    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                        LEGISLATIVE PROPOSALS TO IMPROVE
                            THE U.S. CAPITAL MARKETS

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

                                    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

                                 FIRST SESSION

                                   __________

                                DECEMBER 2, 2015

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-64

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
    RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
        Pennsylvania                     DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
    BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
    BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
    SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
    ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
    ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
    LUKE MESSER, Indiana                 JUAN VARGAS, California
    DAVID SCHWEIKERT, Arizona
    FRANK GUINTA, New Hampshire
    SCOTT TIPTON, Colorado
    ROGER WILLIAMS, Texas
    BRUCE POLIQUIN, Maine
    MIA LOVE, Utah
    FRENCH HILL, Arkansas
    TOM EMMER, Minnesota

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel
      Subcommittee on Capital Markets and Government Sponsored Enterprises

                      SCOTT GARRETT, New Jersey, Chairman

    ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
    PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
    BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
    STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
    DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
    ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
    LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
    DAVID SCHWEIKERT, Arizona
    BRUCE POLIQUIN, Maine
    FRENCH HILL, Arkansas

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        December 2, 2015.............................................     1
    Appendix:
        December 2, 2015.............................................    39

                                   WITNESSES
                          Wednesday, December 2, 2015

    Carcello, Joseph V., EY and Business Alumni Professor, and
      Department Chair, Department of Accounting and Information
      Management, Haslam College of Business, University of
      Tennessee, Knoxville...........................................    10
    Grundfest, Hon. Joseph A., William A. Franke Professor of Law and
      Business, Stanford Law School; and former Commissioner, U.S.
      Securities and Exchange Commission.............................     6
    Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on
      behalf of the Biotechnology Industry Organization..............     8
    Mathieu, Chris, Chief Financial Officer, Horizon Technology
      Finance, on behalf of the Small Business Investor Alliance
      (SBIA).........................................................    11
    Quaadman, Tom, Senior Vice President, Center for Capital Markets
      Competitiveness, U.S. Chamber of Commerce......................    13

                                    APPENDIX

    Prepared statements:
        Carcello, Joseph V...........................................    40
        Grundfest, Hon. Joseph A.....................................    49
        Hahn, Brian..................................................    58
        Mathieu, Chris...............................................    66
        Quaadman, Tom................................................    73

                  Additional Material Submitted for the Record

    Garrett, Hon. Scott:
        Letter from Hon. Joseph A. Grundfest, dated December 8, 2015.    83
    Hinojosa, Hon. Ruben:
        Written statement of Public Citizen..........................    85
        Written statement of Jennifer Taub, Professor of Law, Vermont
          Law School.................................................    89
    Quaadman, Tom:
        Letter to the Public Company Accounting Oversight Board,
          dated October 7, 2009......................................    98

                        LEGISLATIVE PROPOSALS TO IMPROVE
                            THE U.S. CAPITAL MARKETS

                                  ----------

                          Wednesday, December 2, 2015

                 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 10:06 a.m., in
    room 2128, Rayburn House Office Building, Hon. Scott Garrett
    [chairman of the subcommittee] presiding.
        Members present: Representatives Garrett, Hurt, Huizenga,
    Duffy, Stivers, Fincher, Ross, Wagner, Messer, Schweikert,
    Poliquin, Hill; Maloney, Sherman, Hinojosa, Himes, Ellison,
    Carney, Sewell, and Murphy.
        Ex officio present: Representative Hensarling.
        Also present: Representatives Green and Sinema.
        Chairman Garrett. Good morning. And we are not going to go
    by the clock on the wall, which I see is a little bit behind.
        The Subcommittee on Capital Markets and Government
    Sponsored Enterprises is hereby called to order. And 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 on
    Capital Markets and Government Sponsored Enterprises shall be
    permitted to participate in today's hearing.
        Now, as we indicated on the website, today's hearing is
    entitled, ``Legislative Proposals to Improve the U.S. Capital
    Markets.'' With that, I welcome our witnesses to the hearing
    today. Some of them are familiar faces and there are new faces
    as well.
        I thank you all for coming and I thank you for appearing
    before us.
        Before we get to the panel, however, I will recognize
    myself for 2\1/2\ minutes for an opening statement.
        So today's hearing, as I said, will examine a generalized
    topic, and in so doing we will be looking at five legislative
    proposals. And in so doing we will be continuing our work over
    the last 5 years to modernize those securities laws and help to
    improve the U.S. capital markets.
        Now, four of these bills would build upon the success, if
    you will, of the 2012 JOBS Act by lowering barriers to capital
    formation for small and growing businesses. And I want to take
    this time to thank the sponsors on both sides of the aisle for
    their work on those issues.
        The fifth bill we will discuss today is one that I have
    introduced and that is H.R. 3798, the Due Process Restoration
    Act. This legislation would allow defendants in litigated SEC
    enforcement cases to have their cases be removed to a Federal
    district court, thereby availing themselves of the due process
    protections that currently do not exist in the SEC
    administrative proceedings.
        And you may ask, why is this necessary? Well, in recent
    years the SEC has transformed itself into a veritable judge,
    jury, and executioner as it has brought more and more
    enforcement cases before its own in-house tribunal where they
    are heard then by administrative law judges who are themselves
    actually employees of the SEC.
        Let us look at the numbers. In fact, in Fiscal Year 2014
    the SEC brought nearly half of its litigated actions through
    administrative proceedings, and that was an increase of about
    35 percent over 2012. And its win rate in these cases is, not
    surprisingly, extraordinarily high.
        So while prosecuting more cases in this manner is maybe
    more efficient and leads to lower expenditures for the SEC, we
    must realize that these efforts come with a significant cost.
    The cost is less due process protection for defendants who find
    themselves beholden to a seriously flawed system that violates
    the constitutional rights of the accused.
        And despite recent attempts by the SEC to address some of
    the concerns that have been raised, its in-house courts still
    lack many of the protections provided under the Federal Rules
    of Civil Procedure and the Federal Rules of Evidence, such as
    full discovery rights and the right to jury trial.
        So the solution envisioned under the Due Process
    Restoration Act, my bill, is a simple one: Simply allow
    defendants the option to have their cases moved to a district
    court where robust due process protection exists.
        The legislation maintains the ability of the SEC to
    commence an administrative proceeding in cases where the SEC,
    for example, may be seeking to bar someone from practicing from
    their Commission. And importantly, the bill does not mandate
    that certain cases automatically move to a district court.
    Instead, it leaves the decisions up to the defendant.
        So if the administrative proceedings are as fair and
    impartial as the SEC says they are, under the bill those
    defendants would have the ability to remain within the SEC's
    in-house tribunal.
        Hopefully, we can all agree that enforcement is an
    essential part of the SEC's mission, but we can also agree that
    the rights of the innocent must also be protected when the SEC
    takes actions that can destroy the career and reputation of an
    individual.
        So the Due Process Restoration Act would help protect the
    innocent against government overreach. And I look forward to
    hearing from our witnesses today on this important matter.
        With that, I yield to the gentlelady from New York for 3
    minutes.
        Mrs. Maloney. I thank the gentleman for calling this
    hearing and for yielding to me.
        And this hearing will address a series of legislative
    proposals, most of which address capital formation issues. They
    are intended to make it easier for companies to raise capital.
        I am proud to be a cosponsor of one of the bills, the SEC
    Small Business Advocate Act, which my colleague Mr. Carney has
    worked so hard on. This bill would create an Office of the
    Advocate for Small Business Capital Formation within the SEC
    and would also create a permanent Small Business Advisory
    Committee at the SEC.
        This is a common-sense proposal. It is actually modeled off
    of the provision in the Dodd-Frank Act which established the
    SEC's Investor Advisory Committee.
        Ms. Sinema and Mr. Fitzpatrick also have a bill that would
    provide very targeted relief on the auditor attestation
    requirement in the Sarbanes-Oxley Act. All of the Democrats on
    this committee, myself included, voted against a bill last
    Congress that would have provided a blanket exemption from this
    requirement for roughly 75 percent of all public companies.
        But I am intrigued by this compromise bill from Ms. Sinema,
    which is substantially more narrowly targeted. In effect, the
    bill would only provide limited relief and only to companies
    that can prove that they don't have enough revenue to pay for
    the auditor attestation requirement.
        So I will be very interested in hearing more from our
    witnesses about this proposed compromise.
        Finally, the Due Process Restoration Act would overhaul the
    SEC's administrative courts. I am very concerned about making
    changes that could weaken the SEC's enforcement authorities as
    well as their ability to quickly and fairly prosecute
    wrongdoers.
        It is also important to remember that the SEC has long had
    the authority to try certain cases in an administrative forum
    rather than in Federal court. And we simply expanded this
    authority in Dodd-Frank because it has been such a useful tool.
        In fact, people forget that much of our insider trading law
    was developed in an administrative case, the insider trading
    case of Katie Roberts in 1961 was an administrative opinion and
    the Supreme Court later adopted much of the Katie Roberts
    analysis as the basis for insider trading law.
        So I think the SEC's administrative forum has been a useful
    tool. And I will be interested to hear from our witnesses about
    this proposal.
        I look forward to all of your testimony and the exchange we
    will have. Thank you for being here, and I yield back.
        Thank you.
        Chairman Garrett. Thank you. The gentlelady yields back.
        I now yield to the vice chairman of the subcommittee for
    2\1/2\ minutes.
        Mr. Hurt. Thank you, Mr. Chairman--
        Chairman Garrett. For 1\1/2\ minutes.
        Mr. Hurt. Thank you, Mr. Chairman.
        And I thank the witnesses for appearing today in this
    important hearing.
        I represent a rural district in Virginia, Virginia's 5th
    District. It stretches from the northern part of Virginia in
    Fauquier County to the North Carolina border. As I travel
    across my district, I am reminded by my constituents again and
    again that the number one concern that they face is jobs and
    the economy. At a time when our economy is still struggling,
    Congress must do everything possible to help our small
    businesses achieve success.
        These entities are our Nation's most dynamic job creators
    and their success is essential to our economy and American
    working families depend upon their success.
        Every one of the measures we are considering today is
    designed to achieve that goal, whether that means establishing
    an office for small business capital formation, reducing the
    size of the administrative state or helping startups market
    their securities to a larger poll of investors, the goal is to
    help our Nation's small businesses achieve that success.
        One such measure we are considering today is the Helping
    Angels Lead Our Startups Act, or HALOS Act. If enacted, this
    legislation would help startups by allowing them to better
    market their securities and to take part in economic
    development events like demo days where these startups can
    interface with potential investors without the risk of
    violating Federal securities law.
        If adopted, the HALOS Act would alleviate the burden placed
    on startups with regard to privacy and compliance concerns
    which often require entrepreneurs and startups to take on
    burdens that are unnecessary and disproportionately expensive
    for small firms. These burdens have a significant impact on an
    entrepreneur's ability to deal with investors because of the
    risk of having their interactions with investors viewed as
    general solicitations or advertisements in violation of the
    Federal securities laws.
        The adoption of the HALOS Act would be an important step in
    continuing the success that this committee has achieved in the
    bipartisan JOBS Act.
        I look forward to the testimony of each of our
    distinguished witnesses.
        I thank the chairman and yield back the balance of my time.
        Chairman Garrett. Thank you, and the gentleman yields back.
        And now for 2 minutes, Ms. Sinema.
        Ms. Sinema. Thank you, Chairman Garrett and Ranking Member
    Maloney, for holding this legislative hearing.
        I have heard from companies throughout my district that
    burdensome and unnecessary regulations continue to stifle their
    ability to grow and succeed. My bipartisan bill, the Fostering
    Innovation Act, provides targeted regulatory relief for
    companies on the cutting edge of scientific and medical
    research.
        The bill adds an additional 5 years to the current JOBS Act
    exemption from auditing requirements under Sarbanes-Oxley for
    emerging growth companies that have an annual average revenue
    of less than $50 million and less than $700 million in public
    float.
        This common-sense exemption will help ensure that costly
    regulations don't stand in the way of success for companies
    with a research-driven business model.
        I am also a sponsor of the Helping Angels Lead Our Startups
    Act, or the HALOS Act. This bipartisan bill provides a clear
    path for startup businesses to connect with angel investors and
    venture capitalists through demo days without being subject to
    onerous verification requirements.
        Demo days are business-planned competitions, startup days,
    innovation summits, and other public forums that introduce
    entrepreneurs to potential investors. But because of confusion
    under current law, small businesses that need equity capital
    may forgo these events, losing opportunities to meet not only
    accredited investors, but also students, professors, and
    business professionals whose input and eventual investment
    could be invaluable.
        I am committed to working with my colleagues on both sides
    of the aisle to ensure that Arizona's innovative small
    businesses have every opportunity to thrive.
        So thank you to Mr. Chabot, Mr. Hurt, and Mr. Fitzpatrick
    for working with me on these common-sense, bipartisan bills.
        And thank you again to Chairman Garrett and Ranking Member
    Maloney for holding today's hearing.
        I yield back my time.
        Chairman Garrett. The gentlelady yields back.
        The gentleman from Maine is recognized for 1 minute.
        Mr. Poliquin. Thank you, Mr. Chairman.
        I want to thank Chairman Garrett and Chairman Hensarling
    for bringing forward the Small Business Capital Formation
    Enhancement Act in a draft format today that I am sponsoring.
        I also want to thank Congressman Juan Vargas from
    California who will be the lead cosponsor on this bill.
        We all know that 80 percent of the new jobs in America are
    created by small businesses. But often, small businesses can't
    get the traditional loans from banks that they need to grow and
    expand and to hire more workers, so it is so important for our
    small businesses to be able to access our capital markets, the
    most liquid in the world, to make sure they have that lifeline.
        Now, it doesn't matter if you are a boat builder in
    Ellsworth, Maine, or you are a call center in Lewiston, Maine,
    those jobs are critically important to our district and other
    employers throughout the country.
        Now, during the past 35 years, as required by law, the SEC
    holds a forum that combines government officials and the
    private sector to make sure we come up with the best ideas
    possible on how our small businesses can access capital so they
    can grow and hire more workers. And we get the best academics
    and businesspeople, industry people and attorneys and
    government folks in the same room so we can come up with the
    recommendations.
        Now, one of the problems we have, Mr. Chairman, is that
    this group every year comes up with some terrific
    recommendations that should become part of the rulemaking here
    in Congress or part of legislation that we sometimes advance
    here in this committee. But the SEC is not required to do
    anything with these recommendations.
        So all this Act does is require that the SEC access this
    information, take it very seriously, and issue a public
    statement on whether or not they are going to use these
    recommendations to further capital access in America.
        So with that, Mr. Chairman, again I want to thank you very
    much for letting me introduce this legislation in draft form.
        And I thank Congressman Juan Vargas for being a lead
    cosponsor on this bill.
        Chairman Garrett. The gentleman's time has expired. And I
    thank the gentleman for his work on the legislation and for him
    introducing the bill.
        We will now turn to our panel. And again, I welcome
    everyone here on the panel and I thank you very much for being
    with us. You have all submitted written testimony. I have
    reviewed it, and I suggest the subcommittee has reviewed it as
    well.
        You will be given at this point 5 minutes to address the
    subcommittee. For those of you who have not been here before,
    there should be in front of you indicator lights: green menas
    you have 5 minutes; yellow means you have 1 minute left; and
    red means you are out of time. And without objection, each of
    your written statements will be made a part of the record.
        So with that, we will turn to the professor, Mr. Grundfest.
    Welcome to the panel, and you are recognized for 5 minutes.

      STATEMENT OF THE HONORABLE JOSEPH A. GRUNDFEST, WILLIAM A.
    FRANKE PROFESSOR OF LAW AND BUSINESS, STANFORD LAW SCHOOL; AND
      FORMER COMMISSIONER, U.S. SECURITIES AND EXCHANGE COMMISSION

        Mr. Grundfest. Great. Thank you, Chairman Garrett, Ranking
    Member Maloney, and distinguished members of the subcommittee.
    I would like to thank you for the opportunity to address
    matters that are important to the enforcement of our Nation's
    securities laws in general and to the issues that are raised by
    H.R. 3798, the Due Process Restoration Act of 2015 in
    particular.
        A few brief words of introduction. I am the William A.
    Franke professor of law and business at Stanford Law School. I
    am senior faculty at the Rock Center on Corporate Governance at
    Stanford University. And I served as a Commissioner of the
    United States Securities and Exchange Commission from 1985 to
    1990.
        The substance of my testimony this morning can be
    summarized in a single word: balance. There should be a
    reasonable balance between the cases that the Commission
    decides to pursue through its internal administrative
    proceedings and those it decides to pursue in Federal court.
    And as for cases brought as administrative proceedings, there
    should be a reasonable balance between the respondent's rights
    to mount an effective defense and the Commission's reasonable
    interests in the prompt and effective enforcement of our
    Nation's securities laws.
        There is, however, cause for concern that both processes
    are out of balance from many different perspectives.
    Legislative proposals of the sort that this committee is
    exploring this morning can, I believe, help restore a more
    effective equilibrium.
        The SEC's administrative procedures have been criticized
    for decades. Critics have complained of a lack of depositions,
    the imposition of a rocket docket, the admission of hearsay
    evidence, the absence of a jury, bias by administrative law
    judges, long delays in appeals to the Commission itself, and
    the incongruity of an appeal to the same body that initially
    authorized the complaint.
        These concerns have recently been compounded by SEC
    statements suggesting a plan to increase the number of
    enforcement actions filed as administrative proceedings and
    correspondingly to reduce the number of actions filed in
    Federal civil court.
        The Commission has also clearly signaled its intent to
    insist on Chevron deference to its interpretation of the
    Federal securities laws, even when a significant number of
    Federal judges disagree with the Commission. Indeed, a sitting
    Federal judge has warned of serious adverse consequences for
    the evolution of the Federal securities laws if the Commission
    succeeds in this endeavor.
        For all of these reasons, concern has mounted about the
    fairness of the SEC's internal administrative procedures and
    the frequency with which the agency resorts to administrative
    proceedings and not to Federal court.
        To the Commission's credit, it has not been deaf to these
    concerns. It has recently proposed to amend its rules governing
    administrative proceedings so that instead of prohibiting all
    depositions, respondents will now be permitted to take up to
    five. But these are minor concessions given the litany of
    concerns that have been raised about the Commission's internal
    procedures.
        Indeed, as a leading commentator in The New York Times
    recently observed, these are, ``at best, small steps in
    responding to criticisms over truncated rights.''
        The challenge for Congress is to consider a legislative
    strategy that might help restore a more effective balance in
    the Commission's internal procedural rules and in the process
    by which the Commission decides which cases to file in Federal
    court and which to bring as administrative proceedings.
        One possible approach to this challenge would be to
    consider legislation that would help assure that appropriate
    cases are heard in Federal courts and by administrative law
    judges, and the same legislation could provide incentives for
    the Commission to reform its internal procedures so that they
    are viewed as reasonable by the Federal judiciary.
        This proposal would categorize SEC enforcement proceedings
    as falling into one of three groups. The first group of cases
    would involve proceedings that Congress determines can remain
    in the administrative process and that don't, as a rule,
    require the greater safeguards available under the Federal
    Rules of Civil Procedure or the Federal Rules of Evidence.
    Examples of these cases might include late filing cases, net
    capital violations, and a host of other matters that should not
    clutter the dockets of the already overburdened Federal courts.
        The second group of cases would be composed of cases that
    raise questions that Congress considers particularly well-
    suited for resolution in Federal court. Examples of these cases
    might include insider trading prosecutions, or fraud in the
    sale of securities. As to these cases, respondents would have
    an unconditional right of removal, much as they would under the
    legislation being considered today, H.R. 3798.
        The third group would be composed of cases that fall in
    neither the first nor second categories. Respondents in these
    cases could have a right to petition the Federal courts for an
    order of removal that would be granted at the discretion of the
    judge. The entire process could be modeled on Federal Rule of
    Civil Procedure 23(f) which creates a right to petition for
    interlocutory review of decisions on motions for class
    certification.
        This tripartite approach can, I believe, lead to an
    appropriate balance that does not interfere with the SEC's
    legitimate interest in the fair and efficient enforcement of
    the Nation's securities laws and protects the legitimate
    interests of respondents in these proceedings.
        Thank you very much.
        [The prepared statement of Mr. Grundfest can be found on
    page 49 of the appendix.]
        Chairman Garrett. I thank the gentleman.
        Now turning next to the representative from the biotech
    industry. Mr. Hahn, you are recognized for 5 minutes.

           STATEMENT OF BRIAN HAHN, CHIEF FINANCIAL OFFICER,
     GLYCOMIMETICS, INC., ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY
                              ORGANIZATION

        Mr. Hahn. Good morning, Chairman Garrett, Ranking Member
    Maloney, and members of the subcommittee. My name is Brian Hahn
    and I am the CFO of GlycoMimetics, a clinical stage biotech
    company with 40 employees. We are conducting clinical trials to
    treat patients suffering from sickle cell disease and acute
    myeloid leukemia.
        GlycoMimetics' story is mirrored by our colleagues cross
    bio's membership. Our product candidates were developed by
    brilliant scientists and our early research was funded by
    venture capital. When it came time to conduct expensive
    clinical trials, we turned to the public market for financing.
        Growing biotechs do not generate product revenue. We are 12
    years into our research and we are still years away from our
    first dollar in product revenue. Because of this unique
    development pathway, investment capital is vitally necessary to
    support the $2 billion search for new medicines.
        GlycoMimetics went public in January of 2014, raising $64
    million that has funded our research for the last 2 years. Our
    IPO was supported by the JOBS Act, which has stimulated more
    than 180 biotech IPOs by granting company-enhanced access to
    investors and reducing their regulatory burdens.
        Spending capital on one-size-fits-all compliance
    requirements is uniquely damaging to emerging biotechs. Every
    dollar spent on a reporting burden is a dollar diverted from
    the lab.
        The JOBS Act has been so successful because it has allowed
    emerging growth companies to focus capital on science rather
    than compliance. In particular, I am thankful that the emerging
    growth companies are given a 5-year exemption from compliance
    with Section 404(b) of the Sarbanes-Oxley (SOX) Act.
        The external attestation required by SOX does not provide
    meaningful information to biotech investors, yet is extremely
    costly for a pre-revenue company. Our investors demand
    information about our science, our patients, and our regulatory
    pathway, but they do not want us to spend up a million dollars
    on compliance requirements that don't give any insight into our
    business.
        The JOBS Act's 5-year SOX exemption has saved millions of
    dollars for growing biotechs, but most will still be pre-
    revenue when the IPO on-ramp expires.
        GlycoMimetics expects our annual expenses to increase by
    upwards of $350,000 starting in year 6 on the market, capital
    that could be used to treat over a dozen patients in the clinic
    each year.
        I strongly support the Sinema-Fitzpatrick Fostering
    Innovation Act which would extend the JOBS Act 404(b) exemption
    for an additional 5 years for certain small companies.
        This bill would allow growing businesses to remain exempt
    from Section 404(b) through year 10 on the market if they
    maintain average annual revenues below $50 million and a public
    float below $700 million.
        If focusing on revenues is the key metric of a company,
    size is vital to the reform. Public float is a measure of
    investors' predictions about our future potential, but revenue
    is a true window into a company's size today and our ability to
    pay for expensive compliance requirements that are not
    meaningful.
        We are all working toward the first dollar of revenue.
    Until that point, we need to focus all of our investment
    capital on our research rather than on our compliance
    obligations. This important bill recognizes that a low-revenue
    company that has been on the market beyond the 5-year EGC
    window is still very much an emerging, growing company.
        The Fostering Innovation Act will build on the success of
    the JOBS Act by reducing compliance costs for small businesses.
    These cost savings will allow companies like mine to focus
    solely on life-changing science, so I strongly support this
    bill.
        I also support efforts to encourage the SEC to enact
    capital formation initiatives. The JOBS Act came out of
    industry proposals that the SEC could have instituted on its
    own, but Congress had to step in.
        The SEC Small Business Advocate Act and the Small Business
    Capital Formation Act would improve the SEC's policymaking
    processes by bringing small businesses into the room, hopefully
    encouraging smart policymaking that will support capital
    formation and reduce regulatory burdens.
        The JOBS Act has shown us the strong impact that a move
    away from one-size-fits-all regulatory burdens can have on
    capital formation.
        I applaud the subcommittee for considering further cost-
    saving initiatives and look forward to answering any questions
    you may have.
        [The prepared statement of Mr. Hahn can be found on page 58
    of the appendix.]
        Chairman Garrett. I thank the gentleman for your testimony.
        Dr. Carcello, welcome to the panel, and you are recognized
    for 5 minutes.

        STATEMENT OF JOSEPH V. CARCELLO, EY AND BUSINESS ALUMNI
     PROFESSOR, AND DEPARTMENT CHAIR, DEPARTMENT OF ACCOUNTING AND
    INFORMATION MANAGEMENT, HASLAM COLLEGE OF BUSINESS, UNIVERSITY
                        OF TENNESSEE, KNOXVILLE

        Mr. Carcello. Thank you. Good morning, Chairman Garrett,
    Ranking Member Maloney, and members of the subcommittee. Thank
    you for giving me the opportunity to speak with you today about
    legislative proposals that would affect the U.S. capital
    markets.
        I can't reduce my testimony to one word, but I can reduce
    it to one sentence: Capital markets do not exist without
    investors.
        I have served as a professor at the University of Tennessee
    for over 20 years where I teach accounting, auditing, and
    corporate governance. My remarks are also informed by my
    service on the SEC's Investor Advisory Committee and the
    PCAOB's Investor Advisory Group.
        Turning first to H.R. 3784, it would establish an Advocate
    for Small Business Capital Formation and a Small Business
    Capital Formation Advisory Committee within the SEC. This bill
    appears premised on a lack of access that small business has to
    Congress and/or to the SEC.
        The facts belie the existence of a problem, given recent
    changes to small-business regulation contained in the Dodd-
    Frank Act and in the JOBS Act. Even if Congress concludes that
    the interests of small businesses need better representation,
    the bill as drafted is flawed.
        The advisory committee is essentially a lobbying group for
    small businesses, a lobbying group that Congress would have
    granted a government imprimatur to.
        Finally, H.R. 3784, as well as a number of the other bills
    being discussed this morning, seem to view any shortfall of
    capital experienced by small businesses as a problem of demand.
    That is, small businesses lack capital due to onerous and high-
    cost regulation.
        Leaving aside the veracity of this viewpoint, this argument
    ignores the suppliers of capital: investors. Creating a quasi-
    lobbying group to seek a more favorable regulatory climate for
    small businesses may succeed in reducing the cost of
    regulation, but at the potential cost of greater information
    risk to investors. Such an outcome would actually be
    counterproductive for small businesses as capital would either
    exit the market or would only be available at a much higher
    cost.
        Turning to H.R. 3798, this bill would give defendants
    subject to SEC proceedings before an ALJ the option to have
    those proceedings terminated. If the SEC wanted to proceed, the
    Commission would have to bring the charges in U.S. district
    court.
        Before changing the SEC's enforcement process, it is
    important to remember that Congress, first in the Sabanes-Oxley
    Act and then in the Dodd-Frank Act, made it easier for the
    Commission to bring certain enforcement actions before an ALJ.
    Congress should not underestimate the collateral damage that
    may be done by changing the SEC's enforcement powers.
        Giving defendants the right to effectively choose the venue
    in which they will be tried is unlikely to be in the best
    interests of society and will almost certainly make it more
    difficult for the SEC to deter and punish securities law
    violations, including fraud.
        Finally, the Fostering Innovation Act would extend the
    waiver of auditor reporting on the effectiveness of an issuer's
    controls over financial reporting for certain emerging growth
    companies from 5 years to as long as 10 years. Further
    expanding the number of companies exempt from 404(b) is ill-
    advised because auditor reporting on ICFR is valued by
    investors.
        In a recent survey by the PCAOB's Investor Advisory Group--
    by the way, $13.4 trillion of capital was represented by those
    respondents, 72 percent of surveyed institutional investors
    indicated that they relied on the ICFR opinion either
    extensively or a good bit.
        Any decision to exempt smaller public companies from
    auditor internal control testing ignores the ample evidence
    that internal control problems are often most serious in
    smaller public companies. In addition, those companies charged
    with financial statement fraud by the SEC tend to be relatively
    small.
        If Congress decides to move forward with this proposal, I
    have an alternative for Congress to consider. Rather than just
    giving a blanket exemption after 5 years, assuming the $700
    million threshold is not hit and the $50 million revenue is in
    place, put it to a vote of the people who actually own the
    company: the investors.
        If my colleagues on this panel are right, they will
    overwhelmingly vote for a further delay in that requirement.
    And if they value 404(b), they won't. So let the market decide,
    let investors who own the company make the decision.
        I look forward to the committee's questions.
        [The prepared statement of Dr. Carcello can be found on
    page 40 of the appendix.]
        Chairman Garrett. Thank you.
        From Horizon Technology Finance, Mr. Mathieu, welcome to
    the panel, and you are recognized for 5 minutes.

     STATEMENT OF CHRIS MATHIEU, CHIEF FINANCIAL OFFICER, HORIZON
     TECHNOLOGY FINANCE, ON BEHALF OF THE SMALL BUSINESS INVESTOR
                            ALLIANCE (SBIA)

        Mr. Mathieu. Thank you. Good morning, Chairman Garrett,
    Ranking Member Maloney, and members of the subcommittee.
        I am here today representing the Small Business Investor
    Alliance, or the SBIA, which is the trade association for
    lower-middle-market private equity funds, SBICs, and business
    development companies, or BDCs, and their institutional
    investors. SBIA members provide vital capital to small and
    medium-sized businesses across the country.
        My name is Chris Mathieu, and I am the CFO and co-founder
    of Horizon Technology Finance Corporation, an externally
    managed, publicly traded BDC. I have been involved in the
    accounting, finance, and venture debt industry for more than 25
    years.
        Horizon is a specialty finance company that lends to and
    invests in development and growth stage companies in the
    technology and life science industries. Our investments take
    the form of secured loans or venture loans to companies backed
    by established venture capital and private equity firms.
        Having served as a steward of investor capital for the last
    25 years in both public and private markets and for both
    institutional and individual investors, I believe I have a wide
    and deep perspective on the importance of having an advocate
    among the decision-makers within an organization and industry
    and its underlying sectors.
        I am here to express our support for a bipartisan bill
    called the SEC Small Business Advocate Act, or H.R. 3784,
    introduced by Representatives Carney and Duffy.
        In a speech given by former SEC Commissioner Daniel
    Gallagher on September 17, 2014, the genesis of this Act was
    born. In his opinion, Mr. Gallagher argued that the SEC does
    not have adequate structure in place to consider the views of
    small businesses. He argued that the SEC consistently overlooks
    the impact of their decisions on small businesses and this
    could be a detriment to capital formation.
        We agree with Mr. Gallagher's assessment and believe
    Congress needs to put a permanent structure in place at the SEC
    to give a stronger voice to small business and capital
    formation issues. The Act is the favored approach by the
    industry to create this new structure.
        The Act strengthens the voice of small business at the SEC
    by making significant changes to the way the SEC hears from
    small-business stakeholders, and responds to stakeholder
    requests and makes recommendations to Congress and the SEC to
    improve the ability of small business to access capital.
        The advocate will have similar powers to the Dodd-Frank-
    created Office of the Investor Advocate, giving small
    businesses an equal footing with investors in influence over
    the SEC actions.
        For example, the legislation charges the advocate to
    produce an independent annual report to Congress on its
    recommendations. This report will provide a summary of the most
    serious issues encountered by small business and small-business
    investors, and recommendations for change to regulations and
    other guidance that may be appropriate to resolve these
    problems.
        Congress would also benefit greatly from this office.
    Legislating good policy generally includes technical assistance
    and input from regulators. The technical assistance given to
    Congress suffers from the same bias and focus on large
    corporations. Congress would benefit from having small-
    busineses' issues included in both the technical assistance it
    receives and in the way regulations are crafted when
    implementing legislation. Better information means better
    legislation.
        SBIA also supports the HALOS Act. This legislation helps
    address a problematic issue in the raising of private capital
    surrounding the definition of general solicitation in the
    matching of investors with startup investment opportunities.
        SBIA encourages the committee to pass this legislation to
    provide associations like the SBIA and other fund managers that
    are members of the association the protection they need to
    facilitate the meeting of potential limited partner investors
    and general partner investment managers.
        We also support the Small Business Capital Formation Act.
    This legislation would require the SEC to respond in a public
    statement to each of the suggestions by the Government-Business
    Forum on Small Business Capital Formation.
        The bill requires that the SEC acknowledge the receipt of
    the forum's suggestions and explains why they will or will not
    adopt the suggestions.
        I want to thank the committee again for holding this
    hearing today on these important pieces of legislation. And I
    look forward to answering any questions.
        And I also ask for your support and cosponsor of this
    legislation. Thank you.
        [The prepared statement of Mr. Mathieu can be found on page
    66 of the appendix.]
        Chairman Garrett. I thank the gentleman.
        Last, but not least, Mr. Quaadman from the U.S. Chamber of
    Commerce, you have 5 minutes.

     STATEMENT OF TOM QUAADMAN, SENIOR VICE PRESIDENT, CENTER FOR
       CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

        Mr. Quaadman. Thank you, Chairman Garrett, Ranking Member
    Maloney, and members of the subcommittee.
        A prosperous, growing economy needs to have a strong and
    fair securities regulator to facilitate efficient capital
    markets. I know that is a priority of Chair White as well as
    Director Ceresney, but we were looking at SEC enforcement long
    before their tenure.
        This past July, the Chamber released a report on SEC
    enforcement that included 28 recommendations for how the SEC
    can improve enforcement oversight and investigations and, what
    I would like to talk about today, due process.
        The use of administrative proceedings has changed radically
    over the last 25 years that now today administrative
    proceedings are the primary means of adjudicating violations.
    Administrative proceedings are also not an even playing field.
    The SEC has unfettered right to discovery, and can take years
    to bring a case, whereas defendants have 90 days to prepare
    their defense, lack adequate discovery, and no right to
    deposition and have no protection of evidentiary rules.
        The due process recommendations that we made this past July
    included: alternative dispute resolution, so that the SEC can
    quickly resolve very minor violations; clarifying the use of
    administrative proceedings, so that those ministerial matters
    can solely be handled through administrative proceedings; that
    those serious offenses where there is well-settled law in
    Article III courts could have a pathway to district courts;
    that the 1993 rules of practice be replaced with new rules of
    practice that include rights of discovery, ability to have
    depositions, as well as the reliability of evidence including
    hearsay evidence, as well as the right of removal to district
    court and for the defendant, not the government, to decide the
    right to a trial by jury.
        The SEC, as has been mentioned, has proposed limited
    amended rules of practice; I will call it a crawl in the right
    direction. We are going to file a comment letter at the end of
    this week, which we will be happy to provide to the committee.
        We support the Due Process Restoration Act, but would make
    a couple of recommendations for amendments. First, we believe
    that it should include the 1933 Securities Act, the Investment
    Company Act of 1940, and the Investment Advisers Act of 1940.
    This will allow for the major enforcement matters that have
    well-settled law in Article III courts to have a pathway to
    district courts.
        We also believe that there should be one burden of proof.
    We understand what the reasoning is behind the clear and
    convincing standard, but we believe that there should be one
    standard of proof so that there is balance.
        I believe that the passage of an amended version of the Due
    Process Restoration Act, as well as the other due process
    enhancements that we had recommended, would allow the SEC to be
    a strong enforcer of the law and give defendants the ability to
    defend themselves.
        We also support the SEC's Small Business Advocate Act of
    2015. However, we believe there should be a couple of
    amendments as well. First, the powers of the investor advocate
    and small-business advocate should be similar and mirror each
    other. So, for instance, the small-business advocate should
    have the right to appoint a nonvoting member to the Investor
    Advisory Committee.
        Similarly, it is a very longstanding position of the
    Chamber that advisory committees of the SEC and its subordinate
    organizations also be transparent in their processes.
    Therefore, we would recommend that the bill be amended so that
    the Small Business Capital Formation Advisory Committee as well
    as the Investor Advisory Committee be subject to the Federal
    Advisory Committee Act and the Sunshine Act.
        We also agree that the SEC has had a difficult time in
    keeping up with evolving markets. We believe that the Small
    Business Capital Formation Enhancement Act will allow the SEC
    to modernize its regulations and overcome inertia.
        We also support the HALOS Act. We believe that this will
    help unlock capital. However, we also believe there need to be
    strong investor protections in place and that information is
    going to credited investors. We believe that there should be a
    date-certain retrospective review after implementation for the
    SEC to review if the HALOS Act is both facilitating investor
    protection, promoting investor protection and facilitating
    capital formation.
        Finally, I would just like to thank Chairman Hensarling,
    this subcommittee, and the Financial Services Committee for
    including key capital formation improvements in the DRIVE Act.
    We believe that those are very important and are an important
    build upon the JOBS Act.
        I look forward to working with the committee on these bills
    and look forward to any questions you may have.
        [The prepared statement of Mr. Quaadman can be found on
    page 73 of the appendix.]
        Chairman Garrett. Thank you. The gentleman yields back, and
    I thank you for the testimony, and also amendment ideas.
        But that is what these hearings are for, to see how we can
    improve things.
        So at this point, I recognize myself for 5 minutes for
    questions.
        I guess I will go to Mr. Quaadman first. You heard Dr.
    Carcello's comments, and his last comment was on the Fostering
    Innovation Act bill. One of his comments was, well, if you did
    it, maybe what you should do is allow the markets to decide and
    allow the investors in that field to be able to opt in or opt
    out.
        You heard that comment?
        Mr. Quaadman. Yes, I did, sir.
        Chairman Garrett. That was intriguing to me. So if we were
    to go that way, maybe we shouldn't just apply that to that
    sphere, maybe we should apply that to a whole myriad of Dodd-
    Frank pieces of legislation and allow investors to be able to
    opt out all of that.
        I see Dr. Carcello agreeing.
        Mr. Carcello. Yes.
        Chairman Garrett. I will give Mr. Quaadman and Dr. Carcello
    10 seconds on each one.
        Mr. Quaadman. Sure. I think that is a very interesting
    suggestion. I agree with you that if you want to go down that
    logical road, then why not have that process for a whole myriad
    of rules and regulations.
        One thing I just want to do, throw out one area of concern
    about, we do believe that internal controls are important for a
    company to grow from small to big. In fact, BIO and the Chamber
    have been working together to address some concerns with the
    SEC and the PCAOB where those costs have actually ratcheted up
    for many companies.
        I think it is something worthy of discussion, but I think
    we also need to be very concerned as well of an uneven playing
    field.
        Chairman Garrett. Yes.
        Dr. Carcello?
        Mr. Carcello. Just very briefly, I would extend it broadly.
    I would even extend it to the external audit of the financial
    statements. I think if that had to be selected by investors,
    you would find greater competition and probably greater
    responsiveness to market needs.
        Chairman Garrett. I was initially troubled by your ideas
    because I was thinking you were looking at this as a zero-sum
    game as far as our U.S. markets. But I guess if you extended
    this as far as you would go, you would actually potentially
    open up our markets by making us on a more level playing field
    as far as investor concerns across the spectrum. So, thank you
    for that.
        Let me go back to the other end of the dais here.
        Mr. Grundfest, you laid out three pots if you will, three
    silos as far as what these could fall into, three buckets, pro
    forma matters that would remain here, the clear-cut ones that
    were over here, and then other ones that are in the middle.
    Maybe you could just spend 20 seconds on the ones in the
    middle. What would be the criteria? Because if this is
    basically left to a judge to decide, the judge is going to have
    to have some sort of criteria in order to make that
    determination, right?
        Mr. Grundfest. Absolutely, Mr. Chairman. And if you take a
    look at my written testimony, the very last footnote on the
    very last page lays out six considerations in particular that a
    court might view as what would be called core factors with an
    analogy to rule 23(f). They would be first, the presence of
    complex regulatory matters that are better resolved by an
    administrative law judge than by a jury or an Article III.
        Let's face it, there are certain levels of complexity that
    belong with the SEC. You don't want to clutter the Federal
    court docket if you have that kind--
        Chairman Garrett. That is in the first category. I got
    that.
        Mr. Grundfest. Yes. I'm sorry?
        Chairman Garrett. That is in the first category, clearly,
    the ones that are clearly--
        Mr. Grundfest. Actually, even in the toss-up cases.
        Chairman Garrett. Okay.
        Mr. Grundfest. Even in the toss-up cases, sometimes you
    have complex regulatory matters. A judge can look at it and
    say, we really need the expertise of the SEC and an ALJ to
    address these types of issues.
        Then you could look at the value of fact-finding by a jury
    as opposed to an administrative law judge. Sometimes they say,
    we have questions of credibility and we would rather have a
    jury of 12 peers view these issues rather than have the
    decision being made by an administrative law judge.
        Chairman Garrett. Let me just stop you on that because I
    can go through the other six in a moment.
        Mr. Grundfest. Sure.
        Chairman Garrett. But Mr. Grundfest, on that point, if you
    ask the average person on the street, don't we have a right in
    the United States to have a decision made on guilt or
    innocence, if you will, by a jury of our peers? That doesn't
    occur here, correct? The fact finder is not a jury of our
    peers. And is that a violation of our Constitution? Is that a
    usurpation of the powers of Article III judges, of Article III
    of the Constitution?
        Mr. Grundfest. Yes. And there have been a number of cases
    that have been popping up where courts have been expressing a
    lot of concerns regarding this use of administrative
    proceedings.
        We have now the system is set up that the government
    decides whether or not there is going to be a trial by jury,
    which puts defendants at a severe constitutional disadvantage.
        Chairman Garrett. Right. And at the end of the day, what
    are we talking about as far as the penalties that could be
    imposed? Are these not life-and-death decisions actually being
    made by these inside tribunals?
        Mr. Grundfest. Yes. In fact, Russell Ryan, who is a former
    Assistant Director of Enforcement at the SEC, wrote an op-ed in
    The Wall Street Journal last year where he was citing that
    these proceedings are being used as quasi-criminal proceedings.
        So if you take someone like a Nelson Obus with Wynnefield
    Capital--
        Chairman Garrett. Okay.
        Mr. Grundfest. --he was able to get into district court
    under the old rules and was acquitted after 12 years and $13
    million. He would not have the opportunity to do that today and
    would not have had the discovery tools that allowed him to
    unearth the evidence that acquitted him.
        Chairman Garrett. Thank you very much.
        And with that, I turn to the gentlelady from New York, the
    rnaking member of the subcommittee, for 5 minutes.
        Mrs. Maloney. Thank you.
        Professor Carcello, I would like to ask you about the Due
    Process Restoration Act. This bill would permit a defendant
    rather than the SEC to choose the venue of the enforcement
    action, essentially whether it is initially tried in an
    administrative forum or the Federal district court.
        Now when the SEC is bringing enforcement action, it can
    choose the venue that best serves the interests of the
    investors and the public. A defendant in an enforcement action,
    on the other hand, would likely choose the venue that is in the
    best interest of the defendant.
        So the bill, for example, could potentially allow a well-
    funded defendant to choose a district court knowing that the
    Federal district courts are overwhelmed and that may delay a
    trial, realistically, for many years.
        In your opinion, do you think allowing a defendant to have
    this choice is in the public interest?
        Mr. Carcello. No. And the reason why--the choices here are
    very clear. It is obvious to the defendant it is in his or her
    interest to have a choice of venue. It is, I think, clear that
    from a societal perspective the SEC is going to choose the
    venue that they think best serves investors and best serves
    society.
        And I think it is important for Congress and this committee
    to think carefully about the fact that the greater use of ALJ,
    as I have talked about in my testimony, was facilitated by
    actions Congress took. Congress took action in 2002 in Section
    305 of SOX to facilitate the ability of the SEC to move in this
    venue. They took action in Dodd-Frank in 929(p) to facilitate
    the ability of the SEC to move in this venue.
        Both of those Acts followed severe market disruptions,
    massive financial fraud, to the point that our markets were
    essentially paralyzed in 2001 and 2002.
        And I would point out to this committee that in the vote
    against SOX, there were fewer people who voted against SOX--
    look it up--than voted against declaring war on Japan after
    Pearl Harbor was bombed. Okay? And President Bush was the
    President then, hardly a known liberal. So the markets were
    paralyzed.
        Dodd-Frank was not nearly as bipartisan, clearly, but
    followed essentially close to the complete implosion of the
    financial sector in this country. And so Congress viewed market
    failures there. They viewed it as a situation where the SEC,
    among many other things, needed greater enforcement tools.
        So I think the question the committee needs to answer--and
    it is really a very simple question--is what has changed? What
    has changed? Why did the enforcement tools that you have
    created within the last 15 years, it is not 50 years ago, this
    is in the last 15 years, why are these enforcement tools no
    longer needed?
        Mrs. Maloney. To follow up, are you concerned that this
    would hinder the SEC's ability to crack down on bad actors in
    the securities market and especially with the funding
    constraints? We were just told from the screen that the SEC is
    funded 12 percent lower than what their requests are, even
    though their responsibilities have grown.
        So I would like to ask you to follow up on that, and then
    anyone else on the panel who would like to comment on whether
    you think this would hinder the SEC's ability to crack down on
    bad actors.
        Dr. Carcello?
        Mr. Carcello. Very briefly, to give others some time, yes,
    I think it clearly would. It would make it more difficult. I
    think even in Professor Grundfest's testimony, part of his
    testimony in his written remarks indicated that it would make
    it more difficult at the margin.
        And the SEC, in many ways, is an underfunded agency. I
    think many people have viewed that for years. And so it is
    certainly going to make it more difficult for them to enforce
    the securities laws.
        To the extent that there is, in the minds of some, a lack
    of fairness to the defendant, I think that is a legitimate
    concern. But I think there are other ways that can be dealt
    with.
        Mrs. Maloney. Would anyone else care to comment?
        Mr. Quaadman. Yes, Ranking Member Maloney, if we repeal the
    Bill of Rights a lot more people would be in jail, but we
    wouldn't be a better country. The issue here is that if you had
    sufficient rules of practice and administrative proceedings and
    you had a right of removal, you would not have a stampede to
    district court, but at least you would give defendants the
    right to defend themselves.
        The reason why we have a Bill of Rights is because
    prosecutorial powers are so great, the Founding Fathers wanted
    to put some safeguards there.
        The issue here is we do not have constitutional safeguards,
    which also means there is a presumption that somebody is guilty
    until they are proven innocent.
        Mrs. Maloney. But they can appeal to Federal court,
    correct?
        Mr. Quaadman. First, they have to--
        Mrs. Maloney. Wouldn't that be a safeguard?
        Mr. Quaadman. But first, they have to appeal to the
    Commissioners themselves.
        Chairman Garrett. The gentlelady's time has expired.
        The gentleman from Virginia, the vice chairman of the
    subcommittee, is recognized for 5 minutes.
        Mr. Hurt. Thank you, Mr. Chairman.
        Mr. Quaadman, I wanted to start with you. I was wondering
    if you could briefly talk about the importance of the angel
    capital markets and the importance of promoting policies here
    in Congress that encourage more investment by angel investors
    in startups.
        Mr. Quaadman. Angel investors are an extremely important
    investment tool for startup businesses. They are actually the
    first line of accredited investors who are going into startups,
    so they are critical for business formation.
        I think what we have clearly seen with the JOBS Act is the
    changes in general solicitation and the opening up of roadshows
    have been wildly accredited with the increase in IPOs and
    public company formation.
        I think by helping to open up these venues for angel
    investors, if done in the right way, which they can be, I think
    that will certainly help business formation. And as I have
    testified before, we have seen over the last 7 years historic
    lows in business creation in the United States. So I think this
    is a critical reform we need.
        Mr. Hurt. And do you think that is particularly important
    in light of the pressures that have been on other participants
    in providing capital, namely banks and credit unions, the
    pressures that they have suffered from over the last 8 years?
        Mr. Quaadman. Yes. Clearly we have seen with the
    implementation of the Basel III rules and other rules that are
    happening, there are disincentives now for banks to loan either
    through traditional business products or consumer financial
    products that are used for startups. So that market has
    receded, and we are now more dependent upon capital markets. So
    I think reforms like this, as with the BDC legislation and
    others, are very important in terms of moving forward.
        Mr. Hurt. Thank you.
        I wanted to talk to Mr. Hahn and Mr. Mathieu for this next
    question. I was wondering if, beginning with you, Mr. Hahn, you
    could talk a little bit about the current general solicitation
    rules and how they unnecessarily impede the ability of startups
    to access capital under Reg D Rule 506(c), if you could talk a
    little bit about that, and then talk about our HALOS proposal
    and whether or not you believe that this proposal gets to the
    heart of solving that issue or improving that issue? And then
    maybe leave some time for Mr. Mathieu.
        Mr. Hahn. Thank you. I can kind of start working backwards
    with the JOBS Act. We went public in January of 2014. And the
    test-the-waters provision of the JOBS Act was instrumental.
    That is why we had a successful IPO.
        Working backwards toward that, though, most all of our
    funding was from venture capitalists. And over the years, when
    we were still private, we were always looking for different
    ways to raise money. So any expansion for private companies to
    get in front of more investors and to find more pockets of
    capital, would be a tremendous success to help more companies
    succeed.
        Mr. Hurt. Do you think that the HALOS proposal that we are
    considering today helps remove some of those barriers and
    enhances the ability of startups to access that capital?
        Mr. Hahn. Yes, if it works, kind of similar to test the
    waters, it gives you more access with less barriers to get in
    front of more potential investors to tell the story of the
    company. In our case, our science is very complex, so it takes
    more meetings, more time to get people comfortable with our
    technology. I think that would definitely be helpful.
        Mr. Hurt. Mr. Mathieu?
        Mr. Mathieu. Yes, I would actually agree with Mr. Hahn. I
    think that solicitation is a broad subject and it really goes
    to common-sense of how you tell your story.
        At Horizon, we often look at companies like Mr. Hahn's in
    their earlier stages as well as being public, so we actually
    like the stories, we like the time spent in developing the
    relationship. So I think the solicitation, broadening that
    flexibility is really important, not just to raise equity
    capital in the private market, but also the public sector as
    well.
        Mr. Hurt. And I appreciate the testimony of both you and
    Mr. Hahn, in support of the HALOS Act. Do you think that the
    HALOS Act, if enacted, would help remove some of those
    impediments and encourage more angel investing in startup
    companies?
        Mr. Mathieu. I do, yes. And I think it is really a path to
    just improving a process that works, but can be improved.
        Mr. Hurt. Excellent, thank you.
        I yield back the balance of my time.
        Chairman Garrett. The gentleman yields back.
        Mr. Hinojosa is recognized for 5 minutes.
        Mr. Hinojosa. Thank you, Mr. Chairman.
        I ask unanimous consent to enter two statements into the
    record regarding the legislative proposals we are considering
    today. The first one is a statement from Jennifer Taub,
    professor of law, Vermont School of Law, and the second is a
    statement by Public Citizen, a public advocacy organization
    here in Washington, D.C.
        Chairman Garrett. Without objection, it is so ordered.
        Mr. Hinojosa. Thank you.
        I would like to thank the panelists for their appearance
    and testimony here today.
        Our capital markets are the envy of the world because they
    are safe, transparent, and liquid. Emerging companies are the
    lifeblood of our economy. So ensuring that emerging companies
    have access to capital is an imperative if we are to maintain
    our global and financial leadership.
        As we consider the proposals that aim to improve our
    capital markets, we must be careful not to undermine the safety
    and the confidence in our markets.
        My first question is to John Grundfest. Professor, in your
    testimony you voiced some concerns that the SEC faces a crisis
    of confidence over the fairness of its internal administrative
    procedures. H.R. 3798, the Due Process Restoration Act, aims to
    address some of the issues raised by the critics by providing
    defendants to remove their case to a Federal district course, a
    venue of their choosing, and by increasing the SEC's standards
    from a preponderance of the evidence to a clear and convincing
    standard.
        My question to you is, do you think these measures will
    address the concerns raised regarding the SEC's administrative
    proceedings?
        Mr. Grundfest. I think the bill is one approach that can be
    taken to these issues. And I think the existence of the
    challenge is actually effectively conceded by the Securities
    and Exchange Commission itself.
        I think it is valuable for this committee to recognize that
    the Commission itself has decided that its historic approach of
    saying no depositions in any of its proceedings may actually
    not be fair, and for that reason the Commission itself has
    proposed increasing the number of depositions to up to five.
        Now, in some of the more complex matters, the number of
    five could be viewed as being extraordinarily low, arbitrary,
    and capricious, given a case that might involve hundreds of
    thousands of documents, where the Commission itself may have
    taken testimony from hundreds of witnesses. And in order to
    have a modicum of fairness, you need not go to one extreme and
    say we are going to depose absolutely everyone, but limiting
    the number of depositions to five might be viewed as arbitrary
    and also as unfair.
        Mr. Hinojosa. That is your opinion. Do you believe this
    bill will have the result of moving most, if not all, SEC
    proceedings to an already overly burdened Federal court docket?
        Mr. Grundfest. It could move a large number of important
    cases to Federal court docket. And out of concern for the loads
    that the Federal judges do face, an alternative approach might
    be to look at the three categories that I have suggested where
    you could carve out a set of cases where you don't have to have
    any right to bring it to a Federal--
        Mr. Hinojosa. The Federal courts in Brownsville all the way
    to El Paso on the Texas/Mexico border are just overloaded with
    different immigration cases and lots of other cases. And we
    just don't have enough Federal judges to take on more like you
    are suggesting.
        My next question is to Joseph Carcello. The Small Business
    Capital Formation Enhancement Act would require the SEC to
    publicly assess the findings or the recommendations of the
    annual Government-Business Forum on Small Business Capital
    Formation. My question is, do you find it necessary to require
    that the SEC to also formally respond to each recommendation?
        Mr. Carcello. Yes, that is a concern. My understanding is,
    last year the number of recommendations that came out of that
    forum was 20. My understanding also is that any participant in
    the forum can make a recommendation.
        To the extent that these bills are patterned after Sections
    911 and 915 of Dodd-Frank, and speaking as someone who, along
    with Professor Grundfest, is on the Investor Advisory
    Committee, I can tell you it is quite difficult for us to come
    to a consensus. There are 20 members in that group. Each of the
    five SEC Commissioners essentially have four picks. As you well
    know, the SEC is pretty ideologically divided, so the IAC is
    pretty ideologically divided.
        Mr. Hinojosa. They seem to resemble Congress.
        Mr. Carcello. Yes, they seem to resemble Congress.
        Mr. Hinojosa. Do you think the bill will help the SEC--
        Chairman Garrett. The gentleman's time--I will permit the
    last question. Go ahead.
        Mr. Hinojosa. I yield back.
        Chairman Garrett. Okay.
        Mr. Duffy is now recognized.
        Mr. Duffy. Thank you, Mr. Chairman.
        I am concerned about the arguments that are being made that
    we can't allow due process because our Federal courts are
    overburdened. If that were the case, maybe what we would do in
    regard to criminal cases, we want to have the attorney
    general's office set up some form of administrative law judge
    so we can have the FBI investigate, the attorney general
    prosecute, to administrative law judges who are hired by the
    U.S. attorneys office. And then that therefore would be justice
    in the American criminal system.
        But I think most Americans would scream wildly that that is
    not fair. And to think that we are going to now make the
    argument that we can't go to Federal courts because they are
    overburdened, the better outcome then would be stay at the SEC
    and be guaranteed an adjudication of guilt is a better outcome
    for defendants, is absolutely insane.
        I agree with Mr. Garrett's bill. We should give defendants
    an outlet to go to Federal courts and have their cases heard by
    an impartial group of judges and potentially juries.
        Mr. Quaadman, do you agree with that analysis? Am I wrong
    on that? I am supposed to be spending my time on my own bill
    with Mr. Carney, but this is, anyway--
        Mr. Quaadman. No, Mr. Duffy, I think you have hit the nail
    on the head. And the reason why I also mention about creating
    new rules of practice was, if you have fair due process in
    administrative proceedings, you are not going to have a
    stampede to district courts either. You might have large cases
    move over, but it is not going to be a stampede.
        The other thing I just want to mention too, because this
    also shows how Kafkaesque this is, what got us involved in this
    to begin with was that a general counsel came in and talked
    about a situation where they had an issue that both the IRS and
    the SEC were investigating. And the IRS gave this company a
    document giving all their rights and responsibilities during
    the investigation and the SEC had nothing. So they are in
    complete no-man's land from the start of the investigation
    through. And then, when you go into the AP process, you have no
    right to discovery or anything. So it is a completely tilted
    playing field.
        Mr. Duffy. I did well as a former State prosecutor, won a
    lot of cases, but I have to tell you I would have had a much-
    improved record if I was able to try my cases in front of my
    own DA staff, no doubt. And I think that is why we see the
    rates of success so high at the SEC.
        I do want to transition to the bill that I worked on with
    Mr. Carney in regard to our small-business advocate advocating
    for better capital formation with regard to our small
    businesses.
        I think if you look at economic growth, we look at job
    creation, it is coming from our small, emerging growth
    companies and making sure that they have access to capital it
    is incredibly important that we get that right.
        And I appreciate Mr. Carney's hard work and the bipartisan
    effort and the support that we have had on both sides of the
    aisle for this proposal.
        We all agree that we want to protect investors. That is a
    really good thing. But we also want to make sure we have the
    right balance, I would argue.
        And maybe to Mr. Mathieu, do you think we have struck the
    right balance between investor protection and capital formation
    specifically in regard to small businesses?
        Mr. Mathieu. I think currently, we are not fairly balanced.
    I think that is what this legislation is actually trying to do.
        Mr. Duffy. I would agree.
        Mr. Mathieu. And so I think we are trying to say that the
    SBIA supports this very strongly, because right now the small-
    business investor and the small-business operators don't have a
    fair say, a fair spot to express their position.
        Mr. Duffy. I would agree. And I think to have an advocate
    there who can talk about the good, the bad, and the ugly
    specifically to the Commission would benefit our small
    businesses and emerging growth companies.
        I just want to make one comment. I know that some on the
    right have made some complaints, people are concerned about the
    growth of government. We have a really big debt. None of us
    ran, at least on this side of the aisle, to grow government and
    make it bigger. And some have said, well, this bill is a growth
    of government.
        But I think that making sure that you have an advocate
    inside the SEC promoting policies that will support our small
    businesses so they can access capital, they can grow, they can
    create jobs, they are the next innovators, Mr. Hahn, of the
    next lifesaving products or the next iPad or Apple or whatever
    that technology may be.
        To think that we are going to use the growth of government
    argument against good policies that help American businesses, I
    think is shortsighted.
        Mr. Mathieu, would you agree with that?
        Or Mr. Hahn, would you agree with that?
        Does the growth of government for the small agency that is
    funded by fees, not by appropriation, is that small in
    comparison to what this does for the American small-business
    community?
        Mr. Mathieu. Yes, I think this is common-sense. It is a no-
    brainer. The incremental cost, if any, far supports the
    benefits that will come. The lack of support of small business
    from day to day has to change.
        Mr. Duffy. Mr. Hahn, quickly?
        Mr. Hahn. The SEC doesn't often act on the recommendations
    of the advisory committee or the Government-Business Forum. The
    small-business advocate would bring those industry stakeholders
    further into the SEC's decision-making process.
        Mr. Duffy. Thank you, I yield back.
        Chairman Garrett. Thank you.
        There are some people on the right who are making that
    argument. I appreciate that.
        Mr. Green is now recognized for--oh, Mr. Carney is
    recognized for 5 minutes.
        Mr. Carney. Thank you very much, Mr. Chairman, and Ranking
    Member Maloney for having this panel today and for all of you
    who have come to testify.
        A few years ago, I worked with my friend on the other side
    of the aisle, Mr. Fincher, on the JOBS Act, and in particular
    the IPO on-ramp. I come from the State of Delaware; my district
    includes the whole State of Delaware. We pay very close
    attention to corporate formation and business development
    issues. Most of the 500 companies are incorporated in our
    State.
        And folks whom I know well, who do that business in the
    Division of Corporations have been reporting to us that
    companies were no longer going to IPO. And we had had a real
    problem with that, a cutback, and there are lots of different
    reasons.
        And Treasury convened a group of business leaders. And out
    of that confab came a number of ideas to try to promote
    businesses, emerging growth companies to go to an IPO, because
    the facts were that companies that sought public financing
    through an IPO were in a growth stage creating more jobs. And
    what had happened was for some of those companies that were
    emerging, they were looking at a merger and acquisition kind of
    an outlet, which actually resulted in fewer jobs.
        And so the effort that we did in a bipartisan way to put
    the IPO on-ramp together out of the work that Treasury had done
    I think has produced some pretty good results and the facts
    speak for themselves.
        We heard the argument from BIO a while ago that biotech and
    pharmaceutical-type companies, research companies take a longer
    time to develop and therefore need a longer on-ramp. And I
    think that is part of the reason for the bill that is before us
    that Ms. Sinema and others have cosponsored.
        Is there any concern? Originally when we had that testimony
    a year or so ago, I was interested in providing an extension of
    that on-ramp to bio-type companies. This would just do it to
    any company that fits the definition, an emerging growth
    company as defined by the original JOBS Act, and then had the
    limitations of size as part of the bill.
        Should we look at limiting it further to the kinds of
    companies, Mr. Hahn, like yours, or not?
        Maybe Mr. Quaadman could answer this more generally?
        Mr. Hahn. In the last 18 or last 20 years, I have been in
    early-stage startup companies. And I have been in
    manufacturing, IT, and I have been in life sciences now since
    2002. I would say, every one of those industries, every one of
    those companies, I think this is beneficial across-the-board.
        Mr. Carney. Okay, good. So the other issue that we
    struggled with when we did the initial IPO ramp bill, and Mr.
    Himes was arguing that maybe the size limitations were too big,
    does anybody have--is there any concern, I guess from Mr.
    Carcello, about the definition of emerging growth companies
    under that piece of legislation, that it ought to be more
    limited, or anybody on the panel?
        Mr. Carcello. It is certainly significantly more limited
    than the bill you considered last year. So if you are going to
    move forward, I think the way you have structured it now is
    certainly less risky to the market than the bill that was voted
    down last year.
        Mr. Carney. Okay, thank you.
        So Mr. Quaadman, I didn't catch everything that you said
    about the small-business advocate bill, but there was some
    recommendation for a change that you mentioned. Could you
    restate?
        Mr. Quaadman. Sure. I appreciate your work on the bill. And
    as I said, we support it.
        The SEC has a tripartite mission, right: investor
    protection; capital formation; and competition. And your bill
    addresses capital formation and competition.
        The two changes we recommended were: one, that the investor
    advocate and the small-business advocate be on the same plane,
    so that there should be an amendment that the small-business
    advocate would have a similar right to appoint a nonvoting
    member to the Investor Advisory Committee as the investor
    advocate has with the Small Business Capital Formation
    Committee. That is one.
        Number two, and this has been a longstanding position that
    we have advocated for, is that these types of advisory
    committees, and I would say for the Small Business Capital
    Formation Committee as well as for the Investor Advisory
    Committee, that they be subject, that they be under the
    jurisdiction of the Federal Advisory Committee Act so that
    there is transparency with the proceedings, so that neither the
    Investor Advisory Committee nor the Small Business Committee
    could be a quasi-lobbying group that Mr. Carcello says.
        Mr. Carney. I am running out of time, but I just want to
    make a comment about that. To us, those of us who are
    sponsoring the bill and supporting it, we think advocacy, for
    some, advocacy is lobbying. We think it is advocacy and it is
    appropriate in this context.
        We do this in all kinds of different ways for small
    businesses at State, local, and Federal Government. We think it
    is appropriate in this context.
        And I want to thank everybody again for being here today
    and for your comments and input.
        Chairman Garrett. Thank you. And the gentleman yields back.
        Mr. Schweikert is recognized for 5 minutes.
        Mr. Schweikert. Thank you, Mr. Chairman.
        Mr. Hahn, you were kind enough in your testimony, in your
    written testimony to talk a bit about some of the successes and
    some of what was helpful in the JOBS Act.
        First off, thank you from many of us who cared a lot about
    that. But just for curiosity, what would you add? What would
    you change? And what other legislation--the legislation we are
    talking about here today, do you think it enhances both your
    success and your use of the JOBS Act?
        Mr. Hahn. Thank you. As I stated, the test-the-waters
    meeting provision of the JOBS Act was great. It takes investors
    some time to understand our technology and our science and what
    we are doing.
        I think the Fostering Innovation Act takes a targeted
    approach to build onto the JOBS Act from the 404(b) exemption.
    So for the first 5 years, we are 404(b) exempt. And the
    company, GlycoMimetics, has been around since 2003. So here we
    are in 2015 and we still don't have--we are still several years
    out from a product to market and product revenue.
        So we are going to be in year 6 and we have most of our
    expenses, our top three expenses, are our payroll, our clinical
    trials supplies, and clinical trial expenses.
        So I think in year 6, we are looking to add upwards of
    $350,000 in 404(b) attestation and we are still going to be 40
    employees, I am still going to have a staff of 3, we are still
    going to have vanilla financials.
        Mr. Schweikert. Let me ask, within your specialty, how
    common is this, particularly in biotech, research-intensive
    sort of new intellectual capital to have as long an on-ramp as
    you are having?
        Mr. Hahn. Very common, very common. It takes upwards of $2
    million and anywhere up to 10-plus years to get a product from
    concept to FDA approval.
        Mr. Schweikert. Okay. And do you think we are going far
    enough on these pieces of legislation to give you that window
    to tell your story, but also to have the capital without the,
    shall we say, auxiliary expenses?
        Mr. Hahn. I think it is a good, measured, targeted next
    step. So the first 5 years, I think, a lot of companies, we are
    in that stage now where hopefully we can get to years 6 through
    10 and see how that works out. And then possibly expand more
    and measure it.
        Mr. Schweikert. Thank you.
        Mr. Quaadman, in that same sort of realm of subject, I am
    sort of doing a broad brush of, okay, here is our--we will call
    our success from a couple of years ago the JOBS Act, here we
    are doing some very small, incremental touches and
    improvements, may be able to have some voices, some other paths
    if you hit the wall of regulatory or litigation. What else
    would you add? What are we failing to even engage in the
    conversation on?
        Mr. Quaadman. First off, I think both the Small Business
    Advocate bill as well as Mr. Poliquin's draft bill go a long--
    those bills, if they are implemented, will have far-ranging
    consequences because we will actually start to have a real
    debate about capital formation and competition within the SEC.
        Mr. Schweikert. Okay. But first on the Poliquin bill, and I
    think we are still just in draft or discussion draft at this
    point?
        Mr. Poliquin. Yes.
        Mr. Schweikert. Does it actually provide the path that you
    believe is necessary?
        Mr. Quaadman. Yes, because what you are doing is you are
    creating a mechanism that the Commission actually has to
    respond to recommendations. Because remember, the JOBS Act was
    a series of recommendations that advisory committees and the
    SEC had been making for years and nothing had ever happened. So
    rather than things just going over the transom and being
    ignored, this actually starts to force mechanisms for something
    to happen.
        So I think it is also important, for it allows the SEC to
    take the self-initiative to try and keep up with the markets
    rather than having Congress having to bear down on them.
        Mr. Schweikert. Okay, sort of the second half of this, and
    I don't mean to get ethereal. With what I am seeing in much of
    the capital formation marketplace, we all see the numbers that
    today we have, what, a third, or 40 percent fewer publicly
    traded companies, but we see the movement in private equity, we
    see the movement now on versions of capital raises that are
    happening online.
        Are we being robust enough in understanding that the way we
    raise capital today, but over the next decade, is going to look
    really different than it did last decade?
        Mr. Quaadman. The capital markets are always evolving. So I
    can guarantee you that 10 years from now, it is going to be
    much different than it is today. Remember, we are seeing online
    lending start to ramp up.
        Mr. Schweikert. Yes, peer-to-peer, the Lending Club models
    are exploding.
        Mr. Quaadman. Yes.
        Mr. Schweikert. But are we being sort of future-proof in
    the designs of how we are addressing this? And are we being
    prescriptive enough to the SEC?
        And I know, Mr. Chairman, thank you for your patience.
        But for many of us, we sat here for 3 years waiting for the
    rule sets on crowdfunding we all thought was going to be pretty
    simple. So asking the SEC to promulgate rule sets has become a
    disaster. And we almost have to be prescriptive in what we do,
    which also means we have to get it right.
        Mr. Quaadman. Yes. The one other thing that I would mention
    that should occur is also, what are the policies and
    regulations that are driving public companies out of that
    space? So what is the outflow problem? And I don't think we
    have really addressed that one.
        Mr. Schweikert. Okay.
        Mr. Chairman, thank you for your patience.
        Chairman Garrett. Thank you. The gentleman's time has
    expired.
        The gentleman from California is welcome and recognized for
    5 minutes.
        Mr. Sherman. Thank you. I think it is critical that we get
    capital to small business. Outside the scope of this hearing,
    most businesses borrow most of their capital. And what I am
    seeing is that if you are borrowing money at prime-plus-3, you
    can get the money. If you want to borrow money at 33 percent
    annual, well, there is an advertisement every few minutes about
    how you get your money the next day.
        But the prime-plus-6, prime-plus-8 loan, prime-plus-5 loan
    that I was used to seeing when banks and other lenders took
    some limited risk seems to be gone. But here we are focused on
    capital and shareholders' equity rather than loans.
        Mr. Carcello, beyond the JOBS Act, what proposals can you
    come up with that will help small and medium-sized businesses
    get access to equity capital?
        And perhaps others would have a comment as well.
        Mr. Carcello. I initially thought, as I read through these
    bills, that the HALOS Act was good. And so this gives me an
    opportunity to talk about that Act. And as these panelists have
    talked about it, they have focused on angel investor groups,
    and I actually think those are quite good and quite helpful,
    and I think would be bipartisan.
        What threw me when I read that Act, though, is the
    expansion of that Act into venues such as not-for-profits and
    universities and governmental entities. And for someone who has
    worked in a university for over 25 years, I can tell you most
    people who work there are not accredited investors, most people
    who work there are not sophisticated investors. And I think
    that poses tremendous pressure.
        Mr. Sherman. You mean my professors were not as smart as
    they told me they were?
        [laughter]
        Go on.
        Mr. Carcello. Not about financial matters. Most Americans,
    as you probably know, Mr. Sherman, being a CPA, are not quite
    knowledgeable about financial matters.
        Mr. Sherman. Does anyone else have a comment? If not, I
    will move on to the next question.
        Mr. Quaadman, I am a cosponsor of the SEC Small Business
    Advocacy Act, which would create an Office of Advocate for
    Small Business Capital Formation. Do you think this new office
    would help energize the capital markets for small and medium
    size in initial public offering companies?
        Mr. Quaadman. Yes, I think it would allow for that voice
    for capital formation to be heard within the halls of the SEC
    where it hasn't been before. And as I said before, I think it
    would also force the SEC to modernize rules that would prevent
    Congress from having to go through a JOBS Act exercise again.
        Mr. Sherman. Dr. Carcello, should we be providing
    additional exemptions from Section 404, I believe it is 404(b),
    dealing with reporting on a company's internal controls? I know
    this is a cost for some companies and it seems like an
    unwarranted cost except when it discloses a problem.
        Mr. Carcello. Right. Yes, I don't think we should. I think
    if the Congress decides to move forward, as I suggested to the
    committee, I would at least give the investors, the owners of
    the company, the right to elect. So at the end of 5 years, put
    it to a vote, put it to a shareholder vote. And if it is as
    good an idea as all of the people to my left and right think it
    is, then the shareholders will overwhelmingly approve it.
        I do think that 404 has produced tremendous benefits. There
    is a lot of research, not just in the academy. The Financial
    Executives Research Foundation recently released a study where
    financial executives, approximately half of them, have said the
    benefits of the internal control attestation far exceed the
    costs.
        Again, it was put in place because of problems with
    financial reporting, restatements, fraud. And when that
    happens, confidence in the capital markets evaporates and
    capital dries up. So if we are concerned about capital
    formation, don't lose sight of that other side.
        And if you would give me the ability, I want to make a very
    small comment, if I could, about the Small Business Advocate
    Act. I think it is important--
        Mr. Sherman. I do want to. I have just a few more seconds
    and it wouldn't be a committee hearing if I didn't rail about
    the Financial Accounting Standards Board (FASB) and their
    decision to put $2 trillion on the balance sheet of businesses,
    chiefly small and medium-sized businesses.
        Mr. Quaadman and I have been trying to prevent this
    unwarranted damage to our business system. And members of the
    subcommittee should be aware that the FASB has said they are
    going to go forward with this with virtually no input from any
    part of the public that isn't already in their own Rolodex.
        And it is just illustrative of the fact that we should
    never have that much governmental power located in Norwalk,
    Connecticut.
        I yield back.
        Chairman Garrett. Thank you. The gentleman yields back.
        The gentleman from Maine is recognized for 5 minutes.
        Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very
    much.
        When we have an opportunity to get government together with
    the business community, the folks who are on the ground,
    growing their companies and creating jobs, it is a better time
    and a better place for all Americans and all job creators.
        That is why I am excited about discussing with you your
    experience when it comes to the small business capital
    formation forums that the SEC has been having over the past 35
    years.
        Now, it is my opinion if we are going to get all this
    talent together, folks who are taking time out from running
    their businesses to try to inform government officials, in
    particular in this case the SEC, on the best way to allow small
    companies to borrow money and grow and hire more individuals
    and grow the economy, then we should listen to the results they
    come up with.
        Now, what I would like to do is start with you, Mr. Hahn. I
    believe that you were not or have not participated specifically
    in these business-government forums that the SEC has been
    holding the last 35 years, but you represent folks who do.
        And could you, to the best of your ability, inform all of
    us here on this committee and the public as to what experience
    your folks have had with respect to this forum? Have the
    recommendations been useful?
        Mr. Hahn. I think from my understanding, as I said earlier,
    a lot of--the SEC often doesn't act on the recommendations of
    the advisory committee and the Government-Business Forum.
    However, they are published. I think it was Congress that took
    parts of the JOBS Act out of those recommendations--
        Mr. Poliquin. Right.
        Mr. Hahn. --which was a tremendous success.
        Mr. Poliquin. So these specific recommendations from past
    forums ended up in legislation that was passed through this
    committee. Correct?
        Mr. Hahn. Yes.
        Mr. Poliquin. So it was pretty useful.
        Mr. Hahn. Very useful.
        Mr. Poliquin. Okay. And doesn't it therefore make sense
    that not just that one example in the JOBS Act, but on an
    ongoing basis we have the body, the SEC, that is holding these
    and organizing these forums to make sure that every
    recommendation that comes out of these forums they address,
    they comment on in a public format. And if they are going to
    adopt some of the recommendations, fine. And if not, why?
    Doesn't that make sense?
        Mr. Hahn. Total sense.
        Mr. Poliquin. And that would be helpful to those in this
    space to make sure they know what rules coming down the pike
    might affect them when it comes to raising money for their
    companies.
        Mr. Hahn. Also, it makes you wonder what else has been
    missed.
        Mr. Poliquin. Say that one more time.
        Mr. Hahn. It also makes you wonder what has been missed,
    what hasn't come out of those recommendations that could be
    helping businesses like mine.
        Mr. Poliquin. Absolutely. I was about to morph into that.
        And Mr. Mathieu, maybe you can comment on this. If you have
    35 years of forums that are coming up with all of these experts
    from their field, in government, in academia, attorneys even,
    that are coming up with these ideas, doesn't it make sense that
    if you publicly come out and you comment on each of these
    recommendations, then you don't have to start over the next
    year?
        You now have a wealth of information, a database of
    recommendations that might make sense going forward such that
    we can go forward instead of repeating what we have just done
    the last few years.
        Mr. Mathieu. That completely makes sense. First, thanks for
    introducing the legislation.
        Mr. Poliquin. You bet.
        Mr. Mathieu. It is very important. What is crazy about this
    is that, as you said, there are a lot of people who spend a lot
    of time preparing for those forums, the structure makes a lot
    of sense, it gets a lot of people, thoughtful-thinking people
    into group sessions, breakout sessions where they are really
    spending a lot of their emotion and mental efforts to come up
    with really great ideas to help small business.
        They put them in a package, they come up with the idea, and
    then it just goes nowhere.
        Mr. Poliquin. It sits on the shelf.
        Mr. Mathieu. It goes into the atmosphere, which is just
    crazy. That is like, have every small business spend a week-
    and-a-half doing business development or strategic planning and
    then throw it in the trash and the shredder right after they
    have finished it. It doesn't make sense.
        Mr. Poliquin. Yes. We have a fellow named Tom Coyte from
    Atlantic Financial in Maine who runs a VC shop, who came down
    and participated in some of these forums. So, it is close to
    our heart.
        Mr. Quaadman, if I could end with you, I just have a short
    amount of time here. Doesn't it make sense to also require the
    SEC to not only participate in these forums, but make sure that
    their recommendations are not only public, but they are
    relevant to the dynamic nature of our markets?
        One of the great things about our economy and why it has
    been so strong for so long, notwithstanding the recent period
    of time we are going through, is that we have a dynamic and
    growing, evolving and creative capital markets system, the envy
    of the world.
        These regulations should evolve along with our capital
    markets, shouldn't they?
        Mr. Quaadman. Yes. And I agree with all the other comments
    that were said. The other thing I would say too, and the reason
    why it is important for the SEC to be a part of that and to
    respond to it is because it should also focus them on areas
    where they are not looking and where they should be looking.
    So, I think there is a win-win here.
        Mr. Poliquin. I thank all of you gentlemen very much for
    participating. I appreciate it very much.
        Thank you, Mr. Chairman. I yield back my time.
        Chairman Garrett. The gentleman's time has expired.
        Mr. Ellison, for 5 minutes, if he is--
        Mr. Ellison. Thank you, Mr. Chairman, and the ranking
    member. I appreciate the recognition.
        Professor Carcello, thank you for your service on the
    Securities and Exchange Commission's Investor Advisory Board. I
    do appreciate it.
        Anyone following the Presidential election knows that many
    people think that the rules are rigged in favor of powerful
    companies. H.R. 3798 seems to further rig this, in my view, by
    allowing big companies, the defendants, to pick a more
    favorable venue for investigations into their alleged
    misconduct.
        The SEC now chooses a venue for enforcement that serves the
    interests of investors and the public, yet this bill would
    allow a well-funded defendant to choose a district court venue.
    We know that district courts are often overwhelmed, so this
    type of forum shopping may delay trial for up to a decade in
    some cases.
        How is allowing a defendant to essentially forum shop in
    the public interest?
        Mr. Carcello. Yes, I am not convinced it is in the public
    interest. And here is a thought experiment for the committee.
    Imagine if 15 years ago, the SEC thought there was a problem
    with Bernie Madoff, and they brought it in Federal court
    because they were forced to as a result of this, and there was
    a long delay. And during that time, he continued to collect
    money and ruin people's lives. Does this committee really want
    that obligation on their head?
        Mr. Ellison. Dr. Carcello, I think I can say on behalf of
    all of my colleagues on both sides of the aisle, no. So I think
    we should take steps to address it.
        When you served on the Investor Advisory Committee, one of
    the areas the committee considered was the prevalence of
    contracts and bylaws that contained mandatory arbitration
    clauses. In fact, Commissioner Aguilar called to end mandatory
    arbitration.
        I wonder what your views are on the issue of, say, this
    committee bringing a bill to allow defendants to choose the
    venue of the enforcement action while not allowing investors
    the same option.
        Mr. Carcello. Not just investors, Congressman Ellison. How
    about every person in the United States? There was a powerful
    series of stories by The New York Times about a month ago that
    everyone should read, about how the United States has
    essentially become a land where every citizen in this country,
    all of your constituents are routinely every day signing away
    their rights to jury trials in employment, in consumer
    purchases, in virtually every sphere of their life. And there
    is no outrage about that, but there is outrage about due
    process for largely well-monied financial professionals.
        It is far from clear to me, and I think it would be far
    from clear to most people in the United States, why that is in
    the interests of the republic.
        Mr. Ellison. I actually have a bill called the Investor
    Choice Act, H.R. 1098, that would prohibit predispute mandatory
    arbitration clauses in investment contracts. I urge all my
    colleagues to sign it.
        But if I may just ask you a few more questions. In your
    testimony you detail a number of concerns with both small-
    business bills we are considering today. One of your concerns
    is that H.R. 3784 requires redundant authority. And I will just
    quote your testimony, the Small Business Advisory Committees,
    ``create a quasi-lobbying group to seek a more favorable
    regulatory climate for small businesses. This may succeed in
    reducing the costs of regulation, but at the potential cost of
    greater information risk to investors.''
        You note the advisory committee created a rigged system
    that lacks ideological balance and seems gerrymandered. If
    Congress mandated the Small Business Advisory Committee, should
    it require that investor and public interests are represented
    and have voting powers? And can you give us a few ideas to make
    it less of a quasi-lobbying group?
        Mr. Carcello. Exactly. That is exactly right. The IAC,
    which this is arguably patterned against, has--as I said
    earlier, five Commissioners have four picks. Look at this
    committee. Professor Grundfest is here representing the
    Republicans; I am here representing the Democrats. We are both
    on the IAC.
        The SEC is highly split, so the 20 members on the IAC bring
    an ideological diversity to our discussions. It forces us to
    seek consensus solutions.
        If you look at the proposed Small Business Advisory
    Committee, it is essentially officers, directors, advisers, and
    investors, which sounds good until you realize it is venture
    capital, largely, which are heavily owners in that company with
    a different stake than the kind of mom-and-pop retail investor,
    and it is not at all comparable to the IAC.
        So if you are going to move forward with that group, first
    of all, I think one thing that should be thought about,
    Congressman Ellison, there is this implicit undertone here that
    investors are one constituency and small business is another.
    Why don't we have an advisory committee for midsize business
    and large business and biotech businesses?
        Investors are every single adult in this country.
        Chairman Garrett. The gentleman's time is way over.
        Mr. Ellison. Thank you so much, sir.
        Chairman Garrett. Mr. Huizenga is recognized for 5 minutes.
        Mr. Huizenga. Thank you, Mr. Chairman.
        And I will turn to you, Mr. Grundfest. Do you care to
    comment on that riff that we just heard? I would love to hear
    from you.
        Mr. Grundfest. Yes. Just one simple point, in terms of
    point of accuracy. I think many of the issues that we are
    dealing with today aren't Democratic or Republican issues. Not
    that it means anything; I am a registered Democrat, and have
    always been a registered Democrat, and I don't view myself as
    being here representing the Republican side or the Democratic
    side.
        I think there are fundamental questions of fairness about
    how the process is actually operated. I agree with Mr. Ellison
    that fairness is an issue that needs to be considered for all
    people in all forums of all proceedings.
        Fairness can be in the eye of the beholder. That is why I
    go back to that one word that I think is the focus of my
    testimony. The question is, how do we achieve an appropriate
    balance? Clearly, there are situations where investors' rights
    and the SEC's rights need to be very aggressively protected.
        But by the same token, you can't have a situation where I
    think the SEC acts as judge and jury and as summary prosecutor
    and eliminates the rights of everyone else involved in the
    process.
        It is a difficult question. Let us admit that it is a
    difficult question. But let us not try to polarize the issues
    more than they already are.
        Mr. Huizenga. I appreciate that.
        Mr. Hahn, I want to quickly turn to you. The Fostering
    Innovation Act and the high costs associated with the SOX
    404(b) compliance has been cited repeatedly by small and
    emerging companies as one of the deterrents from listing in the
    U.S. public markets. I wanted to get your comment on that.
        And then also regarding Sarbanes-Oxley, obviously, that is
    an admirable goal to protect investors. However, many argue
    that the cost of Section 404(b) far outweighs any perceived
    benefit for most small, public companies. You suggest in your
    testimony that investors in biotech companies do not list
    404(b) compliance as a top priority of their own due diligence.
    Could you describe what types of information are used by
    investors and people looking at that?
        So if you want to touch on the 404(b), and then give me a
    profile.
        Mr. Hahn. On the 404(b) side, I think it is important to
    note that just because we are 404(b) exempt currently, we do
    have a strong internal control framework in place and we do
    have an outside party that audits our controls and reports
    directly to the Audit Committee.
        I spend maybe $15,000 a year on that. As the current now in
    year 6 when I have to be 404(b) compliant, my expenses in that
    go to $350,000 and nothing is going to change from our business
    from year 5 to year 6. We are still going to have 40 employees,
    I still have a staff of three. So that is kind of the impact on
    the 404(b) side.
        As it relates--I'm sorry, what was the second part of your
    question?
        Mr. Huizenga. Yes, just, if they are not looking at 404(b),
    what type of information are investors in small biotech
    companies looking at?
        Mr. Hahn. As I stated earlier, for the test-the-waters IPO,
    we met with 90-plus investors. And since we have been public in
    January of 2014, we have met with approximately 130 more
    investors. So about 220 one-on-one investor meetings in about
    the last 2\1/2\ years. All of the questions around
    understanding our technology, our science, the indications that
    we are going after in our current clinical trials. I think the
    only financial-related questions I get are, what is your cash
    balance and what is your runway, and how long is that going to
    get you? The only questions, no other financial questions that
    way.
        Mr. Huizenga. Okay. So is that information not useful or is
    it just not relevant really to the biotech space?
        Mr. Hahn. It is not, I would say, it is not relevant, not
    primarily relevant to the investors. It is a secondary issue.
    They want to understand the science and the technology and they
    want to know that we are spending our resources and our money
    on the R&D side and not on the administrative side.
        Mr. Huizenga. All right.
        Mr. Quaadman, you said something that I don't even remember
    how many speakers ago it was or questioners ago, but the
    outflow problem on businesses, and I want to give you the last
    little bit here to talk about that problem, because I am very
    concerned about that as well.
        Mr. Quaadman. Sure. We have half as many public companies
    in the United States as we did in 1995. The number of public
    companies has gone down every year, for 19 of the last 20
    years. Clearly, something is wrong and something is broken.
        Mr. Huizenga. Isn't it just a bad economy? That is what we
    hear.
        Mr. Quaadman. No. Remember, 1995, 1996, 1997, those were
    awfully good years and that is when the decline started, right?
    So we have to really match up our policies with capital
    formation.
        Two other points I just want to quickly mention. To
    Professor Carcello's notion of, let's put this out for a
    shareholder proposal, 54 percent of institutional investors say
    our current corporate disclosures are too voluminous and don't
    provide relevant information.
        Mr. Huizenga. In other words, sometimes too much
    information really doesn't give you any information.
        Mr. Quaadman. Correct. So you know what? Let's crank up the
    shareholder proposals because that will be faster than the SEC
    with the disclosure effectiveness project.
        Secondly, what we really have to also pay attention to
    while we are looking at these issues is that Europe is trying
    to replicate what we are doing. So we should also remember that
    as well.
        Chairman Garrett. Thank you.
        Mr. Huizenga. Thank you, my time has expired.
        Chairman Garrett. The gentleman's time has expired.
        Mr. Green, you are recognized for the next-to-the-last
    word.
        Mr. Green. Thank you, Mr. Chairman.
        And I thank the witnesses for appearing today.
        I am exceedingly concerned about the conflating of criminal
    and civil law today. Whether by accident or design, this seems
    to have taken place. All of you are scholarly people and you
    know that out of the same set of circumstances, you can have a
    criminal case or you can have a civil case.
        And in a criminal case, the standard of proof is guilt
    beyond a reasonable doubt, the doubt in the mind of a
    reasonable person. If it exists, then you must say by your
    verdict, ``not guilty.''
        In a civil case, generally speaking, most of the time it is
    preponderance of the evidence, the greater weight and degree of
    credible testimony.
        If you differ with what I have just said, will you kindly
    raise your hand? Let the record show that no one differs.
        And it is also true that these hearings with the SEC
    actually go before an independent arbiter known as an
    administrative law judge? And the administrative law judge
    makes a finding of facts and issues and also conclusions of
    law?
        If you differ with what I have just said, raise your hand.
    How do you differ, sir?
        Mr. Quaadman. The administrative law judge is an employee
    of the SEC; they are not independent.
        Mr. Green. If this is the case, the judge who hears my case
    in court, who also hears my motion for a new trial, is it
    inappropriate for that to happen, to take place?
        Mr. Quaadman. No, what the point here is, and I think Mr.
    Duffy was making this point earlier, if we were to look at it
    in that way, the district attorney would also be the judge. And
    that is currently--
        Mr. Green. I am pleased that you said that because it has
    been my experience that most judges are former DAs.
        If you differ with what I have just said, raise your hand.
        The point to be made is this. If you are talking about
    preponderance of the evidence in a civil case that can be
    appealed to the Commission, correct, and then from the
    Commission to a Federal judge, why would you have clear and
    convincing evidence as a standard at the administrative hearing
    and then when you go to the Federal judge you have
    preponderance of the evidence?
        Do you agree that can occur? If no one agrees, then I will
    have to make the case again. Do you agree that can occur? If
    you have preponderance of the evidence in the Federal district
    court, and you have clear and convincing evidence before an
    administrative law judge, you now have the same set of facts,
    two arbiters, different standards of proof.
        Mr. Carcello, do you agree?
        Mr. Carcello. Yes.
        Mr. Green. Okay. Let us find someone who differs. Who
    differs? Who differs that we would have two standards of proof
    with the same set of facts?
        Mr. Quaadman. Mr. Green, as I mentioned in my opening
    statement--
        Mr. Green. Would you kindly do this? Would you start with
    yes, I agree, or no, I don't agree? Because sometimes when
    people finish, I don't know whether they have said yes or no.
        Mr. Quaadman. No. We had suggested an amendment to the bill
    that there be one standard of evidence.
        Mr. Green. So you agree with what I have said. The question
    is, do you agree with what I have just said? You agree. So if
    you agree with what I have just said, and you understand the
    difference between criminal and civil law, O.J. not guilty
    criminal case, O.J. guilty civil case, these things exist and
    they have been decided clearly by Federal courts that they are
    constitutional. There is no unconstitutionality here.
        And I would also add this. To say, to use terminology of
    finding a person guilty before an administrative law judge,
    now, you heard that said earlier. Why would a professor of law
    not correct that in the record? The administrative law judge
    doesn't find anyone guilty or any corporation guilty.
        If you differ with what I have just said, raise your hand.
    Let the record reflect that nobody differs.
        Dear friends, we have to take these issues seriously when
    we are talking about changing the laws that impact not only
    corporate America, but also the citizens of the United States
    of America. Investors are citizens. They are taxpayers. They
    deserve fairness, too.
        Bernie Madoff treated a lot of investors unfairly. And but
    for the SEC's ability to go before an administrative law judge,
    I am not sure how that would have ultimately ended.
        So I thank you for your time, Mr. Chairman, and I yield
    back.
        Chairman Garrett. The gentleman yields back.
        Mr. Hill is recognized for 5 minutes.
        Mr. Hill. Thank you, Mr. Chairman.
        And I appreciate the witnesses' forbearance today.
        I think I want to start out and continue on that theme.
        And Mr. Quaadman, if you would just, I think, for the
    committee state the difference between mandatory arbitration
    and the SEC administrative proceedings. Because having been in
    the brokerage business for many years, we have had mandatory
    arbitration and it has worked, I think, very effectively. Fifty
    percent of those cases tend to reach a conclusion before they
    even go to a hearing panel.
        But I think we ought to clarify the difference between
    these two.
        Mr. Quaadman. These are two completely different things.
    And we are talking about two completely different universes.
        Mandatory arbitration deals with two private entities
    engaged in a transaction, and they go before a neutral third
    party if there is a dispute. That actually has been a system
    which has worked very well with keeping cases out of the
    courts, which people have talked about overburdened court
    dockets.
        What we are dealing with here, with administrative
    proceedings with the SEC, is we are actually having the
    government prosecute, whether or not we want to talk about
    whether it is civil or criminal, but there are prosecutions
    that will destroy a person's career. So these are completely
    different items altogether.
        Mr. Hill. Thank you. I appreciate that clarification for
    the record today.
        I have spent a lot of my career in private placements for
    small business. And so I appreciate the effort of my colleagues
    on this subject. And I have also on and off been involved in
    small-cap public companies and I know about the cost of trying
    to manage small-cap enterprises.
        One concern I have always had is this quarterly cost to be
    public. And many years ago, I was associated with a company
    with a market cap of around $70 million and around $10 or $12
    million in EBITDA. And if my memory is right, and I am going
    from memory, I didn't prepare for this conversation, it was
    about $400,000 a quarter to do a Q and K prep and internal
    control work and that kind of thing. This is both the audit fee
    as well as the preparation-type costs. And that is substantial.
        So anything that affects costs, I think is one of the
    barriers to Mr. Quaadman's talk about why we have declining
    numbers of IPO companies, despite efforts in recent years to
    reverse that trend.
        Section 404, what is a way to, in my view, look at the
    marginal difference in 404? In other words, sure, there is some
    benefit by having a robust internal control system. But haven't
    we gone overboard in the prescriptive nature of it and perhaps
    the costs really do outweigh the benefits, particularly for
    small, simple businesses where they are really being held to a
    404(b) standard that goes a lot deeper than you would have to
    do in a simple, straightforward business?
        Mr. Hahn, do you want to start out on that? Because I know
    you are preparing essentially for this feature.
        Mr. Hahn. I have been involved in four startup companies
    and implemented the accounting systems and the process and
    procedures. And every one of those, as I have learned over the
    last 18 years, is measured controls, appropriate controls
    measured that are appropriate to the business and the business
    processes.
        If you put too many controls on, you just clamp down the
    business and people can't operate.
        I think the 404(b) should take that same approach where we
    are exempt now, but it seems that this one-size-fits-all; that
    we are held to the same standards as these large corporations,
    we have a $130 million market cap, we cut 125 checks a month,
    we have two check signers. So to hold us to the same standards
    as these large corporations, I just don't feel is appropriate.
        Mr. Hill. It is like in the bank regulatory environment
    where we are all held to a high IT standard for data security
    in commercial banks. Some banks are more simple than others,
    but the regulation is written the same for Citibank's IT
    protocol as for a small community bank.
        And I think 404(b) over the years, because the accounting
    industry wants to be conservative in their approach, they have
    to be certified, they have to be peek-a-boo licensed, and so
    they don't make a distinction perhaps enough, I think, for
    small businesses.
        Any comments on the crowdfunding proposal? In my seconds
    left, who wants to tackle the comments on the SEC's
    crowdfunding proposal? Does anybody have any thoughts on that?
    It just got published in the last couple of weeks.
        Mr. Quaadman. I think we are going to have to see how that
    is going to progress. I think that has been an innovative
    portion of the JOBS Act. We have argued for strong internal
    controls. I know Europe is trying to do some similar things.
        So I think that is something where we had also called for,
    as we did with the HALOS Act, a retrospective review after a
    couple of years to see how it is working and what needs to
    happen to make it better.
        Mr. Hill. Thank you, Mr. Chairman. I yield back.
        Chairman Garrett. The gentleman yields back.
        This brings us to the end. But since one of the Members
    raised a point, and I will yield to you another minute if you
    want, but just to clarify a point since I think he was
    referring to me when I used the term ``guilt'' or not.
        I will just ask Mr. Quaadman for 1 minute the question, is
    this a case where there is a distinction without a difference?
    Truly, there is a difference between a criminal and a civil
    matter, but as far as the ability of the SEC to impose a fine
    or require restitution or to require that you lose your
    license, is that a distinction without a difference? Because
    you can basically devastate an individual, take all his
    livelihood away and take all of his assets away by an SEC
    enforcement action.
        Mr. Quaadman. That is correct. And not only have we seen
    APs change in the way that they are used, but the way that the
    civil tools are used, they are now quasi-criminal trials and
    cases. So I think we can quibble, but I think you are exactly
    right. We are talking about a distinction without a difference.
        Chairman Garrett. And since I went over our time, does Mr.
    Carney have anything else for another minute?
        Mr. Carney. Yes. I would just like to take a minute again
    to go back to the characterization, which I think is troubling
    to hear the small-business advocate referred to as a lobbying
    kind of thing.
        The thing that I hear most from my business constituents,
    large businesses and small businesses, is that there is no
    advocate, there is no voice for small businesses in a lot of
    administrative procedures.
        My history is more at the State and local government level.
    And many of these big bureaucracies that we deal with here in
    Washington, it is an entirely different thing. And maybe it is
    that our politics are so poisoned by that word being such a
    negative thing.
        But the essence of the bill is to bring small-business
    concerns, which are varied and different, to the SEC in their
    processes to facilitate policies and regulations that don't
    hurt small businesses and capital formation.
        I think some of the work that has been done through the
    JOBS Act, again, my effort was with Mr. Fincher on the IP on-
    ramp as the attempt is to get beyond characterizations that are
    pejorative or whatever in such a way to try to move the ball so
    that we do do something that makes it more beneficial for a
    company to be a public company, for companies in particular to
    be incorporated in the great State of Delaware, and not to get
    in these political battles back and forth.
        That is not to diminish the concerns, Dr. Carcello, that
    you have. I acknowledge those, and I will look at those in
    relationship to the legislation.
        But if we are going to make progress, I think we have to
    think about the language that we use as we characterize these
    things.
        Mr. Chairman, thank you, and I yield back.
        Chairman Garrett. Thank you.
        I thank the panel, all of our witnesses here today, for
    your written testimony and also for your testimony today and
    your questions as well.
        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.
        And with that, without objection, this hearing is
    adjourned.
        [Whereupon, at 12:00 p.m., the hearing was adjourned.]

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                                December 2, 2015

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