[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
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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
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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
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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.
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\1\ Kickstarter Stats, accessed 6 August 2018, https://
www.kickstarter.com/help/stats.
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__________
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.
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\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
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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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