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

                                                            S. Hrg. 115-400

       THE INNOVATION ECONOMY, ENTREPRENEURSHIP, AND BARRIERS TO CAPITAL
                                     ACCESS

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

                                    HEARING

                                   before the

                            JOINT ECONOMIC COMMITTEE
                         CONGRESS OF THE UNITED STATES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 25, 2018

                                   __________

              Printed for the use of the Joint Economic Committee

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                         U.S. GOVERNMENT PUBLISHING OFFICE

    31-302                    WASHINGTON : 2019

                            JOINT ECONOMIC COMMITTEE

        [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

    HOUSE OF REPRESENTATIVES             SENATE
    Erik Paulsen, Minnesota, Chairman    Mike Lee, Utah, Vice Chairman
    David Schweikert, Arizona            Tom Cotton, Arkansas
    Barbara Comstock, Virginia           Ben Sasse, Nebraska
    Darin LaHood, Illinois               Rob Portman, Ohio
    Francis Rooney, Florida              Ted Cruz, Texas
    Karen Handel, Georgia                Bill Cassidy, M.D., Louisiana
    Carolyn B. Maloney, New York         Martin Heinrich, New Mexico,
    John Delaney, Maryland                   Ranking
    Alma S. Adams, Ph.D., North          Amy Klobuchar, Minnesota
        Carolina                         Gary C. Peters, Michigan
    Donald S. Beyer, Jr., Virginia       Margaret Wood Hassan, New
                                             Hampshire

                       Colin Brainard, Executive Director
                 Kimberly S. Corbin, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                         Opening Statements of Members

    Hon. Erik Paulsen, Chairman, a U.S. Representative from Minnesota     1
    Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New
      Mexico.........................................................     2

                                   Witnesses

    Mr. Phil Mackintosh, Global Head of Economic Research, NASDAQ....     5
    Ms. Rachel King, CEO, GlycoMimetics..............................     7
    Ms. Lisa Mensah, President and CEO, Opportunity Finance Network..     9

                           Submissions for the Record

    Prepared statement of Hon. Erik Paulsen, Chairman, a U.S.
      Representative from Minnesota..................................    28
    Prepared statement of Hon. Martin Heinrich, Ranking Member, a
      U.S. Senator from New Mexico...................................    29
    Prepared statement of Mr. Phil Mackintosh, Global Head of
      Economic Research, NASDAQ......................................    31
    Prepared statement of Ms. Rachel King, CEO, GlycoMimetics........    40
    Prepared statement of Ms. Lisa Mensah, President and CEO,
      Opportunity Finance Network....................................    49
    Prepared statement of Mr. Michael Brown, General Partner, Battery
      Ventures.......................................................    84
    Slides submitted by Representative Maloney
        Fact: Business lending has increased 75% after Dodd-Frank....    93
        Total number of banks in U.S. (1998-present).................    94
    Response from Mr. Mackintosh to Questions for the Record
      Submitted by Senator Sasse.....................................    95
    Response from Ms. King to Questions for the Record Submitted by
      Senator Sasse..................................................    96
    Response from Ms. Mensah to Questions for the Record Submitted by
      Senator Sasse..................................................    97

                            THE INNOVATION ECONOMY,
                         ENTREPRENEURSHIP, AND BARRIERS
                               TO CAPITAL ACCESS

                                  ----------

                            WEDNESDAY, JULY 25, 2018

                        United States Congress,
                              Joint Economic Committee,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 10:03 a.m., in Room
    1100, Longworth House Office Building, the Honorable Erik
    Paulsen, Chairman, presiding.
        Representatives present: Paulsen, Comstock, Handel,
    Maloney, and Delaney.
        Senators present: Lee, Heinrich, and Peters.
        Staff present: Ted Boll, Colin Brainard, Daniel Bunn, Ryan
    Ehly, Hannah Falvey, Connie Foster, Ricky Gandhi, Colleen
    Healy, Beila Leboeuf, Allie Neill, Neomi Parikh, Ruben
    Verastigui, Kyle Westra, Jim Whitney.

       OPENING STATEMENT OF HON. ERIK PAULSEN, CHAIRMAN, A U.S.
                     REPRESENTATIVE FROM MINNESOTA

        Chairman Paulsen. I call the committee hearing to order.
        The United States has fallen to 11th place in the 2018
    Bloomberg Innovation Index, and one thing is clear: Our job as
    policymakers is to figure out how to find the right mix of
    policies to spur innovation along. After all, economists agree
    that innovation is critical to growth and prosperity, and with
    the headway we have made since the passage of the Tax Cuts and
    Jobs Act, this momentum must continue.
        Innovators start their work from a difficult place. After
    all, great ideas don't appear fully formed. They take research,
    development, and testing. Innovation is just as likely to
    happen in a suburban garage as it is in a corporate lab. That
    is because people of all walks of life can come up with the
    next big thing.
        Are we advocating for the best policies to assist that? The
    Joint Economic Committee has held two previous hearings on this
    topic. Witness testimony, combined with analysis by our staff
    of economists, makes clear that too many barriers stand in the
    way of innovators and the life-improving ideas that they have
    to offer.
        Today's hearing is about innovation, entrepreneurship, and
    barriers to capital access, and how can we ensure that
    innovators have access to financial resources they need to
    succeed. Nearly 70 percent of all startup businesses received
    less financing than they applied for. Nearly 28 percent of
    startup businesses were not approved for any financing at all.
        Innovators know that if an idea is entirely new, it shows
    promise, the first challenge is to finance its development. As
    such, each innovator has to, not only create something entirely
    new, but also fund the work involved by means that require more
    effort and persuasion than simply applying for a commercial
    bank loan.
        Access to capital is one of the most challenging parts of
    starting a new business, especially in the tech sector where
    companies are at the forefront of new technologies and are
    developing products and services for which there is no track
    record. The risks are high, and subsequently, it is difficult
    to raise money from investors.
        For there to be progress, we need to remove obstacles to
    raising seed capital. Take, for example, a company going public
    via an IPO has long offered real advantages. Overregulation,
    however, has driven down the number of IPOs which deprives the
    entrepreneurial ecosystem of capital access.
        We should take a second look and modernize this system so
    that we would remain competitive. We have already taken major
    steps to help. The Tax Cuts and Jobs Act included several
    provisions that may be helpful in expanding capital access.
    Ways and Means Committee Chairman Brady is embarking on tax
    reform 2.0, and now we must take an innovation-friendly
    approach that increases incentives to invest in new companies
    and technologies.
        The government itself is not and can never be the prime
    mover in the world of innovation. Washington shouldn't be
    subsidizing particular companies or activities in the hopes of
    winning big, because picking winners and losers goes against
    America's entrepreneurial spirit and undermines the process by
    which our strongest ideas are honed and improved. Today, I look
    forward to hearing from our witnesses and my colleagues in how
    we can reduce the barriers in empowering those with big ideas
    to make even bigger strides.
        We are facing fierce competition. In 2017, one-third of the
    world's IPOs happened in China. Domestic IPOs today total
    nearly half of what they were 20 years ago. I am hopeful that
    our work today can help us, not only get back into the top 10
    innovative economies in the world, but to make us number one
    overall.
        And I now yield to Ranking Member Senator Heinrich for his
    opening statement as well.
        [The prepared statement of Chairman Paulsen appears in the
    Submissions for the Record on page 28.]

     OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A
                      U.S. SENATOR FROM NEW MEXICO

        Senator Heinrich. Mr. Chairman, thank you for focusing on
    barriers to capital access. It is an important issue, and I
    look forward to the insights of our witnesses here today.
        We have talked before about the important role that small
    and new firms play in driving innovation and creating jobs. Yet
    the startup rate has been declining now for years and new
    businesses increasingly are concentrated in the large urban
    counties, while rural communities are struggling to keep up.
        A big challenge for entrepreneurs in small towns and remote
    areas is getting access to capital to turn their idea into a
    business or to take their business to the next level. JEC
    Democrats recently released a comprehensive report, ``Investing
    in Rural America,'' that examines the economic challenges and
    opportunities as well facing rural communities.
        Two challenges jumped out: First, insufficient access to
    broadband leaves communities disconnected from economic
    opportunities and unable to reach customers around the globe;
    and second, insufficient access to capital constrains growth.
    The more rural you get, the less access to capital there is.
        Many rural communities have seen their financial
    institutions disappear and with them access to the loans that
    people need to build and to expand their businesses.
        In New Mexico, there are just a handful of cities with
    50,000 people or more. Often, small towns are less able to
    access grants and other Federal resources that may be available
    to them, and smaller communities have fewer financial
    institutions, whether we are talking about banks, credit
    unions, community development, financial institutions, or
    nonprofits.
        Let's look at banks. From 2008 through 2016, 86 new banking
    deserts, areas where no banks exist within 10 miles, were
    created in rural communities. We need to reverse that trend.
    Expanding access to capital must go hand in hand with building
    the know-how and the expertise to launch and grow businesses.
        In my State, nonprofits like WESST help budding
    entrepreneurs create new business plans, access micro loans,
    and build their businesses. More than two-thirds of those that
    they serve are women, and an even larger share are low income.
    SBA's Women's Business Center helps fund WESST, but SBA and
    USDA don't have the staff needed to go out and build awareness
    of the many programs they operate that could support rural
    business development. We need more boots on the ground.
        There are also a growing number of resources available
    online. Online services allow consumers to continue to have
    relationships with financial institutions that no longer have a
    physical presence in a community. But the reality is for this
    to be a viable option for rural and Tribal communities, these
    communities need to be connected to broadband, and too often
    that is simply not the case.
        It is not just a shortage of banking options. Venture
    capital is also scarce in rural areas. More than three-quarters
    of venture capital goes to companies in New York, in Boston, in
    San Francisco, and Los Angeles. There are entrepreneurs across
    this country with good ideas and smart business plans, but they
    need access to investors who can help transform these ideas
    into growing businesses.
        The Federal Government has a vital role to play. We need to
    support small business lending through proven programs at the
    SBA, USDA, and the CDFI Fund. We also need to build the
    technical expertise to help people access Federal resources,
    while also promoting increased awareness about the programs
    that exist at SBA, USDA, and Treasury. That is what an
    organization called Grow New Mexico is doing. They connect
    people, businesses, and communities through resources that can
    help.
        Unfortunately, the Trump administration seems to be heading
    in the opposite direction. Instead of doing more to increase
    access to capital, the Administration proposes zeroing out the
    CDFI Fund's grant making. The White House's recision package
    also targeted several USDA programs that support rural
    communities, a sign that the Administration is failing to get
    money out the door. And the recent Republican tax law actually
    makes the Tax Code more complex for small firms.
        We need to realign our priorities. Expanding access to
    capital means providing more and better options, and ensuring
    that people and communities are able to utilize those options.
        I look forward to hearing from our witnesses on how we can
    build an innovation economy that supports innovation and growth
    in all parts of our country.
        Thank you, Chairman.
        [The prepared statement of Senator Heinrich appears in the
    Submissions for the Record on page 29.]
        Chairman Paulsen. Thank you.
        And with that, we will introduce our witnesses. And I thank
    each of you, first of all, for taking the time to be here for a
    second time on a reschedule. Our fourth witness wasn't able to
    be here, but we will make sure his testimony is inserted into
    the record.
        First, Mr. Mackintosh is the global head of economic
    research at Nasdaq, where he leads initiatives in the U.S. and
    Europe to improve market structure, capital formation, and
    trading efficiency. Mr. Mackintosh has nearly 30 years of
    experience in the finance industry and is an expert in index
    construction and ETF trading. He has published extensive
    research on trading ETFs and market structure.
        Before joining Nasdaq, Mr. Mackintosh was head of trading
    strategy at Virtu Financial, where he authored numerous papers
    of market structure, trading, retail flows, and ETFs. Prior to
    this role, he was a managing director at Credit Suisse. Mr.
    Mackintosh holds a BA in commerce from the University of South
    Wales in Sydney and a master's in quantitative finance from the
    University of Technology in Sydney.
        Also with us is Ms. King, who is cofounder and CEO of
    GlycoMimetics, a clinical-stage biotechnology company
    developing treatments for serious diseases. Before founding
    GMI, Ms. King was an executive in residence at New Enterprise
    Associates, NEA, one of the Nation's leading venture capital
    firms. Ms. King joined NEA after serving as a senior vice
    president of Novartis Corporation, where she was CEO of Genetic
    Therapy, Inc., a subsidiary of Novartis. Ms. King also worked
    previously at ALZA Corporation in California, and at Bain and
    Company in Boston.
        Ms. King is a past chair of the Emerging Companies
    Governing Board and of the Board of the Biotechnology
    Innovation Organization, BIO, and continues to serve on the
    BIO's Executive Committee. Ms. King received her BA from
    Dartmouth College and her MBA from Harvard Business School.
        Ms. Mensah, who is with us, is the president and CEO of
    Opportunity Finance Network, OFN, the Nation's leading network
    of community development financial institutions. In this role,
    Ms. Mensah expands sources of capital and provides greater
    visibility for CDFIs. Ms. Mensah joined OFN in March of 2017,
    bringing private and public sector experience and expertise in
    using financial tools to improve the economic security of the
    working poor.
        In 2014, Ms. Mensah was nominated by President Obama and
    confirmed by the U.S. Senate for the position of Under
    Secretary of Agriculture for Rural Development. Previously, Ms.
    Mensah was the founding executive director of the Initiative on
    Financial Security at the Aspen Institute. Ms. Mensah also
    holds a BA from Harvard University and an MA from the Paul H.
    Nitze School of Advanced International Studies of the Johns
    Hopkins University.
        And our fourth witness who was going to be with us this
    morning, Mr. Michael Brown, from Battery Ventures, was
    scheduled also to testify. And without objection, I would like
    to make sure his testimony is also submitted for the record for
    members as well.
        [The prepared statement of Mr. Brown appears in the
    Submissions for the Record on page 84.]
        And with that, we would like to welcome each of you to be
    here this morning with us. And we will recognize Mr. Mackintosh
    for your opening statement, not to exceed 5 minutes.

    STATEMENT OF PHIL MACKINTOSH, GLOBAL HEAD OF ECONOMIC RESEARCH,
                                 NASDAQ

        Mr. Mackintosh. Okay. Good afternoon--or good morning,
    Chairman Paulsen, Ranking Member Heinrich, and all of the
    members of the Joint Economic Committee. Thank you for the
    opportunity to testify on capital formation and to share
    Nasdaq's views on how to maximize economic growth and job
    creation, as well as providing quality high-growth investment
    options for Americans who need to grow their savings.
        In our view, this is best achieved if we modernize the
    public company model, while preserving critical investor
    protections. So today, I will be focused on why capital
    formation is important, not only to help grow the American
    economy, but also to provide retirement security to Americans.
        So how do companies access capital for growth? In the
    beginning stages of a company's life, they are usually cash
    flow intensive. Startups often use crowdfunding or angel
    investors, in addition to their own funds, but as investment
    needs get larger, better organized and deeper sources of funds
    are often used, like private equity or public markets.
        There are two key reasons why growing our public or listed
    markets is important: Firstly, American investors will benefit.
    Most American workers, including teachers, nurses, and
    firefighters aren't qualified investors. This generally means
    they can only invest in the listed companies.
        If American workers are to benefit from the wealth effect
    of new growth companies, we need to attract as many as possible
    at early stages into the public markets. For example, this
    wealth effect, consider that just five Nasdaq listed
    companies--Apple, Microsoft, Amazon, Google, and Facebook--have
    added more than $2.5 trillion of combined value to shareholders
    since their IPO.
        But secondly, the U.S. economy will benefit. Companies that
    list in the U.S. mostly have head offices in the U.S., so they
    are likely to also hire more Americans. In fact, one study
    found that the IPOs between 1996 and 2010 collectively employed
    2.2 million more people in 2010 than before they went public.
        But our public markets need to be able to compete
    domestically and internationally, not only with less regulated
    forms of investment here, but also with exchanges from
    overseas. In fact, a recent Wall Street Journal article about
    the strength of the 2018 IPO market highlighted that Hong Kong
    has attracted new listings after it changed its standards to
    allow dual-class shares, which begins to answer the question:
    Do we actually have a problem attracting IPOs to list here? The
    data seems to show that we do.
        Firstly, there is evidence that companies are choosing to
    stay private longer. There are 2,000 less companies with market
    cap below $250 million now compared to 2003. Second, there is
    no lack of entrepreneurs. The number of private companies has
    grown since 1998, while the U.S.-listed companies have roughly
    halved. And thirdly, this is not a global phenomenon, quite the
    opposite. Over the same time that U.S. listings have halved,
    offshore listings have roughly doubled.
        So what are the reasons? Well, academics and economists
    have suggested many reasons for the decline in U.S. listings,
    including a more organized and competitive private equity
    market. Our issuers also claim that regulatory and reporting
    burdens, as well as the cost to shareholders in proxy fights
    and litigation, distract management and make it harder to grow
    their business.
        Clearly, excessive regulation and costs place the U.S.
    public markets at a competitive disadvantage. But the value
    that investors get from listing standards and corporate
    accountability cannot be underestimated. The cost of those
    standards needs to be weighed against the benefits.
        So what do we propose for the U.S.? Many of the solutions
    we propose were included in our revitalized report released 1
    year ago. Over the past year, we have seen many positive
    developments on these suggestions, including the SEC has made
    changes to help remove repetitive, unsuccessful proxies.
        Congress has moved to improve transparency of proxy
    advisers, businesses have started to support more flexibility
    in quarterly reporting, the SEC has an interest in helping
    small companies to trade better by consolidating liquidity into
    a single exchange, and the House Financial Services Committee
    Chairman Jeb Hensarling and Ranking Member Maxine Waters'
    proposals under the moniker of JOBS Act 3.0 passed the House
    with a vote of 406 to 4, and we look forward to the Senate
    moving to pass this bipartisan bill.
        We also listed a number of tax reform proposals, including
    some to improve competitiveness of public listings on an
    aftertax basis for investors. While on that topic, I would like
    to commend Congress on the passage of tax reform legislation
    last year. This is having a positive impact on the ability of
    small companies to grow and expand.
        In conclusion, we shouldn't ignore the fact that the U.S.
    has the deepest, most liquid, and most efficient capital
    markets in the world, but we need to make sure we keep it that
    way in the face of increasing competition. We appreciate the
    opportunity to present Nasdaq's views on such an important
    topic for American investors and the economy.
        Thank you, Mr. Chairman and all members of the Joint
    Economic Committee.
        [The prepared statement of Mr. Mackintosh appears in the
    Submissions for the Record on page 31.]
        Chairman Paulsen. Thank you, Mr. Mackintosh. Perfect
    timing.
        Ms. King, you are recognized for 5 minutes.

              STATEMENT OF RACHEL KING, CEO, GLYCOMIMETICS

        Ms. King. Thank you.
        Good morning, Chairman Paulsen, Ranking Member Heinrich,
    and members of the Joint Economic Committee. You both touched
    on issues in your opening remarks that are very close to my
    heart and are really critically important to small innovative
    companies like ours, so I am very happy to be here to be able
    to share our thoughts on that.
        I run a biotechnology company based in Rockville, Maryland,
    Congressman Delaney's District. And in the biotechnology
    industry, we are working on therapeutics that are highly
    dependent on our access to capital. Our timelines are long. We
    are developing drugs at substantial risk, and these are
    critical issues to us.
        More than 90 percent of biotechnology companies in this
    country are actually in the R&D stage, which means we are
    preapproval. We don't yet have an FDA-approved drug on the
    market. So virtually every dollar that we spend is a dollar
    that we have to raise from an investor.
        And most drugs that are in development actually fail, so
    when you account for the cost of those failures, the average
    cost to develop a new drug is over $2 billion. These are very
    expensive and very long efforts that we undertake, in some
    cases up to 15 years, to get from the labs to the market.
        So the key point I want to bring to you today, though, is
    that what you are doing in Congress really makes a difference.
    The policies that you put in place really make a difference to
    companies like ours, and I would like to touch on a couple of
    those.
        First, a bit of background on GlycoMimetics. We are a
    clinical-stage company that is developing two drugs now in
    advance testing, one for sickle cell disease and one for
    leukemia. We completed an IPO successfully in January 2014, and
    we benefited from the on-ramp provisions and from some of the
    regulatory relief provisions for emerging growth companies that
    were part of the JOBS Act.
        We also benefited from another law known as FDASIA, and
    because of that law we were able to get breakthrough therapy
    designation for our leukemia product. And that was critical to
    our ability then to raise, over the past 12 months, almost $250
    million through the public markets in order to now finance the
    trials that will help us to determine whether, in fact, that is
    a drug that can bring breakthroughs to patients.
        So together these policies have dramatically improved our
    ability to raise financing, which enables us to potentially
    develop these lifesaving or life-enhancing therapeutics. So I
    encourage you to continue to focus on these important types of
    legislation.
        I want to make some comments today on a provision of the
    JOBS Act which relates to Sarbanes-Oxley 404(b) exemptions,
    which are important to our companies, and then make some
    comments on patents.
        So the JOBS Act has been a tremendous success for the
    biotechnology industry, and one of the provisions that has been
    important in that has been an exemption from Sarbanes-Oxley
    404(b) auditor attestation requirements, and that is a very
    specific type of extra audit that is required under 404(b),
    that without additional action by Congress, many of the pre-
    revenue biotech companies like GlycoMimetics will lose that
    JOBS Act exemption. So in our particular case, that means that
    our financial reporting requirements will nearly double to over
    $1 million a year in order to comply with Sarbanes-Oxley
    404(b).
        So to alleviate these burdens, we encourage the Senate now
    to pass the Fostering Innovation Act, which I know just passed
    the House, and we were very happy to see the overwhelming
    support for that, particularly the strong bipartisan support.
        We wanted to commend Senators Thom Tillis and Gary Peters
    for sponsoring the Fostering Innovation Act in the Senate; and
    Representatives Kyrsten Sinema and Trey Hollingsworth for
    sponsoring it in the House; and also thank Representative
    Delaney for his cosponsorship of that legislation.
        Tax issues are also very important to us, and even though
    we don't have current income tax liability, the Tax Code still
    could have significant impact on us, in particular as it
    relates to NOLs, net operating losses. We want to thank you,
    Chairman Paulsen, for your work on NOLs, which is critical to
    companies like ours.
        I want to also touch on patent reform, which is another
    critical issue for us. There are very few areas in the Nation's
    economy that are as dependent on patents as the biotechnology
    industry. Our investors rely on the strength of patents in
    order to make investments in companies like ours, and we need
    to ensure that these rights are robust and enforceable.
        Unfortunately, there have been a number of changes
    recently, both through legislative action, through agency
    actions, and through court decisions that have made the patent
    system weaker, and, in particular, the fact that challenges can
    now be brought under a new process called IPR. That greatly
    concerns us and that weakens our ability to enforce patents.
        So we urge Congress to advance the bipartisan STRONGER
    Patents Act, which would address many of these deficiencies in
    the IPR process. And here I want to applaud Representative
    Steve Stivers and Bill Foster for sponsoring that legislation
    in the House and Senators Chris Coons and Tom Cotton for
    introducing the bill in the Senate.
        So in conclusion, policies enacted by Congress really do
    make a significant impact on our ability to raise money to do
    the work that we are doing to try to develop these lifesaving
    potential therapies in biotechnology, so we thank you for your
    work in that regard, and we ask you to continue to support the
    type of legislations that will support that kind of innovation.
    Thank you.
        [The prepared statement of Ms. King appears in the
    Submissions for the Record on page 40.]
        Chairman Paulsen. Thank you.
        And, Ms. Mensah, you are recognized for 5 minutes.

       STATEMENT OF LISA MENSAH, PRESIDENT AND CEO, OPPORTUNITY
                            FINANCE NETWORK

        Ms. Mensah. Thank you, Chairman Paulsen, Ranking Member
    Heinrich, and members of the Joint Economic Committee. I am
    pleased to be here, Lisa Mensah, as President and CEO of the
    Opportunity Finance Network.
        I represent a network of community development financial
    institutions. Those are mission-driven community banks and
    credit unions, loan funds, and venture capital funds who are
    all investing to create a strong economy.
        CDFIs fill the market gaps that you both mentioned, and
    public sector support for this role is critical. Key Federal
    programs help CDFIs assure that more communities, including
    those in rural and native and persistently poor areas, have
    access to the capital and the chance to participate in the
    innovation economy.
        A few months ago, I attended the 40th anniversary of
    Coastal Enterprises, a CDFI located in rural Maine, actually in
    Portland, Maine, that serves rural businesses throughout the
    State. And at this celebration, I met Tilson Technology
    Management, a Portland-based IT company that builds broadband
    infrastructure across the U.S.
        And Tilson was founded by an Army veteran, Josh Broder. It
    started with only three people in 2007, and by 2013, it had
    grown to 50 people. But then they got stuck. They needed
    financing to expand, and so that is when Tilson turned to
    Coastal Enterprises for an initial round of capital, and it
    enabled the company to grow now to over 230 employees in now
    eight locations.
        Subsequently, the company expanded, and its investor base
    went beyond Coastal to many other range of private sector
    investors. So Tilson is not only creating jobs, they are
    building that vital physical infrastructure that Senator
    Heinrich mentioned: broadband networks.
        As the JEC report ``Investing in Rural America'' notes,
    more than one-third of rural residents currently lack access to
    broadband, impeding them from reaching new markets and growing
    businesses.
        So small businesses like Tilson turn to CDFIs when they
    can't access capital from traditional lenders. Tilson's
    technology success is really just one example of the way that
    CDFIs are spurring the economy and encouraging
    entrepreneurship.
        But there is a challenge of small businesses. Since the
    recession, the availability of capital for small businesses has
    contracted and credit standards have tightened. Small business
    loan originations are 30 percent below their 2007 levels, and
    rural areas are especially hard hit. Small business lending in
    rural communities remains less than half of what it was in
    2004. And, in fact, when you adjust for inflation, lending to
    rural small businesses is below 1996 levels.
        But CDFIs are hyper local financial institutions with a
    proven ability to reach deep into hard-to-serve rural and
    native and persistently poor communities. When formal credit
    markets for small business contract, CDFIs step up to meet the
    needs of businesses not well served by those traditional
    financial institutions.
        And during periods of economic contraction, like the Great
    Recession, CDFIs play a counter-cyclical role. Between 2007 and
    2009, while SBA 7(a) lending contracted by more than 35
    percent, CDFI business lending actually grew by more than 26
    percent.
        So I am here today to commend the Congress for its
    continued support of Federal small business lending programs
    that expand the CDFI capacity to help small businesses succeed.
    And my recommendation today is for Congress to sustain and
    enhance Federal programs that bring about the kind of
    innovation economy we need.
        I have three recommendations: First, I urge a continuation
    of the $250 million appropriation for the Department of
    Treasury's CDFI Fund. For every $1 awarded by a CDFI Fund, a
    CDFI is able to make $12 in investment. Second, at the Small
    Business Administration, I urge you to make permanent the
    community advantage program. And, finally, at the Department of
    Agriculture, I urge full funding for rural development small
    business lending programs.
        Now, what do these big Federal programs look like on the
    ground? Well, in New Mexico, because of the Treasury CDFI Fund,
    Accion New Mexico can lend to native-owned small businesses,
    like the I Knead Sugar bakery and other micro enterprises.
        And in Saint Paul, Minnesota, because of this SBA's
    Community Advantage Loan Program, Meda can offer its line of
    credit to 4RM+ULA, a minority-owned architectural business,
    allowing it to reach its full growth potential.
        And in South Dakota, because of the USDA, the Lakota Fund
    can provide financing to help the Lafferty family on the
    Rosebud Reservation expand one of the only native-owned cattle
    businesses.
        The Federal Government is such a vital partner to CDFIs,
    helping to close the market gaps that prevent too many
    Americans from participating in the innovation economy. And
    that is why I am here, and I look forward to a continued
    dialogue and your questions. Thank you.
        [The prepared statement of Ms. Mensah appears in the
    Submissions for the Record on page 49.]
        Chairman Paulsen. Thank you.
        We appreciate all of your testimony and your being here
    this morning.
        With that, we will begin the questioning period for our
    members. I will just begin.
        Mr. Mackintosh, you mentioned in your testimony, you talked
    about the concerning decline in IPOs, which negatively impacts
    the entire economy. And if Congress can't help address this
    problem with legislation that eases the burden imposed by
    Sarbanes-Oxley, it is going to have a long-term impact. What do
    you think that long-term impact will be? Do you think this will
    have--what will it have on technological progress, economic
    growth here in the United States without attention?
        Mr. Mackintosh. So I think there are two aspects to that
    question: One is the fact that the investors themselves in
    America won't have access to a lot of these companies, unless
    they start to invest money offshore. And, in fact, we are
    actually starting to see that trend play out already. So if you
    look at mutual fund holdings over the last 10 or so years,
    there has been around about $1.5 trillion coming out of U.S.
    mutual funds, and a third of that has gone back to equities
    overseas. So I think one of the problems that you might have is
    that U.S. investors buying U.S. companies aren't going to have
    access to the growth, which is going to be worse for their
    retirement savings.
        The second thing is that the companies that end up IPOing
    overseas, where the environment is better, are more likely to
    grow their businesses overseas, have head offices overseas, and
    that is going to affect employment. And it is eventually, to
    your point, going to affect where the technology resides and
    where the IP resides as well. And from that, like I think the
    industries and the network effect as well of the IP and the
    sophisticated developments being overseas will make it harder
    for us to keep up and catch up.
        Chairman Paulsen. Ms. King, speaking of intellectual
    property, in a lot of the work and the background that you have
    you talked about long-term investments. You also mentioned
    section 382 of the Tax Code that was put in place to prevent
    companies from acquiring operations that lose money just to
    offset their taxable income. But it also represents an
    impediment to startups that have no tax liability and then
    accumulate net operating losses.
        I have been concerned about this issue for a while. You
    mentioned a number of bipartisan initiatives in your testimony.
    Speaking of section 382, the legislation that I am working on
    right now to address this problem would help the disadvantaged
    side of the startup community, particularly technology startups
    that conduct that valuable research with the potential to help
    improve and maybe even save lives. It is unfair to those
    companies and then damaging to the overall economy that
    discourages investment in innovation.
        So while section 382 was intended to prevent loss
    trafficking, how should we weigh its benefits against the costs
    that have been borne largely by startups?
        Ms. King. And thank you for your work on this because this
    is, in fact, something that is really critical. And we have
    actually had to address this in the context of some of the
    financing that we have done at GlycoMimetics.
        So the problem, as you point out, is that you want to
    prevent what is known as loss trafficking. But what you don't
    want to prevent is smaller companies raising money, which also
    sometimes results in significant ownership changes through the
    natural course of investors coming in and out of a company like
    ours.
        That is the kind of situation where we want to be able to
    preserve our net operating losses, because we hope someday to
    be profitable and to be able to use them. But we don't want to
    discourage the kind of investment that needs to come into
    companies like ours that have to raise a lot of money from a
    number of different investors.
        So I think the objective of preventing trafficking in NOLs
    is a reasonable objective, but we really don't want to inhibit
    the ability of companies like ours to raise the significant
    capital that we raised that also could inadvertently be
    prevented by the law, by this section 382.
        Chairman Paulsen. Would you like to see legislation
    accomplish anything in particular in this area? And what effect
    do you predict it would have if we were able to move something
    forward on capital formation for startups?
        Ms. King. Well, yes, what we don't want to--what we don't
    want to do is we don't want to discourage large investments in
    companies like ours. So I think when we look at these reforms,
    we have to be very careful, as I know you are, to look at
    specifically continuing to encourage investment without
    limiting the ability for companies to retain those NOLs for
    future uses.
        Chairman Paulsen. Thank you.
        Ms. Mensah, you mentioned several recommendations that you
    had with the Small Business Administration, continuing
    appropriations for CDFIs. Do you sense continued bipartisan
    support, or what other message would you have for us as we go
    through the appropriations process and focus on some of these
    initiatives right now?
        Ms. Mensah. I think these initiatives, the three
    recommendations that I raised, all have bipartisan support,
    particularly at the CDFI Fund. We were so pleased to see
    Congress move forward, and I urge this bipartisan continuation.
    I had the privilege to meet with the small business
    administrator who said we are aligned, but this program needs
    to move from pilot to permanent.
        And the Department of Agriculture has traditionally been
    heavily bipartisan, so I see no losers here in doubling down
    just when the economy needs a push into the very areas that
    don't rise easily with market forces. So I look forward to
    seeing more bipartisan work and to your leadership and
    encouraging this.
        Chairman Paulsen. Thank you.
        Senator Heinrich, you are recognized for 5 minutes.
        Senator Heinrich. Thank you.
        Ms. Mensah, you--in your last comment, you brought up
    something that really keeps me up at night, and that is, as we
    have come out of the recession of 2009, 2010, and the Great
    Recession, as they called it, response to that has been fairly
    robust in the coasts and in urban areas. That recovery has not
    extended to every part of our country. And I think, you know,
    the thing that worries me the most is us falling back into
    recession before many of those communities can see the full
    benefit of this recovery.
        I want to ask you about one thing in particular. I have got
    a number of team members who are meeting with small businesses
    in New Mexico this week to learn about the sort of current
    state of the challenges that they face. And one of the things
    that you mentioned in your testimony is just the very real
    challenges that when you have bank closures and consolidations,
    and those have accelerated in recent years, it really has left
    a lot of high-need communities in the lurch.
        What does it mean--can you speak to the--what the absence
    of a physical bank presence in a community means to the ability
    to access capital and to develop new business plans?
        Ms. Mensah. Thank you, Senator. I think the absence of a
    physical bank, you lose two things. You lose trusted
    relationships; you lose human beings who can talk with you,
    even if there is a turn down; you lose connections for firms;
    and you lose a regulated approach to providing capital. And
    while we applaud new moves in technology, we regret those loss
    of tight connections.
        Where the CDFI field can step in is to become the partners.
    Many, many bank CDFI partnerships exist, and so--but it is
    clear that, particularly in our rural areas, when you see--it
    is a people touch and it is a fairness and it is someone to
    talk through. It is additional expertise that I think we--is a
    social capital to this that we miss.
        Senator Heinrich. How does that CDFI role change in those
    places I mentioned that are banking deserts, where we no longer
    have a credit union, we no longer have a community bank that is
    playing that trusted role of somebody that you know in your
    community and you can go access capital through?
        Ms. Mensah. CDFIs I think of as the Swiss Army knives of a
    local economy. They are able--they are mission driven, so they
    are able to take time. They can often make the loan, like in my
    example of Coastal, when other financing sources aren't yet
    ready to play. So they have time, they have ingenuity, they can
    build portfolios.
        We estimate that even amongst our own memberships, we have
    been lending over $50 billion as a network, cumulatively. And
    so it is not a little field. It is a serious field with balance
    sheets ready to help the kind of small businesses that we are
    talking about. So a CDFI steps in, partners, gets those
    businesses to permanent, larger markets, like what we have been
    talking about here. So I see it as part of the growth. And I
    commend you for your concern about those parts of the economy
    that didn't rise yet and that will need to be given an extra
    push. We do know what to do.
        Senator Heinrich. One of those places, and there is a whole
    lot of overlap, but rural communities and Tribal communities
    face some of the same challenges here, and one of them is
    obviously the lack of the physical connection to parts of the
    economy that are thriving, to be able to access those markets.
    So broadband connection, in particular, if you don't have it,
    it really does cut you off from all sorts of avenues to growth.
        Do you have thoughts for how we do a better job of making
    sure that those Tribal communities, those rural communities,
    how much of a governor is that on growth in the places that
    haven't yet seen this recovery?
        Ms. Mensah. I am so glad to have mentioned our rural areas
    and our Tribal areas. And the very core infrastructure, as I
    saw in my time at the Department of Agriculture, broadband
    infrastructure is one of the things that is critical. It is
    critical not only for our students and our elders to learn, but
    it is critical for businesses to be able to sell.
        You have the titles that exist, both--and significant ones
    at the Department of Agriculture. So I think there is a
    bipartisan moment. And I believe CDFIs are here to be partners
    to both the construction, the furthering of broadband
    infrastructure. And I see it as one of the true ways I saw
    agreement on this to keep building in that final mile. They
    call it the last mile in broadband.
        Senator Heinrich. Ms. King, do you want to add just a real
    short statement on venture capital with your experience? How
    can we do a better job of making that venture capital available
    to more geographically?
        Ms. King. Well, actually, when you made the comment about
    the geographies, that also struck close to my heart, because it
    is true that even for companies like ours, which are somewhat
    larger than the very small ones you are talking about in rural
    areas, even for us getting venture capital outside of those
    major cities is a significant concern.
        I think we can do things like what we are talking about in
    terms of improving access to capital, because this is the type
    of thing that helps really any company located anywhere. So if
    we are talking about, for example, the 404(b) legislation that
    we are looking at exempting us from, these things that help
    support the emerging growth companies in general will, I think,
    increase the flow of capital to other regions around the
    country. And I think that is a critical issue.
        Many of the things that support biotech companies come out
    of Federal labs. I think things that come out of Federal labs
    that need to get that financing to get over that hurdle, I
    think, can certainly be helped with the type of legislation we
    are talking about to improve capital access generally.
        Senator Heinrich. Thank you, Mr. Chairman.
        Chairman Paulsen. Thank you.
        And I recognize the Vice Chairman, Senator Lee, for 5
    minutes.
        Senator Lee. Thank you very much, Mr. Chairman.
        Thanks to all of you for being here.
        There is an old saying in politics that goes something like
    this: Don't tax you, don't tax me, tax the guy behind the tree.
    The trick being to pass at least some of the cost of government
    along to someone who either doesn't vote or can't vote or is
    imperceptible to the common voter.
        In some ways, our corporate tax system hides taxes and ends
    up being a fairly regressive tax, one that is paid for by poor
    and middle class Americans, even without their knowing about
    it. They pay higher prices on goods and services, basically
    everything they purchase, as a result of corporate taxes. They
    sometimes pay for it through diminished wages, unemployment,
    and underemployment. It does end up being paid for, one way or
    another, to a significant degree by America's poor and middle
    class.
        It is one of the reasons why in the past I have proposed
    the idea of eliminating the corporate tax and replacing the
    revenue lost from that by taxing capital gains as ordinary
    income. In my view, this policy would accomplish a few things:
    Number one, I think it would make the United States one of the
    most competitive and attractive places in the world for people
    to invest their money; and number two, I think it would also
    help free up the workers' share of businesses' corporate tax
    expenses.
        In addition to this, we can see other benefits by way of
    making the market more efficient and therefore reducing the
    passthrough price on goods and services, wages, unemployment,
    and underemployment that consumers ultimately experience.
        So, Mr. Mackintosh, I would like to ask you, do you think
    this sort of corporate integration tax policy would impact the
    competitiveness of the United States when it comes to decisions
    on where, when, and how to locate workers?
        Ms. Mensah. I think tax policy is definitely an incentive
    that will redirect investments, and I think that we should try
    to encourage people to invest in companies. I think it is fair
    to say that workers--and ideally, as we go towards the future--
    workers' retirements are more self-funded and their investments
    are coming from investments in companies and in listed
    companies and the growth of those companies.
        So you want to make sure that the taxes on those company
    earnings and also on the distributions of those company
    earnings and the returning of capital and returning of the
    profits back to the investors are also not excessively taxed.
    So I think that that is one of the more important things as
    well to consider is the workers that we are talking about
    protecting also have savings. Ideally, they would have even
    more savings, and we want to make sure that we don't overtax
    the savings that they have as well.
        Senator Lee. For the last--for centuries, traditional
    brick-and-mortar manufacturing has served as the primary source
    for building tools for infrastructure, transportation, for
    technology. But today, we have got a lot of advances in
    automation that are changing that. Certain technologies,
    including things like 3D printing, are pointing us toward a
    future in which we can imagine the end consumer being able, in
    some ways, to manufacture their own toys, their own houses, or
    at least major components thereof, and even things like
    prosthetic limbs, simply by plugging in a few inputs to the
    right machine.
        What can you tell us about how this might impact our
    economy, how things like 3D printing, how this might affect
    workers in manufacturing industries like automobile
    manufacturing assembly, food processing, and so forth?
        Mr. Mackintosh. I guess my expertise is not in
    manufacturing. But from the perspective of automation and the
    markets, there has definitely been huge cost savings brought to
    the stock market and to a lot of markets because of automation.
    The stock markets themselves, especially in America, are one of
    the most transparent and electronic and equal and cheap to
    trade markets.
        So I think that automation has brought a lot of change to
    the stock markets, but that has been overwhelmingly good for
    investors. And because it has been good for investors, it has
    been overwhelmingly good in terms of the micro structure for
    trading for the issuers that are trying to list their stocks as
    well. America has some of the tightest spreads and the lowest
    volatility across all of the markets in the world.
        Senator Lee. Ms. King, the Food and Drug Administration
    plays a pretty critical role when it comes to innovation in
    both food and medicine. I am personally a strong supporter of
    the right-to-try concept, and I am hopeful for the results of
    policies like that and what they can bring.
        What, in your opinion, are some other reforms to drug
    policy that we should pursue in order to ensure that we are
    striking the right balance between the need for regulation
    while also promoting innovation and protecting health?
        Ms. King. Yes, well, I think I would say that I strongly
    support a strong and effective FDA, and I think that that is
    one of the things that has enabled our industry to really
    deliver what we think of as the gold standard for regulatory
    approval. So I think having a strong FDA is critically
    important. And I do think we need to maintain the standards
    that the FDA has in terms of giving their drug approvals.
        Some of the things that have been instituted recently, for
    example, I mentioned the FDASIA law in my testimony, which
    enabled the FDA to grant breakthrough therapy status. That is
    an example of something that gives the agency, gives companies
    like ours an opportunity to work closely with them during the
    development process in order to streamline the regulatory
    process.
        So I think to the extent that we are able to continue to
    streamline that process, improve communications, improve the
    FDA's ability to hire and retain the critical people that they
    need, those are the kinds of things that I think can continue
    to ensure that we get a gold standard that we can have
    confidence in and that we get delivery--and that we are able to
    deliver cures rapidly to the patients who can benefit from
    them.
        Senator Lee. Thank you very much.
        Thank you, Mr. Chairman.
        Chairman Paulsen. Thank you.
        Representative Maloney, you are recognized for 5 minutes.
        Representative Maloney. Thank you, Mr. Chairman and Mr.
    Ranking Member, for calling this hearing, and all of our
    panelists.
        Capital is the life blood of our businesses. As one of our
    witnesses, Mr. Mackintosh, said today: The United States has
    the deepest, most liquid, and most efficient capital markets in
    the world, end quote. And I am very proud to represent Nasdaq
    and also the city of New York, one of the greatest financial
    centers in the world. But not all businesses can access the
    capital they need to grow and create jobs, so this is
    particularly true for small businesses and underserved areas,
    as the Ranking Member's report recently showed. They depend on
    small banks and institutions that support them, and I will get
    to my questions on that.
        But first, I would like to address a claim that we have
    heard so often and even in this hearing that Dodd-Frank, Wall
    Street reform, that Sarbanes-Oxley reform, and the Consumer
    Protection Act have severely limited business lending and
    access to capital. I would say that this is false. In fact, as
    this slide shows, business lending has increased 75 percent
    since the passage of Dodd-Frank. It is now at $2.15 trillion,
    and commercial and industrial bank lending is also at a record
    high.
        Some claim that Dodd-Frank and Sarbanes-Oxley has killed
    community banks, an important source of capital and strength to
    all of our small businesses and communities. And, again, this
    is false. As this slide indicates, the total number of banks
    has been declining since the 1980s, long before Dodd-Frank.
        And let's look at what business owners themselves are
    saying about access to capital. In a report released just last
    month in the National Federation of Independent Business, which
    former Federal Reserve Chair Janet Yellen often liked to quote
    and refer to: The NFIB survey of business owners found that
    only 3 percent reported that not all of their borrowing needs
    were not met, and 30 percent said all their credit needs were
    met, and only 2 percent reported that loans were harder to get.
        So I think it is a myth that Dodd-Frank has crippled
    business lending and devastated smaller banks. But I think that
    we have to move forward in an economy that takes care of
    everyone, including our rural and underserved communities where
    it is tremendously difficult to get funding for small
    businesses.
        And I would like to ask Ms. Mensah about CDFIs, community
    development financial institutions, that help make capital
    available to small businesses in underserved communities and
    rural areas.
        In my District, we have several that are very successful. I
    want to read them into the record: the Lower East Side Federal
    Credit Union, the NYU Federal Credit Union, the Community
    Preservation Corporation, the Community Development Trust, and
    the Local Initiatives Support Corporation. And they work by
    leveraging private capital to help underserved areas. And how
    does that leverage work? And what is the approximate return to
    our government investment in these CDFIs? And I thank my
    colleagues for supporting CDFIs.
        Ms. Mensah.
        Ms. Mensah. Thank you, Congresswoman Maloney, for your
    interest and your support of these important community
    development financial institutions.
        When they receive a financial assistance award from the
    U.S. Treasury CDFI Funds--I believe all the ones you mentioned
    may have profited from those--that forms a kind of permanent
    capital to which they can lend against. So a $1 million
    financial institution award is able to be converted into 10
    million of borrowings on this.
        And then in our rural areas, in our native areas, and in
    areas right in New York City, which are working with new
    immigrant communities or new businesses that are yet to
    qualify, they are pre-Nasdaq, they are pre these stages, they
    build their track record often financed by CDFIs, not only
    financing the businesses, but often the facilities that hold
    them.
        So this leverage ratio, this is an important role of
    government. It is hard to grow a mission----
        Representative Maloney. How much is a leverage usually?
        Ms. Mensah. We say 12 to 1. $1, 12 out, so--and that may be
    an undercount.
        Representative Maloney. I would like to ask Mr. Mackintosh
    very quickly about the listings. You mentioned that listings
    are down, but I would say that there is not a level playing
    field on IPOs. I read stories about some countries, they create
    a business, then they buy the business and that is their IPO.
        And also, I would say that it used to be that companies
    would--smaller companies would go to an IPO, and now they seem
    to be waiting till they are larger companies. Why is that
    happening? But I guess the basic question is, what are the
    benefits for listing in America? And could you comment on how
    many foreign companies are still coming to America, or do you
    find foreign companies going elsewhere now?
        Mr. Mackintosh. Sure. So I think looking at the IPO data
    that we see year on year, there is definitely an increase in
    the larger companies with $1 billion-plus IPOs, and a decrease
    in the smaller companies each year that are listing, the less
    than $250 million companies.
        Representative Maloney. Why do you think that is?
        Mr. Mackintosh. There is a lot of academic research that is
    done on the reasons for the shrinkage of the outstanding
    companies at all. But I think that the private equity market is
    better organized now. I think that some of the angel investors
    are much better organized, and so that is making it easier to
    access that capital. There are probably tax incentives and also
    the cost of being public that I think make people resist
    turning themselves into public companies until they are much
    larger and they have much more economies of scale.
        On your second point about the internationalization of
    markets, one data point that I would draw your attention to is
    in Nasdaq we have a Nordic venture market called First North,
    and it has actually grown its listings by 300 percent in the
    last 12 or 13 years.
        So there are countries in the world with much more
    companies coming to markets and listing in venture type
    markets, and that is potentially an avenue that we could pursue
    to get more companies to list in America and stay in America as
    public markets here.
        Representative Maloney. So foreign countries are up in
    listing in America, right? Are American companies going abroad
    to list?
        Mr. Mackintosh. I don't have data on that right now. I can
    get back to you.
        Representative Maloney. Thank you. I yield back.
        Chairman Paulsen. Thank you.
        Representative Handel, you are recognized for 5 minutes.
        Representative Handel. Thank you very much, Mr. Chairman,
    and thank you to all the witnesses.
        I am going to start with Ms. King, and first, thank you. I
    am a Novartis alum as well, so it is great to have you here.
        I wanted--and I am going to ask all of you this. As we as
    Congress start to undertake the next version 2.0 of tax cuts,
    what are your thoughts on the critical components that ought to
    be included in the next version or the next step in tax cuts
    and tax reforms?
        Ms. King.
        Ms. King. So as I said in my remarks, we are a pre-revenue
    company. So for us, the critical issues really relate to this
    issue of NOLs that we were talking about earlier. To be able to
    get that section 382 reform, I think, would be very important
    to us.
        We look to the day when we are revenue positive, but for
    us--you understand the industry--we spend many years where we
    are just spending and so we are accumulating those NOLs. So for
    us, the critical tax issue is really this NOL issue.
        Representative Handel. Great. Thank you.
        Ms. Mensah.
        Ms. Mensah. Congresswoman, you had a wonderful hearing a
    few weeks back on opportunity zones----
        Representative Handel. Yes.
        Ms. Mensah [continuing]. Which was part of the new--of the
    first tax reform. I would encourage you to keep moving forward.
    It is rare to get everything right the first time something
    passes. This has created quite a lot of excitement in our
    field, and yet a big hope that those kind of opportunity zones
    and opportunity funds can have a tighter connection with
    community development financial institutions and can intensify
    in the way they reach rural areas, persistently poor areas. So
    I would encourage you to take another look at how we can deepen
    that part of the legislation.
        Representative Handel. Okay. Thank you.
        Mr. Mackintosh.
        Mr. Mackintosh. So I think tax incentives for savers are a
    pretty strong incentive to give to the market to do more
    saving. And it was mentioned in my introduction, I am from
    Sydney. A couple of things that Australians have done, and they
    have a really strong retirement system, is the money that you
    earn--it is a little bit like the 401(k) system here. It goes
    into a mutual fund structure tax free, and you can take it out
    at a lower tax rate when you retire as well. Plus, on
    dividends, they have made sure that there is no double taxing
    of dividends. And I think things like that can incentivize
    companies to return the money that they have earned to
    investors, and the investors can receive those moneys on a more
    aftertax effective basis.
        Representative Handel. Okay. Thank you.
        In Georgia, Atlanta, Metro Atlanta in particular, has
    become a really robust environment for startups and even access
    to capital. And some of that is being driven by, my
    observation, of some really innovative approaches to how do we
    get capital, in particular, to women entrepreneurs. Georgia is
    number one in the most number of companies that are owned by--
    women-owned companies. And we have some innovative initiatives
    like the ACE Women's Business Center, The Rich Group, and some
    other initiatives.
        What more can we do to drive that type of innovation and
    thinking in how we can create more access to capital? And
    maybe, Mr. Mackintosh and Ms. Mensah, if we have time.
        Ms. Mensah. I will start because you mentioned the Access
    to Credit for Entrepreneurs, ACE, in Georgia. It is a powerful
    CDFI that has led innovation throughout the State, actually.
    And, again, my recommendation is to a full renewed commitment
    of $250 million appropriation to the Department of Treasury
    CDFI Fund.
        ACE wouldn't have grown had it not had the kind of support
    from the CDFI Fund or from the SBA's community advantage
    program and from the Department of Agriculture's business
    lending. So I think those are exactly the kind of programs that
    can reach those women entrepreneurs that can help. At many
    stages we have community development venture capital funds, so
    I would urge the Congress to keep going.
        Representative Handel. Seventy-one women-owned companies
    have gotten loans and financing in investment through ACE. It
    is great, so----
        Mr. Mackintosh.
        Mr. Mackintosh. Yeah. So I guess coming from a larger
    company perspective, some of the things that we hear from our
    issuers are just that the reporting obligations are a big
    problem just to get over in terms of getting a company going.
    So the accounting and reporting obligations, I think, would be
    one thing to streamline for new companies so that the
    entrepreneurs are able to focus on growing their business
    rather than focus on all of the bureaucracy and administration
    of the companies.
        Representative Handel. Great. Thank you.
        Ms. King, would you like to add anything there?
        Ms. King. Well, for us, that speaks to specifically the
    404(b) issue.
        Representative Handel. Yeah. Yep.
        Ms. King. And to the point that Congresswoman Maloney was
    making earlier, I think that we are talking about a specific
    provision of Sarbanes-Oxley, that it would help us greatly if
    we could retain the exemptions that we got under the JOBS Act
    so that we don't have to increase the financial reporting
    obligations beyond what we currently have, which we think are
    sufficient for transparency for our investors.
        Representative Handel. Great. Thank you.
        Mr. Chairman, I yield back. Thank you.
        Chairman Paulsen. Thank you.
        Senator Peters you are recognized for 5 minutes.
        Senator Peters. Thank you, Mr. Chairman.
        And, Ms. King, thank you for talking quite a bit about the
    Fostering Innovation Act. I am happy to work with Senator
    Tillis on that legislation here in the Senate, and hopefully we
    will be able to move it forward. You mentioned the strong
    support it received in the House.
        Ms. King. Thank you for that.
        Senator Peters. Well, you are welcome, but thank you for
    what you do in your business and in bringing this to our
    attention as to this is an important element for your company.
        I think it is important, you've talked about it in response
    to several questions already, but if you could let folks know
    for the record the fact that you won't have this kind of
    reporting requirement, which we, I agree, is being handled in
    terms of other types of reporting and so the transparency is
    still there.
        What will that mean for your company, and more
    specifically, what will it mean for jobs if this bill passes?
        Ms. King. So, again, I just want to reiterate the point
    which you made, which is that we already have and we already
    provide what I think are very transparent, audited financial
    statements----
        Senator Peters. Right.
        Ms. King [continuing]. Transparent audited financial
    statements to our investors. So I think we provide that
    already. What we are talking about is that extra layer, which
    is going to cost us probably about another $600,000 a year. So
    to us, that is money spent on an extra layer of reporting as
    opposed to being spent on people that we can hire or research
    that we can conduct. So it is a real tradeoff. We don't have an
    unlimited pool of capital.
        Senator Peters. Especially your business, which is heavily
    dependent on research and development.
        Ms. King. Absolutely.
        Senator Peters. That is money that you can put into
    basically the research, which will be the seed corn for your
    next big thing.
        Ms. King. Exactly.
        Senator Peters. Hopefully that will come out of your
    company, is your goal.
        Ms. King. Exactly.
        Senator Peters. The IP market, what you are talking about
    today, is one that is incredibly important to keep dynamism in
    the economy. And I have a great deal of concern about the
    concentration we are seeing in industries all--every industry
    sector, big companies becoming bigger, buying out companies
    prior to them having an initial public offering.
        You went public last year, I believe?
        Ms. King. 2014.
        Senator Peters. Oh, in 2014. So you have been out for a
    while.
        Ms. King. Yes.
        Senator Peters. Given the issues related with an IPO, which
    is always complex, more complex than just having a company come
    in and write you a check, walk us through your company's
    decision. Why did you decide to go forward with an IPO?
        Ms. King. Well, as to the complexity, if I had time, I
    would tell you a lot of stories about that.
        Senator Peters. Well, I would like to do that at some
    point.
        Ms. King. It is not an easy process. But for us, the
    critical ability to access that capital is what really made it
    important to us, because as a public company, we are able to
    access capital so much easier and so much more quickly than we
    can through the venture capital network. So it is--and it opens
    up a huge opportunity for us to be able to fund the type of
    research that we need to fund.
        So it was critical to us to be able to get public, and for
    that the JOBS Act was really important. So I think it really--I
    mean, for companies like ours, for biotechs that have to raise
    so much money, if you can get public, I think generally
    companies want to do that, is the benefit to us.
        Senator Peters. To what extent in your offering were
    employees included in ownership? Was that also a factor in the
    decision process?
        Ms. King. Well, every employee in our company gets stock
    options the day they start.
        Senator Peters. Every employee?
        Ms. King. Every employee.
        Senator Peters. Regardless of their position?
        Ms. King. Correct. That is correct. That is an important--
    that is very important to me that every company--every employee
    in our company gets stock options.
        Senator Peters. And tell me why.
        Ms. King. Everybody contributes, and we want to recognize
    everyone's contribution, and we want to share the upside,
    recognize the contribution and share the upside.
        Senator Peters. Well, I want to explore that further with
    Mr. Mackintosh, because in response to an earlier question, you
    talked about how folks are investors as well and can benefit as
    investors in these companies or investors in the economy
    generally.
        To me, that is an incredibly important point, and
    particularly when you look at the tax act that we just passed
    where the vast majority of the tax breaks are basically share
    buybacks of increased dividends, so it goes to the owners of
    those companies.
        And yet an awful lot of research shows--and I think Ms.
    King confirmed that--that having employee ownership on the
    ground does a great deal for a company, and it actually, most
    studies show, enhances productivity dramatically because
    everybody has a stake in that company.
        So my question is, you and your research that you have
    done, how significant is it that employees have a stake in that
    company and are able to participate in profits, whether it is
    in stock option plans, profit-sharing plans and others? And
    does that indeed lead to more productivity and a more dynamic
    economy?
        Mr. Mackintosh. I mean, honestly, I think your experiences
    are probably better than the research that I have read in terms
    of motivating staff and getting them to connect with the
    objectives of the business. But from a financial perspective,
    if the employees have a vested interest in the performance of
    the company, then they are going to want to make the
    performance of the company go better. And I think that is kind
    of the key economic driver of giving staff a share of the
    company, whether it is in options or in stock.
        Senator Peters. Great. Thank you.
        Chairman Paulsen. Thank you.
        Representative Delaney, you are recognized for 5 minutes.
        Representative Delaney. Thank you, Mr. Chairman.
        And I want to welcome all the guests, including Ms. King,
    whose business is located in my District. It is nice to have
    you.
        Ms. King. Rockville, yep.
        Representative Delaney. Exactly. Thank you for what you do.
        I would like to ask a question, and it may be more targeted
    towards Mr. Mackintosh, but I will leave it open for anyone on
    the panel. One of the big things that concerns me is that if
    you look at the data, last year, about 80 percent of the
    professionally managed venture capital in the United States
    went to 50 counties in this country. And there are 3,000
    counties in our country. So about 1.5 or 1.6 percent of the
    counties got 80 percent of the professionally managed venture
    capital, which is considered the smart money. It doesn't mean
    it always is making the right bets, but directionally, these
    are the people who have been hired by the most sophisticated
    investors in the world to allocate capital to what they view
    are the most promising businesses in the United States of
    America. And they have allocated that capital to a very, very
    small slice of our country. So that is kind of one statistic.
        The second statistic is that 70 percent of the kids in the
    United States of America live in a county where there is no
    evidence of upward economic mobility, meaning the jobs that are
    being created are not as good as the jobs that used to exist.
        So you have this situation where there is a dire need of
    new opportunities, new businesses, particularly ones that
    create jobs that have decent standards of living, in the
    majority of our country. Yet a very small slice of our country
    is getting most of the bets that investors are making.
        So from a pure policy perspective, recognizing--and I am
    sure my colleagues talked about things we should do to make it
    easier to access capital, how we need regulatory relief, how
    there are too many burdens, and we have to do all kinds of
    things at the specific kind of tactical level to make sure
    companies get capital.
        What do you think from a macro policy agenda we can do so
    that in 10 or 15 years, those statistics look different, and so
    that you see a situation where 80 percent of the professionally
    managed venture capital is not going to 1.5 percent of our
    counties? It would be a huge victory if it went to 20 percent
    of our counties. I mean, what can we do so that in 10 years,
    those statistics look different?
        Mr. Mackintosh. So I think there is a global trend towards
    people moving to cities, and that is probably because of the
    economies of scale of actually getting your network and your
    infrastructure all together in one place. At the same time,
    there is always--also the trend of people working remotely.
        Representative Delaney. Yes.
        Mr. Mackintosh. So it is possible that the people with the
    skill sets will actually be at work away from where the head
    offices are and sort of foster that interesting work and
    innovation and intellectual property in the country areas. It
    is not a very statistically significant sample, but I was on a
    venture capital company a few years ago which actually
    relocated itself to San Francisco because that is where its
    venture finance came from. And so potentially----
        Representative Delaney. Right, because a lot of the venture
    capitalists are like, I don't even want to get on a plane
    anymore. If you want me to invest, I have to be able to drive
    to your company.
        Mr. Mackintosh. Yes. So, potentially, what they are----
        Representative Delaney. Which I can't blame them, but, you
    know.
        Mr. Mackintosh [continuing]. Claiming is the companies are
    locating near their finance----
        Representative Delaney. Right.
        Mr. Mackintosh [continuing]. So that they can be involved
    with the companies more closely and manage the company.
        Representative Delaney. Sure.
        Mr. Mackintosh. You watch Shark Tank, you see that
    sometimes there is actually a management involvement as well as
    a financial involvement.
        Representative Delaney. Sure. Right.
        Mr. Mackintosh. With that specific company, half of the
    board of directors were actually still working remotely. So the
    skill set was actually still scattered around sometimes in
    remote areas of America, even though what looked like a San
    Francisco-based company.
        Representative Delaney. So that is a trend you are
    observing. But what do you think we can do to accelerate those
    trends?
        Ms. Mensah. Congressman, I would like to hop in.
        Representative Delaney. Please.
        Ms. Mensah. Because I hope, when you invite me back in
    2028, we will be celebrating the success of the mediating
    institutions that are needed to work with traditional VC.
        There are community development venture capital
    institutions. I testified to one of them in Maine. And what we
    have seen is that when you invest in the CDFIs, whether they
    are venture capital associations, loan funds, community banks--
    --
        Representative Delaney. Right.
        Ms. Mensah [continuing]. That is jet fuel for the kind of
    hyper local--yes, it is still local institutions that help
    companies like Tilson Technology to expand a broadband
    business.
        If we want to tackle the scale of what you have mentioned,
    70 percent of the kids in low-mobility counties, from the Raj
    Chetty research, we need a bigger scale of investment in the
    very things that we know will reach those communities. This is
    a 40-year field of community investors, and community
    development financial institutions know how to make those
    investments.
        So I hope that the 2028 solution that I will be coming back
    and celebrating is one that talked about what we added to the
    system. The channels are here. We need to add more fuel to
    those channels.
        Ms. King. You are asking a very complex question which has
    a lot of things to do with education, with infrastructure, with
    where people live. Because even in Rockville, which is outside
    of the Nation's capital, you know, we talk about the need to
    incentivize getting venture capital here.
        Representative Delaney. Right.
        Ms. King. So it is a broad challenge.
        Representative Delaney. Because we don't have many of those
    50 counties actually, which is surprising.
        Ms. King. Yeah, which is really surprising, in spite of the
    strength of our local economy and in spite of the national labs
    that we have here and the universities.
        Representative Delaney. Right. We have all the assets.
        Ms. King. Yes, exactly. So I will just add, and with one
    encouraging note, which is that you do see some venture
    capitalists now recognizing that good science, good technology,
    good people are not only in those counties and that there are
    actually opportunities to invest there because they may not be
    as widely known, maybe less expensive and therefore, you know,
    good opportunities for investments. That is also encouraging, I
    will say.
        Chairman Paulsen. Thank you.
        Representative Comstock, you are recognized for 5 minutes.
        Representative Comstock. Good morning. I wanted to follow
    up a little bit on Mr. Delaney's comments but focus on not just
    location but gender. I am happy to see a panel here with women,
    but it is something like 2 to 3 percent of all venture capital
    goes to women, apparently. And since I am late, you may have
    addressed this already. And then, of course, the people you are
    going to pitch are men often.
        And I was reading a column in Forbes about a very
    successful company, ThirdLove, which this woman is saying, I
    once went to a meeting with a venture capital firm to pitch
    them on my company ThirdLove. At the end of the session, the
    guy told me, sorry, we only invest in things we understand.
    ThirdLove is a women's very successful underwear company. I
    think probably Spanx had the same issue.
        So not to just focus on, you know, things like that.
    Obviously, this goes beyond just understanding women's
    products, but the bigger picture of, you know, whether it is
    geographically we aren't--you know, the venture capital is not
    reaching people in equal ways throughout the country, and
    certainly there is talent everywhere. And Steve Case has done
    the Rise of the Rest tour, which I think kind of speaks to a
    lot of what Mr. Delaney was talking about.
        So how do we get the rise of the 50 percent too?
        Ms. King. Again, this is a challenging question that speaks
    to education and access and networking and a lot of issues. It
    is true that almost all the people that I have pitched in my
    career of raising money, both as a private company and as a
    public company, they are almost all men. That is true.
        And so I think it is a challenge that over time, I hope, as
    more women become investors and more women become CEOs, we
    begin to kind of seed the future of greater diversity, not just
    gender diversity but diversity in all respects. So it is a
    complex question.
        I know you had some specific comments to an earlier
    question on the same topic.
        Ms. Mensah. Thank you, Congresswoman. I love the question
    because we can't leave out half of the people in the country in
    our solution to how to build an innovative and entrepreneurial
    economy. And I am proud to represent the community development
    financial institutions who have overwhelmingly invested in
    women-owned businesses.
        I would say two things: First, Congress' ability to support
    the kind of capital that flows close to the ground with our
    community development financial institutions is critical to
    reaching women-owned businesses; second, Congress' protections
    through the Consumer Financial Protection Bureau, through the
    SBA, that ensure that when you start a company, you are not
    facing a rapacious kind of financing, that you are able to get
    the right, fair, and safe kind of financing to build your
    business so that you don't get overloaded with the wrong kind
    of credit.
        So two things, both the availability of the capital and the
    fairness and safety of the capital to start pushing forward. I
    have seen tremendous entrepreneurial potential and much of it
    led by women, and I hope we are on the right trend. I know our
    CDFIs are in place to support those kinds of businesses.
        Representative Comstock. Well, thank you. I appreciate it.
    I know this is an area where a lot of it is just understanding
    that that discrepancy exists when you hear the points like 1.6
    percent of the counties are getting all of that. It is really,
    it is a boy's club. It is a boy's club in certain country
    clubs.
        There is a rise of talent that we need to embrace all
    across the country. And I think, whether it is racially or
    women who are in other parts of the country, I think that
    discussion needs to be had at every level. And certainly, I
    think we need to shine a light on that about that this has been
    sort of a problem that has been just not recognized in the
    media at all. And not surprisingly, if we look at the boards of
    media, women are not on those boards either in any kind of
    equitable fashion.
        So thank you.
        Chairman Paulsen. Thank you.
        I want to thank all of the witnesses for taking the time to
    be with us this morning. Appreciate that very much.
        And then remind members also, should they wish to submit
    questions for the record, the hearing record will remain open
    for 5 business days. As a reminder, Mr. Brown also agreed to
    answer questions with his testimony submitted. He agreed to
    answer questions for the record as well.
        And with that, the committee is adjourned.
        [Whereupon, at 11:16 a.m., the committee was adjourned.]

                           SUBMISSIONS FOR THE RECORD

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        I call this hearing to order.
        The United States has fallen to 11th place in the 2018 Bloomberg
    Innovation Index and, one thing is clear: Our job as policymakers is to
    figure out how to find the right mix of policies to spur innovation
    along.
        After all, economists agree that innovation is critical to growth
    and prosperity, and with the headway we have made since passage of the
    Tax Cuts and Jobs Act, this momentum must continue.
        Innovators start their work from a difficult place; after all,
    great ideas don't appear fully formed. They take research, development,
    and testing. Innovation is just as likely to happen in a suburban
    garage as it is in a corporate lab.
        That's because people of all walks of life can come up with the
    next big thing.
        Are we advocating for the best policies to assist that? The Joint
    Economic Committee has held two previous hearings on this topic.
        Witness testimony, combined with analysis by our staff of
    economists makes clear that too many barriers stand in the way of
    innovators and the life-improving ideas they have to offer.
        Today's hearing is about ``Innovation, Entrepreneurship, and
    Barriers to Capital Access,'' and how we can ensure innovators have
    access to the financial resources they need to succeed.
        Nearly 70 percent of start-up businesses received less financing
    than they applied for. Nearly 28 percent of start-up businesses were
    not approved for any financing at all.
        Innovators know that if an idea is entirely new but shows promise,
    the first challenge is to finance its development.
        As such, each innovator has to not only create something entirely
    new, but also fund the work involved by means that require more effort
    and persuasion than simply applying for a commercial bank loan.
        Access to capital is one of the most challenging parts of starting
    a new business, especially in the tech sector where companies are at
    the forefront of new technologies and are developing products and
    services for which there is no track record.
        The risks are high, and subsequently, it's difficult to raise money
    from investors.
        For there to be progress, we need to remove obstacles to raising
    seed capital.
        Take, for example, a company going public via an IPO has long
    offered real advantages.
        Overregulation, however, has driven down the number of IPOs, which
    deprives the entrepreneurial ecosystem of capital access.
        We should take a second look and modernize this system so we remain
    competitive.
        We've already taken major steps to help. The Tax Cuts and Jobs Act
    included several provisions that may be helpful in expanding capital
    access.
        As my friend and colleague on the Ways and Means Committee Chairman
    Brady embarks on Tax Reform 2.0, we must take an innovation-friendly
    approach that increases incentives to invest in new companies and
    technologies.
        Yet government itself is not and can never be the prime mover in
    the world of innovation.
        Washington shouldn't be subsidizing particular companies or
    activities in the hopes of winning big.
        Picking winners and losers goes against America's entrepreneurial
    spirit and undermines the process by which our strongest ideas are
    honed and improved.
        Today, I look forward to hearing from our witnesses and my
    colleagues on how we can reduce the barriers and empowering those with
    big ideas to make even bigger strides.
        We are facing fierce competition. In 2017, one-third of the world's
    IPOs happened in China. Domestic IPOs today total merely half of what
    they were 20 years ago.
        I'm hopeful that our work today can help get us not only back into
    the top 10 innovative economies in the world, but to make us number 1
    overall.
        I now yield to Ranking Member Senator Heinrich for his opening
    statement not to exceed five minutes.
                                   __________
       Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint
                               Economic Committee
        Mr. Chairman, thank you for focusing on barriers to capital access.
    It's an important issue and I look forward to the insights of our
    witnesses.
        We have talked before about the important role small and new firms
    play in driving innovation and creating jobs.
        Yet, the start-up rate has been declining for years, and new
    businesses increasingly are concentrated in the large urban counties,
    while rural communities are struggling to keep up.
        A big challenge for entrepreneurs in small towns and remote areas
    is getting access to capital to turn their idea into a business or to
    take their business to the next level.
        JEC Democrats recently released a comprehensive report--Investing
    in Rural America--that examines the economic challenges and
    opportunities facing rural communities.
        Two challenges jumped out.
        First, insufficient access to broadband leaves communities
    disconnected from economic opportunities and unable to reach customers
    around the globe.
        And, second, insufficient access to capital constrains growth.
        The more rural you get, the less access to capital there is.
        Many rural communities have seen their financial institutions
    disappear and with them access to loans people need to build and expand
    businesses.
        In New Mexico, there are just a handful of cities with 50,000
    people or more. Often, small towns are less able to access grants and
    other Federal resources that may be available to them.
        And smaller communities have fewer financial institutions--whether
    they be banks, credit unions, community development financial
    institutions, or nonprofits.
        Let's take banks.
        From 2008 through 2016, 86 new banking deserts, areas where no
    banks exist within ten miles, were created in rural communities.
        We need to reverse this trend.
        Expanding access to capital must go hand in hand with building the
    know-how and expertise to launch and grow businesses.
        In my State, nonprofits like WESST help budding entrepreneurs
    create their business plans, access micro loans, and build their
    businesses. More than two-thirds of those they serve are women. And an
    even larger share are low-income.
        SBA's Women's Business Center helps fund WESST. But SBA and USDA
    don't have the staff needed to go out and build awareness of the many
    programs they operate that could support rural businesses.
        We need more boots on the ground.
        There are also a growing number of resources available online.
        Online services allow consumers to continue to have relationships
    with financial institutions that no longer have a physical presence in
    a community.
        But the reality is for this to be a viable option for rural and
    tribal communities, these communities need to be connected to
    broadband, and too often, that's not the case.
        It's not just a shortage of banking options.
        Venture capital is also scarce in rural areas. More than three-
    quarters of venture capital goes to companies in New York, Boston, San
    Francisco and Los Angeles.
        There are entrepreneurs across this country with good ideas and
    smart business plans. But they need access to investors who can help
    transform these ideas into growing businesses.
        The Federal Government has a vital role to play.
        We need to support small business lending through proven programs
    at the SBA, USDA, and the CDFI Fund.
        We also need to build the technical expertise to help people access
    Federal resources while also promoting increased awareness about the
    programs that exist at SBA, USDA and Treasury.
        That's what an organization called Grow New Mexico is doing. They
    connect people, businesses and communities to resources that can help.
        Unfortunately, the Trump administration seems to be heading in the
    opposite direction.
        Instead of doing more to increase access to capital, the
    Administration proposed zeroing out the CDFI Fund's grant making.
        The White House's rescission package also targeted several USDA
    programs that support rural communities, a sign that the Administration
    is failing to get money out the door.
        And the recent Republican tax law actually makes the tax code more
    complex for small firms.
        We need to realign priorities.
        Expanding access to capital means providing more and better
    options--and ensuring that people and communities are able to utilize
    those options.
        I look forward to hearing from our witnesses on how we can build an
    innovation economy that supports innovation and growth in all parts of
    the country.

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     Response from Mr. Mackintosh to Questions for the Record Submitted by
                                 Senator Sasse
        1. Rural lending has fallen and venture capital investment
    continues to be concentrated in a few major hubs. In your view, what is
    the single biggest policy change that would spur less concentrated
    investment and access to capital?
        There are economic reasons why start-up firms are often located
    near their venture finance. The investors often contribute management,
    marketing and other skills lacking on the entrepreneurial team.
    Similarly, there are economic reasons why venture investors are
    geographically concentrated, as it creates economies of scale when
    attracting and meeting with investment opportunities. It's important to
    remember that start-up firms already have high cash-burn and limited
    resources, which makes expensive roadshows or travel prohibitive.
        However, in my limited experience with venture investing, many
    start-ups also leverage telecommuting which allows those with the
    skills required for the start-up business to work from home, or in a
    city of their choice. Although the head office might be near the
    venture investors, not all investors leave their localities.
        2. In your view, how has tax reform affected your industry and
    potential barriers to capital access? If there has not been any shift
    so far, do you anticipate future adjustments?
        Tax reform has helped most industries. Many companies have paid
    bonuses to staff, while the strong earnings growth recorded since the
    changes is supportive of hiring and investor returns.
        The changes have also been a boost to biotech companies looking to
    raise public capital to fund their research and investment into drugs
    and medical advances.
        3. Overall, how do Sarbanes-Oxley regulations drive up costs and
    disincentivize firms from going public? In your opinion, how should
    these regulations change, and should changes/exemptions be limited to
    emerging growth companies?
        Sarbanes-Oxley is among the rules that add to the costs, complexity
    and business risks for entrepreneurs considering going public. Our
    issuers have told us that regulatory burdens do affect them--this is
    something we detailed in our Revitalize paper. The paper also contains
    a number of recommendations for both EGCs and non-EGCs to reduce costs
    and burdens without creating greater risk for investors.
        4. What regulatory burden exists to limit crowdfunding as a source
    of capital and what policy changes are needed to encourage the growth
    of this practice?
        Unfortunately I have no experience with crowdfunding.
        5. In your opening testimony, you referenced that initial coin
    offerings on the blockchain may soon be a popular option to fund start-
    ups. In your opinion, how far in the future is this and what are the
    opportunities and challenges with this approach to capital formation?
        In the U.S., this will be significantly affected by the SEC,
    especially how they interpret and enforce the definition of a Security.
    However, the technology to allocate and track rights exists in the
    blockchain already. As with many things on the internet, it might be
    difficult to police investments by Americans into blockchain tokens
    issued in other countries.
        The blockchain may in fact offer opportunities. Specifically, it
    may streamline custody and ownership rights for these small companies--
    while also providing access to a broader range of investors in a
    cheaper ``crowdfunding like'' way.
        The challenges are weighing the lower costs and regulation, with
    investor protections. Investor protection and transparency are two of
    the key benefits exchanges offer investors.
        6. Can you expand on your comment on how the expansion of companies
    into public markets interacts with retirement savings, potentially
    saving the government and taxpayers some of the financing burden? What
    data supports this sentiment?
        Most 401k accounts are managed by professional asset managers who
    are typically restricted to holding listed companies.
        The benefit of this is that listed companies offer more
    transparency and liquidity for those investors, as well as better
    disclosures and investor protections.
        But the risk is that as companies stay private longer, these 401k
    accounts are unable to access wealth creation from these companies
    until they are far more mature and their growth has potentially started
    to slow. This can lead to limitations of the growth of these accounts
    which will limit the retirement savings of Americans which can lead to
    greater reliance on public entitlements.
                                   __________
    Response from Ms. King to Questions for the Record Submitted by Senator
                                     Sasse
        1. Rural lending has fallen and venture capital investment
    continues to be concentrated in a few major hubs. In your view, what is
    the single biggest policy change that would spur less concentrated
    investment and access to capital?
        I share your concern with the flow of venture capital to areas
    outside what we generally consider to be ``hubs'' for investment. Even
    my company, GlycoMimetics, which is based in Rockville, Maryland,
    encountered more difficulties raising capital than I think we would
    have if we had been in one of the major biotech hubs such as Boston or
    San Francisco. That is despite the presence of national labs and
    universities, and the strength of the local economy. Several policy
    proposals that I detail in my written testimony--including extending
    the JOBS Act exemption from Sarbanes-Oxley 404(b) for emerging growth
    companies as well as making certain fixes to the tax code to cultivate
    innovation--will help spur investment and increase access to capital in
    early stage companies located anywhere across the country.
        2. In your view, how has tax reform affected your industry and
    potential barriers to capital access? If there has not been any shift
    so far, do you anticipate future adjustments?
        I urge policymakers to do more to encourage emerging innovators
    like GlycoMimetics. Pre-revenue innovators that are still in the lab
    and do not yet have a product on the market are still years away from
    having a tax liability, and thus do not benefit from reductions in
    corporate rates. However, as I detail in my written testimony, several
    simple changes to the tax code can encourage entrepreneurship across
    the country. For example, modest tweaks to Section 382 of the tax code
    would encourage investment in innovation while maintaining the original
    intent of 382, which is preventing loss trafficking. I encourage
    Congress to take forward these reforms and I welcome further
    opportunities to exchange insights on how to improve our tax code to
    support innovators like GlycoMimetics.
        3. Overall, how do Sarbanes-Oxley regulations drive up costs and
    disincentivize firms from going public? In your opinion, how should
    these regulations change, and should changes/exemptions be limited to
    emerging growth companies?
        Sarbanes-Oxley (SOX) Section 404(b) was drafted with the intent of
    ensuring oversight over the internal controls over financial reporting
    of large, complex, multinational companies like Enron and WorldCom. It
    was not tailored for small, emerging companies, and therefore it has
    the unintended consequence of diverting money from science to
    compliance. SOX 404(b) is a key pain point for emerging growth biotech
    companies because of its extraordinary expense, our pre-revenue status,
    and the fact that it is of little use to our investors. For example,
    our external audit costs will more than double when we lose our JOBS
    Act on-ramp in a few months due to the SOX 404(b) external audit
    attestation provisions. This is all despite the fact that we, as a
    public company, are subject to extensive audit and disclosure
    requirements beyond SOX 404(b) that are designed to protect our
    investors. I encourage the Senate to advance the bipartisan ``Fostering
    Innovation Act'' (S.2126/S.488) to right-size compliance requirements
    for emerging growth companies, which I strongly believe will improve
    capital formation and scientific advancement while maintaining
    important investor protections.
        4. What regulatory burden exists to limit crowdfunding as a source
    of capital and what policy changes are needed to encourage the growth
    of this practice?
        To my understanding, crowdsourcing platforms are a growing source
    of seed capital for entrepreneurs, and most of the successfully funded
    campaigns generate $10,000 or less in funding.\1\ As I mentioned in my
    testimony, more than 95% of biotech companies are in the R&D phase
    without an FDA-approved product on the market. The enormous financial
    resources required to develop a single life-saving treatment (which is
    estimated to cost 2.6 billion dollars), the long R&D timeline required
    to get a product approved by the FDA and on the market, and the science
    and technology underpinning the value of a potential medical
    breakthrough, generally make biotechs best positioned to raise startup
    capital from professional, long-term investors (such as angel investors
    and venture capital firms), rather than through crowdsourcing
    platforms, so I am unable to comment on ways to improve them.
    ---------------------------------------------------------------------------
        \1\ Kickstarter Stats, accessed 6 August 2018, https://
    www.kickstarter.com/help/stats.
    ---------------------------------------------------------------------------
                                   __________
       Response from Ms. Mensah to Questions for the Record Submitted by
                                 Senator Sasse
        1. Rural lending has fallen and venture capital investment
    continues to be concentrated in a few major hubs. In your view, what is
    the single biggest policy change that would spur less concentrated
    investment and access to capital?
        While there is not a singular solution to address access to capital
    issues in rural communities, the Federal Government can play a critical
    role in building the financial and credit infrastructure rural
    communities need by providing robust funding for Federal programs that
    leverage public-private partnerships like the Department of Treasury's
    CDFI Fund programs.
        By partnering with mission-driven lenders like CDFIs, the Federal
    Government can enhance its impact and deepen its ability to reach rural
    communities. As bank branches in rural communities continue to close,
    there are limited options for those seeking financing, making the
    organizations that are working in these communities more important than
    ever in ensuring access to capital. However, even the lenders in rural
    communities encounter challenges accessing the low-cost capital needed
    to successfully lend in rural areas, which can have high transaction
    costs and require significant technical assistance.
        The Federal Government has existing tools that support rural
    lending by using ``on the ground'' partners to channel capital into
    rural communities like the aforementioned CDFI Fund programs, the SBA's
    Microloan and Community Advantage programs, or the Rural Development
    lending programs at the USDA. The low-cost capital and credit
    enhancements provided through Federal programs like these make lending
    in underserved communities financially viable, allowing CDFIs to offer
    a variety of financing tools to meet the needs of rural businesses
    seeking financing, whether it is a $500 microloan to a new
    entrepreneur, $100,000 to help a business grow, or multimillion dollar
    financing for more established businesses to purchase equipment or real
    estate.
        However, these programs are not funded at adequate levels to meet
    the demand for financing, preventing critically needed capital from
    flowing to distressed communities. Strengthening these programs will
    build the capacity of organizations working in local communities,
    allowing them to lend to more rural businesses and individuals.
        2. In your view, how has tax reform affected your industry and
    potential barriers to capital access? If there has not been any shift
    so far, do you anticipate future adjustments?
        The Tax Cuts and Jobs Act created Opportunity Zones, a new tax
    benefit with the potential to catalyze investment in many distressed
    communities. CDFIs are hoping the new tax benefit will encourage
    additional investors to provide capital to finance projects and
    businesses by directing equity investments into designated low-income
    census tracts.
        As CDFIs across the country explore how to use Opportunity Zones
    (O-zones), there is concern that O-zone investments could expedite
    displacement via real estate development booms in O-zone tracts near or
    within gentrifying areas. Many stakeholders hope O-zone guidelines will
    be modified to incentivize business investments as much as (or more
    than) real estate to mitigate displacement risk.
        There is a significant opportunity for low-income areas to benefit
    from private sector O-zone equity investments, but there is also a need
    for greater accountability for investments in selected O-zone census
    tracts, either through detailed guidance from the Treasury and IRS or
    through legislative changes put forth by Congress.
        3. As you noted, our financial system has become increasingly
    consolidated, as community banks and credit unions either close their
    doors or merge with larger institutions. What services can these
    smaller institutions provide that larger institutions cannot provide,
    and in particular, how are rural communities like those in Nebraska
    impacted?
        CDFIs, including banks and credit unions, are an important part of
    the small business lending ecosystem, providing capital to businesses
    that cannot access traditional financing. For lenders, transaction
    costs are similar whether the loan amount is $10,000, or $1,000,000,
    causing most financial institutions to focus their attention on the
    higher dollar loans. CDFIs, on the other hand, are committed to meeting
    the credit needs of their borrowers, who seek smaller loans and have
    nontraditional financing needs.
        While other lenders have exited the market or charge high interest
    rates and fees to borrowers, CDFIs have figured out how to lend
    successfully in the most distressed markets by taking a localized
    approach to lending, adjusting their strategies and products to meet
    the needs of their communities, and being accountable to the
    communities they serve.
        CDFIs offer a variety of financial products including working
    capital, equity investments, bridge loans, senior and subordinated
    debt--sometimes at below market rates with lower and fewer fees. Often
    CDFIs can employ more flexible underwriting criteria, credit standards,
    collateralization and debt service requirements than what is otherwise
    available in the marketplace. CDFIs also provide financial education,
    technical assistance, and capacity-building development services to
    their borrowers, including business training and access to social and
    professional networks.
        CDFIs also have referral relationships with local financial
    institutions, whereby a bank may refer a potential borrower who is not
    quite ready for conventional financing to a CDFI where the business
    owner can receive any needed training or technical assistance as well
    as financing. A CDFI may also refer small business owners that need
    larger amounts of financing to their partners. For example, OFN Member
    Nebraska Enterprise Fund, a statewide business loan fund based in
    Oakland, NE, will refer small business owners they cannot serve to a
    partner like the Greater Omaha Chamber of Commerce, Small Business
    Association or Catholic Charities.\1\ For many CDFIs, the goal is to
    help the borrower strengthen and grow their business, improve their
    financial position, and eventually be able to ``graduate'' to
    traditional financing from a mainstream financial institution.
    ---------------------------------------------------------------------------
        \1\ Deonna Anderson, Fund Wants to Show North Omaha Entrepreneurs
    `` `Nebraska Nice,' '' Next City, August 23, 2017. Accessed August 9,
    2018. https://nextcity.org/daily/entry/omaha-small-business-fund-
    lending-north-omaha
    ---------------------------------------------------------------------------
        In addition to providing financing and technical assistance to
    individuals and businesses in distressed communities, CDFIs can be
    partners in addressing bank closures in rural areas. Community
    development credit unions like HOPE, a Jackson, MS-based credit union
    that works in rural communities in the Delta region, and Self-Help, a
    Durham, NC-based credit union, have worked with regulators to reopen
    shuttered bank branches when traditional lenders leave the market,
    ensuring communities continue to have access to financial services in
    their local areas.
                               cdfis in nebraska
        There are currently 10 certified CDFIs headquartered in Nebraska,
    including two Native CDFIs: Ho-Chunk Community Capital, Inc. in
    Winnebago and Native360 Loan Fund, Inc. based in Grand Island. Some
    organizations like Nebraska Enterprise Fund or Midwest Housing
    Development Fund serve a statewide or multistate region, while others
    are focused on rural communities like Chadron Federal Credit Union,
    which serves Dawes, Sioux and Sheridan counties in Northwest Nebraska,
    or the Rural Investment Corporation, a Lyons-based business loan fund
    operated by the Center for Rural Affairs.
        Communities throughout Nebraska benefit from CDFI lending. From
    FY2005 to FY2016, CDFI Fund grantees provided $35,716,181 in financing
    to communities in Nebraska that created 540 permanent jobs, developed
    846,514 square feet of commercial space, developed 790 housing units,
    and financed 786 microenterprises and small businesses.

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