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









                                                        S. Hrg. 115-400

   THE INNOVATION ECONOMY, ENTREPRENEURSHIP, AND BARRIERS TO CAPITAL 
                                 ACCESS

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 25, 2018

                               __________

          Printed for the use of the Joint Economic Committee















[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]








		 
                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
31-302                    WASHINGTON : 2019                 



















                        JOINT ECONOMIC COMMITTEE

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

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

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

























                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

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

                               Witnesses

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

                       Submissions for the Record

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

 
                        THE INNOVATION ECONOMY,
                     ENTREPRENEURSHIP, AND BARRIERS
                           TO CAPITAL ACCESS

                              ----------                              


                        WEDNESDAY, JULY 25, 2018

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

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

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

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

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

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

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

          STATEMENT OF RACHEL KING, CEO, GLYCOMIMETICS

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

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

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

                       SUBMISSIONS FOR THE RECORD


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


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 Response from Mr. Mackintosh to Questions for the Record Submitted by 
                             Senator Sasse
    1. Rural lending has fallen and venture capital investment 
continues to be concentrated in a few major hubs. In your view, what is 
the single biggest policy change that would spur less concentrated 
investment and access to capital?
    There are economic reasons why start-up firms are often located 
near their venture finance. The investors often contribute management, 
marketing and other skills lacking on the entrepreneurial team. 
Similarly, there are economic reasons why venture investors are 
geographically concentrated, as it creates economies of scale when 
attracting and meeting with investment opportunities. It's important to 
remember that start-up firms already have high cash-burn and limited 
resources, which makes expensive roadshows or travel prohibitive.
    However, in my limited experience with venture investing, many 
start-ups also leverage telecommuting which allows those with the 
skills required for the start-up business to work from home, or in a 
city of their choice. Although the head office might be near the 
venture investors, not all investors leave their localities.
    2. In your view, how has tax reform affected your industry and 
potential barriers to capital access? If there has not been any shift 
so far, do you anticipate future adjustments?
    Tax reform has helped most industries. Many companies have paid 
bonuses to staff, while the strong earnings growth recorded since the 
changes is supportive of hiring and investor returns.
    The changes have also been a boost to biotech companies looking to 
raise public capital to fund their research and investment into drugs 
and medical advances.
    3. Overall, how do Sarbanes-Oxley regulations drive up costs and 
disincentivize firms from going public? In your opinion, how should 
these regulations change, and should changes/exemptions be limited to 
emerging growth companies?
    Sarbanes-Oxley is among the rules that add to the costs, complexity 
and business risks for entrepreneurs considering going public. Our 
issuers have told us that regulatory burdens do affect them--this is 
something we detailed in our Revitalize paper. The paper also contains 
a number of recommendations for both EGCs and non-EGCs to reduce costs 
and burdens without creating greater risk for investors.
    4. What regulatory burden exists to limit crowdfunding as a source 
of capital and what policy changes are needed to encourage the growth 
of this practice?
    Unfortunately I have no experience with crowdfunding.
    5. In your opening testimony, you referenced that initial coin 
offerings on the blockchain may soon be a popular option to fund start-
ups. In your opinion, how far in the future is this and what are the 
opportunities and challenges with this approach to capital formation?
    In the U.S., this will be significantly affected by the SEC, 
especially how they interpret and enforce the definition of a Security. 
However, the technology to allocate and track rights exists in the 
blockchain already. As with many things on the internet, it might be 
difficult to police investments by Americans into blockchain tokens 
issued in other countries.
    The blockchain may in fact offer opportunities. Specifically, it 
may streamline custody and ownership rights for these small companies--
while also providing access to a broader range of investors in a 
cheaper ``crowdfunding like'' way.
    The challenges are weighing the lower costs and regulation, with 
investor protections. Investor protection and transparency are two of 
the key benefits exchanges offer investors.
    6. Can you expand on your comment on how the expansion of companies 
into public markets interacts with retirement savings, potentially 
saving the government and taxpayers some of the financing burden? What 
data supports this sentiment?
    Most 401k accounts are managed by professional asset managers who 
are typically restricted to holding listed companies.
    The benefit of this is that listed companies offer more 
transparency and liquidity for those investors, as well as better 
disclosures and investor protections.
    But the risk is that as companies stay private longer, these 401k 
accounts are unable to access wealth creation from these companies 
until they are far more mature and their growth has potentially started 
to slow. This can lead to limitations of the growth of these accounts 
which will limit the retirement savings of Americans which can lead to 
greater reliance on public entitlements.
                               __________
Response from Ms. King to Questions for the Record Submitted by Senator 
                                 Sasse
    1. Rural lending has fallen and venture capital investment 
continues to be concentrated in a few major hubs. In your view, what is 
the single biggest policy change that would spur less concentrated 
investment and access to capital?
    I share your concern with the flow of venture capital to areas 
outside what we generally consider to be ``hubs'' for investment. Even 
my company, GlycoMimetics, which is based in Rockville, Maryland, 
encountered more difficulties raising capital than I think we would 
have if we had been in one of the major biotech hubs such as Boston or 
San Francisco. That is despite the presence of national labs and 
universities, and the strength of the local economy. Several policy 
proposals that I detail in my written testimony--including extending 
the JOBS Act exemption from Sarbanes-Oxley 404(b) for emerging growth 
companies as well as making certain fixes to the tax code to cultivate 
innovation--will help spur investment and increase access to capital in 
early stage companies located anywhere across the country.
    2. In your view, how has tax reform affected your industry and 
potential barriers to capital access? If there has not been any shift 
so far, do you anticipate future adjustments?
    I urge policymakers to do more to encourage emerging innovators 
like GlycoMimetics. Pre-revenue innovators that are still in the lab 
and do not yet have a product on the market are still years away from 
having a tax liability, and thus do not benefit from reductions in 
corporate rates. However, as I detail in my written testimony, several 
simple changes to the tax code can encourage entrepreneurship across 
the country. For example, modest tweaks to Section 382 of the tax code 
would encourage investment in innovation while maintaining the original 
intent of 382, which is preventing loss trafficking. I encourage 
Congress to take forward these reforms and I welcome further 
opportunities to exchange insights on how to improve our tax code to 
support innovators like GlycoMimetics.
    3. Overall, how do Sarbanes-Oxley regulations drive up costs and 
disincentivize firms from going public? In your opinion, how should 
these regulations change, and should changes/exemptions be limited to 
emerging growth companies?
    Sarbanes-Oxley (SOX) Section 404(b) was drafted with the intent of 
ensuring oversight over the internal controls over financial reporting 
of large, complex, multinational companies like Enron and WorldCom. It 
was not tailored for small, emerging companies, and therefore it has 
the unintended consequence of diverting money from science to 
compliance. SOX 404(b) is a key pain point for emerging growth biotech 
companies because of its extraordinary expense, our pre-revenue status, 
and the fact that it is of little use to our investors. For example, 
our external audit costs will more than double when we lose our JOBS 
Act on-ramp in a few months due to the SOX 404(b) external audit 
attestation provisions. This is all despite the fact that we, as a 
public company, are subject to extensive audit and disclosure 
requirements beyond SOX 404(b) that are designed to protect our 
investors. I encourage the Senate to advance the bipartisan ``Fostering 
Innovation Act'' (S.2126/S.488) to right-size compliance requirements 
for emerging growth companies, which I strongly believe will improve 
capital formation and scientific advancement while maintaining 
important investor protections.
    4. What regulatory burden exists to limit crowdfunding as a source 
of capital and what policy changes are needed to encourage the growth 
of this practice?
    To my understanding, crowdsourcing platforms are a growing source 
of seed capital for entrepreneurs, and most of the successfully funded 
campaigns generate $10,000 or less in funding.\1\ As I mentioned in my 
testimony, more than 95% of biotech companies are in the R&D phase 
without an FDA-approved product on the market. The enormous financial 
resources required to develop a single life-saving treatment (which is 
estimated to cost 2.6 billion dollars), the long R&D timeline required 
to get a product approved by the FDA and on the market, and the science 
and technology underpinning the value of a potential medical 
breakthrough, generally make biotechs best positioned to raise startup 
capital from professional, long-term investors (such as angel investors 
and venture capital firms), rather than through crowdsourcing 
platforms, so I am unable to comment on ways to improve them.
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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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