[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE JOBS ACT AT FOUR: EXAMINING
ITS IMPACT AND PROPOSALS TO
FURTHER ENHANCE CAPITAL FORMATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
APRIL 14, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-82
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee BILL FOSTER, Illinois
RANDY HULTGREN, Illinois GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
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Page
Hearing held on:
April 14, 2016............................................... 1
Appendix:
April 14, 2016............................................... 43
WITNESSES
Thursday, April 14, 2016
Atkins, Hon. Paul S., Chief Executive Officer, Patomak Global
Partners, LLC.................................................. 5
Beatty, William, Director, Division of Securities, Washington
State Department of Financial Institutions, on behalf of the
North American Securities Administrators Association, Inc...... 6
Griggs, Nelson, Executive Vice President, NASDAQ................. 8
Keating, Raymond J., Chief Economist, Small Business &
Entrepreneurship Council....................................... 10
Laws, Kevin, Chief Operating Officer and Chief Investment
Officer, AngelList............................................. 12
APPENDIX
Prepared statements:
Atkins, Hon. Paul S.......................................... 44
Beatty, William.............................................. 55
Griggs, Nelson............................................... 68
Keating, Raymond J........................................... 74
Laws, Kevin.................................................. 89
Additional Material Submitted for the Record
Maloney, Hon. Carolyn:
Written statement of the University of Denver Sturm College
of Law..................................................... 100
Royce, Hon. Ed:
Written statement of the Credit Union National Association... 107
THE JOBS ACT AT FOUR: EXAMINING
ITS IMPACT AND PROPOSALS TO
FURTHER ENHANCE CAPITAL FORMATION
----------
Thursday, April 14, 2016
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Royce,
Neugebauer, McHenry, Huizenga, Stivers, Hultgren, Ross, Wagner,
Messer, Schweikert, Poliquin, Hill; Maloney, Sherman, Hinojosa,
Lynch, Scott, Himes, Foster, Carney, and Murphy.
Also present: Representative Emmer.
Chairman Garrett. Good morning. The Subcommittee on Capital
Markets and Government Sponsored Enterprises will hereby come
to order. Today's hearing is entitled, ``The JOBS Act at Four:
Examining Its Impact and Proposals to Further Enhance Capital
Formation.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Also, without objection, members of the full Financial
Services Committee who are not members of the subcommittee may
sit on the dais and participate in today's hearing.
I welcome all the members on the panel today.
And with that, I now recognize myself for 3 minutes for an
opening statement.
It is not often that Congress can look back at a major
piece of legislation and be able to measure the tangible
positive impact of it that it is having on people's lives and
our economy. Too often, we find ourselves, especially in this
committee, counting up the costs of the many misguided
Washington mandates and comparing them with the so-called
phantom benefits promised by the bureaucratic class and the
sponsors of those regulations.
Fortunately, that is not the case today. The Jumpstart Our
Business Startups, or the JOBS Act, signed into law literally 4
years ago this month, has, by I think most measures, been a
resounding success for our economy and for the future of
innovation here in the United States.
The JOBS Act did this not by creating new Federal mandates
or spending taxpayers' money on wasteful government programs,
but instead by empowering entrepreneurs and innovators who were
struggling under a regulatory regime that was better suited for
1934 than it was for 2016.
So, just consider some of these facts.
First, the JOBS Act has led to a resurgence in the initial
public offering, the IPO market, with some 85 percent--yes, 85
percent--of IPOs since April 2012 coming from emerging growth
companies.
Second, companies have raised some $50 billion under the
new Reg D provisions that allow businesses to solicit an
offering to the general public.
Third, while the newly modernized Reg A-plus is only a year
old, businesses are already beginning to issue securities under
that exemption.
And finally, recent reports indicates that the SEC has
already received up to 30 applications for portals under the
new crowdfunding rules, which are set to go into effect next
month.
So while it is clear that many parts of the JOBS Act are
working as intended, the point of the hearing that we are
having today is not to say how great we are for doing that, and
job well done. For starters, because the Senate tried its best,
you would say, back in 2012 to neuter some of the provisions,
especially in the crowdfunding title, and the SEC has also
taken some liberties with other rulemakings, the JOBS Act
obviously needs a little bit of fixing.
So I want to thank the gentleman from North Carolina, Mr.
McHenry, for putting forward the Fix the Crowdfunding Act. What
does it do? It makes some necessary changes to help ensure that
Title III reaches its full potential.
And additionally, I have put forward a bill called the
Private Placement Improvement Act, which will prohibit the SEC
from implementing some burdensome new regulations on Reg D
issuers that are uncalled for in the JOBS Act.
We will also consider two other bills today. Mr. Emmer, who
is here today with us, has introduced an innovative bill that
would create a safe harbor, if you will, for so-called micro-
offerings. And Mr. McHenry, again, has another bill, which
would raise the threshold for when venture capital funds would
have to register with the SEC.
So finally, in addition to these targeted fixes, I am also
interested in hearing from the witnesses about further areas
that Congress should be addressing in order to maintain the
competitiveness in our capital markets. For example, we should
be exploring the cumulative burden that comes with being a
public company, including, unfortunately, some of the
ridiculous disclosure requirements of the Dodd-Frank Act, as
well as the outside influence that proxy advisor firms have in
the corporate government arena.
It is also time, finally, to think more about the lack of
research and liquidity that exists for some public companies
and whether the Equity Research Global Settlement of 2003 swung
the pendulum just too far and has led to a dearth of research
for small cap funds.
So these are all very important questions, and I look
forward to hearing from each one of our witnesses today.
And with that, I now yield to the ranking member of the
subcommittee, the gentlelady from New York, Mrs. Maloney, for 5
minutes.
Mrs. Maloney. Thank you so much for calling this important
hearing.
I thank all of our panelists for attending, particularly
Mr. Beatty and Mr. Griggs, who is from NASDAQ, which is located
in the district I am privileged to represent. I look forward to
all of your testimony today.
This hearing will examine four legislative proposals that
are intended to make it easier for companies to raise capital.
While I am interested in hearing our witnesses' thoughts on
these proposals, I do have some serious concerns with some of
the bills as they are written.
H.R. 4850, the Micro Offering Safe Harbor Act, creates
three entirely new exemptions from the requirement to register
securities. First, the securities will be exempt from the
registration requirement if the buyer has a ``substantive
preexisting relationship'' with an officer of the company
before he buys the securities.
Second, the securities will be exempt as long as the
company ``reasonably believes'' that there are no more than 35
buyers who have relied on these new exemptions in the previous
year.
And finally, the securities will be exempt if the company
hasn't sold more than $500,000 of securities in the past year.
Based on the title of the bill, I believe that is intended
to apply only to very small offerings of securities, or ``micro
offerings'' as they are so called. However, the way I read the
bill, it actually applies to all offerings, no matter how
large, as long as the buyer has a substantive preexisting
relationship with an officer of the company before he buys the
security.
I am concerned that this would blow a hole in the
securities law because a substantive preexisting relationship
could even be developed during the company's sales pitch to the
investor.
It is important to note that we are already seeing a trend
toward the use of unregistered private securities rather than
publicly registered securities. In fact, the private securities
market is now larger than the public securities market in 2014.
Companies raised $2.1 trillion through the private securities
market, compared to only $1.3 trillion through the public
securities market.
I believe we need to take a step back and think about
whether this trend is a good thing. Clearly, this means that
more securities are being sold with fewer investor protections.
Are investors in these securities being harmed or exposed
to risks that they don't fully understand? Or are investors
capable of bearing these risks, which they fully understood
before they purchased the securities? These are important
questions that I think we need to ask 4 years after the JOBS
Act.
Finally, another bill we will consider today, H.R. 4854,
would significantly expand the number of investors who can
invest in venture capital funds that are exempt from SEC
oversight. Under current law, a fund can be exempt from SEC
oversight if it has less than 100 investors and its securities
are not offered publicly.
A fund with fewer than 100 investors which is not marketed
publicly poses fewer investor protection concerns than large
funds that have lots of retail investors in them. This bill
would raise that threshold from 100 investors to 500 investors,
but only for venture capital funds.
I would like to hear from our witnesses as to why this
change to such a longstanding rule is necessary, and what
problem we are trying to solve.
So I would like to thank all of our witnesses for being
here today, and I look forward to a robust discussion.
Thank you so much, and I yield back the balance of my time.
Chairman Garrett. I thank the gentlelady, and for her
questions that she raises there, as well.
I now recognize the vice chairman of the subcommittee, Mr.
Hurt, for 2 minutes.
Mr. Hurt. Thank you, Mr. Chairman. I thank you for holding
today's hearing.
I am pleased that this subcommittee is continuing its
efforts to enhance the strength and vitality of our domestic
capital markets. Four years ago, this committee achieved
bipartisan success with the JOBS Act, and I remain hopeful that
we can continue to improve upon that work.
Capital formation for small companies is critical to the
success of our economy. And as I travel across Virginia's 5th
Congressional District, my district, I am regularly reminded of
how our Nation's small businesses and startups are in dire need
of capital, how they have trouble accessing capital, and how
their potential success is often thwarted by outdated and
unnecessary policies imposed here in Washington.
While small companies are at the forefront of innovation
and job creation, these same companies often incur obstacles in
obtaining funding in the capital markets. The JOBS Act sought
to remove some of these burdens by recognizing that our
securities regulations are often written for larger companies.
Today, we have four additional legislative proposals that
all seek to expand and improve access to capital for our small
businesses and startups. These proposals are aimed at amending
the JOBS Act to enhance capital formation for small companies
and their investors.
Small companies, as we all know, are the backbone of our
economy and our Nation's most dynamic job creators. We must do
everything possible to help them succeed. And if we can do so
without compromising investor protection and transparency, then
we must embrace these ideas.
The ideas we are discussing today are a step in the right
direction, and I thank the sponsors for their work on this
legislation.
I look forward to the testimony of our distinguished
witnesses, and I thank you for your appearance before our
subcommittee today.
Mr. Chairman, I thank you, and I yield back the balance of
my time.
Chairman Garrett. I thank the gentleman.
We now turn to our panel before us.
Some of you have been here before; some have not. You will
each be recognized for 5 minutes, and without objection, your
full written statements will be made a part of the record.
We will begin with Mr. Atkins.
Welcome to the panel once again. It is good to see you. And
you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE PAUL S. ATKINS, CHIEF EXECUTIVE
OFFICER, PATOMAK GLOBAL PARTNERS, LLC
Mr. Atkins. Good morning. Thank you very much, Chairman
Garrett, Ranking Member Maloney, and members of the
subcommittee, for inviting me to testify today.
My name is Paul Atkins. I am CEO of Patomak Global Partners
here in Washington, D.C.; and for 6 years, ending in 2008, I
served as SEC Commissioner.
Small businesses are vital to our Nation's economy.
Startups and young companies are a primary driver of job
creation.
If we are serious about spurring real economic growth,
creating more jobs outside of Washington, D.C., and breaking
down our two-tiered economy, we do not need higher taxes or
more government spending. Instead, we need more entrepreneurs
and small businesses and a sensible regulatory environment in
which these individuals and firms can succeed.
The bipartisan JOBS Act proves that you do not need
hundreds or thousands of pages of complex legislation to help
Main Street businesses and protect consumers and investors. At
only 22 pages, the JOBS Act has already achieved significant
results for small businesses seeking access to much-needed
capital while at the same time maintaining important investor
protections and providing more opportunities for Americans to
put their hard-earned dollars to work investing in America's
future.
Thanks in large part to the IPO On-Ramp, 2014 was the best
year for IPOs since 2004, with emerging growth companies taking
advantage of the on-ramp's scale, disclosure, and reporting
requirements, all of which make public offerings more
attractive for smaller companies while preserving essential
information for investors. More IPOs generally means more jobs.
Thanks to Titles II and IV, we are also seeing issuers and
investors starting to take advantage of offerings using general
solicitation and the amended Reg A-plus exemption. Just 4 years
after its enactment, the JOBS Act has helped rationalize and
modernize the current regulatory environment to better serve
small companies and investors alike, but the job is not done.
The Obama Administration continues to bury small businesses
under record amounts of red tape. I believe that a major cause
of the uncertainty still handcuffing our economy is, in fact,
government policy, particularly the sweeping Dodd-Frank Act.
The real tragedy behind Dodd-Frank and the hundreds of
other major rules flowing from Washington every year is that
consumers, investors, and small businesses are harmed the most.
It is no surprise, then, that major small business surveys
recently have highlighted government regulation and access to
credit as being among the most significant growth concerns
currently facing small companies.
The SEC, which has a statutory mandate to facilitate
capital formation, has also neglected small business or, worse,
firmly placed itself in the way of positive reform. The SEC
could have implemented the provisions of the JOBS Act on its
own, but instead the agency did neither, burying its head in
the sand while Congress went to work. In fact, instead of
fulfilling its core mission, the SEC has misprioritized its
resources by focusing first on Dodd-Frank rules that do not
address the real causes of the financial crisis and only add to
the regulatory burden already weighing on our economy.
Finally, when faced with a clear JOBS Act mandate to
simplify and lift the ban on general solicitation, the SEC
chose on its own to slow the pace of reform by issuing an
additional rule proposal to amend Reg D in ways that would
fundamentally undermine the purpose of the JOBS Act.
The proposal would add unnecessary costs and burdens on
small issuers and investors seeking to take advantage of
general solicitation under Section 506(c)--for example, first,
by making issuers submit two additional Form D filings; second,
by imposing a draconian 1-year ban on using Rule 506 for
failing to comply with the Form D filing requirements even for
a foot fault; and third, by forcing issuers to file all general
solicitation materials with the SEC.
Now, I have talked to lawyers, law professors, and venture
capital investors in Silicon Valley and elsewhere, and they
advise would-be issuers to shun--not use at all--506(c)
offerings because of the uncertainty and the potential for
``gotcha'' enforcement actions by the SEC and, I think, by the
States, as well. Indeed, because the nature of these nonpublic
offerings means that it is hard to define a beginning and an
end to the potential securities offering, the potential for
``gotcha'' enforcement actions with these offerings is real and
a trap for the unwary.
Chairman Garrett's bill, the Private Placement Improvement
Act, would go a long way towards allowing issuers to use 506(c)
in the manner Congress intended.
Over the last 5\1/2\ years, this committee has been at the
forefront of helping America's small businesses grow and create
jobs. I thank you for all your efforts and for the opportunity
to testify here today.
Thank you very much.
[The prepared statement of Mr. Atkins can be found on page
44 of the appendix.]
Chairman Garrett. And I thank you.
Next, Mr. Beatty, welcome, and you are recognized for 5
minutes.
STATEMENT OF WILLIAM BEATTY, DIRECTOR, DIVISION OF SECURITIES,
WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS, ON
BEHALF OF THE NORTH AMERICAN SECURITIES ADMINISTRATORS
ASSOCIATION, INC.
Mr. Beatty. Thank you.
Good morning, Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee. My name is Bill Beatty. For the
past 30 years I have worked as an attorney in the securities
division of the Washington State Department of Financial
Institutions, and since 2010, I have served as the department's
securities director.
I am also a member of the North American Securities
Administrators Association (NASAA), having served as the
Association's president from 2014 to 2015. Since October of
2015, I have served as Chair of NASAA's Committee on Small
Business Capital Formation.
My many years in securities regulation have led me to the
inescapable conclusion that successful capital formation must
include robust investor protection. I am honored to testify
before the subcommittee today on these four legislative
proposals.
The first bill, the Private Placement Improvement Act,
limits the SEC's authority to revise filing requirements for
Regulation D. As we know, Title II repealed the longstanding
prohibition on general solicitation and advertising under Rule
506. State securities regulators remain deeply concerned about
the potential negative impact of these changes on investors.
When the SEC adopted these rules to implement Title II in
2013, it also voted on proposed rules that would mitigate the
risk to ordinary investors in 506 offerings. These included
requiring a prefiling of Form D when issuers intended to
advertise and imposing penalties on issuers who failed to file
Form D. Form D is crucial to State securities regulators like
me because it is often the only information we can use to
determine if an issuer is conducting an offering in compliance
with a lawful exemption.
By prohibiting the SEC from adopting these commonsense
investor reforms, the bill would tie the hands of the SEC to
implement the few investor protections it has adopted or
proposed in connection with Rule 506 and undercut the SEC's
most promising efforts to gather data and additional
information about the 506 marketplace. NASAA is strongly
opposed to any action by Congress to diminish the ability of
the SEC to address the risks to investors resulting from
lifting the ban on general solicitation.
Finally, we take issue with the suggestions that filing of
Form D is an onerous regulatory or compliance burden. Form D is
a short form filed electronically. It captures 8 pages of
information and is minimal, relative to the information in the
issuer's offering documents.
Moving to the Micro Offering Safe Harbor Act, which would
amend section four of the Securities Act and also preempt State
securities offerings, we remain--we are deeply concerned about
this bill as well. Notwithstanding the title, the new exemption
would not be limited to micro offerings. In fact, it would
permit the raising of unlimited amounts of money.
The bill would not prohibit general solicitation,
disqualify bad actors, limit offering amounts, or even permit
notice filings to State or Federal regulators. It would not
impose a holding period or other restrictions on resale of
securities purchased under these new exemptions, making these
offerings highly susceptible to price manipulation and pump-
and-dump schemes.
The bill would also make the task of policing the
unregistered securities marketplace much more difficult for
securities regulators. The new exemption established by the
bill would likely supplant Rule 506, but without the basic
information provided in Form D.
Beyond these overarching concerns, each of the new safe
harbors is discussed in my written comments.
Moving finally to the Fix Crowdfunding Act--proposing
revisions to Title III, State securities regulators understand
the theoretical basis for several of the proposed amendments
and we do not necessarily oppose them. We also appreciate
Congress' frustration that Federal crowdfunding has yet to take
effect. It has been 4 years since the passage of the JOBS Act,
and during that time dozens of States have adopted and
implemented intrastate crowdfunding exemptions.
However, the critical point for Congress today is that
there is no answer to the question of how to fix Federal
crowdfunding because we do not yet know what will work, what
won't work, or what the new marketplace will look like. There
is no data whatsoever about Federal crowdfunding, and only
limited data about what is working at the State level.
By contrast, several years from now there will be a wealth
of data both from State and Federal crowdfunding regimes.
State securities regulators urge Congress to refrain from
amending Title III of the JOBS Act at this time. We believe
that to enact legislation at this point would be
counterproductive and premature.
Instead, we urge Congress to closely monitor the
implementation of Regulation CF, State crowdfunding exemptions,
to conduct oversight and gather information about the new
marketplace. With the coming implementation of Federal
crowdfunding rules and with intrastate crowdfunding already
available in the majority of States, we shall very soon learn
whether and how these new capital-raising tools will be used.
Thank you again, Chairman Garrett and Ranking Member
Maloney, for the opportunity to testify before the subcommittee
today.
[The prepared statement of Mr. Beatty can be found on page
55 of the appendix.]
Chairman Garrett. I thank you, Mr. Beatty.
Next up, Mr. Griggs. Welcome, and you are recognized for 5
minutes.
STATEMENT OF NELSON GRIGGS, EXECUTIVE VICE PRESIDENT, NASDAQ
Mr. Griggs. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee, for the opportunity
to testify on JOBS Act four. The work of this subcommittee to
push forward the JOBS Act is a great achievement of Congress
and a shining example of bipartisanship and statesmanship.
However, there are issues that remain affecting private
companies' view of the public markets today.
Capital formation and job creation are the NASDAQ's DNA. We
brought the capital markets a trusted listing venue and the
changed view that companies can go public earlier in their
growth cycle, dispelling a common Wall Street perception about
when companies should go public. NASDAQ recognized that while
most companies wanted access to capital, investors also want
access to companies at earlier stages of the growth cycle.
In the same vein, since the enactment of the JOBS Act,
NASDAQ has created the NASDAQ Private Market (NPM). We
established NPM to meet the unique needs and challenges of
today's top growth companies.
Thus, NASDAQ, we feel, is uniquely qualified to speak about
both public and private markets.
Four years have passed and the evidence is clear: The JOBS
Act has successfully helped hundreds of companies to go public
while generating new dynamics in the private space. In fact,
785 companies have gone public, leveraging the Emerging Growth
Companies Act, and have raised over $103 billion to expand,
hire, and compete on a global stage. And approximately 1,000
registration statements have been filed with the SEC
confidentially.
From our vantage point, the JOBS Act has not resulted in
diminished investor protection, an important outcome as you
consider moving forward with reforms.
Without question, NASDAQ believes the most successful
provision of the JOBS Act has been the ability for companies to
file confidentially. This has been most evident in the
increased number of IPOs in the biotech and life science
sectors. Many quality companies have been able to work with the
SEC to finalize their registration without public disclosure of
their competitive proprietary information, and companies can
better manage their decisions to go public as they evaluate
market conditions.
Because confidential filing has improved the IPO process
without decreasing investor protection, we believe Congress
should go one step further and allow companies of all sizes to
file on a confidential basis and also allow other types of
registration statements to be filed confidentially.
So turning to some challenges that we see facing public
companies today that I hear day in and day out from our listed
companies, which create a negative light on entrepreneurship
views of going public, for example, certain investors who
accumulate long positions today are required to do public
disclosures of their holdings, but there are no corresponding
obligations for short-sellers to do so, even though the same
policies of transparency, fairness, and efficiency apply.
We believe that some enhanced disclosure of short positions
that matches disclosure for long requirements is warranted.
From a company perspective, this lack of transparency has a
real negative impact because it deprives a company of insights
into trading activity and limits their ability to manage and
engage with investors.
With respect to proxy advisory firms, we remain concerned
that these firms do not always conduct their standard-setting
in a fair and transparent manner. We are pleased that the SEC
issued guidance regarding the use by investment advisories--
advisors of proxy advisory firms, but it is apparent that much
more work needs to be done here.
Last year, NASDAQ partnered with the U.S. Chamber on a
survey of public companies' experience in the 2015 proxy
season. Over 155 companies responded, and it is apparent that
companies continue to have difficulty providing input to
advisory firms or even having errors corrected.
Lastly, with respect to the PCAOB, public companies,
especially smaller ones, face increasing auditing costs. While
companies do not object to costs that provide equal investor
benefit, the companies claim that some of these costs are the
result of nonsensical, one-size-fits-all application of
guidance and feel they are stuck because auditors claim that
they must comply with the PCAOB. For these reasons, we believe
the PCAOB should be required to establish an ombudsman's office
as a resource for companies to bring up issues that they have.
So I want to commend the subcommittee for its continued
work to help capital formation with the bipartisan passage of
the last 15 capital formation bills, including the RAISE Act,
authored by Representative Patrick McHenry and strongly
supported by NASDAQ.
I also want to thank you, Mr. Chairman, for your leadership
in offering an important bill, the Main Street Growth Act, to
foster creation of venture exchanges. We certainly appreciate
the discussion on this and we look forward to being a
participant moving forward.
The subcommittee has asked NASDAQ to comment on the four
proposals aimed at fostering capital formation, and I have done
so in my written testimony. We are in favor of the efforts here
and look forward to supporting them as they move forward.
Thanks very much for your time, and I appreciate the
attention.
[The prepared statement of Mr. Griggs can be found on page
68 of the appendix.]
Chairman Garrett. Thanks for your testimony.
Next up, Mr. Keating. Welcome, and you are recognized for 5
minutes.
STATEMENT OF RAYMOND J. KEATING, CHIEF ECONOMIST, SMALL
BUSINESS & ENTREPRENEURSHIP COUNCIL
Mr. Keating. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, thank you very much for hosting
this important hearing today on the JOBS Act and the need to
enhance capital formation. And I appreciate the invitation.
My name is Raymond Keating. I am chief economist with the
Small Business and Entrepreneurship Council. We are a
nonpartisan, nonprofit advocacy and research and training
organization dedicated to protecting small business and
promoting entrepreneurship.
Access to capital has been a key issue, a central issue for
SBE Council since our very founding. Indeed, access to
financial capital, whether via equity or debt, is vital for
entrepreneurs seeking to start up, operate, or expand their
businesses. But at the same time, gaining access to capital has
remained an enduring challenge for many, if not most, small
businesses.
Long after this last recession and the start of this
recovery, the value of small business loans outstanding is
still down notably from the recent high set in 2008. In fact,
there has been really no growth over the last decade. When you
look again at the small business share of business loans, the
value has also declined markedly; also the number of small
business loans.
On the equity side, angel investment is a critical source
of funding for startups and early-stage businesses. But here,
again, the story has been one of underperformance and
sluggishness in recent years. For all of 2014, the most recent
year that we have full data for, those numbers are still down
from the recent high hit in 2007.
So based on these numbers, the struggle for entrepreneurs
to gain access to the financial resources needed to start up,
operate, or grow continues to be difficult. There are many
reasons for this, including the state of the economy; certainly
the policy environment, including regulations, and not just
regulation directly imposed on small businesses but also on
financial institutions. After all, they are the source of
capital.
The bottom line is that small businesses need more avenues
to expand access to financial capital. In the midst of these
struggles, of course, the JOBS Act was passed by Congress'
bipartisan effort and signed by the President 4 years ago. And
the focus here was on helping to stimulate the U.S. economy by
promoting capital formation.
There have been clear positives resulting from the JOBS
Act. We have heard some of that already.
I looked at an interesting summary analysis done by
Locavesting.com, and it is outlined in my testimony. One point
I would like to highlight from that is under Title II of the
JOBS Act, allowing accredited investor crowdfunding, in effect,
by letting private companies conducting private placement under
Reg D Rule 506 to publicly market the offering. Before that, of
course, they couldn't do that.
And we saw the results. They note, Locavesting, that in the
first 2 years there have been more than 6,000 offerings
conducted under Title II.
Of course, Title II goes into effect on May 16th of this
year, allowing for public, including non-accredited investors--
crowd--investors--investment crowdfunding to take place on SEC-
sanctioned funding portals. As I say, like Kickstarter for
investing, crowdfunding promises to release an immense pool of
capital that has been locked away from entrepreneurs--those
entrepreneurs in search of start-up and growth capital.
Even given the significant and positive changes being
brought about for entrepreneurs and investors with the JOBS
Act, there are areas in need of improvement. A serious concern
persists regarding extra government regulation or placing too
many limitations on the ability of entrepreneurs to gain access
to capital and/or on investors' abilities to make investments
in entrepreneurial ventures.
In terms of making headway toward reducing the costs for
entrepreneurs, SBE Council supports the four legislative
initiatives that we are considering here today.
In terms of one of those, the Private Placement Improvement
Act, that would amend Federal securities law to ensure that
small businesses do not face complicated and unnecessary
regulatory burdens when attempting to raise capital through
private securities offerings under SEC Regulation D, we are
certainly on board with that effort and the other pieces of
legislation offered here today.
To sum up, the effort behind the JOBS Act was to expand
entrepreneurial opportunities in the financial area and in the
broader economy. Those four legislative measures would make
further headway in a positive, pro-entrepreneur direction.
Thank you for your time and attention, and I look forward
to answering any of your questions.
[The prepared statement of Mr. Keating can be found on page
74 of the appendix.]
Chairman Garrett. Thank you.
Last but not least, Mr. Laws, you are welcome and
recognized now for 5 minutes.
STATEMENT OF KEVIN LAWS, CHIEF OPERATING OFFICER AND CHIEF
INVESTMENT OFFICER, ANGELLIST
Mr. Laws. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee, for this opportunity.
I am here as the chief operating officer of AngelList, an
online service that connects companies seeking funding with
both angel investors and professional investors.
Since the JOBS Act was passed 4 years ago, and the SEC
issued several clarifying letters, AngelList launched what we
call our syndicate service. A syndicate allows an experienced
accredited investor who is putting his or her own money into an
early-stage startup to make that investment available to other
angels and professional investors online.
Online investors are grouped into a single fund that
follows along with the lead investors. Companies like this
option because it allows them to deal with just one investor
and to raise capital more quickly; and investors like it
because they get the protection of an experienced lead investor
with skin in the game.
All of this was enabled by the JOBS Act and subsequent SEC
rulings.
Since launching syndicates in 2013, we have helped over a
quarter-billion dollars in capital reach early-stage startups.
And I know that number seems small by Wall Street standards,
but these are the newest companies that just need a little
money to get off the ground. That quarter-billion dollars went
into almost 1,000 companies.
And we are just one of many such platforms. For example,
CircleUp focuses on helping consumer products companies the way
we help technology companies, and there are many more.
So first, I want to thank Congress--in particular, the
leadership of this committee, Congressman McHenry, and the
White House--for the changes brought about by the JOBS Act. It
helped many new companies, ranging from those producing
electric bicycles to Uber; from Spire Global, that launches and
rents imaging satellites by the hour, to Cruise Automation,
which General Motors just paid over $1 billion to acquire so
they can compete in self-driving cars.
All of these new companies raised early money on AngelList,
all because of the JOBS Act. It not only helped these companies
create jobs, but they are also producing innovations that help
the American economy.
Second, I want to discuss a few of the bills under
consideration by this committee. As online fundraising becomes
more common because of the JOBS Act, companies are bumping up
against the limit of 99 investors acting as a group that can
invest in a company.
On our platform alone, we have hit that limit dozens of
times, leaving tens of millions of dollars that didn't go into
good startups. And we are not alone. We represent a small
portion of the capital invested in startups.
The Angel Capital Association includes many angel groups
with more than 99 members. They need to reduce the amount given
to growing companies sometimes to comply with this law.
Raising the limit to 499 would help with capital formation
at that early stage. H.R. 4854 updates the law for today's
technologies but maintains reasonable limits that keep it
focused only on investment in small venture opportunities so
that there aren't unintended consequences. Anybody seeking to
break this law can already do so by ignoring the 99-investor
limit, so this law simply provides guidelines for legitimate
players to help companies get capital that they need legally.
Next up, crowdfunding. While AngelList has worked only with
accredited investors for the last few years, some of the
opportunities on AngelList have been targeted to larger groups
of online investors, the so-called accredited crowdfunding. As
a result, we devised methods that protect investors' interests
while still encouraging capital formation for good companies.
Unfortunately, many of those innovations would not be legal
for unaccredited investors under the crowdfunding rules.
AngelList filed comments with the SEC on the rules and I have
attached that letter as part of my written testimony.
H.R. 4855 takes into account the experience AngelList and
others have had in the real world with accredited investors
over the last 3 years. The investor protections of a lead
investor and syndicate, for example, would be made legal for
crowdfunding, also.
Additional measures ensure that crowdfunding doesn't become
so onerous that only companies accredited investors don't like
would use it. I applaud the goal of preventing fraud, but we
have to do it in ways that don't simply guarantee low returns
for the crowd while giving wealthy investors first look at the
good opportunities.
Finally, on H.R. 4852, the Private Placement Improvement
Act, I have also included our letter to the SEC in my written
testimony. We support the SEC's stated goals of information-
gathering and transparency. Unfortunately, the draft
regulations currently under consideration wouldn't just
measure; they would adopt rules that startups would most
certainly violate by accident.
For example, startups don't have the money to hire lawyers
before they raise the money, but the proposed rules say they
should already know they need to file 15 days before even
mentioning their fundraising--something they would only learn
from their lawyer. In our letter we proposed several ways the
SEC could use technology to achieve the same transparency
without impairing early-stage fundraising. These more modern
methods would still be viable under H.R. 4852, which we
support.
In closing, I would like to thank you for this opportunity
to share our experience with the JOBS Act. The start-up
community deeply appreciates your continued attention to the
issues affecting capital formation for very young companies.
This is an unusual issue because most startups that will
benefit from your work don't exist yet. With your continued
support, we hope thousands more of them can make use of the
JOBS Act to do what Congress intended: raise capital more
easily so they can grow, create more jobs, and innovate.
Thank you.
[The prepared statement of Mr. Laws can be found on page 89
of the appendix.]
Chairman Garrett. Thank you.
This is fascinating. I appreciate all the members on the
panel.
I will now recognize myself for 5 minutes for questions.
I will start with Mr. Atkins. You testified on this both in
your testimony and just right now, as well, with regard to the
proposed new restrictions of Reg D and including requirements
as far as filing Form D, and before an offering is completed.
You also just mentioned the fact as far as the 1-year ban on
offerings.
So I am going to give you one, two, three quick questions
to recapsulize that.
One, do these requirements that are out there do anything
to enhance investor protection? Two, from your viewpoint, is
the mere existence--and you sort of touched on this--of these
proposals, even without the SEC implementing them, putting a
lid on the 506(c) market? And three, is this doing--and I will
go back if you want me to--anything that is burdensome now to
your colleague next to you, as far as the State regulators
doing their jobs, if we don't go in that direction?
So the first thing is, is this doing anything to advance
investor protection, what the SEC is doing?
Mr. Atkins. I think when you look at the SEC's own
statements from its economists and whatnot, they show that
there really is no fraud coming out of the JOBS Act, and
especially 506. So I think that is attributable to it.
I don't think that these things are advancing investor
protection at all. I think that what--if anything, it is
dampening--
Chairman Garrett. That is the second point. You said it is
dampening, why? The attorneys are recommending to them--
Mr. Atkins. Right. Basically they are saying that you
should not use 506(c) because of the uncertainty behind it and
there are other ways to do it. And so it is really putting a
damper on the ability of people to make use of the JOBS Act
provisions.
Chairman Garrett. I will throw that same question over--Mr.
Griggs, if you were listening, too, at the same time, in
general, as we go down the three points as far--is there a
dampening effect of the proposed rules? On the flipside, should
we have it for investor protection?
Mr. Beatty. I think that from my conversations with the
lawyers in my community--I'm sorry.
Chairman Garrett. I was going to Mr. Griggs actually on
that one.
Mr. Beatty. I'm sorry. I misheard.
Chairman Garrett. That is okay.
Mr. Griggs?
Mr. Griggs. Yes. NASDAQ is not very involved in Reg D
offering. We don't feel that investor protection, though, as we
have seen it, has been harmed in any way, so we are supportive.
Chairman Garrett. Okay.
And I want to jump down to Mr. Laws on where you were
going. Well, one flippant sort of answer--response to the
problem of--you raise a really crucial aspect is how do these
people get into the marketplace and how do they know what the
rules are without the lawyers there beforehand? How do they get
the money to hire the lawyers?
Should we have a legal aid society for these--I am just
being facetious on--
Mr. Laws. There do exist such things that the startups,
when they first do their fundraising, don't even know those
exist. It is the first thing they think of when they start.
Chairman Garrett. So, Mr. Keating, right now I--maybe right
about now there are oral arguments in the challenge to the
SEC's final Reg A-plus set to begin this morning in the D.C.
Circuit Court. And as you know, as the JOBS Act was being
developed, many reports, including one from the GAO, pointed
out that the maze of State registration requirements was a
direct cause for the lack of Reg A offerings over the years,
and that is basically what we have been sort of hearing this
morning.
In your testimony, you refer to Reg A-plus as the sleeper
of the JOBS Act. Can you just delve in a little bit more as to
what the effect on the Reg A market would be if the State
challenges prevailed in the court arguments today?
Mr. Keating. Sure. The bottom line is, why has Reg A-plus
worked, providing various relief from the regulations you
mentioned?
I am an economist. I like to look at the results. So when
you see reports in terms of this being the sleeper and in terms
of entrepreneurial ventures that have found funding where they
wouldn't have found funding before, for example, this is
exciting stuff.
This is exactly what we want to see done. Why would we want
to backtrack on that for, from what I can see, no good reason
from an investor protection standpoint or--you don't want to
get caught in that regulatory turf game that we see so much in
government, which may be the reason we got into some of this.
Chairman Garrett. I will throw this out to a couple of you.
Maybe I will start with you, Mr. Keating.
You say you like to hear the data and what have you. Mr.
Beatty was raising the argument that so would he, that he would
like to have the data before we move forward on a number of
these--certain ones of these provisions on the State level and
see how it plays out first.
So is that an argument? Maybe we should just be waiting on
this and let the--just put a hold on it, let the SEC continue--
Mr. Keating. What we have seen in our results, as I
mentioned in my testimony, the results of the various titles--
Chairman Garrett. So the results are in.
Mr. Keating. --and what is going on--right. So we see
results; we see positive benefits.
And not just here. There are examples internationally. I
mentioned in my testimony the United Kingdom and what they have
done there and the tremendous growth we have seen in
crowdfunding, both debt and equity crowdfunding there, and they
have done it very smart from a regulatory standpoint, relying
very much on the crowd, if you will.
So there are plenty of examples for us to understand. I, as
an economist, fall back to Economics 101 and understanding
incentives and how the private market works and are there
incentives to present a good, solid platform that provides
great opportunities for investors.
Chairman Garrett. So the two takeaways is, is this working,
and Congress needs to go back to Economics 101 class.
Mr. Keating. Yes.
Chairman Garrett. Okay.
Mr. Keating. Yes.
Chairman Garrett. With that--also a flippant comment--I
will now recognize the ranking member of the subcommittee, the
gentlelady from New York, Mrs. Maloney, for 5 minutes.
Mrs. Maloney. Thank you, Mr. Chairman. And I ask unanimous
consent to place in the record testimony from the University of
Denver.
Chairman Garrett. Without objection, it is so ordered.
Mrs. Maloney. Okay.
Mr. Beatty, I would like to ask you about the Micro
Offering Safe Harbor Act. In your testimony you said that this
bill would expose retail investors to ``literally unlimited
investment risks.''
Can you talk about why you think this bill is so broad? Is
it because companies could sell unlimited amounts of securities
to buyers that they have a preexisting relationship with? Is
that the main challenge that you see with this bill?
Mr. Beatty. Yes, it is one--it is the main challenge I see.
Creating a substantial preexisting relationship is not a
hard task. Certainly, we have seen it down through the years
through SEC interpretations where an issuer can create a
relationship to investors by dealing with a broker-dealer who
has established a relationship.
More recently we have seen basically advice that seems to
authorize the idea that a relationship could be established
through an issuer questionnaire--
Mrs. Maloney. If I could follow up on that--
Mr. Beatty. Certainly.
Mrs. Maloney. --would your view of the Micro Offering Safe
Harbor bill change if a company had to comply with all three of
the requirements in the bill in order to take advantage of the
relief? In other words, what if the bill was limited to
$500,000-worth of securities a year, to no more than 35
investors, and they all had to have a preexisting relationship
with an officer of a company? Would that--
Mr. Beatty. I think that makes it better. If the true
purpose here is to create an offering for micro type of
offerings, that already exists. Rule 504 has been around for
decades, and allows offerings up to $1 million with a very
simple filing.
I would also note that many States--almost all States that
I am aware of--have specific small offering exemptions for
these types of very small capital-raising, usually with a very
minimal notice filing and very low fees.
Mrs. Maloney. In your testimony you noted that you had
serious concerns about the Private Placement Improvement Act
because it would weaken the few existing investor protections
in Rule 506. Can you elaborate on which investor protections
this bill would weaken and which protections do you think are
the most important? Do you think these investor protections are
particularly onerous for companies?
In other words, are any of these protections really
preventing any companies from raising capital?
Mr. Beatty. I think one of the main features of the
Improvement Act would be to allow--would require only one
filing of the Form D. Right now there is a requirement to file
amendments, and of course, the proposed rules posited the idea
of perhaps a prefiling in the case of a general solicitation.
The only data we have available to us in the State on these
types of offerings is the Form D. And unlike the SEC, we look
at them. We run the officers through databases; we check on who
might be selling them.
We are concerned about these offerings, and many times they
are conducted lawfully, but once in a while we will find
something. And perhaps more importantly, if an investor is
solicited and they are unaware of--have questions, they pick up
the phone and they call us. And if the only thing that we can
say is, ``Well, we don't have any information about this; you
should be careful,'' that is really not providing a very good
service to our constituents.
Mrs. Maloney. Thank you.
Mr. Keating, the SEC just recently completed its
crowdfunding rules, which are set up to take effect next month,
and I was a Democratic sponsor of the original bill. Should we
wait until we have some experiences from crowdfunding before we
move forward with the other significant changes in crowdfunding
exemptions?
And also, you mentioned you had studied what had happened
in England. Has crowdfunding been used not only for the private
sector but for public purposes, for good--not-for-profits? Have
they used crowdfunding for public service endeavors also in
England, or is it just limited to private sector investment
opportunities?
Mr. Keating. I can't speak to that. I know early on during
this whole process, one of the examples that was mentioned for
crowdfunding was the Statue of Liberty, the money being raised
on that front.
Mrs. Maloney. Yes.
Mr. Keating. It was done in that manner.
Mrs. Maloney. I think it could be public-funded, too.
Mr. Keating. Right.
Mrs. Maloney. Don't you think we should wait a little bit
before we come forward with a little--all these changes that--
Mr. Keating. No, because I don't--
Mrs. Maloney. The rules haven't even gone into effect.
Mr. Keating. No, I don't, and the reason is, like Mr. Laws
mentioned, we are talking about the entrepreneurs here that
drive our economy, that create jobs, things that we desperately
need. We desperately need more growth and more jobs in this
country, so why would we want to, for example, have any kind
of--again, within the boundaries of what we laid out so far
legally--but why not extend the opportunity to more people? Why
would we want to leave money on the table, if you will, for
those looking to raise funds to build businesses and create
jobs?
So if there is an opportunity, for example, in crowdfunding
in Title III to raise the limit, yes, I think that is a great
idea. My job is to open more opportunity for small businesses
by reducing their regulatory burdens, and I think that is a
great idea.
Mrs. Maloney. My time has expired. Thank you.
Chairman Garrett. The gentlelady's time has expired. Thank
you. Thank you for the questions.
We are joined now by the sponsor of the McHenry bill, Mr.
McHenry.
Mr. McHenry. Thank you, Chairman Garrett, and thank you for
having this hearing, Mr. Chairman.
And I thank you all for your testimony.
I will begin by asking Mr. Keating a question. You say that
angel investment is a critical source for startup and early-
stage business capital, but you also note that angel investment
is still sluggish. What are the dynamics at play?
Mr. Keating. Yes. It is sluggish. I have laid out some
charts in my written testimony.
I think there are all sorts of dynamics at work here. I
mentioned the state of the overall economy, but you have to
look at issues on the public policy front, and I think you have
to look at regulation and how much uncertainty is created. What
are the costs?
From a small business perspective, you have to plug this
whole debate into the overall regulatory picture, and that has
been a very ugly picture from a small business perspective in
recent years.
So where we have--we either have uncertainty in so many
areas, or where we don't we have increased costs. The JOBS Act
has been a wonderful exception to that, where it was a
deregulatory effort, a reform effort that really expanded
opportunity for small businesses to get access to capital.
So yes, I think part of the question on the angel investor
front comes from the regulatory aspect, absolutely.
Mr. McHenry. So as an economist, you can perhaps state this
more succinctly than I, but if you are capped at 99 investors
you have to have 99 much larger investors than perhaps 150
smaller investors. And there is a cost associated with that, is
there not?
Mr. Keating. Absolutely. As I said, you want to--you don't
want to--from a small business, pro-growth, pro-entrepreneurial
perspective, you don't want to be leaving anything--anybody out
of this equation that obviously is--that understands what they
are getting into.
And it is important to mention--fraud is thrown around a
lot, but fraud is not the same thing as risk in the
marketplace; it is not the same thing as business failure; it
is not the same thing as losses. Those things are all going to
happen in the real world of business, so as long as people
understand that--
Mr. McHenry. Mr. Laws, for that point, in your experience,
this 99-investor cap, coordinating investment pools in
conjunction with that--I had this example presented to me
yesterday that one group decided they would only have 84
investors because the length of the hold they believed that
there would be deaths and divorces, and as such, that number
would rise and they didn't want to imperil the longer-term hold
of it.
Are there examples like that, that you could mention to us
today?
Mr. Laws. Most certainly. I have mentioned that as a 99-
investor limit we happen to, at the advice of our lawyers, use
a 90-investor limit for that exact reason, because the courts
will sometimes force you to add new investors when they split
somebody's holding because of a death or a divorce and an
inheritance situation. So it is actually, for practical
purposes, a 90-investor limit or 84-investor limit in this
case.
We are just hitting it more and more often--with
sophisticated accredited investors, I should specify. This is
still within the sophisticated accredited community.
Mr. McHenry. Shifting to the Fixing Crowdfunding Act, we
have--there has been discussion about the problems with Title
III as enacted and the problems with the over 500 pages of regs
that the SEC has written. And so, Mr. Laws, in your opinion, if
Congress doesn't amend Title III of the JOBS Act, will its
intent actually be useful?
Mr. Laws. I think it is actually a little dangerous as it
exists now, primarily because of this risk that what we will
create is a kind of guaranteed set of bad investments. They
won't be fraud; they will just be bad investments because it
will be used by companies that can't raise using the Title II
of the JOBS Act.
And so I would want to make sure that the crowd gets an
opportunity to get into the good investments, so it is
something that the fixes will help balance the investor
protections with making sure that the good investments will
also use Title III.
Mr. McHenry. So at the current pace you see this as a
potential marketplace for major problems.
Mr. Laws. I think it is a danger. I think there are some
good companies that will use it, primarily for publicity. But I
don't see it yet as something that is a true alternative to
Title II for those companies that have access to Title II.
Mr. McHenry. What is the most important thing or two that
you would point out, in terms of our action here in Congress?
Mr. Laws. I think the most important for that side of it
are, first of all, being able to bring in some investor
protections, frankly. There is one section in the Fix
Crowdfunding Act that adds the ability to create these
syndicates, the funds where a lead investor looks out for the
interests of the crowd.
The other is this notion, the 12G problem, so called, where
as soon as you cross $25 million in assets, if you have a large
enough crowd then you have to start registering the same way a
public company does--$25 million is the next financing round
for a successful company. So if you are a high-growth company
you would now avoid crowdfunding because of the danger of as
soon as you raise your next round from a V.C., suddenly you are
not private anymore.
So I think those are two of the primary ones.
Chairman Garrett. The gentleman's time has expired. I thank
the gentleman.
The gentleman from Massachusetts, Mr. Lynch, is recognized.
Mr. Lynch. Thank you, Mr. Chairman.
And I want to thank the members of the panel.
I would like to talk about H.R. 4852, the Private Placement
Improvement Act, so-called.
Mr. Beatty, the Form D--is that required right--is there a
penalty for not filing a Form D?
Mr. Beatty. There is currently no penalty for failure to
file a Form D.
Mr. Lynch. So any talk that we have heard on the panel
today about the problem of filing this and the encumbrance on
companies--they don't have to file this and there is no penalty
if they don't file it, right?
Mr. Beatty. No. I believe that the--I believe that there
may have been one instance where the SEC might have taken
action on the failure to file, but it is not--it is widely
regarded as not an essential form to file, and I believe that
in some places it is routinely not filed.
Mr. Lynch. Right. However, I do know from talking to some
of the State Secretaries of State and Attorneys General that
this exemption under Rule 506 is the--and I will quote here--it
is reported as the most frequently reported fraudulent product
or scheme involved in enforcement actions by State securities
regulators.
Mr. Beatty. Yes, that is correct. In our surveys, in terms
of what types of action States are taking, and what they are--
what is being reported to us in particular, 506 comes up, I
believe, is the second-most popular thing that comes up. That
is not surprising--
Mr. Lynch. Popular meaning what? The most frequent--
Mr. Beatty. More frequent, yes.
Mr. Lynch. --fraudulent product.
Mr. Beatty. Yes, right. And it is not--
Mr. Lynch. Second-most. Okay.
Mr. Beatty. Yes. It is not the most--it is not surprising,
given that it is the vehicle of choice for raising capital in
this country.
Mr. Lynch. All right.
Form D is just four pages. It is not a whole lot of--
Mr. Beatty. It is actually eight pages with three pages--
Mr. Lynch. There are four pages of instructions.
Mr. Beatty. Three pages of instructions, eight pages of
questions and answers that need to be filled out.
Mr. Lynch. Okay. Maybe I don't have it all then. Still,
it's fairly brief and not very complicated, from what I can
see.
As far as enforcement of Rule 506 and the exemptions, what
is the wisdom of preempting States to protect small investors?
I don't get that.
I do think that, as Mr. Keating says, he has a job to do,
but I think that protecting investors from fraud is also part
of the job, as well.
And, Mr. Laws, this is great, this new idea, crowdfunding.
It is very exciting. But if we get into a situation where it is
seen as an area that is rife with fraud and people are being
taken, I think we might have a big disincentive of people
getting involved, smaller investors especially, who are not
sophisticated.
Mr. Beatty, what about taking the State regulator off the
street here and preempting them from conducting enforcement
actions?
Mr. Beatty. I think that certainly enforcement is a big
part of what States do, and anything that hinders our ability
to bring enforcement actions in the appropriate cases is
problematic. I think that in the Rule 506 area we have long
been preempted, since 1996, from requiring any type of--doing
anything except getting a notice filing. And we certainly have
fraud authority.
But the question is--to us is, we appreciate the fraud
authority but enforcement actions take place when people have
already lost money, have already been harmed, their retirement
savings have taken a hit, maybe they can no longer send their
children to--
Mr. Lynch. All right.
Mr. Beatty. --to college.
Mr. Lynch. I only have 38 seconds left, so the bill that is
being offered today by Mr. McHenry would only require filing
after. There would be no prefiling submission, so that
investors wouldn't be able to look at this until after the
offering was made. Is that right?
Mr. Beatty. The current regime for 506 is a post-sale
filing. If we are talking about the Micro Offering Act, that
calls for no filings whatsoever with anybody.
Mr. Lynch. Wow. Okay.
My time has expired. I yield back. Thank you.
Chairman Garrett. The gentleman yields back.
The vice chairman of the subcommittee, Mr. Hurt, is
recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
Mr. Griggs, I was interested in your testimony and your
support for the JOBS Act generally, talking about the
resounding success, embraced by investors and companies, and
especially interested in your statement that the JOBS Act has
not resulted in any trend that diminishes investor protection,
which I think is critical.
Also, in your testimony you said that there are provisions,
however, of the JOBS Act that are scarcely used because they
run contrary to investor expectations. I was wondering if you
could talk a little bit about that.
Mr. Griggs. Sure. There were a handful of things in the
JOBS Act, most notably the ability for companies to reduce the
years of audited filings from 3 to 2. And I think market
dynamics have taken over there and really the investment
community has an expectation for 3 years, so companies--the
overwhelming companies that we work with or talk to and the
advice of their different parties who are taking them public
have not taken advantage of that.
Really, if I had to go back to repeat a point, it really is
the confidential aspect of filings that has been overwhelmingly
well received across the entire community. There were concerns
about whether 21 days was enough for the investment community
to really understand the investment, and I think from the
perspective that we hear, clearly it is, so that has done no
harm whatsoever.
Mr. Hurt. And then the other thing I noted in your
testimony was talking about the beginning of 2016 so far, that
it looks like IPOs are not coming online as quickly as we would
like to see. Can you talk a little bit about that, and what are
things that we can consider to help increase those?
Mr. Griggs. Sure. That really started near the end of 2015,
and I like to separate the market conditions versus companies'
desire to go public.
As a statistic for you, in the first quarter of 2016 we
received just as many applications for companies to go public
as we did in 2015 first quarter. So there is still a very
strong demand for companies to go public, but across all
sectors right now, due to the overall public market volatility,
I think it is very cyclical right now.
You have public companies. Their evaluations have come
down. So we have seen across all sectors a general--again, I
would call it more a cyclical freeze and companies going
public. But by no means should this indicate there is not a
desire to go public or a company that is still leveraging those
key components of the JOBS Act.
So we do feel that there is going to be a bit of an opening
here, hopefully in April, May, which will lead to a better
second half of the year. But it is market conditions, not a
regulatory issue.
Mr. Hurt. Excellent.
And then I had a question for Mr. Atkins and Mr. Keating,
sort of more of a general nature. But when you think back on
the recession in 2008 and then you think about Washington's
response to that in the form of Dodd-Frank, can you talk a
little bit more generally about how important the JOBS Act and
having us in--having policymakers take a close look on how you
streamline regulations, reduce unnecessary burdens from a
regulatory standpoint--how important that is in light of what
Dodd-Frank has given us?
Because I represent a rural district, 23 counties and
cities. We have a major university in Charlottesville that
where we have small businesses that are eager and looking for
capital, but because of Dodd-Frank have had tremendous
difficulty in accessing capital.
And so the kind of things that we are working on today, it
seems to me, in a way acknowledge, I think, some of the
significant shortcomings of the overregulation that came out of
Dodd-Frank and how--and speak to the necessity of making it
easier to hook up investors with small ventures.
And I would love to hear from you, Mr. Atkins, and then Mr.
Keating, from a economist standpoint.
Mr. Atkins. Yes. With 45 seconds, we could talk about that
for a long time. The Dodd-Frank Act, with 2,319 pages, itself
was only part of it. Then, it had mandates of up to 500 rules
and studies from the different agencies.
And a lot of that still has not been implemented yet at my
old agency, the SEC. They still may be a little bit more than
halfway finished.
So the huge amount of work that still has to be done, the
uncertainty on the industry--just the other day I was
approached by an investment bank with a new offering of a fund
to invest in that will basically take away from small banks,
community banks, loans that they can't carry on the books
anymore because of the examiners from the Fed and elsewhere
putting a lot of pressure on them not to make loans to small
business anymore. Chair Yellen has basically said the same
thing in testimony before Congress.
So it is the uncertainty and the costs that Dodd-Frank has
imposed on the industry that has had ripple effects, which is
why, really, we need to look at things like the JOBS Act, new
ideas that will help spur capital to small businesses.
Mr. Hurt. Mr. Keating, I apologize. My time has expired, so
we will--
Mr. Keating. I agree.
Mr. Hurt. Thank you.
I yield back.
Chairman Garrett. The gentleman yields back with a short
answer.
The gentleman from Connecticut, Mr. Himes, is now
recognized.
Mr. Himes. Thank you, Mr. Chairman.
And let me thank all of you for being here to have this
conversation. I want to just make a couple of observations and
ask a few questions.
To be clear, I actually voted for the JOBS Act. I had some
misgivings, but in the end I thought it was a good compromise.
I am always taken aback, though, when this topic is
shoehorned into the debate that this institution has so often
about where exactly the boundary line of government regulation,
interference, presence should be. It doesn't really fit.
We can eliminate all regulation on the issuance of new
securities. That will make it a much simpler process for
businesses to do capital formation, unquestionably at the
expense of the other half of our economy, which are the
investors.
So it seems to me that this is a problem of really
balancing the interests of two absolutely essential elements of
our economy: the people who need the capital; and the people
who are offering the capital.
I get so confused when the presentations are shoehorned
into this world where, in this case, in this panel's case, if
we just do everything for those people who need capital at the
cost of those people who provide--well, everything will be
fine.
We know that is not true. So I want to make that
observation because it just drives me crazy when good work gets
caught up in this deregulatory fervor.
The question I want to ask, just to bring this point home:
It is well-known that most instruments that are available to
retail investors--mutual funds, equity mutual funds--most
managers, professionals of equity mutual funds, don't beat the
market index.
So I guess my question is, in particular for those who are
so enthusiastic about pushing the boundaries of the JOBS Act,
can anybody here tell me that they are sure that retail
investors--because that is who we are talking about here--that
retail investors--setting aside the issues of fraud and 404(b)
and what companies are actually more prone to poor compliance;
that is a whole other story--but are retail investors going to
make a lot of money in crowdsourcing--crowdfunding?
Can anybody here on the panel tell me that your average
middle-class family out there with, let's just say, I don't
know, $10,000, $20,000 to invest--would anybody here recommend
that a middle-class retail unsophisticated investor ought to
put $10,000, $20,000 into a private placement or a crowdfunding
deal?
Mr. Keating. If they do their homework, I see no reason why
middle-income America cannot do their homework and make wise
investment decisions.
Mr. Himes. But do you think they would make money? Would
you advise a--
Mr. Keating. I think some of--
Mr. Himes. Would you advise a retail investor to put money
into an index fund or into some local crowdfunded--
Mr. Keating. I'm not a financial advisor, but I would say
that if you have extra money for investment purposes and you
think you want to support entrepreneurial ventures, perhaps
some in your State or your district, your neighborhood, and you
have that opportunity and you choose to do that and you do your
homework, that is great. Go for it, and I hope you make a lot.
Mr. Himes. Okay. But that is not my question. My question
is--and you have some economic background--is that individual
likely to outperform an index with that as an investment
strategy?
Mr. Keating. I don't know if there is data available for me
to answer that, but what I can say is on an individual basis,
as an economist, that if you do your homework, you are going
to--listen, investment--there is no guarantee here. I said very
much at the outset that you have to recognize the risks. You
have to--
Mr. Himes. No, no. I understand. You are not actually
answering my--I appreciate what you are doing, but you are not
actually answering my--
Mr. Keating. You asked me, would I advise somebody, and I
said yes. Do your homework, be smart about it, and yes, go
ahead and make the investment if you think that is wise.
Mr. Himes. Right. Okay.
I have another important question here. But the fact is
that the average professional mutual fund manager doesn't beat
the index, so I am going to preserve some skepticism about
whether a retail investor, homework or no homework, is going to
do better.
I have one other question, though, which is--and I
appreciate what the JOBS Act has done. We apparently are saving
companies a lot of money. I did a lot of work on this and
people assured me that full Sarbanes-Oxley disclosure was going
to cost $1 million or $2 million absent the JOBS Act.
I want to ask a question, which is that the average IPO
gross spread, which the average IPO, let's just say it is about
$200 million--a little less than that, $200 million. Gross
spread 7 percent, that is $14 million.
Ninety-five percent of all IPOs in the United States since
2008 have had a 7 percent gross spread, and $14 million has
gone to the underwriters. Why is that?
Mr. Atkins. Congressman, I think that is why crowdfunding
and other things are really exciting. It is a disruptive new
technological way of trying to raise money that will then
disintermediate investment banks and other banks and maybe save
companies that are raising money and their investors a lot of
money over time, which is kind of an exciting thing and so why
not try it. I think that is one thing that we are talking about
here.
And I am as troubled as you by what you are citing.
Mr. Himes. If the chairman will indulge me just for a few
more seconds here--
Chairman Garrett. We are just over time for everyone. We
will circle back.
Mr. Himes. All right. Thank you, Mr. Chairman. Thank you.
Chairman Garrett. I recognize the gentleman from Texas, Mr.
Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
I want to kind of pick up this line of reasoning because it
is one of the things that I am very concerned about, and all
across this government, is we have gotten into a mode now of
the government telling people what is appropriate for them and
what is not appropriate for them.
We have a Consumer Financial Protection Bureau (CFPB) that
is out determining what kind of financial products that it--
ordinary consumers should have, and so now we are trying to
tell people whether they are smart enough or not to be able to
make certain kinds of investments.
And one of the things that I think is very troubling to me
is that the little guys have not had an opportunity in the past
to get in on some of these wonderful companies that were
started in a garage or in a dorm room or--and so I think one of
the things that I wanted to mention, Mr. Laws, is in October
the SEC finalized its rulemaking obligation under Title III of
the JOBS Act but unfortunately imposed new restrictions on
crowdfunding that Congress did not mandate, which could prevent
Title III from reaching its full potential.
And the issue there is that the SEC placed arbitrary caps
on the amount that individuals can invest in companies based
upon the lesser of their annual income or their net worth. The
new crowdfunding rules are set to go live in 2016.
As you know, Commissioner Piwowar dissented that decision
and so I guess the question I have is, how do we determine what
is appropriate for investors? Should the government just
publish a list, ``These are things that we think are
appropriate for people to invest in and these are amounts,''
and just take that decision away from the individuals?
Mr. Laws. I will honestly say I don't have an opinion on
that. I do have an opinion mainly that because when accredited
investors participate in a crowdfunding you can have some very
wealthy investors who are also affected by the caps but would
not be affected by the caps if they went directly.
I believe the changes in the Fix Crowdfunding Act are aimed
at allowing accredited sophisticated investors to do larger
amounts of money, not necessarily allowing individuals who
don't have as much money to invest more. So I realize that
doesn't quite answer your question, but I do believe that the
changes are productive.
Mr. Neugebauer. Mr. Keating, do you have an opinion on
that?
Mr. Keating. I think by definition, they are arbitrary. I
think you are better off leaving it to individuals to make
their own decisions, and it is also important to understand
that with crowdfunding, investors are warned of the risks on
the portals, so they have to go through a test. So they are
going to be made even more aware of the potential risks
involved.
But, yes, I default to the American people and the
individuals over choices made by the government, yes.
Mr. Neugebauer. The observation from my perspective is we
make it difficult for the little guys to get started, and we
also make it difficult for some of the little folks to get in
on those kind of investments. And, quite honestly, mutual funds
and exchange-traded funds and stuff, people lose money on that
too, right?
Mr. Keating. Absolutely. And your point about the little
guy on both sides of the equation is what we are talking about
here. We are talking about not just the small business being--
getting access to capital, but the small investor having that
opportunity where they didn't have it before, to be able to get
in on the next great thing that is coming, as you said, out of
somebody's garage.
Mr. Neugebauer. Mr. Griggs, one of the things I was
wondering, in looking at market activity right now, do--what--
the private placement--do you still see a lot of companies,
because of some of the barriers out there, still opting for
trying to do private placement?
Mr. Griggs. Yes. Absolutely. Especially with the dearth of
availability to go public right now, we do see many, many
companies take advantage of private placements as--it is a very
large market, so it is very active right now.
Mr. Neugebauer. And so is there, do you think, and has
anybody done an analysis, is there--does it raise the cost of
that capital sometimes to be forced into a private placement as
opposed to being able to look at a more market-based activity
pricing based on the market being able to go public? Does that
make sense to you?
Mr. Griggs. We don't have the specific data on that, but
certainly any time you are going to raise money in a more
liquid market the cost of capital is going to be lower, so
private placements are not going to be as liquid, so that is
the case.
Mr. Neugebauer. Thank you, Mr. Chairman. My time has
expired.
Chairman Garrett. The gentleman's time has expired.
Mr. Carney is now recognized.
Mr. Carney. Thank you, Mr. Chairman.
I thank the gentleman from California because I do have to
go.
I am going to resist the urge to get pulled into this
debate about what the government should or shouldn't tell small
investors, but I would like to associate myself with the
comments by my friend from Connecticut, Mr. Himes. I voted for
the JOBS Act, as well, and I worked hard with Mr. Fincher, my
friend from Tennessee, on the IPO On-Ramp part of it.
And there were a lot of folks in the industry and in my
State who worked on it and expressed concern about it.
Delaware, as you may know, is the place where most of these
companies are incorporated. And my friends in the Division of
Incorporation had alerted me to the--to what they were seeing a
couple of years ago with the lack of companies going to an IPO,
and we know that those public offerings have increased since
the JOBS Act passed, and there was some testimony that each of
you made with that respect.
I thought that the 404(b) audit question would be one of
the things that the IPO On-Ramp provided a 5-year phase-in and
that would be the biggest thing that some of these emerging
growth companies would look to in choosing to go do an IPO
with--as an emerging growth company. But actually, as was
mentioned earlier, I think by Mr. Griggs, it is the
confidential filing piece that we hear is the most important
part of that IPO On-Ramp. Mr. Griggs said that we should allow
all companies to file confidentially.
Mr. Beatty, do you have a view of that?
Mr. Beatty. Certainly, that presents challenges, I think,
from a regulatory aspect and a transparency access to allow all
companies--
Mr. Carney. What would those be, at a real practical level?
The attractiveness of it from the other side is a company can
do that, ``test the waters,'' is the terminology that is used,
and not have to give up concerns about their I.P. or whatever
it might be. So what would the concern on the other side of the
scale be with respect to that idea?
Mr. Beatty. Testing the waters, I think, is an idea that
has been around for a long time and States have embraced it,
many years ago in many respects. And if it is done properly, I
don't think it imposes much by way of concern in terms of
investor protection.
The things that we worry about in testing the waters is
whether--is how open the communication will be in terms of will
it be something that is, something that somebody says that is
completely untrue? Is it not a good-faith effort to try and
gauge interests but instead an effort to try and draw investors
in a way that is inappropriate?
Protections that are put in place in terms of requiring a
filing--some type of filing first, having some type of waiting
time between the testing the waters communication and the
actual offering--I think those are all good measures that help
solve some of those problems.
Mr. Carney. Great.
One of the provision in the JOBS Act that did concern me
was the crowdfunding aspect for concern about fraud and the
vulnerability of unsophisticated investors. And I would just
like to ask Mr. Laws and Mr. Keating, we really don't have, as
Mr. Beatty said, any Federal experience here. Why should we
change the rules now before doing that?
Mr. Laws. I actually would disagree with the premise,
because the so-called accredited crowdfunding has been legal
since the JOBS Act passed and some of the SEC rulings. So since
the JOBS Act passed we do have a good 3 years of experience of
some of the techniques that seem to work well in accredited--
Mr. Carney. So do those apply to the investors that I am
most concerned about, the unsophisticated investor who--
Mr. Laws. I believe so. One of the more important aspects,
for example, of the Fix Crowdfunding Act allows this structure
of following after a sophisticated investor, putting a larger
check in and having them look out for the interests of the
other investors, which would not be legal under the current
Act. So I think we could apply some of those learnings with
this bill to improve the crowdfunding for the unaccredited
investors.
Mr. Carney. Mr. Keating, I have 24 seconds.
Mr. Keating. I think it goes back to the crowd aspect of
crowdfunding, right? The wisdom of the crowd here is critical,
and technology allows that where it didn't certainly in 1933
and 1934. So the fact that you have these communications and
you have the crowd evaluating these investments is central to
the whole effort.
Mr. Carney. Great. Thank you all for being here today.
Chairman Garrett. Thanks. The gentleman yields back.
Mr. Hultgren is recognized for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you all so much for being here. I appreciate your
time and expertise in this important discussion.
I want to address my first questions to Mr. Atkins, if I
may.
Earlier this year you wrote an op-ed that ran in the Wall
Street Journal that was titled, ``Equity Policy Needs Surgery,
Not Band-Aids.'' Volatility, flash-crash risks, and bigger dark
pools are the legacy of the SEC's Regulation NMS.
This, of course, was with respect to IEX's application to
be a registered national security exchange. I have commended
IEX for putting forth ideas considered by some to be effective
adjustments to our market, but I have also remained unsure
about how the investor exchange would function in an already
complicated market structure.
In your op-ed, you remarked about a broken process at the
SEC, and I will quote your op-ed where you said, ``Will the
agency address equity market structure concerns
comprehensively, as many Members of Congress and SEC
Commissioners say is necessary, or will it make these far-
reaching policy decisions in an opaque exchange application
approval process?''
Over the last few months there have been some developments
where your perspective would be valuable. One, the extended
comment period for IEX's exchange application, to which they
have made some modifications, ends today. Also, the comment
period on the notice of interpretation for whether 1,000-
microsecond delay should be de minimis for the purpose of Rule
611, the order protection rule, ends today.
So, Mr. Atkins, I have been frustrated with the Commission
that it has been slow to act on changes to market structure,
but do you think in general, changes to market rules through an
exchange application process will result in good public policy?
Mr. Atkins. Thanks for the question. I stand by what I
wrote in the journal there.
I think what the SEC should do is take a total review of
NMS. There were a lot of things that were put forth back there
10 years ago that did not make sense then and don't make sense
now. And I can see the impetus behind trying to let a new
entrant into the marketplace, but still it needs to be done in
a transparent way.
Mr. Hultgren. Following up on that, or continuing, the New
York Stock Exchange recently filed with the SEC to use a
replica of the Discretionary Pegged order that is included in
IEX's application, which was made public through an exchange
application process. Does this raise intellectual property
concerns? It would seem the New York Stock Exchange could
potentially make use of the D-Peg before IEX is granted
exchange status, which would disadvantage IEX.
Mr. Atkins. Yes. That is part of the whole issue here,
where if you treat people disparately and in a manner that
doesn't apply to everybody, you run into those issues.
Mr. Hultgren. Isn't the use of the D-Peg and a notice of
interpretation on the definition of ``immediate evidence'' that
the exchange application process is being used to rush
consideration and changes to market rules, and would notice and
comment rulemaking, not just an interpretation, be more
appropriate?
Mr. Atkins. Yes. I don't know that much about that
particular issue, but I think in general, the Administrative
Procedure Act really should apply in this area.
Mr. Hultgren. As a free market conservative who wants to
see competition and innovation rewarded by the markets, what
advice would you give to IEX and its supporters?
Mr. Atkins. I think they have created an innovative
exchange where lots of investors and traders like to go, so
hats off to them. What I really encourage the SEC to do is take
a really robust view of NMS and the whole process and do it in
an open manner and not just on a one-off exchange application
basis.
Mr. Hultgren. Good. Thank you.
Switching gears a little bit, I am going to address my next
question to Mr. Keating.
I have some questions about implementation of the JOBS Act.
What are the most burdensome provisions of Title III in the
JOBS Act? And do these burdens make crowdfunding useless to
small businesses seeking equity financing?
Mr. Keating. I'm sorry?
Mr. Hultgren. What are the most burdensome provisions of
Title III in the JOBS Act, and do these burdens make
crowdfunding useless to small businesses seeking equity
financing?
Mr. Keating. I don't know if it makes it useless. Hopefully
not. But certainly I think the limitation, but also on the
portal end of things, clarity on their liability and the
liability issue I think is crucial and I--it is addressed in
the one piece of legislation here, and I think that is
certainly a big issue in terms of competition on that front and
a flourishing number of portals.
And by the way, to really plug this very quickly, but
Crowdfunding Demo Day on May 16th, SBE Council is part of a
group that is going to be here in Washington giving demos on
everything that we are dealing with today and I urge everyone
to come. So there you go.
Mr. Hultgren. Great.
My time has expired. I yield back. Thank you, Mr. Chairman.
Chairman Garrett. The gentleman's time has expired.
I now recognize the gentleman from California, Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman.
I am very old. I was around when Reg D was the new thing.
And we were so impressed to think that, well, we are not the
accredited investors' incomes of over $200,000. That was a tiny
group of people who must be incredibly smart to be making that
amount of money. Now it is an amount of money scarcely more
than Congressmen and Federal Judges make.
Now we are here--you--for the most part, relaxing
standards, letting--providing less protection to investors so
that we can provide an easier path to providing capital for
business.
If Reg D made sense back in, what was it, 1982, then it
can't make sense now, and vice-versa, because if it made sense
to put the limit at $200,000 then, then the income level should
be $600,000 to $700,000 now.
I know that there has been discussion of indexing going
further, but, Mr. Beatty, have we opened the door too much by
deciding that $200,000 or $1 million in assets, excluding a
home, is the definition of an accredited investor who can
afford to lose a lot of money?
Mr. Beatty. I think you have to start from the premise that
the idea behind defining ``accredited investor'' and putting
those limits in place was supposed to be a proxy for investor
sophistication. Indeed, in many of the cases that we deal with
nowadays, a fair percentage of the investors that we see who
have been harmed are, indeed, accredited investors. So it is an
imperfect proxy.
NASAA has long advocated for indexing--
Mr. Sherman. Mr. Beatty, was it more of a proxy for ability
to absorb the loss without--
Mr. Beatty. That has been posited, as well.
Mr. Sherman. --or a proxy for knowledge, or at least the
ability to hire it?
Mr. Beatty. Yes, it has also been put forth that that was
meant to be an amount of money that--an amount of assets that--
or net worth that they could absorb a loss.
Mr. Sherman. And does it make any sense--if it--if those
were supposed to be the limits then, what should the limits be
today?
Mr. Beatty. I think you need--
Mr. Sherman. I realize that some people who make an awful
lot more are unsophisticated, and some who make an awful lot
less are very sophisticated. But we still have a rule based on
income and assets. If we are going to have a rule that talks
about accredited investor and looks at income and assets, where
should we draw the line?
Mr. Beatty. I think that certainly from my organization's
standpoint, we have long advocated for indexing those amounts
to inflation. If they had been indexed, I don't have the
numbers right in front of me, but I believe that it would be
roughly two to two-and-a-half times what they are now.
Mr. Sherman. Oh, more than that, but go ahead.
Mr. Beatty. Okay. Other ideas that have been put forth
questioning whether or not income or net worth is the
appropriate standard also have been discussed, and I think
there is some appeal to looking at things such as some type of
liquidity factor that an investor might be held to, in terms of
liquid assets, amounts in a portfolio, things like that.
Mr. Sherman. Mr. Atkins, do you have any comment? And is it
enough for us to just index these numbers from 2016 forward, or
do we need to index them from 1982 forward?
Mr. Atkins. I wasn't actually around when Reg D was
adopted, but I was just beginning to practice law, or just
about to get out of law school. So, things have changed a lot
since 1982. We have a lot more communication, a lot more
sophistication where people can actually go and get
information.
But if somebody can invest 100 percent of their net worth
in Valeant and watch the stock crash overnight, in the single
stock, that is one of the most risky things that one can do,
versus some of the other alternatives. So one of the things
that really impressed me back when I was a Commissioner when we
were talking about raising this limit, was a comment letter
where an investor said, ``I can invest in a hedge fund today,
but tomorrow if you raise the limit, I won't be able to.''
Mr. Sherman. Let me just--
Chairman Garrett. The gentleman's time has expired.
I recognize the other gentleman from California, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman.
In California, as you know, we have a world-class network
of startups from Silicon Valley to Orange County, and the issue
of access to capital for startup businesses--this is critical.
This is critical to our State's economy, but also critical to
ensuring that our country remains the best place for
entrepreneurs--not only to get the entrepreneurs, but also to
bring their products to market.
And so I was going to ask Mr. Keating, because you noted in
your testimony that the Micro Offerings Safe Harbor Act, which
I am an original cosponsor of, appropriately scale Federal
rules and regulatory compliance for small businesses pursuing
capital. Mr. Keating, how will this legislation help these
startups that are looking for the investment to hire and to
grow to enter the market?
Mr. Keating. It all comes down to that cost, and that is
why when we talk about scaling Federal rules, look at the data
and there is data produced by the SBA and a whole host of other
entities, if you will, that show that regulatory costs
certainly fall much more heavily on small businesses. To take
us the next step and consider the regulatory costs on startups
and it becomes even more daunting.
So when I mentioned before the issue on angel investing,
that is certainly in the equation here, in terms of both on the
supply and the demand side of the equation. So any time you can
open up avenues here through reduced costs for entrepreneurs to
gain access to capital, it is a positive development.
And by the way, just understand that the SEC and certainly
the State regulatory bodies have that ability to prosecute
fraud no matter what.
Mr. Royce. Right.
Here is another question I am going to ask. I am an
advocate for regulatory relief for our Nation's community
financial institutions when it comes to their ability to lend.
And legislation I have authored, H.R. 1188, the Credit Union
Small Business Jobs Creation Act, would free up smaller lenders
when it comes to working with business startups.
What role do community financial institutions play in
capital formation for startups, and what are the problem areas
since the financial crisis, and how could Congress help on that
front?
I will go to Mr. Keating, and then to anyone else who wants
to jump in.
Mr. Keating. My immediate response is those small financial
institutions are crucial for small businesses. That is the
bottom line.
When you look at their share of loans to small businesses,
they are it. They are critical.
So again, the regulatory cost--for example, Dodd-Frank and
so on--for--fall more heavily on them, and small businesses get
hurt as a result.
Mr. Royce. Others on the panel?
Mr. Atkins. Yes, sir. Well, one thing that Chairman
Hensarling likes to talk about is that every day a community
bank goes out of business. And it is not because of bad
business; it is because of the burdens, not just overt
regulations, but then also the informal silent regulations of
bank examiners who basically have a lot of ambits with which to
squeeze them and to question the loans that are being made.
And as I referenced before, the private sector is trying to
come into assistance here by taking off the books of some of
the community banks some of the--through funds--some of the
loans that they are making, but it is--
Mr. Royce. Even on performing loans. That is the great
surprise. Performing assets, and suddenly comes the regulator--
Mr. Atkins. Because the bank examiner will--
Mr. Royce. --that that just be imploded.
Mr. Atkins. Right. It is a true crisis. I think we have to
address it. And so I salute you for doing what you can.
Mr. Royce. Other members of the panel on this subject?
Mr. Griggs. I will comment that NASDAQ, for the publicly
traded community banks, we list over 90 percent of them on our
marketplace so we have regular dialogue, and I would echo the
comments that they are in a very difficult situation right now
when it comes to helping small businesses, particularly with
all the regulations that are faced, and they do--that group in
particular questions the reason why they would go public today,
and we all know that when they do go public they do get more
capital to support businesses. So I think it is a crisis
situation.
Mr. Royce. The other two panel members on the subject?
Mr. Laws. At my end of the market nobody has any assets
against which to take out a loan, so it is all equity
financing.
Mr. Royce. Yes, yes.
I yield back, Mr. Chairman.
Thank you very much, to the panel.
Chairman Garrett. Thank you. The gentleman yields back.
Mr. Royce. Thank you again, Mr. Chairman.
Chairman Garrett. Mr. Scott is recognized for 5 minutes.
Mr. Scott. Let me ask you about something I have not heard
before and so I want a little bit of clarity of information
referencing House Resolution 4855. Could you all explain to me
what crowdfunding is? How would the average investor out
there--what does that mean?
Mr. Laws. Crowdfunding in general refers to something that
is done online where there is broad participation by people
in--I will use some examples like Kickstarter, or Indiegogo, or
websites where people will fund a social cause or help a
company get off the ground by buying their product ahead of
time.
What we are talking about here for securities law is
allowing individuals to, when they do that, not just buy a
product or support a cause but take ownership in the company
that they are funding. So it would allow a small company to
sell part ownership in it to the crowd.
The regulation as it exists in law was set up to put a lot
of protections in place to make sure it flows through certain
websites and with certain regulations to make sure all the
disclosures are happening and it is very transparent.
Mr. Scott. And so we are having all kinds of challenges
with online lending, online investments, online payment
transactions folks, online merchants. This machine that we have
created, the Internet, the online services, sometimes appears
to me to be like the machine that we created to serve us, but
we are now having to become servants of that machine. And it
puts us in Congress in a way of trying to navigate a situation
that is constantly changing with our technology.
So the Securities and Exchange Commission has just
recently, as I understand it, completed its crowdfunding rules.
Is that correct?
Mr. Laws. Yes, several months ago. They will come into
effect in May.
Mr. Scott. In May, next month. Now to me, shouldn't we wait
until we have some experience from crowdfunding before we make
significant changes to the crowdfunding exemption?
Mr. Laws. I would answer yes, with the proviso that the
kind of so-called online fundraising for accredited investors,
the accredited crowdfunding, has been legal since the JOBS Act
passed in 2012.
There was, I believe, an earlier bill that had more
extensive changes to crowdfunding. This bill, to my
understanding, is narrowly taking some of the experiences that
we have learned over the last 3 years and using that to improve
the crowdfunding act, in some cases to include investor
protections that were not available in the original one.
So I actually believe it is a wise thing to do to make sure
that some of those make it in place--some of those learnings
over the last 3 years make it in place into this crowdfunding
version.
Mr. Scott. And now there is a grace period involved in
this, right--a 5-year grace period?
Mr. Laws. I am not sure.
Mr. Scott. From my understanding, there is a 5-year grace
period during which the Securities and Exchange Commission
would be prohibited from even enforcing the crowdfunding rules.
Do you feel that is warranted?
Mr. Laws. That is not my understanding of the law. I don't
quite know how to answer that because I don't believe that is
the way it is written.
I believe what is written into the law is there is a time
period during which, when they find violations, they are
supposed to give the portals a chance to address those rather
than instantly shut it down, depending on the severity of the
violation.
Mr. Scott. Let me ask you, is it not in the bill?
Mr. Laws. I am not aware of that portion.
Mr. Atkins. Congressman, I believe there is a provision in
the bill for a grace period, but that is for good-faith efforts
to comply. So, it is clearly open to interpretation. But
anyway, but I think the intent is to try to encourage the SEC
to guide rather than to come with a hammer.
Mr. Scott. It just seems to me that some problems--
Chairman Garrett. The gentleman's time has expired on that
one, and at the very end of the hearing, we always ask for
members of the panel to answer any other additional questions,
so at that time, if the gentleman would like to have additional
input from the panel, he can certainly get more into the weeds
on the answer on that one.
Mrs. Wagner is recognized for 5 minutes.
Mrs. Wagner. Thank you, Mr. Chairman.
And thank you all for joining us today as we look at the
JOBS Act 4 years later and examine the benefits it has brought
to small companies and their ability to raise capital and grow
their businesses.
As President Obama even said himself, this bill has been a
game-changer for startups and for small businesses. We have
seen this especially in my home district, where recent reports
have said that St. Louis has the fastest-growing start-up scene
in the country. This is exciting news. But as many of you have
stated today, there is still more work that we can do to build
on the success of the JOBS Act and in helping small businesses
reach their full potential.
So in that vein, Mr. Griggs, you mentioned that--and it has
been mentioned before--in the 4 years since the JOBS Act, there
have been 865 IPOs with 86 percent being emerging growth
companies. Can you talk a little bit, in some specifics here,
about the most important steps that should be taken to build on
the success?
Mr. Griggs. Sure. I think our viewpoint on the most
important aspects would be to start considering what it means
once you are public and focus on some aspects that we find
continually come up with companies about what the challenges
are once you do go public. Because there is certainly the brand
of going public has, over the years, taken some hits based on
what the ``burdens'' are to be a public company.
So I did highlight in my testimony, I think, what we feel
would be the most important ones would be to provide much more
transparency on the proxy firms and what they are requiring
companies to do. Companies looking at--are continually
frustrated by the PCAOB and how they make ``recommendations''
to audit firms they are not really sure how to interpret, and
so we do feel that much more clarity needs to be done in that
aspect.
And then you look at how a company helps--or goes
understanding who their investors are. There are rules in place
that are--the requirement is to report long positions but
nothing on the short side. And that has become much more
prevalent in terms of how investors use shorts. Companies
continually ask us to advocate for that.
So those three aspects, to us, would do a lot to help
instill more confidence in the public market and going public.
Mrs. Wagner. Thank you very much. And my colleague, Mr.
Hurt, kind of touched on things we were all looking at at the
slowdown at the end of 2015, beginning of 2016, in the IPO
period.
Now, you talked about market conditions being really the
driving force there, but there was still demand. And you have
touched on it a little bit, but can you talk about some of the
regulatory impediments that are perhaps chilling the IPO
market?
Mr. Griggs. Yes. I really would go back to we see a very--
have a very robust pipeline of companies that would like to go.
And typically sometimes you can point to various sectors that
have certain regulatory challenges. That is not the case today,
so our view of it is much more a market condition than a
regulatory condition because it is across all sectors right now
where there just have not been IPOs.
But we have seen this in the past and we do feel very
strongly that the second half of 2016 is going to be strong.
Mrs. Wagner. Good. Let's hope so.
I would like now to turn to the market for private
financing for those companies that haven't gone public yet,
which is a very important source of funding for startups and
early-stage businesses.
In following up, again, my colleague, Mr. McHenry, Mr.
Keating, you stated that angel investors--investment is
sluggish. And you pointed to regulation and the over-regulatory
burden.
Can you expand on some of the specifics of that? You
mentioned it in a broad, overreaching sense, but what are those
impediments, those regulatory impediments that exist regarding
this kind of investment?
Mr. Keating. Actually, the best way to answer that, it is a
broad, overarching issue. I think it is a broad overarching
issue for the entire economy.
When Mr. Griggs talks about the IPO market, when we are
talking about angel investment, when we are talking about the
decline in business loans to small businesses, that is all--
there are a whole host of issues in there, but overarching is
the state of this economy, a recovery that is growing at 2.1
percent when we should be growing, if you base it on history,
at almost 4.5 percent.
So it all goes--but then the question becomes, why is that?
And I will go back to, it is pointing policy in the wrong
direction in every possible area you can think of in the last
several years, especially on regulation. We have been in a
hyper-regulatory market on a whole host of fronts. But taxes,
as well. No leadership on trade.
I will even pick on the Federal Reserve while I am here, in
the sense that they have been saying that they are saving the
economy, but in terms of the monetary policy that has been run,
it is without precedent and I have never heard so many small
business owners say, ``What is going to happen with what the
Fed has been doing?'' And they have never talked to me about
the Fed every before because it is uncertainty now. Nobody
knows how this is all going to come out.
So I would say it is an overarching environment, and then
you can go down and drill down into all sorts of individual
regulations and taxes.
Mrs. Wagner. Thank you, Mr. Keating. I have run out of time
here, and I would say that fourth branch of government, that
over-regulatory nature that we have that has been created here,
which are the regulators, the agencies, the departments, is not
just here in financial services; it is overarching in many
different areas across our jurisdiction. So I thank you very
much.
I yield back.
Chairman Garrett. The gentlelady yields back.
Mr. Hill is recognized for 5 minutes.
Mr. Hill. Thanks, Mr. Chairman. Thank you for hosting this
panel. It is useful, and it is also great to be talking about
kind of a positive topic for the economy because clearly, over
the past 4 years, this was a bright spot in the Obama
Administration and congressional collaboration on the economy,
so it is nice to be talking about ways to enhance something
that is generally working well.
Before I ask questions, I will make a note that I recently
introduced a bill that is related to this topic that will head
over to the Ways and Means Committee, H.R. 4831, which will
allow people who are using crowdfunding and a Subchapter S
company to not have that crowdfunding count as one of the 100
shareholder limitations.
Since pass-through ownership has gotten so popular, I am
not sure S Corps are as popular as they once were because of
State LLC encouragements. We all recognize that. But in the
small community bank arena, and in some niches in the economy,
Subchapter S is still popular, and so this is a way, I think,
to combine the benefits of the JOBS Act with that Subchapter S
form of incorporation.
Mr. Keating, I want to start with you, and you raised a
question that we talk a lot about in here, and that is the AML,
the money-laundering laws. And you made a reference in your
testimony about portals and how they might be treated under
AML. Could you elaborate just for a second on that?
Mr. Keating. Sure. We are concerned with applying those to
portals. It doesn't make any sense when you think about what
the anti-money-laundering laws--
Mr. Hill. They are being applied. It is currently applied
to portals--
Mr. Keating. Yes. My understanding is that it is under
consideration, that it has been kicked around, if you will. And
I believe FINRA said no, but now, from what I understand,
Treasury is--it is at least being kicked around there and we
are concerned about that because it is tremendous regulatory
costs. There are examples of foreign banks not wanting to deal
with American depositors, and so on and so on, because of the
tremendous regulatory costs.
So if you apply that to portals, that would be
catastrophic, I think, in many ways.
Mr. Hill. Thank you.
Mr. Beatty, a question for you from a State perspective:
Since we have had this experience on general solicitation for a
private placement, has it generally been successful that there
haven't been noted through the State securities Commissioners
anything kind of catastrophic happen by having this general
solicitation of certain private placements covered by the act?
Has it gone pretty well, in other words?
Mr. Beatty. I think that a relatively small percentage of
the Reg D filings that we see are utilizing general
solicitation, and in the early history, no, there have not been
much by way of reported complaints with regard to them.
Mr. Hill. Yes.
And, Mr. Griggs, you talked in your--you had two
interesting comments in your testimony. One was on the short
positions disclosure. Would you elaborate on that for a moment?
Mr. Griggs. Sure. If you look at a--
Mr. Hill. Explain to the committee why that is important.
What is going on out there in the capital markets of people
shorting stocks that is concerning right now?
Mr. Griggs. Yes. So a very large part of being a public
company is how you are going to communicate with your
investors, and senior management dedicates quite a bit of time
to doing that because it does help represent in the capital
markets those who are either currently stock to raise, but also
they want to raise more capital.
So today investors are required at certain levels to report
that they are a long holder in the stock, and that dates back
to the 1970s. If you look at a short position, companies by no
means are saying that shorts are not valuable. They do provide
liquidity to the marketplace and they are an important part of
the investment community strategies, but there is no insight to
a company about who those investors are that are short in the
stock the same way there are for long positions.
So in the interest of transparency, companies feel to
really communicate effectively to their shareholders, knowing
who those investors are at certain levels the same way they
know longs would be very valuable.
Mr. Hill. Have you seen anything recently in the market
that concerns you more particularly, like this IVR patent troll
issue and short positions? Are you familiar with that? That
seems to strike at the heart of emerging companies.
Mr. Griggs. I can't speak to that, but this is not a new
issue with short--not knowing who your short positions are.
This has been ongoing for quite some time.
But I think as you look at the rise of activist investors
it has really come to fruition in the last several years. It
has become much more common conversations we have with our
companies.
Mr. Hill. Thank you.
And thanks, Mr. Chairman. My time has expired.
Chairman Garrett. Mr. Emmer is now recognized for 5
minutes.
Mr. Emmer. Thank you, Mr. Chairman.
And thanks to the panelists for being here today.
As we all know, small businesses are vital to our economy.
If you define a small business as a firm with fewer than 500
employees, like the Small Business Administration does, then
there are more than 28 million small businesses in the United
States, and over half of the 120 million American workforce is
employed by one of them. Small businesses have also created
more than 64 percent of the net new jobs over the past 15
years, and today that number is north of 70 percent.
Despite the overwhelmingly positive impact small business
has on our economy, traditional bank lending to small business
is still at pre-recession lows. Furthermore, if a firm would
like to sell stock to raise money, often it must register with
the Securities and Exchange Commission. According to the SEC,
registration costs $2.5 million on average, which many small
businesses simply can't afford.
Fortunately, certain security offerings are exempt from SEC
registration, including a private offering exemption under
Section 482 of the Securities Act of 1933.
There is a problem, however. The problem is the ability of
small businesses to effectively use this exemption is--the term
``private offering'' is not defined in law. Not only does this
prevent small business from using the exemption, it leaves
businesses who try to use the exemption and can't afford a team
of expensive lawyers--which, again, most small businesses
cannot--exposed to potential lawsuits and future liability.
That is why I introduced the Micro Lending Safe Harbor Act
with seven of my colleagues. This legislation will create a
bright line safe harbor for small private offerings. It will
help entrepreneurs open new businesses and expand existing
ones.
It does this by clarifying the safe harbor exemption--not
by creating something new, but by clarifying something that
exists for any offering that meets one or more of the following
criteria: one, each purchaser has a substantive preexisting
relationship with an owner; two, there are no more than 35
purchasers of securities from the issuer that are sold in
reliance on the exemption during the 12-month period; or three,
and this may be the most important, the aggregate amount of all
securities sold by the issuers does not exceed $500,000 during
the 12-month period preceding.
The bill also exempts any of the aforementioned security
offerings from blue sky laws while maintaining anti-fraud
provisions at the Federal and State level. Again, I want to
make it clear, all Federal and State anti-fraud laws will
remain fully applicable to these offerings.
On March 27, 2015, former SEC Commissioner Daniel Gallagher
gave a speech at the Vanderbilt Law School where he noted:
``Given the substantial changes in technology and the markets
since this law was enacted, it may be time to see if there are
other ways to balance access to capital and investor
protection, giving the issuers other choices when raising
capital.''
He went on to say, ``Advancing a micro offering safe
harbor, which would deem certain extremely small or limited
offerings is not involving a public offering under Section
4(a)(2) of the Securities Act, worth exploring.''
As our economy continues to evolve, it is imperative that
our laws and regulations also evolve to keep up with new
business opportunities and demands. The Micro Offering Safe
Harbor Act, which is endorsed by the National Small Business
Association and the Small Business and Entrepreneurship
Council, is a next-generation vehicle for capital formation.
The time has come for Congress to come together and help
small business help themselves by making this important update
and improvement to the Securities Act of 1933.
And in the short time I have left, I wanted to start with
Mr. Atkins. It is interesting because I heard testimony earlier
that I believe it is Section 504 of Regulation D already
exists, so this would solve this problem. But that would
require you to sell up to $1 million in securities in, I think,
any 12-month period preceding.
How would that impact the discussion that we had earlier
about the small businesses? I had one in Minnesota: Medtronic.
We have several of them. The Disney Corporation, just name
them, Amazon. If you wanted to buy--or borrow $30,000 from a
family member, for instance, how would this impact that?
Mr. Atkins. Yes, well, I think your bill really helps to
clarify what already exists under 506 and I think gives a good
amount of certainty. For that, I think it is a very good
effort.
I don't really see huge companies making use of anything
like that. It doesn't make sense in the grand scheme of things.
Mr. Emmer. Thank you.
I see my time has expired.
Chairman Garrett. Mr. Messer is now recognized.
Mr. Messer. Thank you, Mr. Chairman.
And I thank the panel today for being here for this
important topic.
I want to direct my question to Mr. Atkins to start. You
note in your testimony that there is more work to be done with
respect to modernizing the Federal regulatory environment, and
you also importantly note that Federal agencies have issued a
record 392 major rules with economic impact of over $100
million annually on the economy. And many of us are supporters
of the REINS Act, which would have Congress approve any
regulation that had that kind of impact on the broader economy.
Could you just talk a little bit about how the regulatory
burden impacts small businesses in America in search of
capital?
Mr. Atkins. Yes. We talked a little bit before about how
community banks are being squeezed not just by the market in
general, but also by formal and informal regulations. So by
information regulations, I mean the great latitude that bank
examiners have.
Going all the way back to when I was working for Chairman
Breeden at the SEC back in the early 1990s in the wake of the
S&L crisis, you could see how the effect of the bank examiners,
what they had on the decrease of commercial investor loans and
the increase of what banks are holding in treasury securities.
You are seeing a similar thing right now, but even worse, we
are seeing community banks going out of business. And so there
is a real, palpable effect.
Mr. Messer. And you mentioned community banks, but I would
ask you a question: Who do you believe receives the most harm
or bears the greatest compliance cost of today's current
regulatory regime?
Mr. Atkins. It comes down to investors and to Main Street
businesses, frankly, ultimately. They bear the burden just like
on any sort of imposition on the economy.
Mr. Messer. Yes, the back-end consumer.
I want to turn now a little bit to the JOBS Act, which
increased the cumulative Reg A offerings by an issuer from $5
million to $50 million--again, something this panel would
understand well. Despite the significant delays in finalizing
the rule, has the new threshold been enough to entice companies
to use Reg A offerings?
Mr. Keating or Mr. Atkins, if you could--
Mr. Keating. My quick response is that we have seen
positive results with Reg-plus. I noted those in my testimony.
But certainly, again, limiting--I think that limitation, if you
will, leaves money on the table, and why would we want to do
that, as I said earlier.
Mr. Messer. Yes. What does increasing access to Reg A
offerings mean for U.S. businesses looking to raise capital and
grow?
Mr. Keating. Again? I'm sorry--
Mr. Messer. What does increasing access to those offerings
mean for U.S. business?
Mr. Keating. Oh, this, again, goes back to the engine of
the economy. When we are talking about--we have heard wonderful
things today about small businesses and how vital they are.
Well, they have to get capital to make it all happen, whether
it is through debt or equity.
So when you are looking at these regulations, they very
much have a direct impact on small business and therefore the
economy, without a doubt.
Mr. Atkins. And one thing, just to add to--
Mr. Messer. Yes.
Mr. Atkins. --my former answer to your question. The main
effect of all these regulations and the cost is ultimately on
the consumers and the employees of the United States. And in
this economy, where we have--to call it a tepid economy or
recovery is--from 2008 and 2009--I think is a real misnomer; it
is kind of a false recovery.
And so in order to try to get people back to work and have
consumers enjoy a better lifestyle, I think we have to make it
possible for small businesses, which are the engine of the
economy, to get back to work.
Mr. Messer. Yes. Most new jobs in any recovery come from
small business, and so if small businesses can't operation and
function in our economy it is very difficult to create jobs.
Folks want jobs. We need to have healthy small businesses, and
that requires access to capital, really.
One last point, maybe Mr. Atkins or Mr. Keating, in the
limited time we have, I understand that the SEC is statutorily
required to review the Reg A-plus threshold every 2 years,
meaning that such a review is due this month. What do you think
is the most appropriate threshold and how would increasing it
to that amount further aid small business?
Mr. Atkins. It would be interesting to see what the report
looks like, but Chair White talked about Reg A-plus a little
bit at the end of last year, I believe, and talking about how
there have been a lot of--it has an increasing number of
registrations under it. But it seemed to me that there is a
long way to go, and reading between the lines, I think even the
people at the SEC recognize that.
Mr. Messer. Okay. Thank you very much.
I yield back to the Chair.
Chairman Garrett. The gentleman yields back.
And seeing no other Members with questions, I will end
where I began, by saying thank you to the entire panel for
being here, for I think a fairly good discussion on where we
are looking to go in this area: not a position of no
regulation, but basically a position of the appropriate level
of regulation; not a repeal of everything, but actually just
making sure that we have the right level of regulation to
ensure investor confidence on the one hand, and at the same
time, capital formation on the other hand.
I thank all the members of the panel for all their views
here today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Without objection, this hearing is adjourned. And again,
thank you.
[Whereupon, at 12:08 p.m., the hearing was adjourned.]
A P P E N D I X
April 14, 2016
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