[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 

23-890 PDF                     WASHINGTON : 2017 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Publishing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001
                                
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           

                 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

                              ----------                              
                                                                   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
                             
                             
                             
                             
                             
                             
                             
                             
  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]