net 
worth/income test with a cap on the amount of investment by an investor 
in any one issuance. A qualified purchaser would be defined as a 
purchaser having, excluding (in the instance of natural persons) the 
value of a purchaser's primary residence, either:

    a net worth of at least $500,000; or

    a gross annual income of at least $150,000 and a net worth 
        of at least $250,000.

    Further, the amount of investment by a natural person(s) who would 
be a qualified purchaser may not exceed 20 percent of the net worth of 
such natural person(s).
    We would note that this definition is well in excess of NASAA's 
standard guidelines for minimum investor suitability and is designed to 
permit small issuers to reach a broader investor audience while 
addressing investor protection concerns--demanding a requisite amount 
of sophistication from the investor to review and digest disclosure 
drafted to requirements of the Commission designed to be accessible to 
investors in the public marketplace and that has been reviewed and 
qualified previously by the Commission, at the same time, it limits the 
exposure that an individual could have to a potential loss in any given 
instance. \10\
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     \10\ Certain commentators have proposed the use of the 
``accredited investor'' definition found in Rule 502 of Regulation D, 
if a net worth test for a qualified purchaser is to be adopted. We 
disagree adamantly with this suggestion. Given the need for audits, 
mandated forms of disclosure, and periodic reporting under Reg A+, 
adopting such a definition would only have the result of causing 
issuers to default to Rule 506(c) of Regulation D, rather than adopting 
Reg A+, which provides for greater transparency and regulatory 
oversight, for the formation of capital.
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    Without a measured exemption here, we believe the current approach 
by the States, coupled with the current realities of our economy, could 
combine to subvert Congress' intent here to provide a meaningful 
apparatus for capital formation and job creation that is subject to the 
light of public disclosure.
    To date, the regulation of capital formation under our securities 
laws has been premised on the stark dichotomy between private 
offerings, typically made available to a very narrow audience of 
investors, and public registration with its attendant costs and 
regulatory burdens. The genesis of the JOBS Act was the notion of 
finding reasoned approaches for businesses to form capital, balanced 
against the need to protect the investing public. Title IV presents the 
most impactful of the approaches presented in this legislation, 
supported by an existing mechanism to make these securities available 
to the marketplace. The Commission needs to act NOW. Thank you.
EXHIBIT A


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                   PREPARED STATEMENT OF RICK FLEMING
   Deputy General Counsel, North American Securities Administrators 
                           Association, Inc.
                            October 30, 2013
Introduction
    Good morning Chairman Tester, Ranking Member Johanns, and Members 
of the Subcommittee. I am Rick Fleming, Deputy General Counsel for the 
North American Securities Administrators Association, Inc. (NASAA), \1\ 
the association of State and provincial securities regulators. One of 
my roles at NASAA is to coordinate the activities of the NASAA 
Corporation Finance Section Committee. Prior to joining NASAA in 2011, 
I served as General Counsel for the Office of the Kansas Securities 
Commissioner. In that role, I frequently represented the State in 
disciplinary and enforcement cases, including criminal prosecutions and 
related appeals.
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     \1\ The oldest international organization devoted to investor 
protection, the North American Securities Administrators Association, 
Inc. (NASAA) was organized in 1919. Its membership consists of the 
securities administrators in the 50 States, the District of Columbia, 
Canada, Mexico, Puerto Rico, and the U.S. Virgin Islands. NASAA is the 
voice of securities agencies responsible for grass-roots investor 
protection and efficient capital formation.
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    I am honored to testify before this Subcommittee about the 
Jumpstart Our Business Startups Act, or JOBS Act, a year and a half 
after its enactment.
    Securities regulation is a complementary regime of both State and 
Federal securities laws. NASAA has had a long history of working 
closely with the Securities and Exchange Commission (SEC) to affect 
greater uniformity in Federal-State securities matters, including 
meeting annually as required by section 19(d) of the Securities Act of 
1933. The States also work closely together to uncover and prosecute 
securities law violators.
    State securities regulators have protected Main Street investors 
for the past 100 years, longer than any other securities regulator. 
They are responsible for enforcing State securities laws by pursuing 
cases of suspected investment fraud, conducting investigations of 
unlawful conduct, licensing firms and investment professionals, 
registering certain securities offerings, examining broker-dealers and 
investment advisers, and providing investor education programs and 
materials to your constituents.
    States are also the undisputed leaders in criminal prosecutions of 
securities violators. In 2012 alone, State securities regulators 
conducted nearly 6,000 investigations, leading to nearly 2,500 
enforcement actions, including 339 criminal actions. Moreover, in 2012, 
4,300 licenses of brokers and investment advisers were withdrawn, 
denied, revoked, suspended, or conditioned due to State action, up 27 
percent from the previous year.
    State securities regulators continue to focus on protecting retail 
investors, especially those who lack the expertise, experience, and 
resources to protect their own interests. In addition to serving as the 
``cops on the beat'' and the first line of defense against fraud for 
``mom and pop'' investors, State securities regulators serve as the 
primary regulators of most small size offerings. As such, State 
securities regulators regularly work with and assist small and local 
businesses seeking investment capital.
    NASAA shares Congress' desire to improve the United States economy 
by, in part, spurring private investment in small business. However, we 
believe this goal is best achieved through restoring investor 
confidence, and it is our hope that the JOBS Act will be implemented 
with a balanced approach that reflects smarter regulation.
    My testimony today will provide an overview of the current status 
of NASAA's work in designing a new multistate review process for 
offerings conducted under Title IV of the JOBS Act, including a one-
stop, filing process for ``Regulation A+''. I will also present NASAA's 
views on Title II of the JOBS Act, which lifted the long-standing ban 
on general solicitation, and summarize the most important of our 
recommendations to the SEC in association with the rulemakings under 
this title. Finally, my testimony will consider Title III's 
crowdfunding provisions and NASAA's views of the SEC's proposed rules. 
Although preempted from regulating crowdfunding offerings, the States 
have been committed to working with the SEC and the Financial Industry 
Regulatory Authority (FINRA) to develop a responsible regulatory 
framework for implementation of the Act.
    My testimony will conclude with a discussion of sensible efforts to 
improve the ability of small businesses to obtain capital, along with a 
brief discussion of further deregulatory legislation in the House that 
is referred to as ``JOBS Act 2.0''. NASAA's view is that the JOBS Act 
imposed changes to the securities laws that were neither simple nor 
straightforward, and which required the SEC to grapple with very 
complex issues in its rulemaking. We would encourage Congress to 
observe and evaluate the full impact of the JOBS Act before proposing 
further legislation purportedly designed to spur economic growth.
Title IV: Regulation A+
    When a company wants to raise capital by selling securities, the 
company must first register those securities with the Government unless 
the securities are sold in a way that qualifies for an exemption from 
the registration process. Title IV of the JOBS Act requires the SEC to 
adopt a rule to provide an exemption for certain offerings up to $50 
million.
    Because of its similarity to the current exemption under Regulation 
A, which is capped at only $5 million, this new exemption is commonly 
referred to as Regulation A+. These offerings will be exempt from SEC 
registration under the new Section 3(b)(2) of the Securities Act of 
1933, but they will be subject to registration at the State level 
unless the securities are listed on a national securities exchange or 
sold to a qualified purchaser as defined by the SEC.
    Given the inherently risky nature of these offerings, and the 
primacy of the States' role in policing small size offerings, NASAA 
believes State oversight is critically important for investor 
protection and responsible capital formation. However, we also 
recognize that in some instances this process can be costly and 
particularly burdensome upon small companies.
    When a company applies for registration of securities at the State 
level, the company must ensure that the terms of the offering and the 
content of the disclosure document satisfy the legal requirements that 
apply to that particular type of offering. These legal requirements are 
found in State law but are usually derived from NASAA Statements of 
Policy that are approved by a majority of the NASAA members. A typical 
equity offering would be subject to a general set of rules, including 
things like limitations on underwriting expenses and a requirement to 
specify the anticipated use of proceeds. \2\ More specialized 
securities, such as church bonds, oil and gas interests, and real 
estate investment trusts (REITs), are subject to specific rules for 
those types of offerings. All States conduct a ``disclosure'' review to 
ensure that all material risks are disclosed to investors, and some 
States conduct a further ``merit'' review of the offering to prevent 
offerings that are inherently unfair to investors. If an application 
for registration does not satisfy all of the legal standards applicable 
to that type of offering, the State securities regulator will issue a 
deficiency letter and communicate with the company until the 
deficiencies are resolved.
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     \2\ For a full list of NASAA Statements of Policy, see, http://
www.nasaa.org/regulatory-activity/statements-of-policy/.
---------------------------------------------------------------------------
    On behalf of NASAA President and Ohio Securities Commissioner 
Andrea Seidt, I want to assure this subcommittee that one of NASAA's 
priorities is the creation of an efficient filing and review process 
for multistate securities offerings, including but not limited to, 
Regulation A+. In fact, in her inaugural speech to NASAA's membership 
earlier this month, President Seidt outlined her goal for this type of 
system as follows:

        The corporation finance world needs the equivalent of a CRD/
        IARD system for multistate offerings. My vision is for there to 
        be a one-stop, automated filing system for every type of 
        corporation finance offering filed in multiple States. A system 
        that has NASAA guidelines, forms, and core State requirements 
        embedded in its design, a system in which all regulatory and 
        industry users can track the filing status of an offering in 
        all States in real time. \3\
---------------------------------------------------------------------------
     \3\ Andrea L. Seidt, President, North American Securities 
Administrators Association, Inc., 2013 Presidential Speech, NASAA 96th 
Annual Conference, Salt Lake City, Utah (Oct. 8, 2013), available at 
http://www.nasaa.org/26900/2013-presidential-address-andrea-seidt-ohio-
securities-commissioner/.

    For now, NASAA is focused particularly on Regulation A+ and is 
actively engaged in the design of a new multistate review process for 
those offerings. As currently contemplated, one State would be 
designated the lead ``disclosure'' State and another would be 
designated the lead ``merit'' State, and those two States would 
coordinate the multistate review of the offering to minimize the 
possibility of duplicative or inconsistent comments from multiple 
States. Of course, this means that the States would have to agree to a 
set of uniform standards that would apply to the particular type of 
offering. We are also working on a multistate electronic filing 
platform that will allow one-stop filing with automatic distribution to 
all States, and we intend to build out that system to accommodate 
Regulation A+ filings.
    In designing the system and developing a uniform set of standards, 
NASAA has consulted with a task force of the American Bar Association 
(ABA) to determine whether existing standards could be applied in the 
context of offerings under Regulation A+. The task force expressed 
concern about certain existing NASAA guidelines that are difficult for 
start-ups to satisfy, including the required amount of promoters' 
equity investment and the limitation on using investor funds to repay 
loans from officers of the company. In response to these concerns, a 
NASAA project group has proposed a review process that lowers some of 
our long-standing guidelines.
    The proposed multistate review program was submitted to NASAA 
members for ``internal'' comment, and the comment period expired on 
September 30, 2013. In addition, the members of NASAA engaged in a 
face-to-face discussion of this proposal at our annual meeting in Salt 
Lake City on October 6, 2013. From the comments and discussion, the 
NASAA membership appears willing to embrace this new review system.
    I am pleased to report that the NASAA Board of Directors met 2 days 
ago and approved the distribution of the proposal for public comment.
    NASAA is also communicating with the SEC in an effort to ensure 
that the requirements the Commission adopts for the Federal exemption 
are consistent with the requirements we adopt for the State-level 
review of these offerings. As we continue to move forward in this 
process, we intend to keep Chairman Tester and the Subcommittee 
apprised of our progress.
    It remains to be seen whether Regulation A+ will be used with any 
greater frequency than the existing Regulation A, especially 
considering the new alternative of crowdfunding and the use of general 
advertising under Rule 506. \4\ For NASAA's part, however, State 
securities regulators are committed to helping Regulation A+ achieve 
its fullest potential. NASAA realizes that the increase in the cap from 
$5 million to $50 million will mean that the offerings are more broadly 
disbursed and that uniformity and efficiency are critical. NASAA also 
understands that investor protections must be maintained so that 
investors have confidence to enter this new marketplace. By working 
with the ABA and other interested parties, NASAA is attempting to 
strike the best possible balance so that Regulation A+ will be an 
attractive option for both the small business that needs capital and 
the investor who is asked to provide it. If we are successful in 
striking such a balance, we believe that shrewd investors and 
securities professionals will soon see that State review of these 
offerings generally yields safer opportunities than are available in 
the ``Wild West'' of Rule 506, and small businesses will find that 
smart, efficient, twenty-first century regulation can be beneficial for 
their capital formation efforts.
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     \4\ Title IV of the JOBS Act called for a GAO study to determine 
the reasons that Regulation A is underutilized. The study concluded 
that a variety of factors have influenced the use of Regulation A, 
including the time and cost of the SEC review process and the 
attractiveness of other available exemptions. To be sure, State 
regulation was identified as one of the factors that led issuers to 
avoid Regulation A, but it was not the only factor and its importance 
could be greatly diminished if the States adopt uniform review 
standards and an efficient multistate review system.
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Title II: General Solicitation
    Even though securities sold in compliance with Rule 506 are 
``covered securities,'' which results in preemption of State-level 
registration requirements, the States retain antifraud jurisdiction 
and, for all practical purposes, are responsible for policing this 
market. As the regulators closest to small investors throughout the 
United States, State securities regulators frequently receive 
complaints from those who are victimized in offerings conducted under 
Rule 506, and private placements are commonly listed on NASAA's annual 
list of top investor traps. \5\ In 2011 and 2012, NASAA members 
recorded 340 enforcement actions involving Rule 506 offerings, \6\ 
making Rule 506 offerings the most common product or scheme leading to 
enforcement actions by State securities regulators during that period. 
As a result, the States have a very large stake in the SEC's rulemaking 
in this area.
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     \5\ See, ``Laws Provide Con Artists With Personal Economic Growth 
Plan: NASAA Identifies Emerging and Persistent Investor Threats'' 
(August 21, 2012), available at http://www.nasaa.org/14679/laws-
provide-con-artists-with-personal-economic-growth-plan/.
     \6\ The enforcement statistics published by the SEC do not 
specifically identify the number of enforcement actions involving 
private placements. However, under the broader category of actions 
involving ``Securities Offerings,'' which presumably includes private 
placement offerings, the Commission reports that it took a total of 213 
enforcement actions in 2011 and 2012. See, http://www.sec.gov/news/
newsroom/images/enfstats.pdf.
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    In addition to protecting Main Street investors through enforcement 
actions, State regulators educate Main Street businesses about 
alternatives for raising capital under State and Federal law, including 
Rule 506. States want to see those businesses succeed in their capital 
raising efforts so they can thrive and create jobs in our local 
communities. No NASAA member is interested in creating excessive or 
inefficient rules, but States have learned that efforts to spur 
successful capital formation must reflect a balanced regulatory 
approach that minimizes unnecessary costs and burdens on small 
businesses while protecting investors from fraud and abuse. Without 
adequate investor protections to safeguard the integrity of the private 
placement marketplace, investors may flee from the market, depriving 
small businesses of an important source of capital.
    The recent lifting of the ban on general solicitation in Rule 506 
will have an enormous impact on the securities markets in the United 
States. While some of this impact will be positive, NASAA members can 
anticipate that a greater number of investors will be defrauded, sold 
unsuitable investment products, or otherwise victimized in offerings 
conducted under Rule 506. NASAA believes that it is imperative for the 
SEC to adopt reasonable rules to protect investors in this market and 
that improvements to Rule 506 will facilitate the investor trust that 
is necessary to promote the capital formation goals embodied in the 
JOBS Act.
    NASAA believes that modest changes can be made to Rule 506 and Form 
D that will enhance the ability of the Commission and NASAA members to 
protect investors while minimizing the burdens to the small businesses 
who utilize the rule to raise capital. These changes need to be adopted 
quickly, before unmonitored general solicitations begin to erode 
investor confidence in private placements and make it harder for 
businesses to find investors who are willing to enter this marketplace.
    NASAA supported the adoption of the final rules prohibiting bad 
actors from using Rule 506 and requiring verification of accredited 
investor status. In general, we also support the proposed rules that 
would require the filing of Form D prior to advertising and make 
several improvements to the Form. However, we have suggested modest 
changes to the proposed rules that we believe will yield important 
protections for investors at the lowest possible cost to issuers, and 
we have pointed out places where we believe the proposed rules could be 
scaled back to save costs without unduly harming investors. It is our 
hope that our balanced approach will help the Commissioners reach 
consensus on these issues so that the final rules will be adopted as 
rapidly as possible.
Advance Filing of Form D
    From the perspective of State securities regulators, the most 
important item in the proposed rules is the requirement to file a Form 
D prior to the use of general solicitation. As part of NASAA's investor 
education efforts, State regulators implore investors to ``investigate 
before you invest,'' and encourage investors to contact the securities 
regulators in their States if they have questions about an offering. 
Frequently asked questions include whether the offering is registered 
or exempt, whether there have been any complaints against the issuer or 
placement agents, and whether the issuer, control persons, or placement 
agents have any regulatory history. With the Commission's recent 
lifting of the ban on general solicitation, States anticipate a 
substantial increase in the number of investors who will want this type 
of information as part of their due diligence. However, without a 
requirement that the Form D be filed prior to the use of general 
solicitation, there is no way for State securities regulators to 
respond to these basic questions.
    In addition, the lack of a pre-solicitation filing makes it 
impossible for State enforcement personnel to easily determine whether 
an offering is being conducted in accordance with the securities laws. 
Under the current rules, Form D need not be filed until 15 days after 
the first sale, so an issuer can advertise for investors without filing 
the form. An investigator who sees an advertised offering will not be 
able to check the Commission's records to quickly determine whether the 
issuer is attempting to engage in a compliant Rule 506(c) offering or 
is merely advertising an unregistered, nonexempt public offering with 
no intention of complying with any legal requirements. Regulators may 
have no alternative except to contact issuers--with subpoenas, if 
necessary--to determine whether their offerings are being conducted in 
compliance with Rule 506(c). This will increase the number of 
investigative inquiries directed to legitimate issuers and lengthen the 
process for stopping illegitimate offerings. Ultimately, investors will 
be put at greater risk because it will be more difficult for regulators 
to prevent or stop investor losses.
    The proposed rule would require the filing of the Form D at least 
15 days before the issuer engages in general solicitation. For NASAA's 
purposes, it would be sufficient to simply require the filing at any 
time prior to the use of general advertising. The critical issue is 
that the Form D should be publicly accessible before an issuer begins 
to publicly solicit investors.
Consequences for Failure To File
    For far too long, the Commission has failed to address a glaring 
problem in Rule 506 offerings. As reported by the SEC Inspector General 
in 2009, ``there are simply no tangible consequences when a company 
fails to file a Form D.'' \7\ The proposing release cites only one case 
in which the Commission has ever brought an action under Rule 507 to 
enjoin an issuer from future use of Regulation D.
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     \7\ SEC Inspector General Report No. 459, ``Regulation D Exemption 
Process'' (March 31, 2009), at 10, available at http://www.sec-oig.gov/
Reports/AuditsInspections/2009/459.pdf. When Rule 506 was originally 
adopted in 1982, it required compliance with Rules 501 through 503, 
including the timely filing of a Form D, in order to qualify for the 
exemption. 47 Fed. Reg. 11251, 11267 (Mar. 16, 1982). In 1989, 
Regulation D was amended to remove the requirement of compliance with 
Rule 503 as a condition of the Rule 506 exemption. 54 Fed. Reg. 11369, 
11373 (Mar. 20, 1989). The Commission's summary of the rule change 
stated, ``While the filing of Form D has been retained, it will no 
longer be a condition to any exemption under Regulation D. New Rule 507 
will disqualify any issuer found to have violated the Form D filing 
requirement from future use of Regulation D.'' SEC Release No. 6,825 
(Mar. 14, 1989).
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    The voluntary nature of Form D has significant repercussions for 
State regulators. Pursuant to Section 18 of the Securities Act of 1933, 
States are preempted from requiring registration of securities that are 
sold in compliance with Rule 506. However, State regulators routinely 
review Form D filings to ensure that the offerings actually qualify for 
an exemption under Rule 506 and look for ``red flags'' that may 
indicate a fraudulent offering. The absence of a Form D filing 
complicates State efforts to protect the investing public. In addition, 
a promoter who has no intention of complying with Rule 506 may attempt 
to assert it as a defense to a State-level enforcement action by filing 
a Form D long after the fact.
    Apart from bad actors, it is likely that many legitimate issuers 
never file a Form D because they simply have no incentive to file one. 
As the proposing release illustrates, this makes it nearly impossible 
to accurately gauge the size of the private placement market. \8\ From 
what we do know, the market rivals the size of public offerings, but 
policy makers are left to guess at the implications of loosening the 
rules for private placements. The information captured in Form D, as 
enhanced in the proposing release, will provide important data that can 
be used to determine future economic impacts for businesses and 
investors. A lack of a true and complete understanding of the private 
placement market hampers States' ability to foster growth in that 
market and police bad actors.
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     \8\ A study by the SEC's chief economist in 2011 found that 
private offerings grew by nearly 50 percent from 2009 to 2010; from 
about $950 billion to about $1.4 trillion, and that private stock 
issuances surpassed debt issuances in 2010 and the first quarter of 
2011. See, Craig Lewis, ``Unregistered Offerings and the Regulation D 
Exemption'', November 2, 2011, available at http://www.sec.gov/info/
smallbus/acsec/acsec103111presentation-regd.pdf.
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    For these reasons, it is imperative for the Commission to act 
quickly to establish meaningful consequences for issuers who fail to 
file a Form D. Because the filing is such a critical part of the 
exemption, and because it is such a simple condition to satisfy, NASAA 
believes that the loss of the exemption is a reasonable consequence for 
failure to file the form.
Other Changes to Rule 506
    NASAA supports the addition of several data points to Form D. For 
example, we believe the disclosure of certain uses of proceeds will 
provide clear, material information that is necessary for investors to 
make informed decisions and will deter abusive practices in which 
promoters pay themselves with investor funds. We believe that 
additional information on Form D will be beneficial to investors, and 
it will capture data that will help policy makers evaluate the use of 
the exemption. In particular, the proposed closing amendment will 
provide important data about offerings that were unsuccessful and the 
types of issuers who have difficulty raising capital. This information 
can be used to determine whether the changes to Regulation D were 
effective in achieving the JOBS Act goals of economic growth and job 
creation or whether investors are reluctant to invest in these 
offerings.
    In NASAA's view, it is not necessary for the Commission to require 
the long advertising legend as proposed in Rule 509. We agree that the 
issuer should be required to disclose the information that is contained 
in the proposed legend, but believe that it would be better for the 
Commission to require some indication that the issuer has read the 
material. This could be done by requiring the information to be 
contained in the subscription agreement or by requiring the investor to 
click through the information on the issuer's chosen Internet platform. 
Then, instead of the lengthy legend as proposed, the Commission should 
require a very brief legend on all Internet-based advertising. A brief 
legend containing a unique short phrase will readily identify the 
offering as one being conducted under Rule 506. The Commission could 
then monitor online advertising without requiring it to be filed as 
proposed in Rule 510T.
    NASAA has long encouraged the Commission to revisit the monetary 
thresholds set forth in the ``accredited investor'' definition in Rule 
501 to account for inflation that has occurred since the rule's 
adoption. According to the U.S. Bureau of Labor Statistics, $200,000 
had the same buying power in 1982 as $484,719 has in 2013, \9\ but the 
annual income threshold for accredited investors remains unchanged. 
Similarly, $1,000,000 had the same buying power in 1982 as 
$2,423,595.85 today, \10\ yet the net worth threshold has only been 
changed during that time period to remove the value of a potential 
investor's primary residence from the calculation. NASAA also believes 
that the Commission should update the definition of accredited investor 
to ensure that it more accurately reflects investor sophistication. 
However, given the importance of the other rules that have been 
proposed in the current release, we urged the Commission to move 
forward with the other rule proposals and to address the accredited 
investor definition in a separate rulemaking.
---------------------------------------------------------------------------
     \9\ See, http://www.bls.gov/data/inflation_calculator.htm as of 
September 18, 2013.
     \10\ Id.
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Title III: Crowdfunding
    As the voice of State securities regulators, NASAA has a special 
interest in the rules governing crowdfunding issuers and 
intermediaries. State securities regulators work closely with small 
businesses in their capital formation efforts and want those businesses 
to be successful in raising money through crowdfunding or other methods 
so they can thrive and produce jobs. However, State securities 
regulators are keenly aware that capital formation requires confident 
investors who are adequately protected. Thus, NASAA believes that 
crowdfunding, to be successful, requires a balanced regulatory approach 
that minimizes unnecessary costs and burdens on small businesses while 
protecting their investors from fraud and abuse.
    Given the length of the proposed rules that were issued by the SEC 
last Wednesday, October 23, 2013, NASAA has not yet formulated an 
official response to the proposing release. From our initial 
observations, it appears that the SEC has attempted to stay relatively 
close to the statutory mandates, but we will be taking a closer look at 
the proposed rules and we expect the SEC to consult further with State 
regulators as required by Section 302(c) of the JOBS Act.
    NASAA's largest concern about Title III of the JOBS Act is that it 
removed much of the States' authority over equity-based crowdfunding. 
Congress chose to preempt the States from regulating crowdfunding 
issuers, thus retaining only the States' antifraud, post-sale 
enforcement authority. Furthermore, although Section 305 of the JOBS 
Act preserves the authority of a crowdfunding intermediary's home State 
to conduct examinations of resident intermediaries, State rules cannot 
exceed the Federal requirements. In effect, this puts State governments 
in the position of enforcing Federal laws from which they may not 
deviate.
    NASAA firmly believes due to the localized nature of smaller 
offerings, the States should be the primary regulator of small business 
capital formation efforts, including crowdfunding offerings. Based on 
the small size of the offering, the small size of the issuer, and the 
relatively small investment amounts, it is clear that the States have a 
more direct interest in these offerings. The States are in a better 
position to communicate with both the issuer and the investor to ensure 
that this exemption is an effective means of small business capital 
formation. The States will be most familiar with the local economic 
factors that affect small business and have a strong interest in 
protecting the particular investors in these types of offerings. 
Further, requiring the SEC to regulate these small, localized 
securities offerings is not an effective use of the agency's limited 
resources.
    During the debate surrounding the JOBS Act, NASAA asked Congress to 
leave the regulation of small investments in small companies to the 
States because the Federal Government has neither the inclination nor 
the resources to regulate effectively in this area. Before the JOBS Act 
was even introduced, three States allowed crowdfunding in intrastate 
offerings, \11\ and during the debate on the Act, NASAA was working on 
a model exemption that would apply to multistate offerings. The model 
rule envisioned a one-stop filing mechanism and the application of 
uniform review standards. However, those efforts were halted when 
Congress enacted a Federal exemption for crowdfunding that preempted 
State authority.
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     \11\ Two States--Kansas and Georgia--adopted exemptions before the 
JOBS Act was even introduced. See the ``Invest Kansas Exemption'', Kan. 
Admin. Reg. 81-5-21 (adopted Aug. 12, 2011) and the nearly identical 
``Invest Georgia Exemption'', Ga. Rule 590-4-2-.08 (adopted Dec. 2012). 
Idaho adopted an exemption by order on January 20, 2012, which imposes 
similar conditions upon crowdfunding as the Kansas and Georgia 
regulation.
---------------------------------------------------------------------------
    Ironically, many crowdfunding advocates have grown frustrated with 
the pace of Federal rulemaking that they are again seeking State-level 
crowdfunding exemptions. Earlier this year, bills were introduced in 
six States to allow intrastate offerings that involve equity 
crowdfunding. \12\ We believe this underscores why Congress should let 
the States innovate and be creative in striking a reasonable balance 
between investor protection and capital formation for smaller 
offerings.
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     \12\ Maine L.D. 1512, Michigan H.B. 4996, New Jersey S. 3008, 
North Carolina H.B. 680, Washington H.B. 2023, Wisconsin A.B. 350.
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New and Unmet Opportunities and JOBS Act 2.0
    Successful regulation requires balancing the legitimate interests 
of investors with the legitimate goals of business owners through 
tailored regulation, and pursuing policies that are fair to both. One 
of the fundamental problems that the JOBS Act failed to adequately 
address was investor retreat from the markets. Investor confidence in 
the U.S. securities markets remains low, as reflected by a recent 
Bankrate survey. \13\ A Gallup survey in June 2002 found that 67 
percent of Americans owned a 401(k) or otherwise invested in individual 
stocks, bonds, or mutual funds. Earlier this year, that number was down 
to 54 percent. \14\ To have an impact on investor participation, and, 
by extension, job creation, Congress must focus on giving those 13 
percent the confidence to re-enter the marketplace. \15\
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     \13\ When asked to pick the best way to invest money that would 
not be needed for the next 10 years, investors picked cash, real 
estate, and even precious metals over the stock market. The findings of 
the Bankrate survey are available at http://www.bankrate.com/finance/
consumer-index/financial-security-charts-0713.aspx.
     \14\ See, http://www.gallup.com/poll/147206/stock-market-
investments-lowest-1999.aspx.
     \15\ The legislative history of the Securities Act of 1933 reveals 
that ``smart'' regulation can be successful in encouraging investors to 
reenter the capital markets. As one of the principal drafters of the 
Act noted, ``[t]he great and buoyant faith in capitalism, in the 
competitive system, is largely deflated, and . . . it is not only a 
question of whether the system is just, but whether it works.'' L. 
Baker, Felix Frankfurter 146 (1969) (taken from a Frankfurter speech 
delivered at Smith College, Feb. 22, 1933). Smart and robust regulation 
embodied in the Securities Act of 1933 led to a substantial increase in 
new corporate offerings of over $2.5 billion in 1935 and over $4.3 
billion in 1936 (from a low of $644 million in 1932 and $380 million in 
1933). Goldschmidt, Registration Under the Securities Act of 1933, 4 
Law and Contemp. Probs. 19, 28 (1937); see also, Bureau of the Census, 
``Historical Statistics of the United States: Colonial Times to 1970'' 
1006 (1975). As history reveals, smart regulation does not always 
equate to deregulation, and we encourage Congress to study the outcome 
of the JOBS Act in the coming year.
---------------------------------------------------------------------------
    One way to increase investor confidence is to carefully craft the 
rules implementing Titles II, III, and IV of the JOBS Act so they do 
not have the undesired effect of decreasing investor confidence, thus 
subverting the overall intent of the Act. Further, if the rules lack 
clarity, they will lead to litigation between State regulators and 
issuers, and judges will ultimately be required to provide greater 
clarity. We also encourage the SEC to finalize its investor protection 
mandates under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
    Although NASAA has not yet come to firm conclusions about new, and 
unmet opportunities that would decrease investor cynicism and encourage 
capital formation, we are interested in a few proposals, discussed 
below, that would be worthy of further study and consideration by this 
Subcommittee.
    First, NASAA believes that Congress should study the impact of high 
frequency trading and take steps to ameliorate any associated risk of 
harm to retail investors. According to Charles Schwab, high frequency 
traders flood the market with orders to evaluate the market, then 
cancel 90 percent or more of the orders and retain only the 
advantageous trades. \16\ To curb these abuses, some European 
Governments have proposed transaction taxes on all orders that are 
placed in the markets, but Mr. Schwab has suggested a narrower approach 
that would probably be less controversial and more effective--a penalty 
on excessive cancelations. \17\
---------------------------------------------------------------------------
     \16\ Charles Schwab and Walt Bettinger, ``Why Individual Investors 
Are Fleeing Stocks'', Wall Street Journal Editorial, July 10, 2013, 
available at http://online.wsj.com/news/articles/
SB10001424127887323582904578484810838726222?mod=dist_smartbrief.
     \17\ Id.
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    Another innovative effort to combat high frequency trading has been 
undertaken by ParFX and EBS, two international currency trading 
platforms. They use a randomized pause so that the first order placed 
in the system queue is not necessarily the first to be executed. \18\ 
According to Larry Tabb, founder of the TABB Group, ``In the equities 
market, it's going to be pretty tough for an exchange to introduce 
randomization because the regulations have been interpreted to be very 
time-price specific.'' \19\ Therefore, Congress might consider amending 
the laws to allow this type of reform in the United States equities 
marketplace.
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     \18\ Eric Onstad, ``Analysis: `Slow Frequency' Technology Faces 
Tough Shift From FX to Stock Markets'', Reuters, October 2, 2013, 
available at http://www.reuters.com/article/2013/10/02/us-hft-curbs-
analysisidUSBRE9910PJ20131002.
     \19\ Id.
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    Congress could also study the numerous electronic ``glitches'' that 
have plagued the markets with market shutdowns and price instability. 
Many have called for mandatory ``kill switches'' to stop trading when 
problems occur, but we believe more aggressive steps should be taken to 
ensure that our markets are protected. If such havoc can be wrought 
from innocent errors by companies who have every incentive to get 
things right, then we worry what could be done by someone with a 
malicious intent to harm the markets or the country.
    State securities regulators support efforts to seek legislation 
that would authorize the SEC to collect ``user fees'' from federally 
registered investment advisers (an idea proposed in the Dodd-Frank 
mandated Section 914 study), and to use the revenue derived from these 
fees to fund more frequent examinations of such advisers. NASAA also 
supports legislation that would preserve an investor's right to access 
the court system if they have a dispute against their broker-dealer or 
investment adviser. As noted above, NASAA President Andrea Seidt has 
advocated for the equivalent of a CRD/IARD system (the centralized, 
Web-based system for processing of Federal and State licensing 
applications for broker-dealers and investment advisers) for multistate 
securities offerings. In fact, NASAA has already taken the first major 
step in that direction by setting up the EFD, an electronic filing 
depository for Form D notice filings, which is set to launch in the 
coming year.
    The House of Representatives has been circulating additional 
deregulatory proposals for a sequel to the JOBS Act referred to as 
``JOBS Act 2.0.'' NASAA would encourage this Subcommittee to reject 
further changes to the securities laws until at least after the full 
impact of the JOBS Act on investors and securities markets can be 
determined. Until that time, the potential costs and benefits of 
further expanding the JOBS Act is impossible to determine.
Conclusion
    NASAA has been working expeditiously and diligently to update 
applicable statements of policy and coordinate a new multistate review 
program for Regulation A+ offerings. We have also been working to 
provide investor-friendly, yet sensible and realistic comments to the 
SEC as it finalizes the rules implementing Title II of the JOBS Act and 
Form D changes. We are optimistic that the new rules will lead to 
investor confidence and renewed participations in the markets. NASAA 
and State securities regulators look forward to working with this 
Subcommittee on new and unmet opportunities to strengthen our 
securities markets.
    Thank you again, Chairman Tester and Ranking Member Johanns, for 
the opportunity to appear before the Subcommittee today. I would be 
pleased to answer any questions that you may have.
                                 ______
                                 
                  PREPARED STATEMENT OF SHERWOOD NEISS
               Principal, Crowdfund Capital Advisors LLC
                            October 30, 2013
Introduction
    Chairman Tester, Ranking Member Johanns and distinguished Members 
of the Committee, thank you for holding this hearing on the status of 
the JOBS Act in relation to Title III, Crowdfunding. My name is 
Sherwood Neiss. I am a Principal at Crowdfund Capital Advisors, LLC 
(CCA). CCA works with Governments, multilateral organizations, 
investors, and entrepreneurs on creating crowdfunding ecosystems. I am 
also an entrepreneur and one of the cocreators of the Startup 
Exemption, the framework used by Congress to create Title III. I was 
honored to be with my partners Jason Best and Zak Cassady-Dorion at the 
White House on April 5, 2012, as President Obama signed our idea into 
law. This law allows entrepreneurs to use their social networks and 
regulated Web sites to raise capital for their endeavors from people 
who believe in them. It addresses the funding void faced by startups 
and small businesses and, if implemented according to the intent of the 
law, may result in much needed economic growth, innovation, and jobs.
    At a period of time when there are such polarized interests in 
Washington, DC, I continually point to the fact that when it comes to 
jobs, everyone here agrees, more are better. Washington understood this 
when the House voted in favor of our bill 407-17 and the Senate passed 
it, as part of the JOBS Act, 73-26. We can now include the Securities 
and Exchange Commission in that rank. On October 23, 2013, they voted 
unanimously, 5-0 in favor of the proposed rules related to Title III. 
This represents a huge step forward as this vote included skeptics 
among the Commissioners.
    Jason and I worked hard as cofounders of the Crowdfund Intermediary 
Regulatory Advocates (CFIRA) and the Crowdfunding Professional 
Association (CFPA) to pull the industry together behind two unified 
voices to make sure the SEC had as much guidance to craft rules that 
followed the intent and spirit of the legislation. We think, while not 
perfect, the proposed rules go far to strike a fair balance. The intent 
of the legislation was to take what currently exists and efficiently 
operates in the crowdfunding space and layer on securities regulation 
in a way that provides oversight without undue burden. We believe there 
is still work to be done on the ``undue burden'' part. In the end, we 
believe Washington understands that technology is something to get in 
front of and not behind and if we do it right we can help fund our 
Nation's innovators and job creators.
The Challenging Entrepreneurial Environment
    There is plenty of research that indicates the important role that 
startups and small businesses play in an economy. For one, they are the 
breeding ground for new ideas. Such innovation used to cost a lot but 
is rapidly decreasing. According to Don Tapscott, author of Wikinomics, 
``readily available resources such as open source software, cloud 
computing, and the rise of the virtual office infrastructure has driven 
the cost to launch an Internet venture down from $5 million in 1997 to 
less than $500,000 today.'' The decreased startup costs allow for more 
market entrants, which can lead to greater innovation. This innovation 
can spur the M&A market as larger companies who often find it 
challenging to innovate, buy these smaller companies.
    These young companies can also be job creators. As noted in a 
Kauffman Foundation study, 65 percent of net new jobs come from 
startups and small businesses. These jobs can address a problem that 
persists not only in the USA but globally, youth unemployment. As we 
note in our World Bank report ``Crowdfunding's Potential for the 
Developing World'', startups and small businesses may have the greatest 
potential to fill this void. From a personal experience, I cofounded 
and acted as Chief Financial Officer of a company called FLAVORx. We 
flavored medicine so children were more compliant. We sold our system 
to pharmacies and grew it from one pharmacy to over 40,000. To help us 
grow we hired along the way. Prior to selling the company in 2007, we 
had up to 50 direct employees and over 100 indirect (contractors, 
subcontractors, etc.) employees. The average age of our staff was 27, 
which falls right in line with the youth unemployment gap. Companies 
like ours played an important role in hiring youth.
    But you cannot have businesses nor jobs without capital or properly 
functioning capital markets. The capital crunch was exacerbated with 
the Global Financial Crisis (GFC) in 2008. Prior to the GFC startups 
and small businesses had similar choices for access to capital; 
savings, home equity, friends and family, bank credit, bank loans, 
Angels or Venture Capital (VC). With the collapse of the financial 
markets this funding dried up. The banks stopped lending. Interest 
rates rose and limits were cut on credit cards such that credit card 
financing was no longer an option. Home equity values dropped and 
HELOCs shrunk or disappeared as a funding option. And Venture Capital 
saw more opportunity upstream and shifted their focus on bigger deals 
as the Investment Banks braced. The net result was a negative impact on 
startups and small business financing that is still struggling to 
recover.
    It was at this time that we showed up in Washington with a solution 
to the funding void called the Startup Exemption. It was a 10-point 
framework to use the principles of crowdfunding--raising many small 
amounts of money from a large group of people via the Internet and 
merge it with startup and small business financing.
Title III--Crowdfunding Framework
    What ended up being signed into law was strikingly similar to the 
Startup Exemption even though it went through several iterations in 
Congress. The net result is an exemption from registration with the SEC 
provided that rules and procedures are followed. To this effect, the 
SEC released on October 25, 2013, a 585-page report detailing the 
proposed rules for Title III.
    Under ``Regulation Crowdfunding'' an entrepreneur otherwise known 
as an issuer can raise up to $1 million per year on Web sites (also 
known as intermediaries, platform, or portals) that are registered with 
the SEC and overseen by FINRA.
    Issuers and those holding more than 20 percent equity in the 
business must submit to a fraud/background check to weed out any bad 
actors. Issuers must upload disclosures to the SEC and the 
intermediaries that include the following:

    the name, legal status, physical address, and Web site 
        address of the issuer;

    the names of the directors and officers (and any persons 
        occupying a similar status or performing a similar function), 
        and each person holding more than 20 percent of the shares of 
        the issuer;

    a description of the business of the issuer and the 
        anticipated business plan of the issuer;

    a description of the financial condition of the issuer;

    a description of the stated purpose and intended use of the 
        proceeds of the offering sought by the issuer with respect to 
        the target offering amount;

    the target offering amount, the deadline to reach the 
        target offering amount and regular updates regarding the 
        progress of the issuer in meeting the target offering amount;

    the price to the public of the securities or the method for 
        determining the price; and

    a description of the ownership and capital structure of the 
        issuer.

    The disclosures, as well as other identifying information about the 
issuer, including in many cases a video about the entrepreneur(s) and 
the company will appear on the Web site as a campaign.
    Once uploaded, issuers can use their social networks to reach out 
to a community of individuals they have an established relationship 
with to learn more about the investment by pointing them to the 
crowdfunding Web site. While most solicitations are expected to happen 
online, issuers are allowed to use other means of solicitation (in-
store placards, newspapers, etc.) provided that the notice point the 
potential investor to the crowdfunding Web site. The intent of this is 
to make sure that all investment activity take place on Web sites that 
are registered and overseen by the SEC and FINRA and prevent 
unscrupulous actors from claiming to crowdfund when they are not.
    Investors who come to the site must register and take an education 
series and certify they understand the risk. The proposed rules include 
education on:

    the process for the offer, purchase and issuance of 
        securities through the intermediary;

    the risks associated with investing in crowdfunded 
        securities;

    the types of securities that may be offered on the 
        intermediary's platform and the risks associated with each type 
        of security, including the risk of having limited voting power 
        as a result of dilution;

    the restrictions on the resale of crowdfunded securities 
        offered and sold in reliance on this exemption;

    the types of information that an issuer is required to 
        provide in annual reports, the frequency of the delivery of 
        that information, and the possibility that the issuer's 
        obligation to file annual reports may terminate in the future;

    the limitations on the amounts investors may invest, as set 
        forth in the legislation;

    the circumstances in which the issuer may cancel an 
        investment commitment;

    the limitations on an investor's right to cancel an 
        investment commitment;

    the need for the investor to consider whether investing in 
        a security offered and sold in reliance on this exemption is 
        appropriate for him or her; and

    that following completion of an offering, there may or may 
        not be any ongoing relationship between the issuer and 
        intermediary.

    Investors could make commitments provided they are limited to the 
greater of:

    $2,000 or 5 percent of annual income or net worth, if 
        annual income or net worth of the investor is less than 
        $100,000; and

    10 percent of annual income or net worth (not to exceed an 
        amount sold of $100,000), if annual income or net worth of the 
        investor is $100,000 or more (these amounts are to be adjusted 
        for inflation at least every 5 years);

    Issuers must hit 100 percent of their funding target within the 
deadline to reach the target-offering amount or the money is returned 
from escrow to the investors. Investors would have the ability to 
communicate with issuers on the intermediary and ask questions.
    Intermediaries are defined as either funding portals or broker-
dealers. Funding portals are a new entity created by Title III and 
regulated by FINRA. Funding portals were created to act in the limited 
capacity that current crowdfunding Web sites do. In order to create 
funding portals, it was necessary to determine activities they cannot 
perform. These include:

    offer investment advice or recommendations;

    solicit purchases, sales or offers to buy the securities 
        offered or displayed on its platform or portal;

    compensate employees, agents, or other person for such 
        solicitation or based on the sale of securities displayed or 
        referenced on its platform or portal;

    hold, manage, possess, or otherwise handle investor funds 
        or securities; or

    engage in such other activities as the Commission, by rule, 
        determines appropriate

    The intent of this was to create a ``broker-dealer light'' 
regulatory scheme for funding portals that do not perform the wide 
array of activities (including promoting and selling) and hence the 
costs and compliance of a broker-dealer. It would allow these 
intermediaries to list crowdfund opportunities and allow the crowd to 
do the diligence, vetting, and funding very much like what currently 
happens on donation and perks-based crowdfunding Web sites.
Addressing Pumping, Dumping, and Fraud
    The legislation effectively addresses earlier attempts at easing 
regulations to stimulate capital formation. It deters the ``pumping'' 
of securities by disallowing compensation tied to the success of an 
offering unless this duty is performed by an individual who is 
registered as a broker-dealer, expressly disclosed to investors and 
regulated as a broker-dealer activity. It deters the ``dumping'' of 
securities by requiring them to be held for a 1-year period. It deters 
potential scam artists from entering the market by performing 
background checks, mandating disclosures, forcing the transactions to 
take place on regulated intermediaries, and requires issuers to hit 100 
percent of their funding target or no money is exchanged.
    When speaking at an event in Scottsdale, Arizona, I had the 
opportunity to talk with a skeptical FBI Securities fraud agent about 
the JOBS Act and crowdfunding. He has spent the better part of 20 years 
trying to find and hold accountable securities fraud scam artists. When 
I explain the background check requirements within the legislation he 
responded, ``Then I'm not that concerned with fraud.'' Apparently, the 
biggest challenge enforcement officials face is identifying the 
fraudster post-fraud and the trail leading up to that fraud. With a 
mandated background check before funding required, potential fraudsters 
will be self-identifying making for easier accountability. With this 
entire process happening online, it creates a digital footprint that is 
recorded in history and easily referenced if needed.
    If we look at data from the major existing platforms, they show no 
successful fraud has been perpetrated through pledge-based 
crowdfunding. Attempts at fraud have been made but were thwarted by the 
transparency inherent in crowdfunding: would-be investors asked 
questions and challenged the fraudulent postings, revealing the frauds 
and resulting in their removal from funding platforms within 24 hours.
    Fraud is a legitimate concern. However, successful fraud with 
crowdfunding has been relatively rare. While most fraud is perpetrated 
on a one-to-one basis (for example, an identity scheme solicits 
personal information via email), fraud in the context of the social 
media and crowdfund investing in particular would have to occur on a 
many-to-many basis: a potential fraudster would have to stand up to the 
wisdom, queries, and insights of the entire crowd. For this reason the 
most likely scenario for successful fraud involves criminals creating 
fake crowdfunding platforms and fake companies to attract investors' 
money.
    Of the nearly 50,000 projects funded through Kickstarter to the 
tune of $815 million, there are four documented cases of attempted 
fraud. One was a campaign to raise capital for a video game. The 
campaign received numerous questions and accusations on the Kickstarter 
comments page that the game developer was unable to address. This 
response, combined with the revelation that many of the images and 
content in their pitch were taken from other companies, was seen as an 
indicator of potentially fraudulent activity and the campaign was 
quickly shut down without any donor losing money.
    Because no case has been filed, it can be hard to tell the 
difference between a fraud and a well-intentioned project whose 
creators failed to fulfill on their promise. The most notorious example 
was a Kickstarter project called ZionEyez, which claimed to stream 
video directly from a pair of eyeglasses to a person's Facebook stream. 
The project netted US$343,415 in 2011, and the creators have yet to 
deliver its product. The company, which has since changed its name, 
still claims it intends to deliver and is seeking outside capital.
    The primary risk to consumers from donation-based crowdfunding is 
fulfillment risk. Some companies raise funds through crowdfunding 
without having thought through production, shipping, tax issues, and 
other essentials of their business model. There have also been examples 
of technical failure risk, usually involving the presale of software. 
In these cases companies received funds for products they intended to 
build, but technical problems prevented them from shipping the product. 
These same types of risks appear in debt and equity crowdfunding.
The Benefits of Crowdfund Investing
    There are many benefits to crowdfunding outside of access to 
capital. In our World Bank report we identify 8 main benefits to 
crowdfund investing:

  1.  It fills a void left by traditional financing and creates an 
        efficient mechanism for raising money by standardizing and 
        centralizing the process of private capital formation.

  2.  It is an efficient mechanism for investors to analyze if a 
        company fits their portfolio strategy.

  3.  It disrupts the reliance on business angels and venture 
        capitalist so that enterprising entrepreneurs can leapfrog the 
        venture investor boardroom to their social network. It also 
        provides validation from other investors, which may lower the 
        risk for follow on investment.

  4.  It expands the geographic range of angel investment. Social 
        networks demonstrate that investments need not be tied to 
        geography, as are many VC investments. Crowdfunding allows 
        entrepreneurs all over the country to have equal access to 
        capital.

  5.  It provides product validation, support networks and 
        partnerships. Companies can use crowdfunding to explore a 
        product's viability and to engage early adopters at lower 
        costs. This also provides campaigns and the companies hosting 
        them exposure.

  6.  It provides market testing and demand measurement. Successfully 
        funded projects show crowd validation. This validation, or lack 
        thereof, can help determine if enough of a market exists to 
        fund an idea or not.

  7.  It provides access to support networks. Crowdfund supporters that 
        become investors are a highly motivated group that acts as 
        product evangelists and feedback providers. These investors 
        have skills and experience from which entrepreneurs can 
        benefit.

  8.  It provides feedback on the market and how to move forward. 
        Active investors may help enhance an issuer's business plan 
        with ideas and suggestions for moving forward.

    Issuers interested in choosing Regulation Crowdfunding over 
Regulation D would do so for several reasons:

  1.  Companies that use Regulation D are usually more established and 
        can incur the costs associated with putting together a full 
        private placement memorandum that is usually associated with 
        such offerings. Companies using Regulation Crowdfunding can use 
        technology and software programs to create a business plan and 
        financials necessary for this offering at much lower costs.

  2.  Companies that use Regulation Crowdfunding are seeking less than 
        $1 million. Companies using Regulation D may be seeking more 
        than $1 million.

  3.  Companies using Regulation Crowdfunding would benefit from the 
        standardized forms used on crowdfunding platforms and the tools 
        to keep the issuer compliant.

  4.  Companies using Regulation Crowdfunding want to leverage their 
        social network that includes both accredited and unaccredited 
        investors for which companies using Regulation D are only 
        limited to up to 35 unaccredited investors.

  5.  Companies using Regulation Crowdfunding do not have to worry 
        about hitting the investor cap of 2,000 before filing with the 
        SEC that a Regulation D offering would subject them to.

  6.  However companies using Regulation Crowdfunding will be subject 
        to mandated annual reporting that issuers using Regulation D 
        might not. This may increase the burden on Regulation 
        Crowdfunding companies.
Firms That Might Be Interested in Utilizing Crowdfunding
    Given the $1 million cap per year that entrepreneurs can seek from 
the crowd and the all-or-nothing financing mechanism, Regulation CF is 
geared towards small businesses.
    There are many business types that could benefit from crowdfunding. 
I list some of them below and why:

    High-growth/technology businesses are uniquely suited to 
        crowdfund investing because they find general market 
        understanding and acceptance.

    Research institutions can enable researchers and students 
        to demonstrate broader interest in their research topics.

    Main Street USA businesses may not have access to bank 
        loans since the financial crisis and crowdfunding may serve as 
        a way to convert customers into investors and lenders.

    Franchisees may gain because there has been an absence of 
        financing available to individuals who want to start a business 
        franchise. Individuals well suited for this may be retirees 
        looking for additional financial security or a military veteran 
        who can leverage the franchise support system to transition to 
        business ownership.

    Real estate companies can use crowdfunding as a means to 
        rehabilitate communities ravished by the economic crisis and 
        allow these same communities to benefit from the rehabilitation 
        both physically and financially.

    Women and minorities who have historically been both 
        underfunded and left out of the startup and small business 
        financing realm can now access capital from other women and 
        minorities who until now haven't had either the way or an 
        efficient means to support their peers.

    Because Regulation Crowdfunding has yet to go into effect it is 
difficult to gauge the impact it will have on the economy and jobs. 
However, on September 24, 2013, Title II, another provision of the JOBS 
Act went into affect and this might be a leading indicator. Title II 
lifted the ban on general solicitation. For the first time in 80 years 
issuers can raise an unlimited amount of money from investors provided 
that they only take money from accredited investors. Such a change 
essentially allows issuers to use crowdfunding Web sites to market 
their offering to accredited investors.
    This opened the door for platforms like AngelList, an online 
accredited investor platform, to expand their reach. Based on 
conversations with Kevin Laws at AngelList, over 2,959 companies have 
listed since Title II went into effect. At a crowdfunding event last 
week in New York City it was remarked that over $50 million of capital 
has already been committed to those companies. To put this into 
perspective, last year Venture Capitalist funded only 3,800 deals. 
While VC deployed over $26 billion we can see that increasing both deal 
flow and reach may lead to more business funding outside of what VC's 
deploy. Initial estimates from the Program for Innovation in 
Entrepreneurial and Social Finance, a crowdfunding think tank at the 
University of California, Berkeley, estimates that within its first few 
years the crowdfund investing market size could be as high at $4 
billion.
    One trend we expect to develop is more and more businesses 
circumventing the traditional means of finance and seeking funds from 
the crowd. Successful companies at crowdfunding may use their vested 
customers to help fine tune product offerings. They will leverage the 
crowd's marketing power to promote the business, which may in turn lead 
more sales, visibility and Angels getting involved. Angels who have an 
interest in the business can play a lead investor role in a Title II 
offering or as a syndicate, meaning they come in with say the first 
$100,000 and syndicate the other $150,000 to accredited investors. 
Continued growth and success may raise the interest of Venture 
Capitalists who can come in at a later stage when a business is 
developed, product tested and market validated. They can provide the 
stronger hands and deeper pockets to take the company to the next 
level. All along the way, the crowd investors can either be bought out 
in successive rounds at the current price thus experiencing liquidation 
and cash flow or stay along for the ride with the knowledge that they 
own less (due to dilution) of a more valuable company for which they 
may experience greater benefit down the road.
    When this industry is up and running we should have answers to 
questions we never could answer before like what is the valuation of 
dry cleaner, hair salon, or small farm. As investors come in and invest 
in these businesses, valuations at different company sizes will be 
determined. These valuations will be stored online for all to see and 
may shed light on what has historically been a challenging exercise; 
how to value your company?
    The disclosure requirements could also improve informational 
efficiency in the market. Specifically, the required disclosures would 
provide investors with a useful benchmark to evaluate other private 
issuers both within and outside of the securities-based crowdfunding 
market. Companies like Crowdnetic, a New York-based company, are 
already stepping into the space by providing an in-depth view into the 
private capital markets, who is getting funded, what sectors see the 
most funding, where trends are developing and more.
Rulemaking Overview
    I would like to commend the Securities and Exchange Commission for 
the detailed and thorough analysis of Regulation Crowdfunding. I 
personally would like to acknowledge the incredibly hard work performed 
by the staff at the SEC. Since the bill was signed into law we as an 
industry have requested and been granted meetings with key stakeholders 
in the SEC to share our knowledge, experience, and concerns. All our 
meetings were accepted and we are gracious for the staff's time and 
consideration. We note that the 13 letters from CFIRA, the organization 
we helped cofound to work with the SEC and FINRA on the rules, was 
referenced 57 times in the proposed rules.
    When considering the 585-page report on the proposed rules put out 
by the SEC the following thoughts come to mind:

  1.  The SEC worked really hard to follow the majority of the spirit 
        and intent of the legislation. However they missed the ball on 
        funding portals and need to make some enabling changes.

  2.  Compliance is the key word to come out of these 585 pages. 
        Issuers will have to files forms with the SEC periodically and 
        these forms are attached to either dates or milestones. It is 
        critically important for a small issuer who is new to running a 
        business, raising capital or being compliant with regulation to 
        either find an individual, technology or a portal that can keep 
        them compliant.

  3.  Education is key. Probably the most important thing potential 
        issuers can do is to learn as much about crowdfunding and these 
        rules as possible. Issuers will need to learn about types of 
        securities, valuation, and investor relations. If they want to 
        be successful they should study prior to crowdfunding. This is 
        one of the reasons we started an online education training 
        series called ``Success With Crowdfunding''. Investors too need 
        to be educated and we are pleased to see that the SEC expanded 
        upon what they believe investors should know prior to putting 
        their money behind a crowdfund offering. We were surprised 
        though that there was no mention of the importance of 
        diversification.
The Good
    There are parts of the rulemaking that could make this offering 
more appealing to prospective issuers.
    First, the SEC did not create rules that would kill crowdfunding 
before it had a chance to start. By this I mean, while there is a 2,000 
limit on the number of investors before a company needs to essentially 
be a public reporting company, the SEC understood that since there can 
be many crowdfund investors, they needed to be grouped together and 
exempted from that ceiling. Doing so will allow successful crowdfund 
companies to continue on the funding lifecycle without having to worry 
about the costs of becoming a reporting company prior to their desire 
or opportunity to do so.
    Second, issuers don't have to decide whether to do a Title III or 
Title II offering. The proposed rules seem to understand that the type 
of investors in each Title may be different and not to preclude issuers 
from choosing one over the other. The proposed rules allow for 
concurrent offerings without integration, so if an issuer wishes to do 
parallel offerings, the issuer would be able to exceed the $1 million 
cap in Title III without losing his exemption.
    Third, as mentioned earlier Title II of the JOBS Act lifted the ban 
on general solicitation provided that investments only come from 
accredited investors. Title II requires that issuers affirm the status 
of an accredited investor. In Title III this burden is left with the 
investor. This will ease the compliance burden of verifying income or 
net worth of individual investors, allow them to self-disclose these 
amounts and allow them to represent and certify that they have not gone 
over their individual investment limits.
    Fourth, while there are disclosures mandated the SEC did not define 
set disclosures for a business plan or use of proceeds. This will help 
new entrepreneurs who are otherwise unsure of what is in a business 
plan to try crowdfunding. It would be highly recommended though that 
these entrepreneurs use technology, business planning software, or 
advisors to generate the reports necessary for disclosure.
    Fifth, you can exceed your offering amount as long as you disclose 
what you would do with the extra money in your use of proceeds. This is 
actually very good. It allows issuers to set a minimum amount they need 
to achieve and allows others who come in toward the end to still have 
an opportunity to participate even if the company hits its minimum 
funding target. I believe that companies that exceed their funding 
targets will be the first point of contact and follow on deal flow for 
Angels and VCs.
    Sixth, while not expressly stated in the legislation, it was good 
of the SEC to understand that crowdfunding operates in conjunction with 
the social network and that issuers should use their social networks to 
drive people to the intermediaries Web site provided they don't talk 
about specifics of the offering.
    And, seventh, the SEC added the flexibility of dynamic pricing 
without limiting the types of securities. This may allow issuers to 
offer different types of shares at different prices to investors. While 
this may not benefit the untrained issuer, it allows more sophisticated 
issuers to raise money from more sophisticated investors, reward early 
supporters and increase the likelihood that the offering would be 
successful.
The Bad
    There are parts of the rulemaking that could make this offering 
less appealing to prospective issuers.
    As mentioned above, the biggest hurdle issuers face will be 
compliance. There is a lot of reporting required in the system. While 
such reporting will promote transparency and deter fraud, it may also 
deter the honest yet new issuer from deciding to crowdfund. It may also 
force issuers to raise more money to either pay for a compliance 
officer or an alternative solution. While this may promote jobs, this 
was not the intent of the legislation.
    Second while the legislation does allow for both accredited and 
unaccredited investors to support issuers, accredited investors are not 
usually capped in their investment, within Regulation Crowdfunding, 
they are capped at $100,000.
    Third there are disclosure requirements for directors and officers 
that include disclosing 3 years of business experience. While such 
disclosures may help investors understand who is running the company, 
depending on the number of owners, their backgrounds and the system 
used for gathering this information it might be challenging to disclose 
all this information.
    Fourth, while the legislation mandates it, we were still hopeful 
that the SEC would understand the almost impracticality of audited 
financials for offerings in excess of $500,000. Audited financials are 
beneficial for large corporations to uncover nuances. Smaller 
corporations are more transparent by nature. According to the SEC's 
figures an audit would cost about $28,700. Given the 2 year required 
disclosures in the proposed rules, this figure could be well over 
$50,000 or 10 percent of the raise. This might deter some issuers. We 
would hope in future amendments; this figure would be scaled up or just 
switched to CPA review.
    Fifth, while FINRA is the only National Securities Association in 
the United States and hence assigned to be the oversight authority of 
the crowdfunding portals, I believe that the industry might be better 
served if it were overseen by the industry participants itself who are 
more concerned about developing an efficient, credible, transparent 
marketplace and building this credible crowdfunding marketplace is 
their only priority and core competence. Not knowing whether the SEC 
and FINRA are making rules to benefit brokers over funding portals 
might deter both intermediaries and issuers from getting into 
crowdfunding.
The Really Bad
    The proposed rules don't allow funding portals much flexibility 
when determining who can list on their sites. Not giving them the 
flexibility to deny a business they believe isn't ready for 
crowdfunding or won't be successful may decrease efficiencies and 
increase failure.
    The proposed rules leave liability with the funding portals for 
material misstatements by the issuers. While it would seem obvious that 
material misstatements should be a reason for liability, a portal is 
not in the same business as the issuer and hence might not know a 
statement is material. In addition, the roles and responsibilities of a 
funding portal are much less than that of a broker and while brokers 
may be paid to provide detailed vetting, portals are not. In reality, 
under the proposed rules, funding portals have greater liability 
because the Due Diligence defense afforded to brokers is not afforded 
to them. When it comes to funding portals, it is the role of the crowd 
to do the diligence on the issuer and question the disclosures on the 
comment pages of the campaign. Funding portals should not be held 
accountable for misstatements. As a matter of fact, funding portals 
should explicitly state on their Web sites that it is the job of the 
issuers to review the disclosures for nonfactual statements and that 
the portal is just providing the matching service. This was the intent 
of the legislation.
    It is unclear from the proposed rules of funding portals can 
receive payment for a successful campaign in terms of a percent of the 
raise. This is how current donation and perks crowdfunding platforms 
operate and the intent of the legislation. One part of the proposed 
rules talks about disclosing the amount of compensation paid to the 
intermediary for conducting the offering. Another part states the 
funding portal cannot compensate employees, agents or other person for 
such solicitation or based on the sale of securities displayed or 
referenced on its platform or portal. And a third part goes on to state 
the proposed rules would define ``funding portal'' consistent with the 
statutory definition of ``funding portal,'' substituting the word 
``broker'' for the word ``person,'' seemingly implying that the 
intermediary cannot be paid a success fee. This would effectively 
remove the economic model for the intermediary.
    The proposed rules also require the escrow agent for a funding 
portal to be a bank. While escrow services are part of a bank's duties 
it is not their primary focus of activity. By not allowing other escrow 
agents into the process, this makes it not only challenging for funding 
portals to develop and flourish but increases the cost of capital for 
the issuer.
    The reality of these four items, I believe, will make it very hard 
for funding portals to succeed in the space. Anyone that wants to be a 
funding portal will have to form a strategic relationship with a 
broker. Doing so might allow them to perform more activities but the 
funding portals will probably have to give up an excessive amount of 
their fees with the broker. Unfortunately the additional costs of 
capital will come out of what issuers raise and not where investors 
want their investment going.
    The reality for an issuer is also fairly stark. In my calculations 
and conversations with Kevin Laws at AngelList we both came to the same 
conclusion, crowdfunding might be too expensive from a prepare and 
comply point of view to event get in the game at the low end. Karen 
Kerrigan, President and CEO of the Small Business and Entrepreneurship 
Council (SBE Council) stated it another way, ``the rules as proposed 
will prevent or turn off many small businesses and entrepreneurs with 
limited resources from tapping into this new financing opportunity.'' 
Quite simply, at least at present, SBE Council believes the regulations 
work against the efficiency and transparency of technology in this 
space.
    ``The complexity and burden of the SEC's proposed regulations, 
FINRA requirements, and the potential threat to regulate even more will 
act as a barrier to entry to new funding portals, which means less 
innovation and competition,'' says Kerrigan. ``We are not opposed to 
regulation and accountability, but SEC Title III rules tip the scales, 
which create immediate barriers to funding portal competition and 
choice for entrepreneurs in this new space.''
    In sum, the potential for equity and debt-based crowdfunding will 
be constrained by the proposed regulations (as they now stand) to 
implement Title III of the JOBS Act. Entrepreneurs who have the 
resources to comply with the various requirements at each step of their 
funding (pre-, during, and post raise) will be fine. Small business 
owners and entrepreneurs with limited resources will have more 
difficulty tapping into this opportunity.
What Can We Learn From Crowdfunding Internationally?
    In our World Bank report we have a section titled Early Data from 
the Developed World. In there we state, ``Currently there is limited 
data to report on equity and debt-based crowdfunding, but Australia and 
the United Kingdom are demonstrating interesting results. After 7 years 
of crowdfunding companies, the Australian Small Stock Offering Board 
(ASSOB) shows that 86 percent of companies crowdfunded on its platform 
were still operating in 2012. This contrasts with a figure of 40 
percent of noncrowdfunded (non-ASSOB) companies that fail after 3 
years.
    An engaged base of both customer and investors in the business is 
cited as one of the main reasons for longevity by ASSOB. ASSOB also 
vets deals prior to posting on their platform. Equity-based 
crowdfunding platforms have also launched in the Netherlands and Italy. 
No affirmative data yet exists to show investor returns from these 
platforms, though projected market size analysis has been completed by 
the University of California, Berkeley, and well-regarded venture 
capitalist, Fred Wilson.
    Debt crowdfunding in the United Kingdom has had some early 
successes in providing returns to investors. Since 2007 investors in 
companies listed on U.K.-based Funding Circle have completed financing 
totaling over 156 million (about US$250 million), receiving 
an annualized return of 5.8 percent (after expenses and bad debt 
expense, but before taxes) with a 1.6 percent default rate.'' This 
represents much better performance for both investors looking to earn a 
yield and issuers seeking to borrow at competitive rates.
    There have been no successful cases of fraud on any debt or equity-
crowdfunding platform globally.
Conclusion and Recommendations
    With the global financial crisis the funding void for startups and 
small businesses got bigger. Crowdfunding has emerged as a unique 
solution and now Congress, the President, and the Securities and 
Exchange Commission see its potential in addressing this problem but 
there is still work to do.
    Youth unemployment in the United States according to one study is 
more than twice the national average. College graduates are competing 
for unpaid internships and not experiencing the benefit of having 
worked toward a degree. As stated by Judith Rodin in Innovations 
Journal, ``Young people who are not on track to secure employment are 
often stuck in a self-perpetuating cycle of poverty and instability. 
Their future earning potential is stilted, and they are likely to 
settle for part-time jobs or temporary work. As a result, today's youth 
many of whom are concentrated in urban areas, face high levels of 
social exclusion and lack clear access to the safety nets that 
employment can provide: health benefits, retirement accounts and 
pensions.'' In other parts of the world we've seen civil unrest as 
dispirited youth take to the streets in anger. This was even evident 
during the Occupy movement in the United States.
    We may stand at a unique time in history to address both the 
funding void and unemployment by allowing individuals with aspiring 
ideas to take them to regulated platforms and let the crowd decide if 
they are worthy of funding. However, entrepreneurs need to approach 
this opportunity with eyes wide open. There is a great deal of 
disclosure and compliance required in this opportunity and it is 
advised that they take the time to study and learn everything they can 
about crowdfunding and the proposed rules before moving forward.
    For crowdfunding to really flourish under Title III, and be in line 
with the way crowdfunding currently operates, I would encourage 
Congress to have the SEC make the following changes to the proposed 
rules. Doing so will allow funding portals, which were intended to be 
stand alone entities from brokers in the first place, to survive:

  1.  Funding portals that are not broker dealers or partnered with a 
        broker be allowed to be paid in the form of a success fee in 
        the form of a commission on deals closed. Without this economic 
        model, portals will not survive.

  2.  Funding portals be allowed to curate deals other than what type 
        of offerings they allow on their portal so that they have the 
        flexibility to keep deals off their platform that they do not 
        deem worthy. This type of curation can only stand to benefit 
        investors because it is not providing investment advice on a 
        specific deal already listed on a platform but in essence 
        keeping out deals that are not ready to raise capital, not 
        fundable or not worthy from the portal's perspective for 
        listing.

  3.  Funding portals not be liable for any material omissions or 
        misstatements of the issuer. If the legislation approved by 
        Congress and signed into law by the President meant to include 
        funding portals in the liability it would have directly named 
        ``funding portals'' in the list of those liable, forcing 
        funding portals to diligence deals and be paid for that service 
        like a broker. Funding portals play a limited role and 
        shouldn't be held to the same liability standards as brokers.

    With these proposed chances I believe a robust and efficient 
crowdfund investing market may develop in the United States. I look 
forward to your questions.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN
                       FROM KEITH HIGGINS

Q.1. In an address to the Security Traders Association on 10/2/
13, Chairman White discussed one-size-fits-all markets. Could 
you please elaborate on why a one-size-fits-all market 
structure may not effectively serve smaller public companies?

A.1. In the speech you mention, Chair White discussed how, for 
the most part, market rules and trading mechanisms are today 
the same regardless of wide variations in the size of public 
companies. According to Commission staff in the Division of 
Trading and Markets, by its nature, such a one-size-fits-all 
market structure will be designed primarily to address stocks 
with the majority of trading volume, and the great majority of 
trading volume in the U.S. equity markets is attributable to 
larger company stocks. For example, the SEC Advisory Committee 
on Small and Emerging Companies received data indicating that 
the average daily dollar volume for NASDAQ-listed companies 
with $1 billion or more in market capitalization is vastly 
greater than for companies with less than $100 million in 
market capitalization. See, Presentation of Jeffrey M. Solomon, 
CEO, Cowen and Company (Sept. 17, 2013) (available at http://
www.sec.gov/info/smallbus/acsec.shtml).
    At the same time, the level of trading volume in smaller 
companies may not appropriately reflect the economic 
significance of the smaller company segment of the market in 
terms of capital formation and economic growth. To address this 
potential disconnect, Chair White highlighted the need to focus 
particularly on the market structure needs of smaller 
companies, rather than simply assuming that their needs are the 
same as larger companies. For example, smaller company stocks 
generally do not have the same sources of liquidity as larger 
company stocks, and an efficient market structure specifically 
designed for smaller company stocks that generates additional 
liquidity and protects investors may have greater marginal 
benefits for smaller companies than a one-size-fits-all 
structure.

Q.2. Chairman White also shared that staff has been working 
with exchanges to develop a plan to implement a pilot program 
allowing smaller companies to use wider tick sizes.
    Could you provide an update on the progress the SEC has 
made in developing a pilot program and when I might expect the 
implementation of the pilot program?

A.2. At Chair White's instruction, SEC staff in the Divisions 
of Trading and Markets and Economic and Risk Analysis are 
continuing to work with the exchanges as they develop and, if 
possible, present to the Commission for its consideration a 
plan to implement a pilot program regarding tick sizes as soon 
as practicably possible.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                       FROM KEITH HIGGINS

Q.1. Some small businesses and investors have noted that the 
current definition of ``general solicitation'' is very broad. 
Does the Commission plan to provide additional clarification on 
what ``general solicitation'' means and how the concept can be 
applied to a number of common capital raising activities? If 
so, what are some key issues the SEC will address in the 
definition? If not, why not?

A.1. Title II of the JOBS Act mandated that the Commission 
amend Rule 506 of Regulation D to permit general solicitation 
and advertising in Rule 506 offerings, provided that all 
purchasers of the securities are accredited investors and the 
issuer takes reasonable steps to verify that such purchasers 
are accredited investors. The Commission adopted Rule 506(c), 
which permits the use of general solicitation and advertising 
in offerings relying on the exemption. In connection with the 
issuance of the new exemption, some have raised questions about 
what activities may be considered to be a general solicitation.
    As you may know, the concept of general solicitation in 
connection with private offerings has been in existence for 
many years. Although the Commission's rules, including new Rule 
506(c), do not provide a definition of general solicitation, 
the Commission has over the years provided guidance with 
respect to general solicitation and the analysis for 
determining whether a specific communication or activity 
constitutes a general solicitation for the offer or sale of 
securities. That guidance did not change with the adoption of 
Rule 506(c). As a general matter, since the determination of 
whether a specific communication or activity constitutes a 
general solicitation is dependent on the particular facts and 
circumstances, it is difficult to provide additional generally 
applicable guidance that would be helpful in this area beyond 
what is already provided. I anticipate that some of the 
concerns about what may constitute a general solicitation may 
diminish as companies and their advisers become increasingly 
familiar with new Rule 506(c). Commission staff will continue 
to carefully monitor developments and consider whether there is 
any more specific guidance we could issue that may be useful. 
As always, the Commission staff is available to consult with 
companies and their advisers about questions that may arise in 
connection with the use of the new rule.

Q.2. Regarding the verification of accredited investors in 
generally solicited offerings, will the Commission provide 
written clarification on application of the principles-based 
approach in common situations? For instance, if the investors 
are members of established angel groups, accredited investor 
platforms, or have made previous investments in Rule 506 
offerings, could the issuers confirm their participation and 
reasonably believe these investors are accredited?

A.2. As you know, Title II of the JOBS Act mandated that the 
Commission amend Rule 506 of Regulation D to permit general 
solicitation and advertising in Rule 506 offerings, provided 
that all purchasers of the securities are accredited investors 
and the issuer takes reasonable steps to verify that such 
purchasers are accredited investors. In adopting Rule 506(c) to 
implement Title II, the Commission considered a number of 
approaches and the comments received, ultimately adopting a 
principles-based method of verification along with four 
nonexclusive methods of verifying the accredited investor 
status of natural persons. In so doing, the Commission 
concluded that a general requirement that issuers take 
``reasonable steps to verify'' that the purchasers are 
accredited investors combined with a nonexclusive list of 
verification methods deemed to meet this requirement would 
maintain the flexibility of the verification standard while 
providing additional clarity and certainty to issuers if one of 
the specified methods is used. The adopting release provides 
guidance with respect to the methods for verifying accredited 
investor status.
    Under the principles-based method, an issuer would look at 
the particular facts and circumstances of each purchaser and 
transaction to determine the steps that would be reasonable for 
verifying the purchaser's accredited investor status. In the 
adopting release, the Commission identified a number of factors 
that should be considered under this analysis, such as:

    the nature of the purchaser and the type of 
        accredited investor that the purchaser claims to be;

    the amount and type of information that the issuer 
        has about the purchaser; and

    the nature of the offering, such as the manner in 
        which the purchaser was solicited to participate in the 
        offering, and the terms of the offering.

    After considering the facts and circumstances of the 
purchaser and the transaction, the more information an issuer 
has indicating that a prospective purchaser is an accredited 
investor, the fewer steps the issuer may have to take to verify 
accredited investor status, and vice versa. The Commission 
adopted this method to provide issuers and market participants 
with the flexibility to use verification methods tailored to 
their specific circumstances, to adapt to changing market 
practices, and to encourage innovative approaches for meeting 
the verification requirement, such as third-party databases of 
accredited investors and verification services.
    The principles-based verification method allows issuers to 
consider the factors you identified, specifically, membership 
in established angel groups, the use of accredited investor 
platforms, and investments in previous Rule 506 offerings. A 
person's investments in previous Rule 506 offerings or 
membership in an established angel group is information about 
the person that may affect the likelihood of the person being 
an accredited investor and therefore may be useful in 
determining the steps that would be reasonable for an issuer to 
verify the person's accredited investor status. The issuer 
would, of course, still need to consider any other relevant 
facts in making its final determination about the person's 
accredited investor status.
    In addition to the principles-based verification method, to 
provide greater certainty to those issuers seeking it, the 
Commission provided a nonexclusive list of methods an issuer 
may use to satisfy the verification requirement. These methods 
include, among other things: reviewing copies of any IRS form 
that reports the income of the purchaser and obtaining a 
written representation that the purchaser will likely continue 
to earn the necessary income in the current year; or receiving 
a written confirmation from a registered broker-dealer, SEC-
registered investment adviser, licensed attorney, or certified 
public accountant that such entity or person has taken 
reasonable steps to verify the purchaser's accredited status.
    Of course, as questions arise in connection with the use of 
the new rule, Commission staff will be available to consult 
with companies and their advisers.
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