[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




                     LEGISLATIVE PROPOSALS TO HELP
                 FUEL CAPITAL AND GROWTH ON MAIN STREET

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,
                       SECURITIES, AND INVESTMENT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 23, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-95





[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





                                   ______
		 
                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
31-459 PDF                WASHINGTON : 2018                 


























                 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
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                     Shannon McGahn, Staff Director
      Subcommittee on Capital Markets, Securities, and Investment

                   BILL HUIZENGA, Michigan, Chairman

RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
LUKE MESSER, Indiana                 BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 23, 2018.................................................     1
Appendix:
    May 23, 2018.................................................    41

                               WITNESSES
                        Wednesday, May 23, 2018

Coffee, Jr., John C., Adolf A. Berle Professor of Law, Columbia 
  University Law School..........................................     8
Eggers, Barry, Founding Partner, Lightspeed Venture Partners, on 
  behalf of the National Venture Capital Association.............    12
Gellasch, Tyler, Executive Director, Healthy Markets Association.    14
Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on 
  behalf of the Biotechnology Innovation Organization............    10
Knight, Edward S., Executive Vice President, Global Chief Legal 
  and Policy Officer, Nasdaq, Inc................................     7
Paschke, Brett, Managing Director, Head of Capital Markets, 
  William Blair, on behalf of the Securities Industry and 
  Financial Markets Association..................................     5
Quaadman, Thomas, Vice President, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................    16

                                APPENDIX

Prepared statements:
    Coffee, Jr., John C..........................................    42
    Eggers, Barry................................................    63
    Gellasch, Tyler..............................................    67
    Hahn, Brian..................................................    88
    Knight, Edward S.............................................    94
    Paschke, Brett...............................................   102
    Quaadman, Thomas.............................................   112

              Additional Material Submitted for the Record

Huizenga, Hon. Bill:
    Written statement from California Public Employees' 
      Retirement System (CalPERS)................................   125
    Written statement from Equity Dealers of America (EDA).......   129
Maloney, Hon. Carolyn B.:
    Written statement from Council of Institutional Investors....   131
    Written statement from Morningstar...........................   142
    Written statement from OTC Markets Group, Inc................   144
    Written statement from Service Employees International Union 
      (SEIU).....................................................   180
    Written statement from XBRL US...............................   182

 
                         LEGISLATIVE PROPOSALS
                          TO HELP FUEL CAPITAL
                       AND GROWTH ON MAIN STREET

                              ----------                              


                        Wednesday, May 23, 2018

                     U.S. House of Representatives,
                           Subcommittee on Capital Markets,
                                Securities, and Investment,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
[chairman of the subcommittee] presiding.
    Present: Representatives Huizenga, Hultgren, Wagner, 
Poliquin, Hill, Emmer, Mooney, MacArthur, Davidson, Budd, 
Hollingsworth, Maloney, Sherman, Scott, Himes, Ellison, Foster, 
Sinema, Vargas, Gottheimer, and Gonzalez.
    Also present: Representative Hensarling.
    Chairman Huizenga. The committee will come to order. The 
Chair is authorized to declare a recess of the committee at any 
time. This hearing is entitled, ``Legislative Proposals to Help 
Fuel Capital and Growth on Main Street.'' And I now recognize 
myself for 4 minutes to give an opening statement.
    We all know that small businesses are what drive the 
American economy. These innovators, entrepreneurs, and risk-
takers are critical to our country's economic prosperity. Small 
businesses helped create more than 60 percent of the Nation's 
new jobs over the past 2 decades. So if our Nation is going to 
have an opportunity that provides opportunities for every 
American, then we must promote and encourage the success and 
growth of our small businesses and startups.
    In order to succeed, these companies need capital and 
credit, the lifeblood for growth, expansion, and job creation, 
yet the Government continues to construct arbitrary walls that 
cut them off from central financing, the smaller companies are 
caught up in red tape created for the largest public companies 
that have the financial means to hire lawyers, accountants, 
managers, and consultants to guide them through the sheer size, 
volume, and complexity of the Federal securities laws.
    Since becoming Chairman of this subcommittee, one of my 
biggest concerns is the declining number of public companies, 
which has led to fewer investment opportunities for Main Street 
investors. IPOs, or initial public offerings, have historically 
been one of the most meaningful steps in the lifestyle of a--
lifecycle of a company. Going public not only affords companies 
many benefits, including access to capital markets, but IPOs 
are also important to the investing public.
    However, over the past 2 decades, our Nation has 
experienced a 37 percent decline in the number of U.S. listed 
companies. Equally troubling in my eyes, we have seen the 
number of public companies fall to around 5,700. These 
statistics are concerning because they are similar to the data 
that we saw in the 1980's when our economy was less than half 
of its current size.
    These statistics demonstrate that regulatory costs 
associated with going public is deterring new and emerging 
companies from making the decision to go public, thus 
preventing our capital markets from reaching their full 
potential.
    However, Congress has made strides in tailoring the 
regulatory environment for smaller companies, most notably when 
we passed, with strong bipartisan support, the Jumpstart Our 
Business Startups, or JOBS Act, in 2012. Signed into law on 
April 5 of 2012, the JOBS Act, which consisted of six bills 
that originated here in the House Financial Services Committee, 
was designed to help small companies gain access to capital 
markets by lifting burdensome securities regulation. By helping 
small companies obtain funding, the JOBS Act has facilitated 
economic growth and job creation.
    Even President Obama called the law a game changer for 
entrepreneurs and capital formation. To further quote the words 
of former President Obama, the first JOBS Act was, quote, one 
useful and important step along the journey of removing 
barriers that were preventing aspiring entrepreneurs from 
getting funding. I completely agree.
    Unfortunately, we need capital--much needed capital is 
unnecessarily left be--left on the sidelines right now. These 
small businesses make up 99 percent of all enterprises in 
America and employ about half of the American workforce, but 
they are being left behind as our economy continues to recover. 
The big are getting bigger, the small are getting smaller, and 
fewer small businesses are actually forming in the first place.
    Regulatory tape is preventing small businesses from 
realizing their full potential. While small and middle market 
business optimism hover around record levels, burdensome red 
tape still is their ability--hampers their ability to obtain 
important capital to grow and thrive. Small businesses depend 
on access to financing to get off the ground, sustain 
operations, manage cash, make payroll, and create jobs, the 
very financing that all too often doesn't come through.
    Implementation of the JOBS Act has demonstrated that while 
today's capital formation framework is better than it was 6 
years ago, those 6 years have made clear that the JOBS Act was 
not just some magic formula. Aspects of the JOBS act, as well 
as JOBS 2.0, can and should be improved and other reforms 
should be implemented to further unleash innovation.
    Our hearing today will examine several legislative 
proposals that will help fuel capital and economic growth on 
Main Street. Many of those proposals were outlined in the 
Expanding the On-Ramp report that was released last month by 
the U.S. Chamber of Commerce for capital markets 
competitiveness, BIO (Biotechnology Innovation Organization), 
SIFMA (Securities Industry and Financial Markets Association), 
Nasdaq, National Venture Capital Association, American 
Securities Association, dealer--Equity Dealers of America, and 
TechNet.
    It is time for Congress to advance a broader capital 
formation agenda. Let us continue to build upon the success of 
the bipartisan JOBS Act by further modernizing our Nation's 
securities regulatory structure to ensure a free flow of 
capital, job creation, and economic growth. It is time to get 
the Federal Government working to support innovation, reward 
hard-working Americans, and lay the groundwork for tomorrow's 
economy.
    And with that, the Chair now recognizes the Ranking Member 
of the subcommittee, the gentlelady from New York, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. I thank the Chairman for calling this 
important meeting, and welcome to all of our panelists. This 
hearing will consider 11 different bills designed to increase 
capital formation. Some of these bills have been considered by 
this committee before, while others are new proposals that we 
are seeing for the first time.
    One bill in particular, H.R. 5054, which is the XBRL bill, 
is something I have expressed strong opposition to, and I 
continue to believe this proposal will harm, not help, capital 
formation, especially for small companies. Structured data like 
XBRL has enormous potential to improve our financial markets. 
It is the wave of the future, to make them more efficient, more 
transparent, and more accessible to ordinary investors.
    Structured data puts all public companies, large and small, 
on a level playing field by making it easy for investors and 
analysts to quickly download standardized financial statements 
for an entire industry, and immediately start making cross-
company comparisons to identify the best performers. This will 
enable investors to more easily identify those small companies 
with innovative business models that are true diamonds in the 
rough.
    Ultimately, this makes our markets more efficient and our 
economy more productive, and helps small businesses. So I am 
still very concerned about a proposal that would completely 
exempt over 50 percent of all public companies from the 
requirement to file their financial statements using the 
efficient XBRL model.
    Another bill, H.R. 5756, would make it more difficult for 
shareholders to influence the management of the companies that 
they own. Currently, the shareholders can re-file a proposal, 
which will get voted on at the company's annual meeting. If it 
received at least 3 percent of the vote the first time it was 
submitted, 6 percent the second time, 10 percent the third, 
H.R. 5756 would make it more difficult for shareholders to re-
file proposals by raising this threshold to 6, 15, and 30 
percent.
    Oftentimes these proposals that the shareholders put 
forward help the companies grow, they are innovative ideas. 
According to a letter from the Council of Institutional 
Investors, and I quote, ``It often takes several years for a 
proposal regarding an emerging issue to gain enough traction 
with investors to achieve double-digit votes,'' end quote. But 
they go on to note that, ``In many cases, these proposals 
eventually receive substantial support, leading to widespread 
adoption by companies,'' end quote.
    So cutting off these shareholder proposals on emerging 
issues could prevent positive long-term changes from being 
adopted.
    Finally, H.R. 5877, introduced by Mr. Emmer, would allow 
for a new type of exchange specifically for small companies, a 
so-called venture exchange. I am certainly not opposed to the 
concept of a venture exchange, but I--I think it is important 
to get the details right. In particular, the bill would exempt 
any stocks traded on a venture exchange from State securities 
laws, which has historically only been allowed for larger, more 
mature companies that trade on full national securities 
exchanges.
    I will be interested to hear from our witnesses on whether 
this State preemption is truly necessary for venture exchanges 
to be successful, or if there are alternatives that could 
achieve the same goal without State preemption, which is always 
contentious.
    As I noted earlier, many of these are new proposals that 
this subcommittee has not considered before, so I am very eager 
to hear the testimony today.
    And before I yield back, I would like to place in the 
record several letters that industry representatives have asked 
me to put in the record, one from the Council of Institutional 
Investors, one from Morningstar, one from OTC Markets, and XBRL 
US. I ask unanimous consent.
    Chairman Huizenga. Without objection.
    Mrs. Maloney. And I thank very much the Chairman. I look 
forward to the testimony, and I yield back. Thank you.
    Chairman Huizenga. The gentlelady yields back. We too are 
looking forward to this testimony.
    With that, I would like to recognize the gentleman from 
Illinois, the Vice Chairman of this subcommittee, Mr. Hultgren, 
for 5 minutes.
    Mr. Hultgren. Thank you. Thank you, Chairman Huizenga, for 
convening this hearing. Access to capital markets in job 
creation is incredibly important in my district, and this 
subcommittee has the key responsibility of making sure the U.S. 
capital markets remain competitive.
    I believe that it is extremely important for us to continue 
this work. I would also like to thank our witnesses for their 
work on the recent report Expanding the On-Ramp recommendations 
to help more companies go and stay public. The experts we have 
before us today will be important partners as we craft more 
legislation in the spirit of the JOBS Act.
    I know the JOBS Act has made a meaningful impact in 
Illinois, and I am eager to hear how Congress can do more to 
spur capital formation. The Encouraging Employee Ownership Act, 
which I sponsored with John Delaney here in the House, will 
soon be on its way to the President's desk for a signature, and 
I am hopeful to work on new legislation to help with job growth 
in Illinois.
    And as has already been stated, and I know will be stated 
multiple times, we can't lose sight of the fact that the number 
of public companies today is about half what it was 20 years 
ago. We went from about 8,000 public companies in 1996 to some 
4,400 public companies today. We need to learn more why this 
is, and how Congress can help change the trajectory.
    Thank you, and I yield back.
    Chairman Huizenga. Gentleman yields back. Today we welcome 
the testimony of a large panel, but we think--we wanted to get 
a cross-section on a number of things to--and issues to--to 
deal with today.
    First and foremost, we have Mr. Brett Paschke, the Managing 
Director and head of capital markets for William Blair, on 
behalf of the Securities Industry and Financial Markets 
Association, or SIFMA.
    Next we have Mr. Edward Knight, Executive Vice President 
and General Counsel for Nasdaq OMX.
    Next we have Mr. John C. Coffee, Jr., who is the Adolf A. 
Berle Professor of Law at Columbia Law University--or, Law 
School.
    Next we have Mr. Barry Hahn, Chief Financial Officer of 
GlycoMimetics, Inc., on behalf of the Biotechnology Innovation 
Organization, or BIO, organization.
    Next, we have Mr. Barry Eggers, a Founding Partner of 
Lightspeed Venture Partners on behalf of the National Venture 
Capital Association.
    Tyler Gellasch is next, who is the Executive Director of 
the Healthy Markets Association.
    And last but not least, Mr. Tom Quaadman who is the Vice 
President of the Center for Capital Markets Competitiveness for 
the U.S. Chamber of Commerce.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. Simple math says we have 
35 minutes of testimony in front of us here, so feel free, if 
you have the ability to shorten that up, so we can get to 
questions, that is--that is fine, but it is your 5 minutes.
    And with that, Mr. Paschke, you are recognized for 5 
minutes.

                   STATEMENT OF BRETT PASCHKE

    Mr. Paschke. Thank you. Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee, thank you for the 
opportunity to testify today on the importance of preserving 
the vibrancy of our public capital markets. My name is Brett 
Paschke, and I am the Head of Equity Capital Markets at William 
Blair testifying today on behalf of SIFMA.
    I joined this industry because I wanted to help business 
founders raise capital to build companies, invent products, 
solve problems, cure diseases, create jobs, and provide wealth 
creation opportunities for the investing public. All these 
years and many deals later, I am still motivated and inspired 
by the opportunity to help our clients achieve their missions.
    On the Capital Markets side of William Blair's business, 
for which I am responsible, we are best known for serving the 
needs of small and mid-cap growth companies, including many 
innovative leaders in technology, health care, and life 
sciences. Over the last 10 years, we have been an underwriter 
on approximately 20 percent of all U.S.-listed IPOs. I will do 
my best to bring these perspectives and experiences to the 
subcommittee today, as I did in serving on the task force that 
put together the recommendations that ultimately created the 
JOBS Act.
    I still believe, as I believed then, that no single policy 
change will reverse the decline in public listed companies or 
unlock the IPO market. The authors of the JOBS Act understood 
this, and wisely took a holistic approach to improving capital 
formation. Policymakers today should take on our present 
challenges with a similar mindset.
    It is difficult to overstate the changes that have occurred 
in U.S. public capital markets over the last 20 years. An 
explosion in private funding, the rise of index and passive 
investing, electronic trading, hedge funds, consolidation, and 
regulation have all played a role in reshaping our markets.
    Unfortunately, not all of these changes have been positive. 
As has been noted often, the number of publicly listed 
companies in the U.S. has fallen by almost 50 percent since 
1996. The explosion of private capital markets has allowed 
companies to grow their businesses and valuations without ever 
tapping public markets.
    It is worth discussing why this evolution matters. One 
important implication is that many startup companies are being 
built to be sold as opposed to being built to be independent 
public companies. This often does not lead to the same level of 
expansion and job growth with a long life as an independent 
public company does.
    Another important implication is that access to the private 
markets is limited to a much smaller group of high net worth 
individuals and institutions, effectively excluding retail 
investors from the value creation that occurs within these 
opportunities. Our public markets provide much greater access 
to wealth creation, from direct retail investing to the mutual 
funds that manage money on behalf of individuals, retirement 
plans, pension funds, and endowments. Indeed, the need to 
support our public capital markets is why SIFMA and a broad 
coalition of stakeholders joined together recently to produce a 
report on these topics.
    We also support many of the draft bills that have been 
released alongside this hearing, and, in particular, the draft 
legislation which would extend the EGC (emerging growth 
company) on-ramp from 5 to 10 years.
    The JOBS Act's on-ramp of tailored financial reporting 
requirements and auditing and accounting standards greatly ease 
the burden for smaller companies going public. Providing a 
longer runway for companies to scale up to the full reporting 
requirements should incentivize more issuers to go and stay 
public. We also have the benefit now of having seen companies 
operate under these rules and investors react to them for 5 
years, which can inform that extension.
    Another critical topic to explore is the provisioning of 
research on publicly traded companies, which I believe is one 
of the most important and least understood facets of our public 
capital markets. At William Blair, we provide sell side 
research for over 600 public companies, with a focus on small 
and mid-cap stocks.
    SEC (U.S. Securities and Exchange Commission) Rule 139 
provides a safe harbor for research produced by broker-dealers 
participating in distribution if the issuer is a large 
reporting company under the `34 Act. We feel that this safe 
harbor should be extended to smaller issuers as well.
    In conclusion, I would flag that policymakers certainly 
have a challenge before them, in improving the vibrancy of our 
public capital markets and balancing investor protections. But 
the U.S. capital markets are the envy of the world and worth 
the effort to preserve. SIFMA and its members stand ready to 
assist the committee and the SEC in this important endeavor, 
and I look forward to your questions.
    [The prepared statement of Mr. Paschke can be found on page 
102 of the Appendix.]
    Chairman Huizenga. Thank you very much for your testimony. 
With that, Mr. Knight, welcome back and you are recognized for 
5 minutes. And if you can make sure that microphone is on and 
close to you. Thanks.

                   STATEMENT OF EDWARD KNIGHT

    Mr. Knight. Yes. Thank you, Mr. Chairman and Ranking Member 
Maloney. I am Ed Knight, I am the Chief Legal and Policy 
Officer at Nasdaq. And the question before you today is: How 
can we ensure the continued success of the U.S. public company 
model? When we think about that at Nasdaq, we go back to the 
beginning of our history in 1971, where we were the first in 
the world to have an all-electronic market with enhanced 
transparency through technology to protect investors.
    Many thought we would fail. Many were against it, but the 
laws in the United States and regulations were flexible enough 
to allow it. We did succeed, and today we have 2,977 highly 
innovative entrepreneurial companies creating jobs and growing 
the economy every day. Among those companies are the five 
largest operating companies on the globe.
    But at the core of our DNA is working every day to make a 
market for early stage companies, high-growth companies that 
will be the future Amazons, Googles, and Microsofts.
    A little over a year ago, we looked at the question of the 
vibrancy of our markets and found that they were not very 
attractive to entrepreneurs, and very importantly, they did not 
meet the needs of individual investors who were often locked 
out of investing in these early stage, high-growth companies.
    We looked at what were the possible solutions, we consulted 
experts from around the country, and we put together a number 
of proposals that we are proud to say are embedded in some of 
the legislation before you today.
    This legislation does not represent radical change. We are 
not suggesting that you defund the SEC. We like the SEC, we 
want you to fund the SEC. We are not suggesting that we depart 
from the materiality disclosure standard that is embedded in 
U.S. law. These are largely technical changes. Some of these 
changes have been proposed by the SEC or adopted by the SEC 
through regulation. Some of them are extensions of the JOBS 
Act.
    And frankly, we do not believe these are partisan issues. 
The JOBS Act was signed in a Rose Garden ceremony by President 
Obama. I served 7 years in the Clinton Administration Treasury 
Department. Such considerations are not relevant to this 
debate, in my view.
    The changes that are being proposed are part of the natural 
process of updating rules based upon experience with 
regulation. We work with these rules every day. They directly 
regulate our economy. In some cases, we have worked with them 
for decades. We know what works and what doesn't. The economy 
evolves rapidly and our regulations should also evolve with it.
    If these changes are merely technical, why do we care? Why 
do you have this coalition that supports it so strongly? Is 
there some hidden agenda here? I would submit that by moving 
forward with these ideas, all that Congress is doing is 
signaling a willingness to work alongside entrepreneurs to make 
the markets stronger while preserving investor protection. This 
builds business confidence, which is the cheapest form of 
economic stimulus.
    I want to just highlight a couple of elements of the bills 
with--before you. The venture exchange legislation addresses an 
issue that everyone recognizes that works with the markets, and 
that is they are designed to help large companies trade their 
securities. They are not designed to help small companies do 
it.
    The market structure that applies today fragments liquidity 
across 50 or more venues. The venture legislation would allow a 
company, not a stock exchange, not a broker-dealer, but the 
company to elect to have all that liquidity trade at one place 
so we would have deeper liquidity and these markets would work 
better for smaller companies.
    The 10-Q optionality bill, I would submit, would enhance 
disclosure by putting before investors an enhanced financial 
disclosure. At this moment, we have a two-part disclosure 
regime in which companies file an 8-K with their financial 
results, and a few weeks later a 10-Q that no one reads.
    Give them the option, as under the venture legislation--the 
company the option to consolidate the material changes since 
their last quarter along with their financial disclosures, 
instead of making them file a 10-Q--which most people do not 
read--what moves the market is the 8-K, not the 10-Q.
    The selling disclosure legislation would also enhance 
disclosure. We have disclosure about long holdings, but not 
short holdings.
    Much of the other legislation, as I said, is--are 
extensions of ideas that the SEC has proposed in the Obama 
Administration that have been part of regulations that had been 
adopted by the SEC and would codify those.
    We think they are modest.
    Chairman Huizenga. Sorry--sorry, Mr. Knight, your--
    Mr. Knight. Thank you.
    [The prepared statement of Mr. Knight can be found on page 
94 of the Appendix.]
    Chairman Huizenga. Your time has expired. I am going to try 
and keep a tight rein on that for this. And with that, Mr. 
Coffee you are--you are afforded 5 minutes.

                    STATEMENT OF JOHN COFFEE

    Mr. Coffee. OK. Thank you Mr. Chairman, Ranking Member 
Maloney, and fellow members of the committee.
    We have essentially been asked to comment on 11 proposals. 
On overview, I think these proposals range the gamut from 
promising ideas and useful studies that should be conducted to 
ideas that are irredeemably bad and would degrade our 
disclosure system.
    But all of these 11 ideas come from one common source: This 
Expanding the On-Ramps study. And it in turn, in connection 
with the JOBS Act, is based on the same idea that moved the 
JOBS Act. That somehow the SEC discourages IPOs because of 
overregulation and very costly rules.
    I think the vast majority of professors who study this 
area, of law professors and finance professors, think that is 
very overstated and borders on a myth. It is a myth that gets 
perpetually--continually asserted, and I think we should 
understand what reality looks like.
    The world changed dramatically in 2001, when the high hot 
issue bubble crashed. We have never approached that level of 
IPOs since. It was like the falling off of a cliff. And what 
caused this? Well, we should remember that underregulation can 
be even more dangerous than overregulation. Underregulation 
caused investors to flee the new issue market, and we have 
never gotten many of them back.
    The JOBS Act didn't really cure this problem at all. IPO 
volume continued to fall, and in 2015 and 2016 it was lower 
than in years before the JOBS Act. Although there has been some 
comeback this year in high-tech offerings, the smaller offering 
continues to approach extinction. Small offerings are both few 
and generally unprofitable.
    Now, if all this were caused by high regulatory costs and 
SEC overregulation, then the decline in IPOs would be a 
uniquely American problem caused by American overregulation. 
But it is not an American problem. It is a worldwide problem. 
IPO volume has declined even more dramatically in Canada, and 
the decline in Europe and Japan is as great as the decline in 
the U.S. of IPOs by number of offerings.
    And because Canada has no national securities regulator, 
there was no overregulating national adviser. There are 11 
different provinces and IPOs are virtually extinct in Canada 
currently.
    Something else is causing the problem. What else is there? 
I will give you two principal causes, although there are 
others. They would be, first, private companies find it easier, 
quicker, and cheaper to raise capital in robust private markets 
where litigation risk is much, much lower, private firms can 
raise capital in these markets in weeks, not months, and with 
much less diversion of executive time. That is reason one.
    Two, IPOs for smaller firms have been consistently 
unsuccessful for a sustained period. Jay Ritter, a prominent 
finance economist, in his latest study finds that about 80 to 
90 percent of these small offerings are characterized by 
negative earnings-per-share in subsequent years.
    In short, small issuers remain unprofitable, and as a 
result analysts and underwriters are coming to shun these 
deals. Academic research suggests that the relative 
disappearance of small IPOs is probably because these smaller 
issuers cannot gain the economies of scale and scope that are 
increasingly necessary to compete in a globalizing market.
    Is there a crisis? I suggest not. A company can get capital 
easily in the venture capital market, and the smaller firms, 
although I wish they could find a way to do an IPO, can get 
successful exit strategies through the merger market. Frankly, 
the smaller firm gets a much higher price in the merger market 
than in the IPO market, and thus it will go in that direction.
    Given these problems, I don't think we should relax 
disclosure and Government standards to encourage more small 
IPOs that are already losing money.
    In my last half minute, let me give you my nominations for 
the best and worst ideas among these 11. I think one truly 
promising idea is venture exchanges, but it has a very flawed 
execution here. The way this bill is drafted, it looks like a 
fly by-night group could set up its own venture exchange 
tomorrow, and the SEC would be in the position of an overworked 
fireman racing from fire to fire to put out the various crises.
    And if you think that is not possible, you should look at 
what is going on in the cryptocurrencies exchanges, where we 
see some very disreputable people working behind exchanges. The 
idea that I think is most problematic--and I will stop here--is 
the idea of substituting a press release for the form 10-Q. 
That would really end our disclosure system as we know it 
today.
    Thank you.
    [The prepared statement of Mr. Coffee can be found on page 
42 of the Appendix.]
    Chairman Huizenga. Thank you, the gentleman's time has 
expired. And with that, I owe Mr. Brian Hahn an apology. I was 
going to my list, and Barry Eggers and Brian Hahn sitting next 
to each other. So with that, Mr. Brian Hahn, you have 5 
minutes.

                     STATEMENT OF BRIAN HAHN

    Mr. Hahn. Good morning, Chairman Huizenga, Ranking Member 
Maloney, and members of the Capital Markets, Securities, and 
Investments Subcommittee.
    My name is Brian Hahn, and I am the Chief Financial Officer 
of GlycoMimetics, a 48-employee public company based in 
Rockville, Maryland. I am happy to be here today to discuss 
proposals to help fuel capital and growth, and how they will 
help GlycoMimetics and other early stage biotechnology 
companies in our pursuit to fund the next generation of 
treatments.
    The ability of growing business to access the public 
markets is of paramount importance to biotechnology innovation, 
because investment capital is the lifeblood of scientific 
advancement. It can cost over a billion dollars to develop a 
single treatment, and most companies spend more than a decade 
in the lab before their first therapy is approved.
    During this long development process, virtually every 
dollar spent by an emerging biotech company comes directly from 
investors. To that end, the JOBS Act has been an unqualified 
success, enhancing capital formation and allowing 260 
biotechnology companies to focus on science. It certainly 
helped pave the way for GlycoMimetics' IPO in January 2014, and 
has helped us nearly double our employee headcount and move 
three new drug candidates into human clinical trials.
    Given the long development timelines and substantial costs, 
legislation being considered today that would extend the JOBS 
Act on-ramp and provide other relief for emerging innovators 
would be extremely beneficial for growing companies like mine. 
When GlycoMimetics rolls off its EGC status in a few short 
months, we will lose the key JOBS Act exemption and will be 
subject to the erroneous and expensive disclosure burdens as 
mandated by Sarbanes-Oxley Section 404(b).
    While a private company, our audit fees were just $40,000 a 
year. After our IPO, our audit fees increased by roughly 
$500,000 due to the existing regulatory environment from public 
companies. Absent additional exemption, we expect our SOX 
404(b) compliance obligations to alone more than double our 
cost to as much as $1.2 million annually starting in January 
2019, when our 5-year exemption ends.
    I would like to thank Representatives Kyrsten Sinema and 
Trey Hollingsworth in this subcommittee for their efforts in 
drafting H.R. 1645, the Fostering Innovation Act. This bill 
recognizes that a company that maintains the characteristics of 
an EGC is very much still an emerging company, even if it has 
been public for longer than 5 years. I am hopeful that the 
Senate will also recognize the importance of the Fostering 
Innovation act in a timely manner before any more companies are 
rolled off the JOBS Act provision and subject to the rules of--
burdens.
    In addition, draft legislation being considered by the 
committee today that expands the SEC's definition of non-
accelerated filer would also help small business innovators 
avoid the burdens of Section 404(b). Under current SEC rules, 
companies qualify both as an SRC and a non-accelerated filer if 
their public float falls below 75 million. SRCs benefit from 
scaled obligation under regulation SK and regulation SX, while 
non-accelerated filers are exempt from Section 404(b). 
Increasing the public float cap and adding an annual revenue 
test would be tremendous benefit to small business innovators.
    Another issue of concern for small public companies is 
proxy advisory firms. I want to thank Congressmen Sean Duffy 
and Gregory Meeks for their bill, H.R. 4015, the Corporate 
Governance Reform and Transparency Act, which passed the House 
last December on a bipartisan basis.
    The role of proxy advisory firms has grown to have an 
outsized influence in the decisionmaking processes of emerging 
biotechs and their shareholders. When a proxy firm issues a 
recommendation that is not applicable to an emerging biotech 
and remains unwilling to consider alternative approaches or 
methodologies, it can harm a company's relationship with its 
shareholders, and distract management from the core business of 
the company.
    I would also like to thank Representative Duffy for H.R. 
5756, which would adjust certain resubmission thresholds for 
redundant shareholder proposals that burden many small 
biotechs.
    I would like to take a moment to discuss the problem of 
manipulative short-selling and express my support for a 
disclosure regime for short sellers. The unique business model 
for groundbreaking innovation leaves emerging biotechs 
particularly vulnerable to stock manipulation.
    BIO acknowledges that appropriate shorting can support the 
stable, liquid markets that fuel the growth of emerging biotech 
innovators, however, we strongly believe that current lack of 
transparency related to short positions is enabling trading 
behaviors that unfairly harm growing companies, long-term 
investors, and most importantly, patients.
    Finally, I would like to mention XBRL compliance, an issue 
that seems technical but can have significant costs for small 
companies like mine. The Extensible Business Reporting Language 
is an attempt to make it easier for investors to compare 
financial data, but with--as with many of the issues I have 
discussed today, it disproportionately affects small issuers 
due to its one-size-fits-all approach.
    Cost of compliance can be significant. GlycoMimetics is 
forced to spend $50,000 to $60,000 every year on XBRL and 
without much benefit to investors. Biotech investors are less 
concerned with the reporting metrics that XBRL compares and 
more concerned with the actual science of the company and their 
path forward toward FDA (Food and Drug Administration) 
approval, and ultimately getting the drug to the market.
    BIO appreciates, therefore, Congressman David Kustoff's 
legislation, H.R. 5054, the Small Company Disclosure 
Simplification Act that exempts EGCs from XBRL reporting 
requirements and provides temporary XBRL exemptions for 
companies with revenues below $250 million.
    I would like to thank the subcommittee for considering 
further initiatives for small business innovators, and I look 
forward to answering any questions that you may have.
    [The prepared statement of Mr. Hahn can be found on page 88 
of the Appendix.]
    Chairman Huizenga. Thank you for that. Mr. Eggers, you have 
5 minutes.

                    STATEMENT OF BARRY EGGERS

    Mr. Eggers. Chairman Huizenga and Ranking Member Maloney, 
thank you for the opportunity to testify here today on the 
important subject of capital markets reform and encouraging 
more U.S. public companies.
    My name is Barry Eggers, and I am a founding Partner at 
Lightspeed Venture Partners, a venture capital firm that 
invests in and works closely with cutting-edge technology 
startups. We invest in areas such as information technology, 
big data, cloud computing, networking, eCommerce, and consumer 
marketplaces. I am here in my capacity as a board member of the 
National Venture Capital Association.
    Let me begin by explaining why venture capitalists care 
about policy issues pertaining to our public capital markets. 
There are three main ways that venture capitalists exit an 
investment. Number one, a merger or acquisition; number two, an 
initial public offering, or IPO; or number three, a business 
failure.
    While the vast majority of venture capital investments are 
in private emerging growth companies, or EGCs, recent research 
has shown that nearly half of all companies that have gone 
public since 1979 have been backed by venture capital. In other 
words, VCs build the product for the IPO pipeline.
    To provide a little background on venture capital, we are 
investors in the Nation's startups. At Lightspeed, for 
instance, we invest early in a company's life, often when there 
are a few founders trying to build out a new concept.
    We work with these entrepreneurs to grow the company into a 
successful enterprise, including providing mentorship and 
strategic advice, helping them hire new employees, introducing 
them to potential customers, and providing additional rounds of 
financing to fuel continued growth. This work typically takes a 
lot of patience over a long time horizon. At Lightspeed, the 
average time to IPO from first investment is roughly 8 years.
    I have been a venture capitalist for over 2 decades, and in 
the technology ecosystem for over 30 years. When I first got 
started in the business, the goal of most entrepreneurs was an 
IPO, and many companies were successful in that endeavor, such 
as Maker Communications, a company I invested in that went 
public in 1999. Maker had quarterly revenue of $3 million prior 
to their IPO, and went public at a valuation of $230 million.
    Twenty years later, many entrepreneurs now view the public 
markets as hostile to small-cap companies and would rather have 
the certainty of a trade sale than deal with the challenges, 
complexities, and costs of running a public company.
    And for those that do go public, they often do so when they 
have grown to a size that can better bear the burdens that come 
with being public, such as Nimble Storage, another company I 
invested in which went public in December 2013, and is 
representative of the first batch of EGCs to go public under 
the 2012 JOBS Act. Nimble had quarterly revenue of $33 million 
prior to their IPO, which valued them at $1.5 billion; over 10 
times larger in revenue and six times more valuable than Maker.
    My firm, Lightspeed, has one of the strongest track records 
of IPOs since 2016. We have had seven portfolio companies go 
public over the last 2-1/2 years. That is still less than 5 
percent of the 145 active companies in our portfolio.
    Avoiding the public markets has unfortunately become the 
prevalent view among many EGC executives. The issues that 
discourage EGCs from going public can be grouped into three 
broad categories. Number one, the increased cost and complexity 
of running a company; number two, the collapse of market-making 
infrastructure, including research coverage; and number three, 
the challenges presented by a culture of short-termism.
    In each category, since the turn of the millennium, policy 
changes and industry trends have conspired to increase the 
headwinds facing small public companies. I believe there are 
two significant consequences arising from the lack of IPOs and 
the decline in U.S. public companies; less job creation, and 
loss of investment opportunities for retail investors.
    Research indicates that the lack of IPOs has cost the 
economy on average about 2 million new jobs a year. From what I 
have seen, many of these jobs can be the type that support 
middle-class families and don't necessarily require college 
degrees. Thinking, for instance, about human resources or 
administration jobs, which often disappear after a merger.
    A lack of IPOs has also had an impact on middle-class 
retirement savings and retail investment portfolios. Think 
about Amazon, Genentech, Microsoft, or Intel as examples of 
companies that created exponentially more wealth in the public 
markets than private markets.
    The joint report endorsed by NVCA, Expanding the On-Ramp, 
offers a blueprint for building off the success of the JOBS Act 
and making it more attractive to be a public company. The 
report considers a breadth of perspectives from company 
operators, people whose job it is to facilitate public 
offerings, exchanges, and investors.
    While I note several policy proposals in my written 
testimony, I did want to take time to reference one now. I 
strongly support the proposal to allow any investment in an EGC 
to be qualifying for purposes of the VC exemption definition 
from the RIA regulatory regime.
    Congress created both the EGC definition and the VC 
exemption for similar purposes; namely, a favorable capital 
formation regulatory environment for growing companies. That 
secondary share purchases of EGCs are currently nonqualifying 
is becoming an increasing challenge for VC funds that are 
forced to choose between supporting their company's growth 
while risking the significant expense and difficulty of 
registration, or passing on further capital formation 
opportunities for certain portfolio companies. Happy to answer 
any questions.
    [The prepared statement of Mr. Eggers can be found on page 
63 of the Appendix.]
    Chairman Huizenga. Thank you, Mr. Eggers. Mr. Gellasch, you 
have 5 minutes.

                   STATEMENT OF TYLER GELLASCH

    Mr. Gellasch. Thank you. Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee. Thank you for holding 
the hearing today and for offering us the opportunity to 
appear.
    I am the Executive Director of Healthy Markets Association, 
and our members are the pension funds and investment advisors 
that folks here seem to be concerned with in the public 
markets.
    And today, we are here to discuss a least 11 legislative 
proposals, so just let me cut to the chase: Not one of these 
proposals is likely to measurably increase the investment in 
public capital markets or improve the economy for Main Street, 
and several of the proposals are likely to have the opposite 
effect.
    The reason is simple. They either ignore or affirmatively 
harm investors in the public markets. From the vantage point of 
an investor in the public markets, these proposals reduce the 
quantity, quality, or utility of information available to them.
    They increase the riskiness of a company's financials, such 
as by removing required audits of internal controls. They 
increase the valuation risks of the company. They increase the 
costs of trading those securities. They divert investment 
opportunities from the public markets by further easing limits 
on private securities such as through the ventures exchange. 
And they decrease corporate accountability to shareholders by 
restricting shareholder proposals, by reducing access to proxy 
advisors, or other reforms.
    The proposals aren't offering any reason for investors to 
want to put more money into the public capital markets, and so 
I will argue that they will likely have the effect. I 
appreciate the Chairman's focus, and many of the folks here, on 
the public markets, but of course they matter. Public 
securities are often accompanied by more robust accounting and 
financial business disclosure practices, and that is a given.
    But they are also--information about public companies, 
including third-party research, is more readily available and 
fairly distributed. Public securities are far more easily and 
reliably valued, and really importantly from an investor's 
perspective, liquidity is significantly greater. Trading costs 
are significantly lower.
    If we are talking about fractions of a penny a share, or a 
penny a share, or maybe a few pennies a share in the public 
markets, we are talking orders of magnitude greater cost for 
investors in the private markets.
    And frankly, that is a transaction cost. That is lost 
returns for investors. Public securities are much more easily 
benchmarked, such as against the S&P 500. These factors play an 
important role for pension funds and investment advisors who 
are fiduciaries to their beneficiaries to minimize costs and 
minimize risks.
    Unfortunately for them, as many have noted here, the public 
markets have dwindled. The vast majority of the decrease in 
public companies, 2,800 of the lost companies, were lost before 
2003. That is well before Sarbanes-Oxley, and well before the 
Dodd-Frank Act and its CEO pay ratio disclosures, and it was 
after proposals and--that were implemented in the 1990's to 
curtail private litigation.
    So if those things didn't cause the decline, what did? Well 
a lot of things, but most importantly, the SEC and Congress, 
frankly, at the urging of many of the folks I sit on the panel 
here with today, spent years digging trenches to drain capital 
and companies out of the public markets, usually in the name of 
promoting access to capital for small companies.
    So put simply, many companies don't go public anymore 
because they can do things like raising money. We talked about 
the explosion of private capital; that is it. We made it so 
that you can do a private offering with a Super Bowl halftime 
commercial. You can do it over an internet radio ad. That was 
never allowed before.
    Policymakers' and regulators' obsession with IPOs is also 
somewhat misplaced. Do we really think it is a good idea to 
return to the 1990's, when a sock puppet can raise millions of 
dollars in an IPO? Could it be that as--as Mr. Coffee alluded 
to, that perhaps public investors are concerned with IPOs 
because they have chronically underperformed the markets, and 
that a lot of the IPOs that do come to market these days are 
exits from folks like venture capital firms and--and 
executives?
    Do we really think that undercutting the reliability of a 
company's financial reports or a company's accountability to 
shareholders is going to make investors more interested? We 
don't. So we offer three alternatives.
    First, we share the concerns with many about the lack of 
good research into small cap companies, but rather than forcing 
investors to pay more for trading, as the failed Tick Pilot 
suggested, how about we let investors separately shop for 
research in a transparent market? To do that, we encourage you 
to direct the SEC to empower investors to be able to separately 
shop for the research they want and the trading services they 
need.
    Second, we encourage you to reduce the exemptions and 
exceptions from the Federal securities laws. We should stop 
digging trenches out of the public capital markets. It is time 
to put down the shovels.
    Third, we urge you to think about rules that promote 
industry consolidation. The difference between large and small 
cap companies in raising capital has a lot of reasons, and I--
thank you--I--for the opportunity speak before you, and I look 
forward to questions.
    [The prepared statement of Mr. Gellasch can be found on 
page 67 of the Appendix.]
    Chairman Huizenga. I appreciate that, and Mr. Quaadman, you 
have 5 minutes.

                  STATEMENT OF THOMAS QUAADMAN

    Mr. Quaadman. Thank you, Chairman Huizenga, Ranking Member 
Maloney, and members of this subcommittee. We appreciate this 
subcommittee's continued focus on issues related to business 
creation and growth.
    The atmosphere for business creation and the path for 
growth is not what it should be. Systems that have supported 
the ability of businesses to start and then grow from small to 
large have not kept pace with the times or international 
competition.
    We have seen 10 years after the financial crisis continued 
depressed business creation rates, and we continue to be 
hundreds of thousands of businesses short from where we should 
be, historically. We have also seen a 20-year decline in the 
number of public companies and an anemic IPO market over the 
same period of time. Indeed, we have seen a calcification of 
entrepreneurship, where 50 percent of all business startups in 
the United States are concentrated in 20 counties.
    Action is needed. There are several reasons for these 
problems and much needs to be done to address the situation, 
and indeed some things have already been done. The JOBS Act and 
the JOBS Act 2.0 measures in the Highway Bill have arrested the 
decline of public companies and we have seen a modest increase 
in IPOs in the 6 years since the JOBS Act passed.
    S. 2155, which was passed by the House yesterday and should 
be signed soon by the President, helps to restore community and 
regional banks to being a Main Street business liquidity 
providers. However, it is important to remember that 75 percent 
of all business financing and development happens in the non-
bank financial markets.
    More needs to be done and we need to reverse this 
situation. That is why the Chamber and seven other trade 
associations, under the leadership of Brian O'Shea, last month 
issued a report on expanding the IPO on-ramp. That report 
includes 22 recommendations which are centered around JOBS Act 
enhancements, increased research, corporate governance and 
disclosure improvements, financial reporting issues, and equity 
market structure reforms.
    These ideas, and many of the bills already passed by the 
House, can form a core of a JOBS Act 3.0. Indeed, the bills 
that we are discussing today are a good step forward. These 
bills will increase liquidity, extend JOBS Act protections, 
address the resubmission thresholds issue, reduce redundant 
disclosures, establish venture exchanges, and generally remove 
obstacles to growth.
    Indeed, last month we also released a poll which shows 
widespread support for these measures. Indeed, over 90 percent 
of Americans agree that there needs to be a level playing field 
for IPOs, and also agree that the rules of regulators should 
promote growth and that all investors should benefit from them.
    Additionally, over 75 percent of Americans believe that 
regulators should simplify the IPO process, and they also agree 
that Government policy should be geared for growth; that 
support cuts across all ideological, generational, and economic 
lines.
    And we also can't wait because of international 
competition. The China 2025 and 2050 plans are specifically 
geared to make China, not the United States, the innovation 
center moving forward. Also the EU, with its capital markets 
union proposal--they are also looking to build out their non-
bank financial system; in fact, copying many of the things we 
do here in the United States.
    However, many of the Brexit-related proposals are also 
specifically designed to keep American financial firms out. 
Indeed, the EU also sees itself as a global regulator. Their 
MiFID (markets in financial instruments directive) specifically 
impacts research here in the United States, and in fact will 
make it more difficult for Congress to incentivize research for 
smaller IPOs.
    Indeed, some things are also positive. The SEC, unlike in 
2013, is a willing partner to work on these issues. But it is 
important to remember that it is Congress that sets the public 
policy parameters, and it is Congress that ultimately will lead 
us down the road that then the regulators can help fill in the 
blanks.
    We look forward to working with this subcommittee on these 
issues, and thank you, happy to take any questions you may 
have.
    [The prepared statement of Mr. Quaadman can be found on 
page 112 of the Appendix.]
    Chairman Huizenga. Well, ``A'' on turning in 50 seconds. 
Thank you, Mr. Quaadman.
    Now I--at this time, I will recognize myself for--for 5 
minutes for some questioning, and clearly we heard some 
contradictory things here. Mr. Hahn, Mr. Eggers, you had both 
talked about--I think Mr. Eggers talked about an EGC that had 
gone public, Mr. Hahn, you were talking about some of the other 
biotech.
    Professor Coffee had said that there really isn't a 
problem, and that the JOBS Act--I--I got it down here--didn't 
address the issue of IPOs and the lack of IPOs at all, and so I 
am curious. Is this worth pursuing?
    We are--we are looking at a--we have done a non-
legislative--but a package, but a JOBS 2.0 previously, we are 
working on a JOBS 3.0, for lack of a better working title at 
this point--but did we have a problem and did the JOBS Act and 
these types of reforms actually address the problem?
    Mr. Hahn, Mr. Eggers?
    Mr. Hahn. I think the JOBS Act did--did help address these 
problems. What--I am sitting here today talking about--what I 
would like to see is the extension of the 5-year on-ramp, 
especially for us with 404(b).
    We do a third-party audit of our internal control that gets 
reported directly to the audit committee. That costs us less 
than $50,000 a year. To have--and I have a proposal, since next 
we are going to roll off of that from our audit firm, $650,000 
a year for our audit firm to audit those results. And the third 
party will go from $50,000 up to $150,000 a year.
    And 98 percent of our balance sheet is still cash. We have 
no revenues yet, we still only cut 125 checks a month, we still 
only have two check signers. So for that additional $650,000 to 
$800,000 in added expense, it doesn't add any more safety to 
investors. We have good controls, we have been audited. So, 
from my standpoint it is the extension of the EGC until we 
are--we are producing revenue.
    Chairman Huizenga. OK, Mr. Eggers? Can you make sure you 
hit your mic?
    Mr. Eggers. I do believe it has helped. I have seen it 
first-hand. I mentioned Nimble Storage, which was one of the 
first companies to go out under the JOBS Act in December 2013. 
They filed confidentially, they were able to work under EGC 
status.
    One of the problems, though, is that an EGC status doesn't 
last very long, potentially because you can become a large 
accelerated filer very quickly at the $700 million threshold. 
When these companies go public, they are very volatile. I 
looked at the last seven companies that we have taken public 
since 2016, and in the first 6 months of trading the difference 
between the high price and the low price was on average 68 
percent. So many of those lost their EGC status.
    Chairman Huizenga. OK. And I think it was Mr. Paschke who--
you had talked a little bit about providing a longer runway? Is 
that correct? Is that relative to what Mr. Eggers was talking 
about?
    Mr. Paschke. Yes, so there are two things I would say. 
First, why do investors care? One is IPOs have actually 
outperformed the S&P 500 in 2015, 2016, 2017, and 2018 year to 
date. So I did want to get it out there that IPOs in--are in 
fact working and a good vehicle for wealth creation.
    Extending the on-ramp, to me--and as I mentioned in my 
opening statement, I was part of the initial set of 
recommenders on the task force--there is a timeframe on them to 
see how it worked. To see if the market reacted, if there was 
pushback from investors. If some of the disclosure allowances 
led to problems or information issues. As we sit here now, 5 
years later, there really haven't been issues. Virtually every 
company that has been eligible has taken advantage of those 
allowances and there has been really no pushback or valuation 
differential afforded them by the market.
    So it feels like the extension is appropriate for existing 
public companies who already became public, but also helps 
incentivize others to--
    Chairman Huizenga. Real quickly because I think this is one 
of the things that Professor Coffee brought up. He basically 
said that there is enough money out there. We don't need the 
IPOs, venture--is there enough cash out there? What is the--
what is the purpose for accessing it?
    Mr. Paschke. I think that is actually one of the most 
important points. There is a lot of money out there, it is 
privately funded. It is being invested by high-net-worth 
individuals in venture capital firms, so all the value creation 
is accruing to very few people.
    So in an era where income inequality and wealth equality is 
such a topic, I think we need to be encouraging greater access 
to that wealth creation and there is just no question that the 
public markets, through all its vehicles, is the number one way 
to do that.
    Chairman Huizenga. Well, it is interesting you say that. 
I--literally, I will read verbatim what I had written down: How 
do common investors, non-high-net-worth investors access the 
upside of market growth? That in my mind is one of the major 
elements in this--in this entire thing. My time is up and I--
and I am going to be a little generous here with the 
questioning since we have a few people up here. Because I real 
quickly--I would like Mr. Knight to address 5756.
    Is there an issue or a problem? And what do you hear from 
those public companies who work with or are on the--on Nasdaq 
with some of those activist shareholders and some of their--
some of their proposals?
    Mr. Knight. Well, yes. Shareholder activism is a major 
factor in the public markets. It is a reason why some 
entrepreneurs choose not to go public. Shareholders should be 
active. Shareholders should be engaged. But it is the short-
term focus, often of activists, that distorts the market. And 
that is why we support legislation that would provide more 
transparency about shorting the market.
    We think that would be healthy. And--but activism is a 
major factor in the market today and it--it is something many 
are concerned about.
    Chairman Huizenga. So appropriate for it to be addressed?
    Mr. Knight. Yes. Yes, sir.
    Chairman Huizenga. All right, my time is well-exposed--
expired. With that, the Ranking Member. Or the--
    Mrs. Maloney. Thank you. I would like to welcome John 
Coffee back to the--to the panel. And I would like to ask you 
about the venture exchange bill which you called promising. As 
I mentioned in my opening statement, I am not opposed to this 
concept, but I have some concerns about preempting State 
securities laws. And is there a way to make the venture 
exchange model work without exempting State laws, or preempting 
State laws?
    Mr. Coffee. Right now, the alternative to a venture 
exchange is the alternative trader, ATS system, which has a 
number of companies trading over the market. Venture exchanges 
may prove to be a more interesting, more novel, more creative 
alternative. We don't know until we try. But we have seen that 
under regulation ATS, we have small companies trading in the 
over-the-counter market without a preemption of State blue sky.
    So it is possible to have entrepreneurs trade over-the-
counter small companies even though they are subject to State 
blue sky regulation. And frankly, this is the key point about 
this, when you have a venture exchange, you are going to have a 
thin market. Thin markets invite pump and dump schemes. You 
need resources to monitor those pump and dump schemes, and the 
SEC tends to focus on bigger issues, bigger higher-profile 
cases. And we need the States which are very familiar with some 
of these smaller companies, and I think are better monitors for 
them.
    That is the problem about preemption. The other problem I 
was pointing to was that the way this statute is written, the 
SEC has to shut you down. You can start trading as a venture 
exchange until the SEC comes in and says you must stop. I think 
that puts the SEC under undue pressure. They have to run like a 
fireman from fire to fire and I think you will get fly-by-night 
operators under that kind of structure.
    But the idea I still think is promising.
    Mrs. Maloney. Would anyone else like to comment on it? 
Just--
    Mr. Gellasch. Thank you--thank you, Congresswoman, I would. 
I think that there is actually a reason why pension funds and 
investment advisors aren't beating down the door for more IPOs 
and pulling companies into public markets. And frankly, I think 
the venture exchange is likely to just make it easier for the 
existing investors and executives of those companies to exit. 
But it is not going to be the thing that pulls public pension 
funds or investment advisors or fiduciaries into those markets.
    So it is not actually going to have that effect. It is not 
going to be able to overcome the costs or risks associated with 
those private securities.
    Mrs. Maloney. Anyone else?
    Mr. Knight. Yes--
    Mr. Quaadman. Yes, Ms. Maloney. I am sorry, Ms. Maloney, we 
are supportive of it, and I think one thing to remember here is 
that the small investor's been shut out. The retail investor's 
been shut out. This is a platform where the SEC can put very 
robust rules in place for oversight, allow for concentration 
liquidity, allow for smaller investors to participate in this, 
and it is just another way and another venue of trying to drive 
liquidity to smaller public companies.
    Mrs. Maloney. Anybody else? Comments?
    Mr. Knight. Yes, I would just point out the SEC has 6 
months to license these exchanges. They have been licensing new 
exchanges quite rapidly. We now have 13 of them in the United 
States, no other country has that many. With regard to Nasdaq 
and the venture legislation, we would be able to trade these 
securities because our listing standards are already blue sky-
exempt by statute and regulation.
    So this would encourage more competitors to Nasdaq which I 
don't think is a bad idea, we are not against competition. 
And--but I think there is a way to do it. Professor Coffee 
definitely has a point that State securities regulation plays 
an important role. But with regard to the New York Stock 
Exchange and Nasdaq, right now we are exempt.
    Mrs. Maloney. OK, I would like to also ask about the XBRL 
bill. And I would like to ask Mr. Gellasch here, your 
organization represents investors and I believe that it is the 
investors who benefit the most from a structured data like 
XBRL. Do you think that exempting over 50 percent of public 
companies from the requirement to use XBRL will harm investors 
and ultimately transparency? And I would also like to ask Mr. 
Coffee and anyone else, Mr. Quaadman and others, to respond.
    Mr. Gellasch. Thank you for the question. I think I am 
struck by the dichotomy of two--of different proposals here. On 
the one hand, we are saying that we want to encourage research 
into small companies and the utility of that research into 
small companies. On the other hand, we are actually going to 
make that research less useful for the people who read it. XBRL 
is common and it is something that folks need to have to 
compare investment opportunities.
    And so one of the things that is really interesting here 
is, we are saying on the one hand, we need to do things to 
promote research into small companies. And on the other hand, 
there is a proposal to expressly go in the opposite direction.
    Mrs. Maloney. Mr. Coffee?
    Mr. Coffee. Just one sentence. XBRL is a tool, a cost-
saving tool. We want analysts to study the smaller company. 
They are not doing it now because the costs of benefits don't 
work out for them. If you reduce the cost, you might get more 
analyst attention to smaller companies. So, I think it will 
encourage analysts to look at smaller companies.
    Mrs. Maloney. Yes, Mr. Quaadman?
    Mr. Quaadman. Yes, thank you Ms. Maloney for that question. 
First off, we support use of interactive data like this for 
investors. However, XBRL, from studies I have seen, only 11 
percent of investors actually use it extensively. That is a CFA 
study. So, this would actually allow for companies to have the 
option to deal with this--to deal with the cost and the like.
    But I think we also have to understand, too, XBRL is a 1998 
platform, as we are increasingly going into a block chain 
world. So, if we can go into a block chain world where you have 
a common electronic ledger where everybody is connected with, 
that is much more transparent and easier to use in an XBRL 
system. So, I think we also need to be very open to other 
innovative ways of disseminating data.
    Mrs. Maloney. My time is expired. Thank you. I thank all of 
the panelists. It was very interesting, thank you.
    Chairman Huizenga. With that, our Chair of the Oversight 
and Investigations Subcommittee, the gentlelady from Missouri, 
Mrs. Wagner, for 5 minutes.
    Mrs. Wagner. Thank you, Chairman Huizenga and I think my 
friend, the gentleman from Arkansas for yielding me the 
opportunity to move ahead of him.
    Mr. Quaadman, welcome back. In your testimony, you noted a 
2011 report of the IPO task force found that 92 percent of 
public company CEOs said that the administrative burden of 
public reporting was a significant challenge to completing an 
IPO and becoming a public company. How does my draft 
legislation on 10-Q reporting help to alleviate that burden?
    Mr. Quaadman. Yes, so, first off, let us remember your bill 
doesn't hide any information. That information is already put 
out there publicly. It allows companies to do it in a different 
way. So, I think if you take your bill, you take some of the 
legislation here, in terms of shelf registration--
    Mrs. Wagner. Right.
    Mr. Quaadman. Other things such as company file, which we 
have proposed in the past. It allows for information to be put 
out there for investors without being done in a redundant 
fashion, and then avoiding those costs. So, this isn't hiding 
the ball for anybody.
    Mrs. Wagner. Thank you. Mr. Knight, your colleague, Tom 
Whitman, testified before this committee, last year. And noted, 
the Nasdaq believes it is long past time to move away from a 
one-size-fits-all approach to corporate disclosure.
    In fact, Mr. Whitman suggested eliminating the archaic 10-Q 
form altogether because it was duplicative and bureaucratic. 
Can you quickly walk committee members through some of the 
duplicative standards that exist between the current Form 10-Q 
and company earning releases?
    Mr. Knight. Well, the--the premise behind this is, I would 
quote a famous technology pioneer, Grace Hopper, who was an 
Admiral in the Navy who said, ``The most dangerous phrase in 
the English language is, we have always done it this way.'' And 
there is a redundancy to disclosure in our system today.
    But it is undergirded by a principle of materiality, and we 
think what you have proposed would preserve that materiality, 
while also the key financial disclosures that are required 
under Reg S-K and that come out in an 8-K and which is what 
really moves the market. When you look at the Nasdaq market, on 
any day, where there are substantial movements is where someone 
has had an earnings release and put out their 8-K with their 
full financial disclosure.
    Now, full--a few weeks later, they make a--a 10-Q filing. 
That filing has a number of things in it, some of it redundant 
to the K, but any material change since the last disclosure 
would be in that, we would combine that through your 
legislation in one disclosure.
    It would be at the option of the company and I think that 
is important that several pieces of legislation before the 
subcommittee restore some role for the listed company in how it 
is regulated and give them some choice.
    Mrs. Wagner. What--what are the costs and resource burdens 
on companies that are required to file 10-Q forms with the SEC?
    Mr. Knight. Well, I--when you are talking about cost, there 
is a dollar cost, but then there is, what I referred to in my 
testimony and my statement, the signaling that goes on through 
regulation to the economy, to the business community, about the 
attitude of regulators in Congress toward what they are doing 
on a day to day basis.
    When they see things that don't make sense--when they see 
redundancy and they think about going public and that--that is 
a very long-term commitment they are making. Do they want to be 
part of that system? When you signal that you are making the 
system and the technical aspects more rational, they get more 
confidence about jumping into that.
    So, it is more than just the--the cost in dollar terms. It 
is rather, the system is being run in a rational way that 
reflects the fact that these are the companies that are 
creating the jobs and the growth in this country.
    Mrs. Wagner. Are press releases sufficient for investors to 
obtain the information they need to make form--informed 
investment decisions?
    Mr. Knight. No, no. It needs to be prescribed, but the 
current system, I would argue, is redundant. And the Qs are 
really not studied in the same way the K is. So, why not use 
that disclosure to put everything in it, again, at the 
company's option.
    Mrs. Wagner. Great, thank you. I yield back the remainder 
of my time.
    Chairman Huizenga. The gentlelady yields back. With that, 
the gentleman from Georgia, Mr. Scott, is recognized for 5 
minutes.
    Mr. Scott. Chairman, I am sitting here listening to all of 
you and you have such great knowledge and each of your 
testimonies has been very informative, but there is some cross-
section going on here on one side or the other.
    And it fits it with some of the concerns that I have. And I 
want to start by saying that--I want to emphasize that, both 
the Republicans and Democrats, on this committee are willing to 
work together to make it easier to fuel capital growth in our 
markets.
    As a matter of fact, I am usually the first to jump onboard 
to proposals like that. However, listening to you and just my 
own research, I am beginning to get a little worried about--we 
are getting to a point where we may be placing too much value 
on capital growth.
    And maybe we need more evidence and assurances that this 
actually needs to be done and that we are not compromising the 
integrity of many of our U.S. firms in our marketplace, which 
makes our U.S. firms so attractive. So, I am not singling out 
any bill here, but let me call your attention to the discussion 
draft that has to do with requiring the SEC to revise the 
definition of a qualifying portfolio company to include 
emerging growth companies. And I couldn't help but think, is--
is this really necessary. My staff also tells me that in 
February 2017, the social media company Snapchat filed for an 
initial public offering, claiming EGC status.
    And I am pretty sure that the IPO was overprescribed with 
many investors clamoring to buy up its shares. Now, the same 
thing happened in March with Dropbox when they went public in 
an oversubscribing offering, claiming EGC status. So a lot of 
these discussion drafts and bills amount to a drip, drip 
erosion of our security laws.
    And I am somewhat worried we may be ignoring the needs of 
investors and marketplace transparency. And so I am--this 
subject of Expanding the On-ramp reports that many of your--our 
witnesses have worked on. But a common trend that I have 
noticed in these proposals is that there is only one direction 
we go when we balance investor protections versus expanding 
access to capital. And that direction is always weakening of 
our disclosure requirements.
    Now, Mr. Gellasch--is it Gellasch? I am sorry. Gellasch. I 
really was intrigued in your testimony because you stressed the 
importance of considering the impact of these proposals on 
investors who are contributing to the capital. So could you 
describe how expanding regulatory accommodations for users 
might affect the attractiveness of U.S. companies to investors?
    Mr. Gellasch. Yes. Thank you for the question. I certainly 
appreciate it. So as we have talked about the explosion of 
private capital and--and Professor Coffee agreed that--he said, 
gee, there may not be all of this need for capital formation. 
It is just not--
    Mr. Scott. Yes.
    Mr. Gellasch. In the public markets anymore. We have to 
think that when we talk about some of the proposals before us, 
we are trying to make--give--make those investment 
opportunities more accessible for retail investors. Well, 
pension funds and big mutual funds are how the predominant 
number of actual retail investors invest. And the people who 
have the fiduciary duties to them are saying these private 
markets are too costly, generally, and too risky, generally, 
for us.
    And so when we talk about expanding the private markets and 
making them more accessible to folks, we are not actually going 
to get those people more involved. At the same time, when you 
are looking at the public markets and focusing on the burdens 
and costs and risks of issuers and the folks that are trying to 
sell their securities, we are saying, hey, you, the investors 
in those public securities, we have a great deal for you. It is 
less.
    You are going to have less transparency, higher costs, and 
higher risks.
    Mr. Scott. And Mr. Coffee, you agree with Mr. Gellasch on 
this--my concerns?
    Mr. Coffee. I agree mainly with your point that--that the 
hope for more IPOs, we shouldn't eliminate, abolish, and 
downsize all of the protections that give shareholders some 
right to comment on and criticize corporate behavior. Earlier 
it was mentioned that there is a shareholder proposal rule. And 
that would be downsized by a resubmission provision. I have to 
tell you that empirically, there is a study that shows since 
2000, 50.1 percent of shareholder proposals have gotten less 
than the 30 percent level at which they would be cut off--
    Chairman Huizenga. Gentleman's time is expired.
    Mr. Scott. Thank you, Mr. Coffee. I appreciate the extra 
minute, too, Mr. Chairman. Thank you.
    Chairman Huizenga. Gentleman's time is expired. I now 
recognize myself for 5 minutes. I want to first address my 
initial questions to Mr. Knight, if I may. And I know this is 
slightly off topic for the hearing today, but since you are 
here, I would value your testimony on legislation that I have 
introduced to amend the risk- and leverage-based capital rules 
for banks in order to improve liquidity for listed options.
    I have several questions I am going to go through, and then 
if I could get your response. One, I wondered if you could 
discuss how improved liquidity decreases spreads and makes it 
less costly for investors to make use of listed options. And if 
you also discuss the importance of liquidity in options markets 
when there is volatility for the underlying assets.
    For example, how important is it to have the ability to 
manage risk through options when there is volatility in equity 
markets. And then is it fair to say that this is a timely issue 
that the Federal Reserve and other banking regulators should 
address as soon as possible, and do you share the concern that 
the timeline for implementation of this standardized approach 
for counterparty credit risk, which proposes to amend the 
treatment of options and capital rules, is too far off? They 
are saying maybe a couple years away.
    So several questions there, but wondered if you could 
respond to that, Mr. Knight.
    Mr. Knight. Certainly. The options market is critical to 
the management of risk in the underlying cash equities market. 
It is a market that is populated mainly by professional 
traders, by market makers on behalf of financial institutions 
and investors who are laying off risk through the investment in 
options.
    It is a critical market to our economy. Central clearing of 
those instruments provides stability to the economy and 
something that is encouraged across markets. The rules that 
apply there don't necessarily recognize the capital structure 
and the investment policies of some of the midsized firms that 
are populating that market and may cause a reduction in their 
participation in those markets.
    There are alternative, more modern capital markets, capital 
requirement markets for the central clearing houses that the 
Fed could consider that would preserve the participation of 
those mid-level market makers, which would provide more price 
discovery participation and that would narrow the spreads and 
narrow the cost to the investing public.
    Chairman Huizenga. Thanks, Mr. Knight. I appreciate that. I 
am going to move to Mr. Paschke if I could. I am interested in 
the part of your testimony that discusses the diversified fund 
limits under the Investment Company Act. I don't believe this 
is something we have spent much time discussing here on our 
committee. I wondered if you could discuss the history of the 
10 percent limit on mutual fund positions.
    Why does it matter if a mutual fund owns 10 percent or even 
50 percent of certain company as long as the overall fund 
remains diversified? And why do you believe it would be 
appropriate to increase this limit to 15 percent for 
diversified funds?
    Mr. Paschke. So the--the point of the rule itself is just 
for clarity to who you are investing with and alongside and 
particularly it is relevant now with the activist rules and 
activist campaigns. Why moving the 10 percent up to 15 percent 
as relevant to today's conversation has been one of the--the 
shining lights of the JOBS Act passage has been the 
proliferation of life sciences companies.
    I think the statistic that came out earlier is 260 life 
sciences companies have gone public since the JOBS Act. Those 
companies by and large tend to be very small. They are taking 
drugs through the FDA process. They haven't built out a full 
staff. They also have a specialized group of investors who 
invest in portfolio theory across those 260 in many cases 
because some are going to hit and some are going to miss.
    So to limit those specialist funds' ability to invest into 
those funds to help fuel that drug discovery, lead them through 
the FDA process to get them to a point where they are able to 
commercialize. I think this really expands the opportunity for 
them to get the funding they need from high quality specialist 
funds. Ten percent limit on a company that may come public at a 
$75 million or $100 million market gap, there is only $7.5 
million or $10 million. It is often insufficient in order to 
move the drugs to the FDA.
    Chairman Huizenga. Thanks. Mr. Hahn, I am wondering, do you 
agree that mutual funds are needlessly restrained in their 
ability to invest in startup companies because of this 10 
percent limitation in the Investment Company Act? And what will 
increasing this limit mean for the ability of startups to 
access the capital they need to grow?
    Mr. Hahn. When GlycoMimetics was private, we raised about 
65 million. It took us over a year to raise that last 38 
million. One of the main reasons we went public in 2014 was 
access to capital markets and the quick ability to raise funds. 
Since we have gone public, we have raised over 300 million in 
the public markets, so access to larger investments, we would 
welcome that. We raise money with this. It is a large anchor 
investor we are looking for. As I was saying, more than--we are 
looking for a $20 million to $30 million investment from any 
quarter, not just $5 million to $10 million.
    Chairman Huizenga. Thank you, Mr. Hahn. My time has 
expired. Next, I will recognize the gentleman from Connecticut, 
Mr. Himes, for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman and thank you gentlemen 
for--for really interesting presentations. I was there when we 
were doing this in the original JOBS Act and participated in 
its formation and ultimately, despite a few reservations out 
was happy with its passage.
    This conversation actually allows me to resurrect a not 
entirely dead horse to beat a little bit, because I was always 
struck, though I was a supporter of the JOBS Act, the best 
estimates I could get at the time was that the Sarbanes-Oxley 
and other compliance regimes probably imposed in the 
neighborhood of $1 million to $3 million a year of compliance 
costs, which is real money, but as a guy who used to do IPOs, I 
was always struck by the fact that I couldn't get anybody to 
focus on the other area or another area in which there is a lot 
of money out the door, which of course is the gross spread paid 
by companies going public.
    So I did some studies and lo and behold, there are studies 
out there that show an absolutely remarkable consistency in 
pricing of IPOs of 7 percent. It almost never changes for 
midsized IPOs. I have been crying in the wilderness. I have had 
a hard time getting, FINRA (Financial Industry Regulatory 
Authority) and SEC, and I have letters here promising studies 
and monitoring.
    And the SEC told me that it is hard to establish the cost 
incurred by underwriters, it is not. I have done it. And I just 
haven't gotten any traction until recently when SEC 
Commissioner Rob Jackson came out with a speech in April that 
called the history of the gross spread pricing a middle-market 
IPO tax.
    So I get to beat this hopefully not dead horse. Mr. Eggers, 
I am going to start with you. Does perfectly consistent 7 
percent gross spread IPO pricing and the cost that imposes 
which, as you know is $14 million to $20 million, does that--
this comes out of your pocket, issuers' pockets and IPO 
investors' pockets. This--does--does the seven--perfect 
consistency of 7 percent gross spreads in this country and not 
anywhere else in the world, does that feel to you like a 
competitive market?
    Mr. Eggers. No, it doesn't. Remember in the late 1990's, we 
had the Four Horsemen which were a midmarket group of bankers 
that would take companies public. Those--all those companies 
are gone, so we have fewer bankers that generally take 
companies public. Most the time, our best companies want to be 
taken public by someone like Morgan Stanley, Goldman Sachs, or 
J.P. Morgan, so there is less competition than there used to 
be, to answer your question.
    Mr. Himes. So I have had a hard time, in addition to 
getting FINRA and SEC interested in this until Commissioner 
Jackson gave his speech, I have certainly had a hard time 
getting the venture capital community, which I know well, 
interested in pushing on this. Why is that?
    Mr. Eggers. I--I would be happy to push on this.
    Mr. Himes. OK.
    Mr. Eggers. I think it is an important--
    Mr. Himes. Mr. Hahn, you went--thank you, Mr. Eggers. Mr. 
Hahn, you went public. Do you agree with Mr. Eggers that this 
doesn't feel like a competitive market?
    Mr. Hahn. Bankers are helpful in accessing the capital 
markets.
    Mr. Himes. I know, I was one. I am just asking whether the 
fees they charge are emerging from a truly competitive market.
    Mr. Hahn. You know, it is always been set at 7 percent, so 
it is something we really just didn't question. So now I think 
it should be looked at.
    Mr. Himes. OK. Mr. Knight, Rob Cook responded to my request 
for a study--because look, I have looked at the academic 
literature and it is pretty clear, but I don't know everything. 
Rob Cook is a good friend, by the way. We were in college 
together and despite that, I have not been able to extort him 
into--into doing this study. FINRA in January 2017, his letter 
said that you support a comprehensive assessment of the IPO 
market and gross spreads attendant. Have you actually 
undertaken that comprehensive assessment?
    Mr. Knight. Of the IPO market?
    Mr. Himes. Of gross spreads in the IPO market?
    Mr. Knight. Well, we study all aspects of the market. I 
have to tell you, I am not familiar with what our chief 
economist has there, but we may have. And if we do, I will 
supply it to you.
    Mr. Himes. So I am in a little stronger position than I was 
when we had this correspondence. Mr. Eggers, who knows the 
venture capital community pretty well and Mr. Hahn, who had the 
experience of this have both agreed that this doesn't feel like 
a competitive market. The numbers we are talking about here 
dwarf the compliance costs that if we have a perfectly 
calibrated JOBS Act, they dwarf the numbers that we are talking 
about.
    So now I have finally gotten SEC commissioner in some 
fairly public statements on this, will FINRA undertake this 
study with the SEC to determine whether gross spread pricing 
for midmarket IPOs is truly competitive, or whether there is 
some oligopolistic behavior?
    Mr. Knight. I am not with FINRA. Nasdaq is independent of--
    Mr. Himes. I am sorry. I apologize for that, I misread 
your--
    Mr. Knight. I was at one time, but we are not--
    Mr. Himes. OK. OK, I apologize. I don't mean to put you on 
the spot.
    Mr. Knight. No, frankly, what we see is a lot of 
competition amongst the banks to take companies public, the 
pricing issue is a separate issue. but they are certainly 
competing out there to get those assignments and we have not 
seen signs of a lack of competition. Of course, Spotify 
recently took a different model and avoided that. So there is 
competition and models that are--that is emerging. And as 
technology changes here, I think you are going to see more 
innovation.
    Mr. Himes. Thank you, I yield back.
    Chairman Huizenga. The gentleman's time has expired. With 
that, the gentleman from Maine, Mr. Poliquin is recognized for 
5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman very much. Gentlemen, 
thank you all for being here today, I really appreciate it. Now 
I know you have very stressful jobs, very stressful jobs, and I 
have some great news for you--
    Chairman Huizenga. If you will allow the Chairman to 
interject.
    Mr. Poliquin. Yes.
    Chairman Huizenga. There will not be additional time for 
the PSA for Maine tourism.
    Mr. Poliquin. Well, Mr. Chairman. on Maine's license plate, 
it says Vacationland. I want to make sure all these wonderful 
people in this room know that as you are planning your summer 
vacation, we don't even need air conditioning up there, we have 
moose walking around, all kinds of other critters, lobster, 
blueberry pie. You need to go to Maine where you belong, with 
these stressful jobs. And--and I think your families will thank 
you for that, and if you can put another 35 seconds back on the 
clock, I would be very grateful, Mr. Chairman.
    Chairman Huizenga. Motion denied.
    Mr. Poliquin. Now, there seems to be all this bad news that 
circulates in this town. I am not used to that. I represent the 
rural part of Maine. And we have a great problem to have up in 
Maine. We can't find workers. I know the national unemployment 
rate is about 3.9 percent. We are at 2.7 percent. And I don't 
care if you want to have folks working on the docks or picking 
apples or working in precision machinery, we can't find those 
bodies.
    Business confidence is through the roof, consumer 
confidence is high, we have seven million job openings across 
this country and it is all because--we know what it is. It is 
because regulations now are more predictable and there are 
fewer regulations. And the equity market is a forward-looking 
animal and they are looking at that and they are discounting 
it. On top of that is that we have lower taxes, so our families 
can keep more of their own money and spend it the way they want 
to spend it.
    And our businesses are growing. And they are investing. And 
Maine's second district is an economy of small businesses. Now, 
one of the things that keeps me up at night is how do we make 
sure there is access to capital so our businesses can grow--all 
sizes. And some folks borrow money from banks and that is all 
great--or credit unions. Some folks have access to capital 
markets.
    It is critically important to make sure we keep these 
reforms going. I--I am going to tell you what you folks already 
know. If we start raising taxes, if we start layering more and 
more regulations like we have been the last 10 years, we are 
going to be growing at half what we are growing at now. And 
when the economy grows, it is great for everybody. So one of 
the issues is how do we make sure these reforms continue.
    Now we all know what the stats are the last 5 or 10 years, 
the number of companies that have gone public have about cut in 
half, roughly. I would like to know, Mr. Paschke, when you talk 
to folks in the board room--Mr. Knight probably another good 
person to ask--what are they telling you? Are they telling you 
what we heard from Mr. Coffee a short time ago?
    What are their concerns and why are they choosing to stay 
private instead of going public? And second, a follow up 
question. We now have a new SEC. You folks, for the most part, 
deal with the SEC on a regular basis. Do you see a change over 
there where these folks want to be helpful and not layer on and 
make it more difficult for you folks?
    Tell me what you see out there so we are apprised of what 
needs to be done.
    Mr. Paschke. So answer two things very quickly--
    Mr. Poliquin. And speak right up, sir. Get right in that 
microphone.
    Mr. Paschke. So answer two things very quickly. One, we 
just had a very productive working session with the SEC about 3 
weeks ago, a group that SIFMA had organized. Very constructive, 
very roll up your sleeves, very specific--
    Mr. Poliquin. Was Mr. Clayton in the room?
    Mr. Paschke. He was not but he then circled back with 
feedback on--he had heard it was a very constructive--
    Mr. Poliquin. Good.
    Mr. Paschke. So early returns feel quite good in that 
regard, and constructive. The second thing you talk about, what 
do they say about why they want to stay private. One is you can 
structure those investments however you want. But the other 
part of this whole discussion that hasn't been talked about in 
terms of why didn't we see a huge jump in IPOs right after the 
JOBS Act, we have been operating in a near 0 percent interest 
rate environment.
    Mr. Poliquin. Right.
    Mr. Paschke. There has been so much access to alternative 
forms of investment.
    Mr. Poliquin. Right.
    Mr. Paschke. You know, direct private investment on the 
equity side or very cheap debt on the debt side, that has had a 
major impact. As you see rising rates, what you are seeing 
actually is an increase in equity offerings from existing 
public companies. There is too much of an on-ramp for the IPOs 
to have caught up to the changing environment.
    But that is going to change. And I am going to highlight--
the one thing I keep highlighting here is for your district in 
Maine, the other way for those people to get wealth is to be 
able to invest in the public markets. They do not participate 
in the wealth creation that occurs in the private markets.
    Mr. Poliquin. I worry about our small investors in Maine, 
folks that are working on the docks or working in the woods or 
pulling traps or--or growing potatoes and these folks are 
saving as much as they can every week to go into a retirement 
nest egg or to save for their kids' education. And a lot of 
those investments--not all but a lot of them, as you mentioned 
earlier--I am not sure if you did, Mr. Quaadman, mention this--
through retirement funds.
    I guess it was Mr. Gellasch--through State and other 
private employee benefit funds. So there are a lot of folks in 
this country, a lot of folks in our district who are owners of 
corporate America and it is really important to make sure these 
regulations are helpful to them so they have a better 
opportunity to live better lives and more freedom. With that, 
are you going to award me, Mr. Chairman, another 35 seconds 
that I rightly deserve?
    Chairman Huizenga. The fine folks at PureMichigan.com have 
asked me to evoke your time. So the--but with that, the 
gentleman's time has expired.
    Mr. Poliquin. Thank you very much.
    Chairman Huizenga. All right. That would be 
PureMichigan.com. And with that, the gentleman from Ohio, Mr. 
Davidson, is recognized for 5 minutes.
    Mr. Davidson. Thank you, Chairman. And I really want to 
thank our witnesses. Thanks for the time you have committed to 
be here today and for the work you do to advance capital 
formation, particularly with our small companies.
    And Mr. Eggers, I wanted to talk about venture for a bit 
and just the important role that venture plays in helping so 
many Americans realize their version of the American dream.
    Starting and growing a company in America is trending in 
the right way. For a long time, we were seeing more companies 
go out of business than launch. We have seen challenges in 
companies scaling. And I guess I am curious as you think about 
companies that want to access public markets, to go from a 
privately traded founder capital to maybe a round of venture 
funding.
    One of the keys to getting scale is that next round of 
capital. It is one of the keys where the venture folks get paid 
for the risks that they have taken. How have you seen the 
impact of the JOBS Act or other small capital formation 
initiatives on the space and particularly with information 
coverage, the research coverage for small companies? Could you 
address that?
    Mr. Eggers. Yes, thank you for the question. I think the 
JOBS Act has been effective in certain areas. And I mentioned 
the confidential disclosures and ability for a company to test 
the waters, so to speak, before they file, reduced reporting 
requirements, although when they get to a certain level, those 
go away. But there are other fundamental issues that also 
factor in to the problem of less IPOs.
    There is the uncertainty in the market once they are 
trading, the--the culture of short-term-ism, whole bunch of 
stuff like that. Let me--let me tell you a story about one of 
our companies, AppDynamics. Was one of our really fastest 
growing companies in the private area and raised a lot of 
venture capital and wanted to go public. Went, hired bankers, 
paid--paid that 7 percent. Or they were going to pay that 7 
percent.
    They went through their road show successfully and they 
were going to price the next morning and they decided instead 
to get acquired by Cisco Systems. Obviously for a premium on 
how they would price, but it makes you wonder why a company 
like that, a very good company, high-growth company that has 
created a lot of jobs would take the certainty of an 
acquisition over the uncertainty of the public markets.
    Mr. Davidson. Yes. Thanks. Good--good explanation. Mr. 
Quaadman, how--do you see provision of the JOBS Act--have you 
seen it boost coverage in pre-IPO, particularly for EGCs?
    Mr. Quaadman. It has been mixed. I think the testing the 
water provisions certainly have helped, but I think in terms of 
research, it is been mixed. We still see a dearth of research 
for smaller issuers. So I think the--the draft legislation 
here, I think is going to be an important way to help 
incentivize some more of that research, which that research 
will then also help drive liquidity investors to those 
companies.
    Mr. Davidson. Thank you. And maybe for the group, I am 
working on an ICO bill, so when you look at companies that 
choose to raise capital through an initial coin offering--we 
are trying to get our arms around how early formation is 
different. It seems that a lot of the things in--in the JOBS 
Act, in--in--perhaps even in EGC designation, or Reg A+ could 
help. Have any of you spent time thinking about this with 
respect to ICOs?
    Mr. Quaadman. Mr. Davidson, this is something where we have 
put together a group of companies to look at this, and we have 
actually had some meetings with Treasury, some meetings on the 
Hill as well, and we are trying to determine if that is a way 
of helping with capital formation, but we also have concerns 
about investor protection as well. So I think that is something 
we would like to have a further dialog with you on.
    Mr. Davidson. Thank you.
    Mr. Gellasch. If I may, Mr. Davidson, on the investor side, 
I would like to echo those remarks. Obviously, coin offerings 
have exploded themselves, and there are a lot of interesting 
issues related to that. Are they securities, for example, is a 
really basic question that the regulators are wrestling with.
    One of the things I--I think--and you mentioned 
alternatives there, thinking about do we put these things in 
the registered public space, the traditional public space, some 
scaled-back version of that? Do we go even further into a Reg 
A+ type of model?
    I would encourage you to think about those things very 
carefully, because the Reg A+ experience is remarkably 
different than the ECG experience. So as you think about 
alternatives, I would encourage significant caution.
    Mr. Davidson. Yes, thank you for that, and clearly some 
would--would still qualify as commodities, as CFTC has tried to 
make clear. So talking secure--where does that line exist--and 
my time is expired. Mr. Chairman, I yield.
    Chairman Huizenga. The gentleman's time has expired. I am 
not seeing--no further speaker--questioners on the--on the 
Democrat side at this point. The gentleman from North Carolina, 
Mr. Budd, is recognized.
    Mr. Budd. Thank you, Mr. Chairman, and again, thank you all 
for coming today and for your time and your input and your 
insight.
    So this is an important hearing, and one that is timely 
considering that Chairman Huizenga is negotiating a package of 
bills with the Senate that will focus on, yet again, capital 
formation. These bills would include some that have already 
passed the House, including my own bill, H.R. 3903, which is 
encouraging public offerings, and possibly some proposals 
before the subcommittee today.
    I want to go back again, to continue on with what Mr. 
Davidson was asking about the JOBS Act, and Mr. Quaadman, can 
you please explain some of the regulatory requirements that 
emerging growth companies are exempt from under the JOBS Act in 
their on-ramp provisions?
    Mr. Quaadman. Sure. There are certain executive 
compensation disclosures that they are exempt from. There are 
certain--there is the potential for certain exemptions from new 
audit or accounting standards as well.
    And generally, it provides for disclosures, but done in a 
slimmed-down version that allow for investors in those 
companies to get the information that they need. And it also 
allows for some of the more costly disclosures, such as--let us 
say, conflict minerals or others that they are exempt from 
also.
    So it is a way of allowing companies to grow into the 
existing public company system, and to eventually ramp up. 
Because one of the problems at Sarbanes-Oxley was that internal 
controls and all are extremely important. It was trying to make 
some of the costs scalable, and effectively what the JOBS Act 
tried to do in a very broad way was to make it scalable and 
ensure that their investors are receiving the information that 
they need, as well as have the protections in place.
    Mr. Budd. Very good. So why are--and you answered some of 
this next part, but why are the exemptions provided in Title I 
so necessary for emerging growth companies? If you care to 
elaborate any more on that, maybe some other reasons?
    Mr. Quaadman. Yes, it is their investor base is more 
interested in some of the things that the company is doing 
rather than what its sales are at that time. So it is--
investors are much more forward-looking there.
    It--it also--as I said, it allows for an ability for a 
company to gradually work its way into a public company model, 
because regardless of some of the discussion we have had here 
this morning, we have built in a lot of inefficiencies into the 
public capital markets. And what--effectively, what the JOBS 
Act tries to do is tries to shield those emerging growth 
companies from some of those inefficiencies to--until a point 
where they can deal with it.
    So we actually view the extension from 5 to 10 years--will 
actually allow for existing EGCs a little more time, and will 
also continue to make EGC--the EGC model a more attractive one.
    Mr. Budd. So why are things like the say-on-pay 
provisions--why are they not appropriate for these small EGCs?
    Mr. Quaadman. Well, first off, say-on-pay passes with 95, 
90 percent with large public companies. And we have also had an 
issue--we don't have--necessarily have an issue with say-on-pay 
itself. Investors should have a dialog with companies about 
executive compensation. But what has happened with the proxy 
advisory firms is that they have required a year by year vote, 
whereas Congress said, investors can decide what the frequency 
is.
    So rather than have an entity or a duopoly like the proxy 
advisory firms place a very costly provision on EGCs, Congress 
is actually somewhat going back to the intent of Dodd-Frank 
with say-on-pay to actually allow companies some breathing room 
with that.
    So that is one where I think, again, it is something where 
you have a founder-type system with EGCs, which you probably 
primarily have; investors are as invested in that founder as 
they are with the company itself. So, say-on-pay is a less 
relevant tool than it is for, let us say, a more mature 
company.
    Mr. Budd. That makes sense. Thank you, Mr. Quaadman. Mr. 
Hahn, since the enactment of the JOBS Act, about 265 biotech 
companies have used provisions in the act to go public. A lot 
of those are working on research that is ultimately going to 
save lives. Can you discuss with us in the partial minute that 
we have left how the on-ramp provisions have helped these 
companies better allocate their resources?
    Mr. Hahn. I think the biggest provision that helped us was 
test-the-waters. So, we have complex science, and getting 
investors up to speed to understand the science and to want to 
invest in the company in the traditional 2-week timespan of a 
roadshow, we would have lost a lot of investors with that. So 
test-the-waters gave us the ability to bring those investors up 
to speed.
    And also with the 404(b) exemption we talked about, that 
helps us save money--divert money into the science instead of a 
one-size-fits-all regulatory burden.
    Mr. Budd. I appreciate that. I think my time is expired. 
Again, thank you all.
    Chairman Huizenga. Amazing self-discipline. A gentleman's 
time is always ready to expire, so with that, the gentleman 
from California is recognized for 5 minutes.
    Mr. Sherman. Thank you. We have a bunch of bills that are 
designed to help small companies get capital one way or the 
other. And then included in discussion for this hearing is a 
bill designed to prevent shareholders from being able to put 
forward questions for a vote and be included in the proxy 
statement.
    Mr. Coffee, are you aware of any small startup in a garage 
that has ever had a second presentation of the same shareholder 
question in their proxy statement?
    Mr. Coffee. That small startup is the subject of the proxy 
rules, in most cases, so it is going to be totally 
inapplicable. But I think you are right in pointing out that 
unrelated to the IPO concerns of raising capital, there are 
provisions in here that downsize the shareholder voice in 
challenging corporate conduct.
    And there are other provisions in here that give major 
exemptions to what are called well-known season issuers, our 
largest companies, and allow them directly to sell before 
filing a disclosure document. It has nothing to do with small 
firms. That is our largest top quarter firms, and it is just a 
wish list of various deregulatory proposals various people on 
this committee agree to.
    So I don't think there is a clear, rationalized coherence 
to all of this. But on to your first point--
    Mr. Sherman. Yes, and I am aware of the social benefit put 
forward by making these issues come to light, and I think it 
taints the rest of the bills that we are discussing to throw in 
here something that has nothing to do with raising capital for 
small or big companies, and everything to do with suppressing 
discussion of important issues that face corporations in their 
operation.
    The next point I want to make is a number of the issues 
come in, how much money will we, as a society, spend on 
investor protection? And some would say, well, as a society as 
a whole we are spending a billion dollars on this aspect of 
investor protection, and maybe we are avoiding a billion 
dollars of fraud, so that balances out.
    No it doesn't, it is a good thing for society, because a 
billion dollar fraud loss--it doesn't just affect the people 
who lose their money, it dampens public interest, foreign 
interest, retail interest in investing in stocks. And having 
the game be fair is worth every penny that is necessary to 
achieve that.
    Mr. Gellasch, there is this proposal here to slash 404(b) 
audits, to increase by double or triple the various floors, and 
in effect say we will save a lot of money on worrying about 
internal control, and we will maybe only have one or two Enrons 
a decade as a result, probably a smaller company or smaller 
examples of that.
    What do you think of the need for attestation of internal 
control and reports on internal control?
    Mr. Gellasch. Well, I think we have seen examples, both--
not just Enron, but also in the--in the private company space, 
like Aranos, where the need for robust internal controls and 
financials is important, and some of the smartest guys in the 
room in the private space have proven ineffective at being able 
to do those things themselves in their own due diligence.
    So one of the things that is really important for the 
public capital markets, as you alluded to earlier, is ensuring 
that you have investor confidence and you don't lose it. And 
the accuracy of financial statements is critically important to 
investors. And so when we think about what the costs are 
associated with that--and I certainly appreciate and respect 
those may not be trivial. That is fair.
    I think--but that is also--
    Mr. Sherman. And I could sneak in, it is not just important 
to investors. You may have some division of a company, or 
what--where they are having signing parties forging documents 
for mortgages, et cetera, where you are hurting consumers. How 
is internal control important for those other than investors?
    Mr. Gellasch. Exactly right. It is a corporate governance 
issue that is far beyond just an investor protection measure. 
And one of the things I think we tend to focus on is just the 
cost associated with that. I would say what is also really 
important is focusing on that aspect. These are improving the 
quality of the offerings, including the quality of the 
companies and how they are governed.
    Mr. Sherman. I yield back.
    Chairman Huizenga. The gentleman's time has expired. With 
that, the gentleman from New Jersey, Mr. MacArthur, is 
recognized for 5 minutes.
    Mr. MacArthur. Thank you, Chairman. Good morning. I 
appreciate all of you being here.
    I am proudly wearing this pin--you probably can't see it 
from back there, but it is a--Foster Youth Shadow Day, and 
Rishawn, stand up. Stand up. This is Rishawn from my district. 
Young man--very interesting young man. Very--yes, give him a--
give him a hand.
    He has an entrepreneurial spirit, I can tell you that just 
from our conversations this morning. He is doing all kinds of 
things, and very interested in both philanthropy and in growing 
a business.
    We all know it takes more than hopes and aspirations and 
dreams and ideas. It takes money and it takes a path that is 
not completely cluttered with obstacles. I know, because that 
is the life I lived for 30 years growing a business.
    So I am listening this morning--first, I am impressed that 
he is awake, because some of this stuff could make anyone's 
eyes glaze over when you--when you listen to this. But--but 
this translates into real people's lives that want to do 
things.
    And I had--as we do in this business, I had to step in and 
out this morning, and so I have missed a lot of things, but I 
was here for the opening remarks. And Mr. Coffee, I was really 
struck by yours.
    It is a great name, by the way, if you weren't a professor, 
it would be a great name for a business. Mr. Coffee.
    That has been done. It took money for them to grow that 
business. I used to handle their insurance many decades ago. It 
takes money to grow a business. And I listened to you--I am not 
meaning to poke fun, I am just--I just was struck by your 
remarks, and you said that the reason companies don't really 
need the public markets--it is not because of regulatory 
overreach or overzealous attorneys general who criminalize 
management mistakes.
    It is none--it is none of that, it is just that companies 
can get money from the venture world, or the private equity--I 
think you said the venture world, but I think that may include 
other--
    Mr. Coffee. Private equity firms also, I said.
    Mr. MacArthur. Well, sure. Well let me tell you--let me 
tell you the decision I had to make when we got to a State 
where my business was big enough that I thought I could go 
public, and there would be enough float to actually make that 
viable. We had gone from a hundred-odd people to thousands. We 
could have done that. Why did I choose something other than 
private equity?
    I just left a meeting--one of the meetings I had to step 
out for was with a person that works with the exchanges. And I 
asked her the question, Why don't companies go public? She said 
the number one reason I hear is they are deathly afraid of 
overzealous regulators and State attorneys general. That is 
their number one reason.
    And then I think about your remark that, well, it is not 
that. Underregulation is--is far less dangerous than--or far 
more dangerous than overregulation.
    Mr. Coffee. Equally dangerous, I meant.
    Mr. MacArthur. Here is--here is the problem with that. If 
you really get practical. This doesn't--this doesn't play out--
no disrespect intended, but this stuff doesn't play out in a 
classroom. It plays out in the real world with real pressures 
coming from all sides. Venture capital, private equity capital, 
all of it is the most expensive form of capital for a business 
person to access.
    By far the most expensive. More expensive than the public 
markets. More expensive then debt capital or any of the 
alternatives around that. It comes with the greatest amount of 
outside control. Because private equity funds--private equity 
funds, venture funds, this is what they do every day. And they 
don't give their money without exacting a price, without 
getting certain controls, without getting certain investment 
thresholds.
    It is the longest liquidity possible outcome. You take 
capital from those sources and you are going to wait 5, 6, 7 
years or more. So why would a rational business person choose 
that anyway? Most costly, most control lost, longest liquidity 
event. Sir, with respect, it is not because it is just easy 
money and it has nothing to do with the state of the public 
markets.
    I am telling you from personal experience, it has to do 
with the fact that the public markets are frightening to 
business people who don't want to get squeezed and attacked and 
have a management mistake criminalized and all of the other 
stuff that comes with it. And I don't usually make speeches 
with my 5 minutes, I usually ask questions but my speech has 
lasted 5 minutes and so with that, I yield back, Mr. Chairman.
    Chairman Huizenga. Gentleman yields back. Gentleman from 
Arkansas, Mr. Hill, is recognized for 5 minutes.
    Mr. Hill. Thank the Chairman. I want to thank my friend 
from New Jersey because of his 5 minute speech, I may--I have 
more time for questions because I enjoyed it, I associate 
myself with it and it reflects the experience I have had for 35 
years and in corporate finance. So I appreciate my friend Mr. 
MacArthur and his perspective on the public and private 
markets.
    It has been--it has been said that we want more public 
companies--all of you agree with that universally--to give more 
opportunities for our pension funds, our 401(k) plans, our IRA 
accounts and that there is absolutely no reason to say that is 
not the primary objective. We want that opportunity because it 
shares the prosperity of America.
    So then it gets down to, well how do we accomplish that. 
And one is in sales and trading and research and bringing that 
company out. That is a key component that we are talking about 
today. And then the other is the cost of maintaining that 
public enterprise. And so we have bills on both sides of those 
issues. And I was with a company a couple of weeks ago--it is a 
publicly traded company, $2 billion market cap.
    One division has 5,000 suppliers. That is a lot. And you 
can imagine they have a lot of things that they sell to have 
5,000 suppliers. But one of the most costly things they have in 
this public company--long-time public company, $2 billion 
market cap--is trying to comply with the conflict minerals 
rule. It just--it just takes over their whole process, trying 
to prove that they have done that in case they are sued. Which 
they of course fully expect to be, because it is not possible 
to comply with it with 5,000 suppliers in just one division 
that--in a globally sourced enterprise.
    And so that is an example of what we are talking about, I 
think, today on the second piece, the cost of maintaining that 
public enterprise in a competitive--in a competitive way.
    Mr. Quaadman, there was a lot of discussion today about 
studying research coverage for small issuers before they had an 
IPO. I would love for your perspective on maintaining coverage 
of a small cap issuer after they are public and then I will ask 
Mr. Paschke to comment as well.
    Mr. Quaadman. No, I think--no, that is a great question 
because we have actually seen some problems with that, where 
there has actually been a retrenchment of research at times as 
well. And the reason why I raise MiFID with my opening remarks 
is that EU rule is actually going to impact research here and 
is going to impact costs. So it is a matter of--it is a supply 
and demand issue, right? What are the costs of the research, 
what are the--how is it priced out?
    And it is unfortunate that--I think the JOBS Act tried to 
address some of that but we actually need to do more of that 
and we are going to have to try and also determine with the SEC 
how we also deal with this in terms of MiFID as well.
    Mr. Hill. Yes. Thank you. Mr. Paschke, what is your view on 
that in the marketplace?
    Mr. Paschke. It is an absolutely major issue. And I 
mentioned, we cover 600 companies in research with a focus on 
small and mid cap. And the data shows that for companies with a 
$500 million market cap and below, they have an average of 
about three research analysts covering them. Larger cap often 
will have 25-plus. So it is very important in those voices that 
cover them are the voice to the market.
    MiFID was an appropriate thing to bring up because most 
market estimates say that the cost that the buy side is willing 
to pay for sell side research is going to come down by about a 
third through unbundling. So if you are a small cap name and 
there are two or three research analysts covering you today and 
the research budget just went down by a third, you may lose one 
to two of them.
    Mr. Hill. Yes. I think it is super important and I think 
this $500 million number is a reasonable number. The company I 
referenced, $2 billion market cap has six regular research 
firms covering them. I was surprised by that and delighted. And 
some have longstanding--it is a mix of regional firms and Wall 
Street firms. In the time I have remaining I just want to bring 
up one other issue for you representing SIFMA.
    Just like we talk about community banks needing relief from 
regulations, I think the same is true for privately held non-
bank broker-dealers. And one of the ways to do that is I have a 
bill that is going to permanently exempt of the peekaboo 
standard, the audit standard for small private broker-dealers. 
And I would hope that SIFMA would look at that issue and be 
supportive of a permanent waiver, effectively, for the peekaboo 
standard on audit for a small broker-dealer--because it is 
introducing--not holding customer funds.
    Mr. Paschke. Yes. It is my understanding that that was 
definitionally caught up in Dodd-Frank and that some brokers 
who probably weren't appropriate the privately held non-
custodial brokers, were caught up in some of the regulations, 
which would seem to us would make sense.
    Mr. Hill. Good. I look forward to working with you on that. 
Thank you, Mr. Chairman.
    Chairman Huizenga. Gentleman's time is expired with that. 
The gentleman from Minnesota, Mr. Emmer, is recognized for 5 
minutes.
    Mr. Emmer. Thank you, Mr. Chair and thanks for the 
committee--or the witnesses being here today before this 
committee and your patience. The Treasury--and Paschke, I will 
start with you. I am going to read you a statement from--an 
October 2017 Treasury Department report. This I think goes to 
something that you started to talk about a few questioners 
before and that frankly, Chairman Huizenga brought up at the 
very beginning of this hearing today.
    The quote is this. Or the Treasury report noted that, 
quote, ``to the extent that companies not to go public due to 
anticipated regulatory burdens, regulatory policy may be 
unintentionally exacerbating wealth inequality in the United 
States by restricting certain investment opportunities to high 
income and high net worth investors.''
    And isn't that what we are talking about here today with 
these--this isn't just pro-growth, but of the 11 bills, much of 
it is addressing the fact that you have to be too big to play 
in this country today. And the thing used to distinguish us 
from every other country on the face of planet is that any 
rank-and-file member of our society who wanted to participate 
in the marketplace, to grow his or her wealth and help grow the 
wealth of this great Nation, that has been restricted over the 
last many years and isn't that exactly what you were trying to 
get to earlier?
    Mr. Paschke. I think it is absolutely one of the most 
fundamental issues that is going on, is who can participate in 
the wealth creation. You know, for sure, the small individual 
retail investor who has no access or idea about the 
opportunities and is excluded.
    It is even gotten to the point where the mutual fund, 
active fund managers who are often managing money on behalf of 
a lot of small individuals or pension funds or police unions, 
whatever it may be, they are complaining that because companies 
are going public either later or never at all, that they are 
missing out on the entire wealth creation that occurs with an 
Uber or a Spotify or wherever it may be. These companies have 
achieved huge valuations all through private capital.
    So it is not just mom-and-pop retailers, it's active money 
management funds who don't have access to the private 
investment either who are one more where away from the 
individual.
    Mr. Gellasch. If I may for a moment, is to--one thing I 
think that is important though, is they all actually have--
those investment advisors and pension funds actually are likely 
to be able to physically have access to those markets. The 
reason why they are not accessing them right now is because of 
the risks and costs associated with a lot of those investments. 
Every mutual fund or investment advisor.
    Mr. Emmer. So you disagree with the Treasury's statement?
    Mr. Gellasch. No, I actually wholly agree. I think that we 
have to recognize that one, when you bifurcate the retail 
investor of ma and pa with an Etrade account from the mutual 
fund investor or the pension funds, which are in fact, the 
majority of how Americans actually invest in these companies, 
and those folks who are the fiduciaries, who are in charge of 
those, are actually saying, look, we actually do not want to 
and have investment guidelines that say we are not going to get 
involved, or we are to a very small extent in these private 
offerings; we are in venture investments in large part because 
of the costs and risks associated.
    Mr. Paschke. Which is exactly the point that was made by 
the previous speaker, about it is the most expensive capital 
out there. So to say that the private companies ought to be 
going there instead of public--
    Mr. Emmer. And that is what we are trying to address. That 
is exactly what we are trying to address.
    Mr. Knight, I have the venture exchange bill and I 
appreciate in his remarks, his opening remarks, Professor 
Coffee likes the concept but has some issues with how it is 
drafted. Can you--I know you are familiar with this set 
provision, can you give us just a picture of what it would look 
like if an entity was going to apply to become a venture 
exchange? What would they do? What is the timeline with the 
SEC?
    Mr. Knight. The SEC would have 6 months to determine 
whether they meet the qualifications to become the venture 
exchange. On our market, we would already be qualified, and the 
issue would be whether the company would choose that market 
structure, that the optionality that is in your legislation, 
that it would allow the aggregation of trading interest in--in 
one market.
    Right now, it is split amongst 50 with work--which works 
well when you are trading Amazon, but it tends to drain the 
liquidity away from the price discovery process. We tend to be 
very focused in the United States on competition between 
marketplaces and don't focus enough on having the competition 
or price discovery between orders and quotes, and that needs to 
be aggregated, particularly for small companies if you are 
going to have a liquidity thickness that you need so that 
people can sell securities by securities on an orderly basis.
    Mr. Emmer. Thank you. I see my time has expired.
    Chairman Huizenga. The gentleman's time has expired, but 
this has been fascinating, very helpful. And I would like to 
thank our witnesses today for their testimony. Without 
objection, I would like to submit the following statements for 
the record from the Equity Dealers of America. My Ranking 
Member, Mrs. Maloney, had taken care of a couple others 
earlier.
    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.
    [Whereupon, at 12:05 p.m., the subcommittee was adjourned.]

                            A P P E N D I X



                              May 23, 2018

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