    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                          GOING PUBLIC: SPACS, DIRECT

                        LISTINGS, PUBLIC OFFERINGS, AND

                       THE NEED FOR INVESTOR PROTECTIONS

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

                                VIRTUAL HEARING

                                   BEFORE THE

                      SUBCOMMITTEE ON INVESTOR PROTECTION,

                     ENTREPRENEURSHIP, AND CAPITAL MARKETS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 24, 2021

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 117-26

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                              ______

                 U.S. GOVERNMENT PUBLISHING OFFICE
     45-078 PDF           WASHINGTON : 2021

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
    GREGORY W. MEEKS, New York           BILL POSEY, Florida
    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
    AL GREEN, Texas                      BILL HUIZENGA, Michigan
    EMANUEL CLEAVER, Missouri            STEVE STIVERS, Ohio
    ED PERLMUTTER, Colorado              ANN WAGNER, Missouri
    JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
    BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
    JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
    JUAN VARGAS, California              TOM EMMER, Minnesota
    JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
    VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
    AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
    MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
    CINDY AXNE, Iowa                     TED BUDD, North Carolina
    SEAN CASTEN, Illinois                DAVID KUSTOFF, Tennessee
    AYANNA PRESSLEY, Massachusetts       TREY HOLLINGSWORTH, Indiana
    RITCHIE TORRES, New York             ANTHONY GONZALEZ, Ohio
    STEPHEN F. LYNCH, Massachusetts      JOHN ROSE, Tennessee
    ALMA ADAMS, North Carolina           BRYAN STEIL, Wisconsin
    RASHIDA TLAIB, Michigan              LANCE GOODEN, Texas
    MADELEINE DEAN, Pennsylvania         WILLIAM TIMMONS, South Carolina
    ALEXANDRIA OCASIO-CORTEZ, New York   VAN TAYLOR, Texas
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    NIKEMA WILLIAMS, Georgia
    JAKE AUCHINCLOSS, Massachusetts

                       Charla Ouertatani, Staff Director
            Subcommittee on Investor Protection, Entrepreneurship,
                              and Capital Markets

                       BRAD SHERMAN, California, Chairman

    CAROLYN B. MALONEY, New York         BILL HUIZENGA, Michigan, Ranking
    DAVID SCOTT, Georgia                     Member
    JIM A. HIMES, Connecticut            STEVE STIVERS, Ohio
    BILL FOSTER, Illinois                ANN WAGNER, Missouri
    GREGORY W. MEEKS, New York           FRENCH HILL, Arkansas
    JUAN VARGAS, California              TOM EMMER, Minnesota
    JOSH GOTTHEIMER. New Jersey          ALEXANDER X. MOONEY, West Virginia
    VICENTE GONZALEZ, Texas              WARREN DAVIDSON, Ohio
    MICHAEL SAN NICOLAS, Guam            TREY HOLLINGSWORTH, Indiana, Vice
    CINDY AXNE, Iowa                         Ranking Member
    SEAN CASTEN, Illinois                ANTHONY GONZALEZ, Ohio
    EMANUEL CLEAVER, Missouri            BRYAN STEIL, Wisconsin

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 24, 2021.................................................     1
    Appendix:
        May 24, 2021.................................................    37

                                   WITNESSES
                              Monday, May 24, 2021

    Deane, Stephen, Senior Director, Legislative and Regulatory
      Outreach, CFA Institute........................................     5
    Kupor, Scott, Managing Partner, Andreessen Horowitz..............    10
    Park, Andrew, Senior Policy Analyst, Americans for Financial
      Reform.........................................................     6
    Rodrigues, Usha R., Professor, and M.E. Kilpatrick Professor of
      Corporate & Securities Law, University of Georgia School of Law     8

                                    APPENDIX

    Prepared statements:
        Deane, Stephen...............................................    38
        Kupor, Scott.................................................    47
        Park, Andrew.................................................    61
        Rodrigues, Usha R............................................    66

                  Additional Material Submitted for the Record

    Huizenga, Hon. Bill:
        ``IPOs, SPACs, and Direct Listings, Oh My!'' by Jennifer J.
          Schulp.....................................................    77

                          GOING PUBLIC: SPACS, DIRECT

                        LISTINGS, PUBLIC OFFERINGS, AND

                       THE NEED FOR INVESTOR PROTECTIONS

                                  ----------

                              Monday, May 24, 2021

                 U.S. House of Representatives,
                   Subcommittee on Investor Protection,
                 Entrepreneurship, and Capital Markets,
                               Committee on Financial Services,
                                                         Washington, DC
        The subcommittee met, pursuant to notice, at 12:01 p.m.,
    via Webex, Hon. Brad Sherman [chairman of the subcommittee]
    presiding.
        Members present: Representatives Sherman, Scott, Himes,
    Foster, Vargas, Gottheimer, San Nicolas, Casten, Cleaver;
    Huizenga, Wagner, Hill, Emmer, Mooney, Davidson, Gonzalez of
    Ohio, and Steil.
        Ex officio present: Representatives Waters and McHenry.
        Chairman Sherman. The Subcommittee on Investor Protection,
    Entrepreneurship, and Capital Markets will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time. Also, without
    objection, members of the full Financial Services Committee who
    are not members of this subcommittee are authorized to
    participate in today's hearing.
        As a reminder, I ask all Members to keep themselves muted
    when they are not being recognized by the Chair. The staff is
    instructed not to mute Members except where a Member is not
    being recognized by the Chair and there is inadvertent
    background noise.
        Members are also reminded that they may only participate in
    one remote proceeding at a time. If you are participating
    today, please keep your camera on. And if you choose to attend
    a different remote proceeding, please turn your camera off.
        I want to commend Sean Casten for being the new Vice Chair
    of this subcommittee, and I will endeavor to figure out ways to
    transfer as many of the tedious and unpleasant duties of the
    Chair to Sean, and we are now trying to think through exactly
    what that would be.
        Today's hearing is entitled, ``Going Public: SPACs, Direct
    Listings, Public Offerings, and the Need for Investor
    Protections.''
        I now recognize myself for 4 minutes for an opening
    statement.
        Every year, there are hundreds of trillions of dollars in
    securities transactions. But what matters not to investors, but
    to the economy as a whole, to people who are just working for a
    living, is when money flows into companies that they can use to
    expand, provide jobs, and build factories. Of that money, $2.1
    trillion is going into the issuance of corporate bonds, $312
    billion going into companies that are selling stock who are
    already public, and $132 billion for initial public offerings
    (IPOs).
        But this $132 billion, of the trillions of dollars of
    securities transactions, is probably the most important for the
    average American, because these are the companies that are
    going to make our future in the second half of this century.
    And that $132 billion is basically broken down between
    traditional IPOs and Special Purpose Acquisition Companies
    (SPACs).
        In looking at these IPOs, there are three elements we need
    to look at. The first is, how is the company treated, since our
    goal is to get money into companies that can expand in the
    future. Seven percent for smallish to medium-sized companies
    goes to underwriting fees in a traditional IPO. A recent study
    shows that 11 percent goes if it is a SPAC transaction. But
    what I hear most from companies thinking about going public is
    a concern about underpricing. That is to say, in addition to
    the fee, they are selling all their shares for, say, $20 a
    share, and wouldn't you know it, 2 days after the offering, the
    shares are worth $30. Who gets that extra $10? Not the company.
    So, the company is worth $30 a share but is getting only $20 a
    share in the transaction.
        The second issue is protecting the investor. We have strict
    liability when a company first goes public in the traditional
    system, strict liability for projections that are made about
    the future. But if a company goes public through the SPAC
    mechanism, we have a lower level of liability, unless Mr.
    Coates is right and somehow it is a higher level of liability.
    We don't know. It is up to Congress to clarify what level of
    liability, what level of investor protection we have for IPOs,
    and it should be the same whether it is done through the SPAC
    mechanism or the regular mechanism. If we need to hold the
    underwriters accountable for misstatements about the future
    projections, then we need to do it for both. If we don't need
    to do it, then we should do it for neither.
        The second issue is the investor--as I was saying, I was
    talking about protecting the investor. With SPACs, we see 70
    percent of those who invest in SPACs take their money out
    before the transaction goes forward, and then we see that those
    who choose to remain see their investment diluted with the
    Private Investment in Public Equity (PIPE), the investors who
    come in afterwards.
        Finally, there is the allocation of this great opportunity
    to invest in the IPO, as most IPOs do go up on their first day,
    in their first week, or in their first month. First, who gets
    these good opportunities to invest in a new IPO, and are retail
    investors missing out?
        And second, do we have, in effect, a system of bribery
    where an underwriter can go to someone with a fiduciary duty, a
    CFO of a big corporation, the trustee of a large charitable
    foundation, and give them for their own account a chance to buy
    a $30 stock for $20, and then go back a month later and do
    business not with the individual whom they have enriched but
    with the big company or the big charitable trust that they
    control?
        So, we have a lot to cover in a limited amount of time. I
    believe my time has expired.
        The Chair now recognizes the Chair of the full Financial
    Services Committee, the gentlewoman from California, Chairwoman
    Waters, for a 1-minute opening statement.
        Chairwoman Waters. Thank you very much, Chairman Sherman.
        Special purpose acquisition companies, known as SPACs, are
    blank check companies and have skyrocketed in popularity as a
    way for private companies to go public and avoid the public
    scrutiny of an initial public offering, or IPO, process.
        In 2020, the amount of proceeds raised by SPACs jumped an
    astounding 462 percent over the previous year. I have deep
    concerns about the lack of transparency and accountability that
    is a hallmark of the SPAC process, and it appears that SPAC
    mergers are structured to ensure that Wall Street insiders
    receive huge profits, and retail investors pay the cost.
        I look forward to discussing with our witnesses what
    Congress and the SEC can do to better protect investors and
    ensure that our markets are fair.
        I yield back the balance of my time.
        Chairman Sherman. Thank you, Madam Chairwoman.
        I now recognize the very patient ranking member of the
    subcommittee, the gentleman from Michigan, Mr. Huizenga, for 4
    minutes.
        Mr. Huizenga. Thank you, Mr. Chairman.
        In a challenging global economy, the strength of our
    capital markets is vital to long-term economic growth, yet
    regulatory burdens and bureaucracy are preventing small
    businesses from thriving and hindering the United States'
    ability to compete globally. Small businesses, which are the
    fuel that powers our economic engine, make up 99 percent of all
    enterprises in the United States and employ almost half of our
    workforce.
        Prior to the COVID-19 pandemic, roughly three-quarters of
    all small businesses relied on financing in the last 12 months.
    Nearly 70 percent of startups received less financing than they
    initially requested, while 28 percent received no financing at
    all. The fact is, most people don't realize it, but 80 percent
    of business debt financing comes from investors in our capital
    markets, not from banks.
        The U.S. continues to experience a slump in the number of
    new businesses, which in 2016 hit a 40-year low. Last year
    showed a spark in IPOs, which broke that disturbing trend.
    Until 2020, our economy launched half the number of domestic
    IPOs than it had 20 years ago.
        At the same time, the U.S. doubled the regulatory
    compliance costs that businesses incur, just one of the myriad
    reasons why the decline in traditional IPOs is the cost of
    going public. Costs associated with, ``going public'', are high
    because investment bankers, lawyers, and auditors collectively
    charge millions of dollars to prepare the lengthy registration
    statement that is required to be filed with the SEC before any
    shares can be sold.
        Additionally, a series of regulatory burdens placed on
    public companies only adds even more costs to these companies.
    The SEC estimates the average cost of just achieving initial
    regulatory compliance for going public in a traditional IPO is
    $2.5 million, with an annual compliance cost averaging $1.5
    million after that. These costs are prohibitive for small and
    other emerging companies focused on growing their businesses.
        As a result, more companies are opting for private
    fundraising over the costly hassle of entering our public
    markets. In 2016, private offerings in the U.S. raised nearly 5
    times the equity as IPOs. In 1997, 8,884 companies were listed
    on exchanges in the United States. Since then, the number of
    companies on the exchanges has decreased by more than half,
    which results in fewer investment choices for everyday Main
    Street mom-and-pop investors.
        In the U.S., there are 242 unicorns, startups with
    valuations of more than a billion dollars, that were privately
    financed as of November 2020. That is called a herd of
    unicorns. Those aren't unicorns.
        Conversely, as more businesses today remain privately
    funded instead of going public, the number of publicly held
    companies has declined to levels not seen since the 1980s. The
    decline in IPOs only hurts everyday American consumers, as I
    said, because there are fewer opportunities for them.
        It is important to note that while the U.S. IPO market has
    steadily decreased, until last year, foreign markets,
    specifically China, were growing. China's annual GDP growth
    remains approximately 6.2 percent despite the recent trade war.
        Additionally, in 2020, mainland China was the only major
    economy to achieve positive economic growth. China's IPO market
    produced over one-third of the world's IPOs in 2020, reporting
    536 out of the 1,363 IPOs across all global markets. Beijing's,
    ``Made in China'' 2025 agenda lays out its plan to dominate the
    high-tech, biotech, and artificial intelligence industries
    within the next 10 years. Additionally, experts predict more
    IPO activity on mainland China's 14th 5-year plan, which is
    designed to boost IPOs in specific sectors through direct
    financing.
        Increased pressure from foreign markets only heightens the
    necessity for immediate action and reform. Republicans support
    making our markets more attractive, but make no mistake: China
    is aggressively pursuing policies that challenge us
    economically. This includes the IPO space. Republicans and
    Democrats must work together to continue to make our capital
    markets the envy of the world.
        Given the capital formation issues facing American
    companies and the decline in IPOs over the last several
    decades, this committee needs to be focused on legislative and
    regulatory frameworks that make our public markets more
    attractive and preserve various paths for companies to pursue
    going public.
        I look forward to hearing from our witnesses today, and I
    yield back.
        Chairman Sherman. Thank you very much.
        I now recognize the ranking member of the Full Committee,
    the gentleman from North Carolina, Ranking Member McHenry.
        Mr. McHenry. Thank you. Look, if any one of my colleagues
    wanted to discuss ways to make public companies more attractive
    today, they would be disappointed. Today, committee Democrats
    will push for more regulation, which ultimately will discourage
    companies from going public. That is unfortunate.
        What we should be discussing instead is Mr. Huizenga's
    proposal to facilitate small business mergers and acquisitions
    as an alternative to small business bankruptcy; Mr. Hill's bill
    to expand investment opportunities for investors who know the
    subject matter; Mrs. Wagner's proposal to provide investor-
    friendly disclosure formatting and reduce disclosure costs for
    public companies; Mr. Emmer's bill to facilitate trading in
    smaller, early-stage companies to spur capital raises and
    reward innovation; Mr. Steil's bill, his proposal to reduce
    regulatory costs and streamline disclosures for small public
    companies; and Mr. Loudermilk's bill to remove misguided
    regulation and reduce costs for non-bank financial
    institutions.
        All of those bills I just mentioned would do more to help
    investors and small businesses than the discussion we are
    having today.
        I yield back.
        Chairman Sherman. Thank you.
        Today, we welcome the testimony of our distinguished
    witnesses: Stephen Deane, the senior director of legislative
    and regulatory outreach at the CFA Institute; Andrew Park, a
    senior policy analyst at Americans for Financial Reform; Usha
    Rodrigues, professor, and M.E. Kilpatrick Professor of
    Corporate & Securities Law at the University of Georgia School
    of Law; and Scott Kupor, a managing partner at Andreessen
    Horowitz.
        Witnesses are reminded that their oral summary of their
    testimony will be limited to 5 minutes. You will be able to see
    the timer on your screen which will indicate how much time you
    have left, and a chime will go off at the end of your time. I
    would ask that you be mindful of the timer and wrap it up
    quickly if you hear the chime. And without objection, your full
    written statements will be made a part of the record.
        Mr. Deane, you are now recognized for 5 minutes.

     STATEMENT OF STEPHEN DEANE, SENIOR DIRECTOR, LEGISLATIVE AND
                   REGULATORY OUTREACH, CFA INSTITUTE

        Mr. Deane. Chairman Sherman, Ranking Member Huizenga, and
    members of the subcommittee, my name is Steve Deane, and I am
    with the CFA Institute. It is an honor to be here.
        I would like to focus on SPACs and investor protection. If
    we look at the track record so far, we see two starkly
    different worlds. On the one hand, we have big, sophisticated
    investors such as hedge funds that invest at the IPO stage, and
    then they exit when the SPAC announces a merger to take a
    company private.
        On the other hand, there are individual investors who buy
    in the public markets, often at the time of the merger
    announcement, and hold their shares in the post-merger period.
        These two sets of investors face two starkly different
    results. There are lucrative profits for the sponsors, as well
    as the hedge funds who exit, but poor returns for ordinary
    investors who stay on.
        The question is, are there any design features of SPACs
    that could explain this pattern, and I point to three. First,
    dilution. The initial IPO investors, including hedge funds, buy
    SPAC units which consist of shares and warrants, but those
    warrants are detached after about 2 months. So later, in the
    second phase, when these investors redeem their shares, and
    most of these hedge funds do, they get their money back, plus
    interest, but they get to keep their warrants.
        One academic paper calls this a, ``default-free,
    underpriced, convertible bond with extra warrants.'' In other
    words, a free lunch. We know there is no such thing as a free
    lunch. It comes at the expense of the investors who hold their
    shares in the post-merger period, and that includes retail
    investors. So, dilution is a handicap and it is one that the
    record shows that SPACs to date have not overcome.
        A second investor concern involves misaligned incentives.
    For example, the sponsor has a strong financial incentive to
    make a merger deal, even a bad one that may not be in the
    interest of the other shareholders. In addition, the SPAC may
    offer special inducements such as discounts to get still other
    investors to invest in private deals called PIPEs. The details
    of these side deals are not always disclosed.
        The third area of concern involves forward-looking
    statements. SPACs enjoy a safe harbor. At least, it has been
    thought until now that they enjoy a safe harbor from private
    litigation if they make a forward-looking statement or
    projections about the future of the proposed merger. That is
    different from a traditional IPO, which gets no safe harbor,
    and therefore almost never offers forward-looking statements.
    This heightened liability in IPOs is an important investor
    protection, and the question is, why doesn't this same investor
    protection apply to SPAC mergers?
        So, where do we go from here? First, we have seen an
    explosion of SPACs, and now they are facing heightened
    scrutiny, including this hearing. That is a good thing. Public
    education is an important component to help protect investors.
    As SPACs evolve, we may see market solutions to address some of
    these concerns.
        But there is also a clear role for Congress and securities
    regulators to remain vigilant to protect investors. As Congress
    deliberates on possible actions it may take, we would welcome
    the focus on investor protection and transparency. I would
    specifically suggest focusing on dilution, misaligned
    incentives, undisclosed side deals, and safe harbors to
    forward-looking statements.
        Thank you.
        [The prepared statement of Mr. Deane can be found on page
    38 of the appendix.]
        Chairman Sherman. Thank you, Mr. Deane.
        Mr. Park, you are now recognized for 5 minutes.

    STATEMENT OF ANDREW PARK, SENIOR POLICY ANALYST, AMERICANS FOR
                            FINANCIAL REFORM

        Mr. Park. Thank you. Chairman Sherman, Ranking Member
    Huizenga, and members of the subcommittee, thank you for
    inviting me this afternoon to share my views on the different
    ways that private companies have been choosing to go public
    outside of the traditional IPO process. My testimony today will
    focus in particular on the rise of SPACs.
        Over $100 billion worth have been issued so far this year,
    or nearly 10 times the total that we saw in 2018. This
    exponential growth is concerning because SPACs historically
    have performed very poorly for retail investors, while the
    issuers, advisors, and a select group of institutional
    investors will still profit.
        The SPAC surge appears to be driven in part by private
    companies' desire to exploit the perceived speed, streamlined
    disclosures, reduced liability, and reduced shareholder rights
    that are offered by the SPAC process. Although many have just
    started hearing about SPACs recently, SPACs are really far from
    new. In fact, they actually date back to the 1980s, when they
    were actually called blank check companies, and they were often
    associated with scams, and in the process bilked unsuspecting
    investors out of millions of dollars.
        Fraud was, in fact, so pervasive in these blank check
    companies that Congress back in 1990 had to pass the Penny
    Stock Reform Act (PSRA) to address some of these problems. The
    SEC followed shortly thereafter with Rule 419 that also
    dictated blank check company rules.
        Blank check company issuers, though, decided that they
    would get around these rules and devised this modern-day SPAC
    structure, reminding us that properly regulating new assets
    requires both continuing attention and action, and there are
    two main ways that SPACs escape from coverage from both the
    PSRA and also Rule 419.
        The first is this arbitrary $4-a-share threshold that
    defines a penny stock; and the second is the extremely low
    standard of $5 million in net tangible assets. None of those
    conditions end up applying to SPACs, because everyone holds
    more than $5 million in cash, and they are deliberately issued
    at $10 a share to get around that $4 mark.
        SPACs also rely on a safe harbor from being held
    accountable to forward-looking statements under the Private
    Securities Litigation Reform Act of 1995. Whereas with an IPO,
    issuers and underwriters are liable for making false and
    misleading forward-looking statements, SPACs are not subject to
    that same standard. That has emboldened many pre-revenue
    companies in highly speculative industries such as electric
    vehicles, cryptocurrency, and space exploration to use what we
    could generously call, ``rosy projections.''
        Take, for example, nine electric vehicle companies that
    have gone public through a SPAC in 2020. Their combined annual
    revenue was $139 million that year. But between them, they
    project to investors that by 2024, they will generate $26
    billion in annual revenue. Or let's take a look at a space
    exploration company, Holicity, which is proposing a merger with
    Astra Space. They have disclosed to investors, for example,
    that they have not yet launched any rockets, but by 2025, they
    project that they will have daily rocket launches.
        What is most concerning is that retail investors are buying
    into this type of hype, and in some instances pouring a
    significant portion of their savings into certain SPACs when
    the data continue to show, time and time again, that they
    perform poorly over the medium and long run. A large part of
    that underperformance comes from the sizable up-front
    compensation that goes to the sponsor who receives that 20
    percent promote regardless of the quality of the acquisition.
        As a result, when you look at the average SPAC that is
    issued at $10 a share, after you pay the sponsor and you meet
    the redemptions of the shareholders who want to cash out, that
    SPAC only ends up with $6.67 in cash after the merger. Or put
    another way, that would mean that the value of the company
    would need to rise 50 percent just to get back to that $10, and
    that leaves many of the retail investors who hold this post-
    merger SPAC at a significant disadvantage.
        We wouldn't want people's 401(k)s to be used at the
    blackjack table, given how the game is mathematically stacked
    against them. But unfortunately, investing in SPACs in their
    current form is not too different. I will end my remarks with
    these figures that show just how clearly the house always wins.
        The average SPAC sponsor between 2019 and 2021 saw returns
    of 958 percent. The average institutional investor who is doing
    this arbitrage trade, which I can later elaborate on, averages
    a 40-percent return. But now, retail investors who chase these
    SPACs with high hopes are losing. So if we look at between 2010
    and 2018, the average one-year return of SPACs following a
    merger was negative 15.6 percent. Even more recently, Goldman
    Sachs found that 200 SPACs in April lost around 17 percent
    compared to a 10 percent return.
        Given these dramatically misaligned incentives that
    characterize these deals and their extremely poor performance,
    we urge the committee to take action. We urge you to amend the
    Exchange Act to align the rules that govern forward-looking
    projections in SPACs with those of IPOs and to broaden the
    definition of blank check companies to better protect Main
    Street investors.
        I thank you for your time, and I look forward to answering
    your questions.
        [The prepared statement of Mr. Park can be found on page 61
    of the appendix.]
        Chairman Sherman. Thank you.
        Professor Rodrigues, you are now recognized for 5 minutes.

    STATEMENT OF USHA R. RODRIGUES, PROFESSOR, AND M.E. KILPATRICK
    PROFESSOR OF CORPORATE & SECURITIES LAW, UNIVERSITY OF GEORGIA
                             SCHOOL OF LAW

        Ms. Rodrigues. Chairman Sherman, Ranking Member Huizenga,
    and members of the subcommittee, it is an honor to participate
    in today's hearing. Because my time is limited, I am going to
    highlight just two aspects of my written testimony. I will use
    a somewhat offbeat metaphor, and then an analogy that I think
    might hit home.
        First, the metaphor. The subject of this hearing is going
    public, and I am going to propose to you that you think of the
    traditional IPO process like a traditional wedding. Most of us
    have attended many weddings: the couple picks out the date
    months in advance; there is an announcement; there are elegant
    invitations; the venue is selected with care, and so are the
    flowers, the photographer, the caterer, and the dresses. The
    couple's families will meet and perhaps help with planning the
    ceremony. It is quite a process.
        Well, how is an IPO like a wedding? An IPO also starts out
    months ahead of time. The CEO, the CFO, and the General Counsel
    have likely been dreaming for years of the day when they can
    take their company public. Once they decide they are ready to
    embark, they interview a series of investment banks and select
    the right one to lead the offering. The lead underwriting bank
    then shepherds the company through the process. It works for
    the company to draft the registration statement, which it files
    confidentially with the SEC. The SEC comments on the draft, the
    company responds, and they go back and forth several times.
    Finally, the company files its first public registration
    statement.
        But that isn't the end of the story. The banks and the
    company then launch a road show in which they try to explain
    the company's business to interested investors and convince
    them to invest in the IPO. The SEC continues to comment, asking
    for clarification or adjustments in wording. Finally, the SEC
    signals that it has no more comments, and the bank is
    comfortable that it can sell the offering and the prospectus is
    free of material misstatements.
        Then, and only then, will the offering price and the IPO
    commence.
        Now, if an IPO is like a traditional wedding, then an SPAC
    is more like a Vegas wedding. It just doesn't have the same
    level of preparation and vetting that a traditional IPO does.
    But here is the point: It is still a legal wedding. Whether it
    is Vegas or traditional, at the end of the day, you still have
    a lawfully married couple, and that is just like whether a
    company goes public via an SPAC or via a traditional IPO. At
    the end of the day, it is a publicly traded company.
        But these are the products of two very different processes.
    And it is misleading to try to equate the two. That is why I
    support prohibiting forward-looking statements in the De-SPAC,
    and extending Section 11 liability, underwriter liability, to
    include the De-SPAC disclosures. These reforms will help to
    equalize the process.
        Okay, that is my offbeat metaphor. Here is my analogy. As I
    described in my written testimony, SPACs used to allow a vote
    in the De-SPAC so that SPAC shareholders got a say in whether
    or not to make the acquisition. And if enough of them said they
    wanted their money back, 20 percent to be precise, then the
    deal wouldn't close. After all, the SPAC needed the money from
    the trust account to fund the acquisition.
        The rules changed, and I don't have time here to get into
    why, but they did, and now just a majority vote is required,
    except sometimes a vote isn't required at all. And what
    actually troubles me isn't the elimination of the vote; it is
    how meaningless the vote is when it does occur. And that is
    because SPACs allow shareholders to vote for the acquisition
    and still redeem their shares.
        As a SPAC shareholder, you can basically say, sure, I think
    we should acquire this company and take it public, but I don't
    want any part of it; give me my money back.
        And that takes me to my analogy. This is like a U.S.
    citizen voting in an election, say a congressional election,
    except this citizen is in the process of renouncing their
    citizenship while they are voting. They vote, but they have no
    interest in the outcome.
        I suggest that this decoupling of voting and economic
    interest is a real problem that you should consider.
        This concludes my remarks. Thank you again. I look forward
    to your questions.
        [The prepared statement of Ms. Rodrigues can be found on
    page 66 of the appendix.]
        Chairman Sherman. That is perhaps the most interesting
    presentation I have heard in a while.
        And Mr. Kupor, you are now recognized for 5 minutes.

    STATEMENT OF SCOTT KUPOR, MANAGING PARTNER, ANDREESSEN HOROWITZ

        Mr. Kupor. Thank you, Chairman Sherman, Ranking Member
    Huizenga, and members of the subcommittee. Thank you for the
    opportunity to talk about this very important topic.
        Before I give you some perspectives on potential reforms to
    consider in order to enhance capital formation and access to
    investment opportunities for all Americans, I will briefly
    summarize a few trends that haven't yet been touched on in this
    setting.
        First, I think we shouldn't lose sight of the fact that the
    raw number of IPOs has declined significantly. From 1980 to
    2000, we used to do about 300 IPOs per year. From 2001 to 2016,
    that number fell to about 108.
        Second, companies are staying private longer, roughly
    double the time period they used to, and therefore we have more
    mature and obviously higher valuation companies at the time of
    the IPO.
        Now, I think it is a reasonable question to ask, why should
    we care about any of this? First, the number of publicly listed
    companies in the U.S. has declined by 50 percent, which reduces
    competitiveness and overall consumer choice.
        Second, we know publicly traded companies drive employment
    growth and are the key to expanding geographic access to
    economic opportunity.
        And third, and I think very importantly, the vast majority
    of appreciation of high-worth companies is now accruing to
    institutions, pension funds, and wealthy individuals who can
    invest in the private markets, while retail investors are
    largely relegated to the public markets. This two-tiered market
    structure has significant implications for income and wealth
    inequality.
        There is some good news, which is we have seen some
    positive developments. The number of IPOs has been steadily
    increasing in the last few years, and no doubt, some of this is
    due to the work that many of you were instrumental in as part
    of the passage of the JOBS Act. So we appreciate that, and
    thank you for your efforts.
        We also now have choice, which is really important.
    Traditional IPOs now compete alongside direct listings and
    SPACs for quality issuers. And choice is good. It drives
    competition, it reduces expenses, and it enables more companies
    to seek capital to grow their business.
        However, to ensure that choice and competition thrive, and
    that all investors have access to growth opportunities, and
    that the U.S. continues to create new jobs and economic growth,
    and that the U.S. remains the best place for company formation
    and growth, there are a number of things that I believe
    legislators and regulators should consider.
        First of all, we should consider, how can we make it easier
    for companies to go public and to do so at earlier stages of
    maturity? Expanding the current JOBS Act emerging growth
    company (EGC) eligibility criteria for issuers from 5 years to
    10 years, as noted in the Helping Startups Continue to Grow
    Act, would help smaller-cap companies on-ramp into the public
    markets; and providing a transition period of one year for EGCs
    could trigger the large accelerated status when public flow
    exceeds $700 million for the first time, which would also help.
        Second, we have to be mindful of the fact that very low-
    volume small-cap stocks are especially vulnerable to short
    activity, and so this body should consider short positions
    closure similar to what exists for materially long positions to
    support innovative small capitalization companies.
        Another way to enhance liquidity would be to look at the
    opportunity for EGCs to opt out of unlisted trading privileges
    and therefore select the venues on which they want to trade
    their securities and consolidate trading volume.
        We ought to ensure that the choices exist for going public
    and that they engender fair competition, and enhance price
    discovery and broader retail participation.
        With respect to direct listings, one of the very important
    things for clarification is around the tracing rules and
    Section 11 liability. There is some uncertainty around this for
    selling shareholders, and this is potentially preventing direct
    listings from achieving their full potential.
        You have heard a lot already about SPACs, so I won't
    comment on that, but I think, Chairman Sherman, you noted the
    most important thing, which is that we should have a level
    playing field. Whatever this body determines, it should not be
    the case that there are different regulatory regimes for
    traditional IPOs relative to SPACs.
        While enhancing the public market, I think we also need to
    look at ways to enhance access to the private markets for non-
    institutional investors, obviously with appropriate oversight
    and investor suitability. While the SEC has taken some initial
    steps towards amending the credit investor definition, I think
    there are more ways that we should expand that to materially
    increase the number of individuals who qualify.
        We might also consider making it easier for retail
    investors to access private fund investments. Models such as
    that proposed by Representative Gonzalez could enhance retail
    access to private growth companies.
        And finally, there is another area of capital formation
    that hasn't been touched on here, which is around blockchain
    crypto industries. In many ways, a healthy blockchain ecosystem
    not only creates economic growth and technological development
    for the U.S., but it is also an opportunity for anyone who
    desires to be part of a project and benefit from the success of
    that endeavor. Unfortunately, to date, the SEC has not provided
    clear regulatory guidance for how tokens will be treated under
    existing regulatory rules.
        This is important, because we need to differentiate between
    good-faith technology entrepreneurs and get-rich-quick schemes,
    and make sure that this is very clear to others.
        I appreciate the opportunity to be here, and I look forward
    to your questions.
        [The prepared statement of Mr. Kupor can be found on page
    47 of the appendix.]
        Chairman Sherman. Thank you. I want to thank all of our
    witnesses for their presentations. I now recognize myself for 5
    minutes for questions.
        I am going to be interested in all of our witnesses
    presenting for the record their ideas on how we can reduce the
    cost of the companies' base because we need more companies to
    decide to go public for all of the reasons that have been
    outlined. And when I talk about cost, it is not just the
    commission that is shown but also underpricing or anything else
    that prevents the company from benefitting from all the dollars
    invested.
        I want to thank our last witness for recognizing that we
    ought to have the same liability system, whether you choose the
    SPAC route or the IPO route. Either we want to encourage
    companies to speculate about the future so that we at least get
    some information or some speculation and tell them they are
    free to do so without strict liability, or we want to tell all
    investors that you are protected and that any forward-facing
    statement will be subject to all of the protections of Section
    11 liability.
        I want to focus on the use of the IPO as a way, in effect,
    to bribe those with fiduciary duties. A public (inaudible)
    spends a lot of attention making sure that Members of Congress
    who owe a fiduciary duty to our constituents and the people
    aren't taking gifts. And yet, there is also the private sector,
    where every corporate officer owes a fiduciary duty to the
    corporation.
        We have charitable trusts; we have pension trusts. And it
    occurs to me that if I was in the investment banking business,
    I would love to do business with a $100 billion pension trust.
    And if I were to go into the trustee's office with $100,000 in
    a briefcase and say, ``I will be bringing you similar
    briefcases from time to time, no quid pro quo, I just like
    bringing you briefcases full of money,'' my guess is that I and
    the trustee would go to jail.
        But if instead, I call the trustee and say, ``Look, for
    your own account, you may want to invest in this hot IPO. I
    won't make it available to any but my best friends, and no quid
    pro quo, it is just that every month I am going to give you
    another IPO and you will make about $100,000 from the shares I
    allocate to you. And, oh, by the way, I would like to, in some
    other conversation, talk to you about your $100 billion fund
    and how we can be of service.''
        Professor Rodrigues, does that work? Is that legal?
        Ms. Rodrigues. It is a practice called IPO spinning, and it
    is not legal. The allocation of IPO shares from the syndicate
    to investors is a really opaque one. I was looking on--
        Chairman Sherman. If I can interrupt, Professor--
        Ms. Rodrigues. Yes, of course.
        Chairman Sherman. --it is kind of known that the
    underwriter can make this opportunity available to their best
    customers.
        Ms. Rodrigues. Yes.
        Chairman Sherman. And the best customer is the one with a
    $5 million account. But if you have a person who only has a
    $50,000 account, but they happen to be the trustee of a big
    charitable trust, can you treat them as one of your good
    customers?
        Ms. Rodrigues. I was looking on the Fidelity website, and
    it says, ``Customers who want to participate in an IPO offering
    are evaluated and ranked based on their assets and the revenue
    they generate for their brokerage firm.'' So, it is clearly a
    system where--
        Chairman Sherman. Okay, so that is a system whereby it is
    just what you generate for the firm. Would it be illegal to
    say, or what you generate for this firm through the accounts
    you control? I don't think Fidelity does it that way, and I
    would put it in writing if I did. But would it be illegal for
    them to say, you generate a lot of money for our firm because
    you are the trustee for the big trust?
        Ms. Rodrigues. I think it would. It certainly is an
    ethically questionable practice.
        Chairman Sherman. I look forward to trying to draft
    legislation to make sure that not only is it illegal to bring
    the fiduciary a briefcase with $100,000 in cash, it is also
    illegal to bring a fiduciary a chance to make $100,000 profit
    that is not available to the other customers of the brokerage.
        And with that, I will call on our next questioner, who, of
    course, is the ranking member of the subcommittee, Mr.
    Huizenga.
        Mr. Huizenga. Thank you, Mr. Chairman.
        First of all, I would like to ask unanimous consent to
    enter into the record an article written by Jennifer Schulp
    entitled, ``IPOs, SPACs, and Direct Listings, Oh My!''
        Chairman Sherman. Without objection, it is so ordered.
        Mr. Huizenga. Thank you.
        Mr. Kupor, today's hearing is focused on three primary
    pathways for going public: traditional IPOs; SPACs; and direct
    listings. Will you please discuss each of these three pathways
    to go public, and why one may be more attractive or
    advantageous over another, depending on a company's specific
    circumstances and needs at the time?
        Mr. Kupor. Yes, sure. Thank you very much for that
    question. In general, let me take them one by one. The promise
    of SPACs is that the process typically can be faster for
    companies because you already obviously have a public vehicle,
    and there is more certainty around the initial pricing because
    you pre-negotiate, obviously, through the merger and the De-
    SPAC agreement, as well as a PIPE, what the valuation is. That
    has been the promise.
        I would say so far, if you look at the data, that has
    generally been true, which is the timeframe has been faster. I
    will note, and I mentioned this in my written testimony, that
    of late, we have seen things slowing down at the SEC, just
    given the volume of SPACs, and that has created more
    uncertainty around market timing. We have also seen the PIPE
    market be very, very different in terms of being much less
    robust than it was even just a couple of months ago. So, that
    timing question kind of remains to be seen.
        Direct listing today is most relevant for companies that do
    not have to raise primary capital. Now, there is, as you know,
    the opportunity for companies to raise primary capital, but to
    date we have only seen secondary offerings. The direct listing
    tends to be most attractive for companies where they don't need
    access to primary capital, and in general, where there is
    enough what I would call awareness and brand of the company so
    that they can effectively be able to become public through a
    lesser marketing process.
        And the traditional IPO is, again, mostly today being taken
    advantage of by companies who need access to primary capital.
    That is really the main reason. It is obviously a heavier-
    weight process from a regulatory perspective. It certainly
    takes typically more time. But it does have that effect.
        I think what is important in this discussion, which I don't
    think we should lose sight of, is that this choice really
    matters because it is very important, and we are already seeing
    market responses to these choices being available.
        Mr. Huizenga. Expand on that. It is my understanding that
    you have helped bring a number of companies public?
        Mr. Kupor. Yes.
        Mr. Huizenga. So, talk a little bit about why do some of
    them want to go public, and why are some of them choosing to
    not go public? We talked about these unicorns. I always say if
    you have 240-some-odd unicorns, they are not unicorns; that is
    a herd. And there is a reason why they are doing that, and we
    can't seem to come to an agreement on both sides of the aisle
    as to these massive costs or what it is that is keeping that.
    But let me ask this last part, if you can touch on that.
        What kind of concerns do you have about the SEC or Congress
    making it more difficult or less attractive for companies to go
    public via these three pathways?
        Mr. Kupor. I have a lot of concerns, because I think it is
    really important for us to have more public companies.
        To give you just a few specific thoughts, one of the
    reasons that companies are staying private longer is because it
    is very difficult to be a small-cap company today in the public
    markets. You don't have research coverage. You tend not to have
    sales and training activity happening at the banks. You
    obviously do have regulatory burdens, but I would say the
    regulatory burdens are a little bit of an up-front cost often.
        But the real question is, once you are a public company,
    what is it like to be a public company? It can be very lonely
    to have a very low float, not well-followed stock.
        So some of the things, as I mentioned in my testimony, we
    can do is to think about how do you increase liquidity and
    volume of activity for small cap stocks in particular? I think
    that is one really important area.
        Second, we do want to have more public companies. One of
    the beauties of this country has been that the capital markets
    here are the envy of many across the world. And if you look,
    quite frankly, at what we have seen even in this horrible
    crisis of COVID, companies like Moderna--the reason we have
    vaccines is because companies like Moderna were able to both
    tap private capital, and then, quite frankly, tap public
    capital in a way that gave them access to tremendous research
    and development dollars that has now resulted in what is today
    a medical miracle, and there is a whole host of companies doing
    that.
        So, the most important thing that I would ask this body to
    think about is, before we introduce additional regulation, I
    think I would ask: first, does that regulation help or hinder
    access to capital markets for companies; and second, does it
    help or hinder access for retail investors to be able to
    actually access these opportunities?
        Mr. Huizenga. In my closing seconds, I know that these are
    the questions that we have. We need to pursue these and make
    sure that we remove those barriers, not put more up.
        With that, I yield back.
        Chairman Sherman. Thank you.
        I now recognize the Chair of our Full Committee, Chairwoman
    Waters.
        [pause]
        Chairman Sherman. Chairwoman Waters?
        [pause]
        Chairman Sherman. I don't know if Chairwoman Waters is
    available.
        I am going to go to Mr. Himes, and we will come back to
    Chairwoman Waters later.
        Mr. Himes. Thank you, Mr. Chairman. Thank you for holding
    the hearing.
        And thank you to our witnesses.
        We have been talking a lot about investor protection in the
    context of Robinhood. There is a dispiriting dialogue on this
    committee where the Republicans accuse the Democrats of wanting
    more regulation. When that dispiriting dialogue happens, we
    forget to focus on something that I think is particularly
    important in this realm, which is remarkable rent-seeking
    behavior. By rent-seeking, of course, I mean taking advantage
    of oligopolistic situations or information asymmetries or
    dislocations in markets to make money which you wouldn't
    otherwise make in a competitive scenario.
        I do think that an awful lot of investors--as Warren Buffet
    says, you don't know who is swimming naked until the tide goes
    out. The tide really hasn't gone out much in the last couple of
    years, and I do think that investors at some point are going to
    get a very expensive education in the fact that equity markets
    don't go to the sky, but I don't think that, absent shining a
    light on or considering regulatory behavior, we are going to
    see a decline in the amount of rent-seeking.
        It hasn't been mentioned, but for a long time I have been
    banging the drum on the fact that if you do an IPO between
    roughly $30 million and $150 million in proceeds, the mint
    market IPO, you always get to pay a 7 percent gross spread.
    That has never felt to me like competitive activity.
        There is another area that has been mentioned this morning,
    and I would like to highlight it for a minute or two, maybe
    starting with Mr. Deane, and that is IPO pricing. I used to do
    IPOs for many, many years, and we always used to celebrate when
    you were 10 times oversubscribed and priced the IPO at exactly
    half or one-third of what the value was on the second day of
    trading. It always struck me that that was a way to leave an
    immense amount of value, value that might have otherwise gone
    to the limited partners at Mr. Kupor's organization or to the
    company itself.
        So, Mr. Deane, talk to me a little bit about pricing
    behavior and who benefits when IPOs are underpriced. And I will
    open this up, once you are done, to anybody on the panel.
        Is there any long-term fundamental value in having a big
    IPO pop, long-term fundamental value? Mr. Deane?
        Mr. Deane. Thank you, Mr. Himes. Actually, Commissioner
    Jackson, Professor Jackson has often made the same points that
    you have about the 7 percent tax and competitiveness.
        I guess first, I would say that on the one hand, IPOs offer
    tremendous strengths in investor protections, including Section
    11 strict liability. On the other hand, they just don't seem to
    be perfect, and you have identified one of the big issues,
    which is, are the issuers leaving money on the table for the
    pop, the extra price that the shares trade at on the first day,
    and also a seemingly uniform 7-percent cost for the IPO?
        It does seem to me that some of these other things we are
    seeing, like SPACs and direct listings, maybe they are
    identifying some underlying problems, even if the SPACs
    themselves have flaws, even if they are not the perfect
    answers. Maybe we also have to ask, what are they telling us
    about the market that could be improved?
        So again, on the one hand, I think, yes, these are
    problems--in my opinion, these are problems with IPOs. The
    issuers are leaving money on the table. On the other hand, I
    would reiterate that they also come with some great strengths
    in investor protection.
        Mr. Himes. Thank you, Mr. Deane.
        Professor Rodrigues, I saw you nodding away there. Give me
    30 seconds, because I do have a question for Mr. Kupor. Give me
    30 seconds on the value of a very substantial IPO pop. Who gets
    that value?
        Ms. Rodrigues. The investors, right? The investors in that
    initial IPO get a huge bump. They get a huge rise in value on
    one day.
        Mr. Himes. To go with your metaphor, the investors are the
    guests at your wedding. Does every guest at that wedding get an
    equal chance to see that Day-1 doubling in value?
        Ms. Rodrigues. Let's beat this metaphor. So, no.
        Mr. Himes. Let me put it this way, some people weren't
    invited to the wedding, right?
        Ms. Rodrigues. Yes.
        Mr. Himes. Lots of people weren't invited to the wedding,
    and I will leave the witness here by saying usually those are
    the retail investors, right?
        Ms. Rodrigues. Right. So, the syndicate, the banks, get the
    value of having their customers be happy with them because they
    have gotten this initial first-day pop. Those are the winners,
    and then the losers are everybody who has to buy at the real
    market price.
        Mr. Himes. Which is generally retail investors investing a
    couple of weeks after you have seen that pop, and an awful lot
    of institutions have actually made an awful lot of money,
    correct?
        Ms. Rodrigues. That is exactly right.
        Mr. Himes. Thank you.
        Mr. Kupor, I'm sorry I don't have time to go to you. My
    time has expired, and I yield back.
        Chairman Sherman. I would point out the company might also
    be losing if they underprice the shares.
        Mrs. Wagner is now recognized for 5 minutes.
        Mrs. Wagner. Thank you, Mr. Chairman.
        Mr. Kupor, I will go to you. Would you agree that being a
    public company comes with additional disclosure and filing
    requirements that can often deter a private company from going
    public?
        Mr. Kupor. Yes, I think that is a fair statement.
        Mrs. Wagner. In your experience, and I know your experience
    is vast in this, from taking private companies public, what are
    some of the specific overly burdensome regulatory requirements,
    specifically filings and disclosures, that you believe make
    going public less attractive to a private company?
        Mr. Kupor. Yes, some of the things that were identified in
    the JOBS Act, the EGC status of being able to defer some of the
    Sarbanes-Oxley requirements, obviously, is very helpful and
    valuable, and those things can be burdensome, particularly for
    small-cap companies where you are really trading off regulatory
    dollars versus R&D dollars.
        There are other things like say on pay and other disclosure
    items that I think are challenging as well, particularly for
    some of these smaller cap companies. But as these companies get
    much larger, many of those things are much more manageable.
        Mrs. Wagner. There certainly is more work that this
    committee should be doing to make our public markets more
    attractive to increase the number of companies going public
    while also, very importantly, preserving investor protection.
        Mr. Kupor. Absolutely.
        Mrs. Wagner. One way to help increase IPOs is by
    simplifying the quarterly financial reporting burden on
    companies. In recent years, quarterly reporting requirements
    have grown in size and complexity, making it much more
    difficult for investors to determine, I think, relevant
    information, often leaving them overwhelmed and unable to make
    sound investment decisions.
        Furthermore, some companies believe that current reporting
    requirements have become a barrier to registering as a publicly
    traded company, as noted in a report by the IPO Task Force. The
    report, which was promoted by the JOBS Act that you mentioned
    of 2012, found that 92 percent of public company CEOs said that
    the administrative burden of public reporting was a significant
    challenge to completing an IPO and becoming a public company.
        It is time, past time, to move away from this one-size-
    fits-all approach to corporate disclosure and focus on
    transparency through new technologies and the flexibilities
    that I think new technologies have allowed us. The current
    disclosure rules were written before the advent of websites and
    social media and direct connection to investors that comes from
    the ubiquitous access of even just smart phones.
        I believe that you can reform disclosure requirements
    without depriving investors of any critical information that
    they may need or that they absolutely deserve. That is why I
    have introduced the Modernizing Disclosures for Investors Act,
    which would require the SEC to implement rules simplifying the
    quarterly reporting regime for SEC registrants. My legislation
    would allow issuers of securities traded on a national
    securities exchange to disclose quarterly financial information
    in a much more simplified manner and reduce some of the
    administrative costs that are deterring small and mid-sized
    companies from going public, and I would certainly urge my
    colleagues, especially here on the Capital Markets
    Subcommittee, to co-sponsor this legislation.
        Mr. Kupor, in the limited time I have left, is it
    beneficial for businesses to have multiple pathways of going
    public? And why?
        Mr. Kupor. Yes, it absolutely is, and the good news, as I
    mentioned in my testimony, is that we are seeing that now.
    There are some issues that many of the panelists have raised
    here around SPACs, and I think those are worthy of discussion.
    But the idea that we now have SPACs, we now have direct
    listings, and we have traditional IPOs really is helping from a
    market perspective. So even in some of the comments that were
    mentioned earlier by some of the Members here, things like IPO
    pricing has actually improved. If you are concerned about pops,
    those pops have actually gone down as a result of greater
    competition. We are getting better price discovery in these
    mechanisms.
        And so to me, the most important thing to preserve is
    competition and choice, and if we do that alongside, as you
    mentioned, Mrs. Wagner, investor protection, then I think we
    have a very good shot at remaining a very important capital
    market center.
        Mrs. Wagner. Great. Thank you very, very much. I appreciate
    it.
        Mr. Chairman, I yield back.
        Chairman Sherman. Thank you. I thank the witness for
    mentioning direct listing, and I am hoping that the questioning
    will focus more on that.
        And I now recognize the Chair of the Full Committee,
    Chairwoman Waters.
        Chairwoman Waters. Thank you very much, Mr. Chairman.
        Mr. Park, in a letter sent to the House Financial Services
    Committee, the Consumer Federation of America and Americans for
    Financial Reform noted that initial SPAC sponsors and hedge
    funds that are granted exclusive access to the early investor
    pool are granted, ``attractive investment returns on an
    essentially risk-free investment while avoiding the disclosure
    obligations and liability risk associated with the typical
    IPO.''
        The letter noted that these initial investors who sell or
    redeem their shares before the SPAC merger received, on
    average, an 11.6-percent rate of return, while the SPAC
    sponsors themselves, ``performed even better, earning a mean
    return of 32 percent in the 12-month period post-merger.''
        However, unsurprisingly, retail investors in the rest of
    the market appear to have a much different experience. Reports
    show that 90 percent of SPACs that announced this year are
    lagging the S&P 500 based on when they began trading. According
    to a Reuters analysis, ``The median performance of a SPAC from
    the day it announces what company it will merge with is 6
    percent.''
        Why is it that, once again, it appears that Wall Street and
    hedge funds are profiting while retail investors are left
    bearing the cost? A lot has been said about this already, but
    what I would really like, instead of answering that question, I
    would like to know, can you explain the protections and
    safeguards that are part of the traditional IPO process that
    are absolutely absent from the SPACs and how this may affect
    investors, particularly retail investors? What is it that
    investors have access to with the IPO that they don't have with
    the SPACs?
        Mr. Park. Thank you for that question, Chairwoman Waters. I
    would say, first off, that the key critical component that is
    missing is information. When investors are buying into these
    SPACs at the initial offering, they don't have any insight as
    to the financials, nor really necessarily what the business is
    going to be. So what they are doing is they are putting their
    faith in the sponsor to be able to find a good deal for them,
    or ultimately a good company with which to merge.
        Now, the problem here is that when it comes to the process
    where the SPAC has finally identified a company to merge with,
    there wouldn't be a vote in place. But what we find is that a
    lot of the initial investors are more interested in voting for
    the merger and then selling their shares because they know that
    they can still profit. They can do so because when you
    originally buy into a SPAC, as Mr. Deane was saying in his
    testimony, you get both the shares and you get these warrants.
    So, if you sell the shares and you still vote for the merger,
    you can still hold onto these warrants. What happens with the
    warrants is that if the stock were to go above $11.50, you can
    still make money, even though you don't still own the shares.
    But at the same time, you still voted for the merger.
        That conflict right there seems to be very odd. And keep in
    mind, too, with the compensation structure of these SPACs, as I
    was stating in my testimony, the sponsor, upon completing a
    deal, gets 20 percent. They are not evaluating necessarily on
    whether it is a good deal but whether it gets completed. They
    collect that, right?
        And there are also these other sets of investors that come
    in later called the PIPE investors. They have a different set
    of securities that they are investing in, and they have a
    different set of interests.
        So all throughout the whole SPAC process, everyone has
    their own set of incentives where they can make money.
        Chairwoman Waters. Okay. Let me just ask you before my time
    is up, Mr. Sherman has legislation dealing with precisely what
    we are discussing, making sure that more information is
    available, et cetera. Have you seen the legislation, and do you
    think it is what we need? Do we need to make it tougher? Do we
    need to add to it? Have you examined that legislation of Mr.
    Sherman's?
        Mr. Park. Yes, I have, Madam Chairwoman.
        Chairwoman Waters. What do you think?
        Mr. Park. It is certainly a step in the right direction. We
    are really going after these forward-looking projections that
    are being abused. That is the core component of the difference
    between an IPO and a SPAC. And on top of that, I will add the
    fact that there are reasons why Rule 419, which dictates blank
    check companies, was put into place, again, to protect
    investors. And we are asking the committee to also consider
    aligning SPACs with blank check company rules.
        Chairwoman Waters. Thank you, and I thank all of our
    witnesses who are here today. I yield back the balance of my
    time.
        Chairman Sherman. Thank you.
        I now recognize Mr. Hill.
        Mr. Hill. Thank you, Mr. Chairman, and I appreciate you
    holding this hearing. It is, of course, I think, no surprise to
    any of the Members that with interest rates at negative returns
    due to artificially keeping our interest rates too low and
    fueling a major fiscal injection into our economy, and the GDP
    at the growth rate that it is projected to be this year, and
    our bit companies announcing outstanding earnings, I think it
    is no surprise that over the last 5 months, we have
    concentrated on some of the excesses that we have seen out in
    the capital markets and people taking advantage of this
    unprecedented expansion in the capital markets due to, I think,
    the monetary policy.
        So with that, I do share Mr. Huizenga's goal that we need
    to be thinking long term, which is, how do we bring down that
    marginal cost of going public and staying public? Of course, we
    want that going public to be done in a fair and transparent
    way, but the real issue is that ongoing cost of being public
    and continuing to stay public, and try to lower that as much as
    we can consistent with our obligations to the investing public.
        So, I appreciate Ranking Member Huizenga raising that
    point. I think, long run, we need to get that ecosystem of both
    private company capital formation and public capital formation
    really looked at closely so that we encourage the U.S. to be
    the preeminent capital market.
        One thing I wanted to concentrate on in this hearing today
    is a bill that I have introduced with my friend, Mr. Schweikert
    of Arizona. I have introduced this bill during my time in
    Congress, and it has gotten a good report in the past in
    previous Congresses, and it speaks to expanding the access to
    investors by expanding the definition of an accredited investor
    to include professional expertise. We introduced that in the
    114th Congress, and it was passed favorably by the committee
    with strong bipartisan support, and received a 347-8 vote on
    the House Floor. It also received strong support in the
    committee during the 115th Congress, and a voice vote on the
    House Floor. But with the change in the Majority in the 116th
    Congress, this bill did not receive Floor consideration, and I
    hope, Mr. Chairman, we can do that.
        Mr. Kupor, I believe you have had a chance to review the
    legislation. You and I have talked about the importance of an
    accredited investor definition before. I wonder if you would
    reflect on what the Commission has done, and do you think the
    bill that Mr. Schweikert and I are proposing would aid
    investors that have the professional qualifications and
    knowledge to be a bigger participant in that accredited
    investor rule in a private placement?
        Mr. Kupor. Thank you, Mr. Hill. Yes, I have reviewed it,
    and I agree with your general proposition, which is in addition
    to figuring out how we have more companies going public, we
    also need to figure out how we actually increase private access
    participation from more investors, and I do think expanding the
    definition of accredited investors would be very helpful.
        One of the things that also could be considered is that in
    the crowdfunding legislation that was part of the JOBS Act,
    this Congress decided that there were certain dollar limits,
    for example, that they were comfortable with, even unaccredited
    investors investing in that market. So, another potential way
    to expand that access to investors in the private markets would
    be to adopt that language and give people, for example, a set
    number of dollars that even unaccredited investors could invest
    in the private markets.
        And then finally, I think we have discussed this as well,
    the other way to help increase private market access for
    unaccredited or even accredited investors under a new
    definition would be to look at expanding fund-level investment
    opportunities by giving people the benefit of professionally
    managed funds and revisiting, for example, the 3(c)(1)
    limitations on the number of accredited investors that are
    currently limited to 100 in those funds. Those I think would
    expand access, as well.
        Mr. Hill. That is helpful, because I think we want to do
    both. I think we want to make sure that our public investors,
    through 401(k)s and through their IRAs and through their
    company pension plans have more opportunities, as you have
    outlined, to invest in public companies. The number of public
    companies has been cut in half over my business career. But we
    also want to safely give them opportunity to participate in a
    private market if, in fact, as you argue, companies are staying
    private longer.
        Give me one thing that would lower that marginal cost of
    being public so that a small or mid-cap company might be
    inclined not to wait until it is huge to go public? What would
    be the top thing for you?
        Mr. Kupor. To me, I think the framework that this Congress
    laid out on the EGCs is the right framework. So if you could
    extend the time period under which those issuers could take
    advantage of the lighter regulatory environment for EGCs that
    exists today, I think that would be very meaningful.
        Mr. Hill. Good. Thank you so much.
        I yield back, Mr. Chairman.
        Chairman Sherman. Thank you.
        I now recognize Mr. Foster for 5 minutes.
        Mr. Foster. Thank you, Mr. Chairman. First, just two quick
    comments on the thing that we have been struggling with on this
    committee for quite some years, which is, who is going to pay
    for the research on a small-cap firm at the edge of going
    public? There is an asymmetry because wealthy private equity
    investors have the wherewithal to look into details. If they
    are talking about investing in a potential unicorn, they can
    look and ask if the intellectual property is sound and
    defensible in court. That is never going to be cheap or easy or
    transparent, but it is a real cost, and someone ought to do it
    at the point that the issue goes public, because the retail
    investor is not going to have the wherewithal to do that kind
    of due diligence.
        And a second general comment on it, I think it is very
    often pointed out that maybe one of the drivers of wealth
    inequality is the asymmetric access. I think it may actually be
    the other way around, that when you have an increasing
    concentration of wealth at the top, then those are the people
    who can realistically make private equity-type investments,
    which are the high-risk, high-reward investments. So the
    problem is at least feeding on itself, and we should look at it
    from both sides of that coin.
        Okay. I really appreciate the argument about the benefits
    of competition between IPOs, direct listings, and SPACs. That
    has to be part of a good solution to this. But the question I
    have is, do we know enough at this point to define what a safe,
    sound, and economically efficient SPAC looks like? In an effort
    to at least carve out a subset of SPACs that are really
    reasonable things to invest in, can we define those? This huge
    boom in SPAC listings has given us a lot of data. So, do we
    know enough?
        Does anyone want to grab that and try to say what are the
    essential things that we could do, and is it a wise thing to
    try to split off part of the SPAC market into well-regulated,
    responsibly-run entities?
        Let's start with weddings. How do you make weddings less
    likely to end in divorce?
        Ms. Rodrigues. I am studying SPACs right now. I am studying
    the current crop of SPACs right now. I will have better answers
    when that study is concluded. I will say that I think all of
    the witnesses are in agreement that we need to equalize the
    regulations so there isn't this regulatory arbitrage. It
    shouldn't be that it is easier, that the liability is
    different, or the disclosure level is different in one versus
    the other.
        So once that is done, I think a lot more disclosure--I will
    tell you, I am looking at these disclosures around the mergers
    right now, and they are incredibly complex. I can't really
    understand them, and this is what I am doing every day. They
    are opaque, and I am not exactly sure whose money is coming in
    and what their interests are. So, standardizing disclosure.
        And then, the final thing that I think would make SPACs
    safer is to make it a real vote, to have there be a real vote
    from the market so that if 50 percent--and this was the
    intention at the outset of the form--of the SPAC shareholders
    want their money back, then it is not a good acquisition and it
    shouldn't go forward. But if more than 50 percent are willing
    to stay in, that is a market test.
        Again, I am looking at the empirics, but that is where I am
    right now.
        Mr. Foster. Any other comments or suggestions?
        Mr. Kupor. Mr. Foster, if I could comment on your earlier
    comment, you mentioned two things that I think were very
    important. One was you mentioned who will pay for research for
    these small-cap companies, because it is very critical, and I
    do think fundamentally this goes back to, is there an economic
    incentive for this through making sure that these stocks trade
    and they have appropriate volume and liquidity. So, some of the
    suggestions that I brought up around UTB suspension, and also
    looking at the global research settlement and making sure that
    there aren't impediments to research covers that may still be
    stemming from that.
        And then, if I could just also comment on the second thing
    you mentioned, which is wealthy individuals being able to
    access private markets, I 100 percent agree with you that is a
    real issue, and I think that is why, again, this body should
    consider how you could improve retail access to the private
    markets in addition to all of the good work you are doing
    around IPOs. So, thank you for bringing this up.
        Mr. Foster. Does anyone else have a suggestion?
        Mr. Deane. I would just also speak--when you ask about how
    we can identify better SPACs, they are evolving. I talked
    earlier about the dilution, the misaligned incentives.
        I see the time is up. I would just say the current designs
    that they have are not locked in stone, and there could be
    changes. But I see my time is up.
        Mr. Foster. Thank you, and I was just suggesting that maybe
    we can carve out a set of responsibly run SPACs and let the
    market, let the Wild West try to develop more efficient models.
        My time is up, and I yield back.
        Chairman Sherman. I believe next in seniority order is Mr.
    Davidson.
        Mr. Davidson. I thank Chairman Sherman for this hearing. I
    really appreciate our witnesses highlighting this important
    topic, and I have enjoyed the discussion thus far.
        Ms. Rodrigues, in your testimony you stated that you do not
    believe there is anything fundamentally wrong with the current
    IPO process. But in Mr. Kupor's testimony, he eloquently
    pointed out that small IPOs, companies with less than $50
    million in annual revenue at the time of their IPO, have
    declined from more than 50 percent of all IPOs in the 1980 to
    2000 timeframe, to about 25 percent of IPOs over the past 15
    years. Additionally, he points out that companies are trying to
    stay private much longer. The median time to IPO from founding
    hovered around 6\1/2\ years from 1980 to 2000, but now
    companies are staying private for 10 years or more.
        Ms. Rodrigues, when you look at these facts, how can you
    say that there is nothing fundamentally wrong with the IPO
    process?
        Ms. Rodrigues. Thank you for that question. I will say,
    one, I want to be more precise. I think there is nothing wrong
    with the basic IPO process from a regulatory perspective. I
    think that the move to direct listings and SPACs is, in part, a
    function of companies' dissatisfaction with phenomenon like
    underpricing and the fact that there is a lot of uncertainty
    surrounding that traditional system, wanting to get more
    control over it, which they can get from a direct listing or
    from a SPAC.
        I would echo what Mr. Kupor said about how it is pretty
    unattractive to be a small-cap publicly traded company, that
    there isn't that coverage, there isn't the trading volume. So,
    that is one explanation.
        Another explanation is it is pretty darn easy to be
    private. There has been so much money sloshing around private
    equity firms. Venture capital firms are throwing money at these
    private companies--
        Mr. Davidson. Thank you for that reference to the private
    market. I think that would be a great hearing, as well.
        When you talk about public markets, there are really
    important things. Mr. Deane highlighted some good topics on
    dilution. My colleague, Mr. Hill, who has a bill that I am a
    co-sponsor of, highlighted one of the barriers to participation
    in our markets with accredited investor rules. Frankly, Mr.
    Himes did a nice job talking about reference price, which you
    alluded to here, all a big deal in terms of affecting value for
    not just the companies that launch but the people who invest in
    them, and so broadly, access to capital.
        But when you look at the things that are broken, the SPAC
    market and the volatility in it, is coming in after the IPO
    market. If you look back a few years ago, the initial corn
    offering market was in a kind of meltdown, and you saw some
    fraud.
        Mr. Kupor, I appreciate you for highlighting that issue,
    because it is heavily dominated in the crypto space. For the
    structure of our market, the SEC failed to provide regulatory
    clarity, and that has kept your average investor from being
    able to hold these in retirement accounts. What has that meant
    for people, and what needs to happen in that space?
        Mr. Kupor. Mr. Davidson, as you mentioned, I think this is
    another example where I think we just have very significant
    disparity between, let's call it institutional or high-net-
    worth individuals versus traditional retail investors, which is
    for the former category people can afford to spend a lot of
    money on legal counsel and understand exactly what is the
    nature of these tokens, are they securities, are they not, what
    the SEC is likely to do. But for ordinary folks without that
    clarity from the SEC, it really does mean that they are missing
    out on what at least we do believe is a really important growth
    opportunity.
        Mr. Davidson. Yes, thanks for that. For example, because of
    that lack of regulatory clarity, there is no Bitcoin exchange-
    traded fund (ETF), though many have tried and are lingering in
    never-never land with some hope that there will be some
    clarity. Maybe with new Chairman Gensler, we will get there.
    But you can get a SPAC ETF. You can still buy those.
        All of these highlight voids in the fundamental IPO market,
    and I really think that the market is trying to tell us the IPO
    market is not healthy, it is not fundamentally sound, it is
    broken, and everyone is trying to find a path around that.
        Lastly, I want to thank Ranking Member McHenry for his bill
    on Regulation Crowdfunding (Reg CF). I think just the promise
    that has offered for crowdfunding should be looked at as a
    model, though we could expand to provide broader access and
    more democratic access to capital.
        The last thing--and I am running low on time--is direct
    listings. I think Coinbase's direct listing highlights that it
    can be a viable model and all important areas, and I thank
    everyone for helping us get to this point in the hearing, and I
    yield back.
        Chairman Sherman. Okay. We have five more questioners. We
    will be done in less than 30 minutes, unless there is a general
    consensus to do a second round of 2\1/2\ minutes per Member. So
    if you have a view on that, please text me.
        Mr. Vargas is now recognized for 5 minutes.
        Mr. Vargas. Thank you very much, Mr. Chairman, for holding
    this hearing. And I especially want to thank the witnesses
    today. I think the most important question that came up today
    was, what about weddings and marriages?
        I am going to give you the answer right now, very clearly.
    It doesn't matter if it is a wedding in Vegas or a traditional
    wedding. If you want to make the marriage work, if you love
    your spouse, you don't cheat on them. I have been married for
    30 years; it works great, okay? There. That one has been asked
    and answered.
        So now, we move to this. The way that traditionally we hold
    a hearing is that whatever party is in power has two or three
    or four witnesses, and then the party in the Minority has one
    witness. Normally, they don't agree on things. That is why you
    have the disparity, which is fine.
        But I think we may have found something that everyone
    agrees on today, and that is why I want to pursue this line of
    questioning, and that is the issue of liability. I think Mr.
    Kupor said we should have the same liability system for all of
    these.
        Section 11, as I understand it, is a strict liability
    regime. Issuers are made strictly liable for registration
    statements that contain an untrue statement of a material fact,
    or that they omit one. So, you don't have to prove causation or
    reliance on the misstatements. It is a strict liability statute
    and regime.
        Now, did I understand correctly, Mr. Kupor, that you agree
    that an IPO should have the same--that the playing field should
    be the same for a SPAC and for an IPO, or am I misstating what
    you said?
        Mr. Kupor. No, Mr. Vargas. Yes, I agree that this Congress
    should determine--I am not taking a position on what the
    appropriate liability regime should be, but I absolutely agree
    with your position that we should have a level playing field
    and we should not have regulatory arbitrage that determines
    which path makes most sense for companies.
        Mr. Vargas. To me, that seems like a very big deal. I am
    going to ask Professor Rodrigues, that seems to me a huge issue
    with these forward-looking statements, do you agree?
        Ms. Rodrigues. Yes, absolutely.
        Mr. Vargas. Could you expound on that?
        Ms. Rodrigues. Sure. So, information is valuable. That is
    why issuers disclose it on their own, and that is why we
    require disclosure under the securities laws. If you are
    interested in a company, you are interested in what happened in
    the past, but you are probably as or more interested in what
    should happen in the future, what the CEO and the CFO think the
    prospects of the business are. That is why Congress, in 1995,
    said, okay, under the Private Securities Litigation Reform Act,
    you have a safe harbor and we can protect you if you want to
    say, hey, here is what we think is going to happen down the
    road.
        But that is not for IPOs, because IPOs are a special world
    where the company is first coming out into the public markets,
    and so we have really strict liability standards. We want to
    make sure that everything there is accurate, that there isn't
    any material misstatement.
        Mr. Vargas. And do SPACs have that today?
        Ms. Rodrigues. They do, because when they go public they
    are just an empty shell. What you really care about is when
    they find that private target and they are acquiring it. That
    acquisition is effectively an IPO. But in that, the Vegas
    wedding IPO, then they get to say whatever they want about the
    company's prospects in a way that a traditional IPO can't, and
    that is just not fair, right? There is a different standard
    depending on which way you take to--
        Mr. Vargas. I agree with that.
        Does anyone disagree with that?
        Mr. Park, do you disagree with that?
        Mr. Park. No, I don't. In fact, I think this whole notion
    of forward-looking statements and the accuracy of that is very
    important, and the way that we know that is because if we look
    back most recently to COVID, actually, the strength and the
    certainty of these forward-looking statements are very
    important to make sure that not only do investors have
    protections, but also other business owners who rely on what
    some of these other businesses are doing.
        For example, the SEC, back in April 2020, had to give
    guidance to a lot of executives on how to handle a very
    unprecedented and uncertain time as it pertains to how COVID
    affects their business models, and that shows how strong the
    protections are for public companies right now.
        If you also think about this from another point of view, if
    I am a travel agency and I need to look at airlines and hotels
    and what they are doing, I need to trust their forward-looking
    statements as well.
        Mr. Vargas. Yes. My time has expired, but I am glad that we
    may have agreed on something here.
        Thank you. I yield back.
        Chairman Sherman. Thank you. And I would add one more thing
    for a happy marriage: Do not undervalue your spouse, or
    underprice in this world.
        The gentleman from Ohio, Mr. Gonzalez, is now recognized
    for 5 minutes.
        Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, for holding
    today's hearing, and thank you to our witnesses for being with
    us today, and thank you to Mr. Vargas for preaching a little
    bit; I enjoyed that.
        In any event, over the last year we have seen significant
    changes in the way that retail investors of all stripes are
    engaged in our capital market system, and personally, I am
    encouraged to see more and more retail investors invested in
    the market in an effort to better their lives and build a more
    prosperous future for their families.
        Of course, that is not without risk. That is how markets
    work. And in this case I do think it is important that we take
    a step back and recognize that whether we are talking about the
    crypto or NFT markets or SPACs, the proliferation of riskier
    investments has been driven by a zero-interest-rate world,
    which has resulted in a fully valued stock market and investors
    moving further and further out on the risk curve. I don't think
    we have mentioned that, but I do think it is important to keep
    that in mind as we debate what is happening in our markets.
        So rather than doing what I fear my colleagues on the other
    side are doing, which is trying to turn off options at times
    for retail investors to put their capital to work and to make
    it harder for companies to raise capital, I do think we need to
    recognize the uniqueness of the moment and try to find ways to
    improve the efficiency and the strength of our capital markets
    for all participants.
        Mr. Kupor, in your testimony you talk about the two-tiered
    capital market structure where, because more companies are
    willing to go public later, a disproportionate amount of value
    is created in the private markets, which structurally lock out
    retail investors. I completely agree. You also correctly point
    out that having multiple avenues to go public is a good thing
    from a competitive standpoint.
        And we haven't talked much about direct listings, and I
    want to hear from you from the perspective of the entrepreneur
    or the founder. When it comes to a direct listing, what is the
    benefit specifically of a company looking at that as a vehicle
    to go public? And if you could also touch on the projections
    that are made in that process, because I see projections when I
    look at the YouTube videos and things like that, but I would
    love for you to just sound off on that, if you could.
        Mr. Kupor. Sure. Thank you, Mr. Gonzalez.
        So, yes, with respect to direct listings, as mentioned
    before, typically the companies that are choosing this route
    are ones that don't have a need for primary capital. So they
    are able, again, to avoid the dilution, quite frankly, that you
    would have in the IPO process, and that is very positive.
        The second benefit to direct listings is they utilize what
    I would call more of an auction mechanism to actually try to
    derive the opening price for the stock. We see a little bit of
    advancement here in the traditional IPO markets. There are some
    banks trying to do a modified auction process, but the kind of
    process that goes into a direct listing is still a much more
    robust process. Therefore, for people who are concerned about
    potential underpricing or things of that sort, there is
    probably a closer market price and a better way to discern that
    market price that happens there.
        So, it has been very positive. As I said, the reality is we
    have had very few. We have had about six of them in the
    technology market, so I think there is a lot of work to be done
    there. But it also has the positive effect, as you mentioned,
    from a competitive perspective. It has forced traditional
    underwriters and IPOs to kind of tighten their pricing windows,
    which I think has been positive, and it has forced people to
    think about things like lockups, for example, which can create
    distortions based on supply and demand in the market.
        I think making sure direct listings stay as a viable option
    will also actually address some of the challenges that many of
    you have mentioned around traditional IPOs.
        Mr. Gonzalez of Ohio. Thank you.
        Mr. Deane, one thing that you talked a lot about on the
    SPAC side with respect to disclosures and subsequently
    incentive alignment--and I think that is right in many ways. I
    am personally somebody who wants to be able to take risk. I
    just want those things disclosed so I can understand them. And
    more or less, I do think you can figure out what the promote
    structure is in a SPAC if you go through the listings. Yes, it
    is hard, but I think you can do it.
        One thing you didn't touch on, which sort of surprised me,
    is with respect to the syndication of the risk capital at the
    pre-IPO stage, if you will. So in essence, if you are
    purchasing pre-merger shares in a SPAC, you are really just
    buying a sponsor. But is it possible today for someone to know
    who owns the sponsor, or can the sponsor syndicate the risk
    capital such that you don't actually know?
        Mr. Deane. To be honest, I am not certain what your
    question is about. You are asking who actually stands behind
    the sponsor?
        Mr. Gonzalez of Ohio. Yes. The sponsor has to put up risk
    capital. Can the sponsor syndicate that, sell it off, and not
    disclose it?
        Mr. Deane. In the pre-IPO, I would question that. But to be
    honest, I would like to look at it further and get back to you.
        Mr. Gonzalez of Ohio. Sure.
        Mr. Kupor, do you know how to answer that?
        Mr. Kupor. I believe that is correct.
        Mr. Gonzalez of Ohio. So, the answer is yes. I think that
    is another area where I think from a disclosure standpoint we
    probably need to do a little bit better work.
        I have run out of time, but thanks again for the hearing.
    With that, I yield back, and thanks for the marriage advice.
        Chairman Sherman. Thank you.
        Good news for our witnesses. Our friends on the other side
    of the aisle did not want an abbreviated second round, so we
    will be done in around 20 or 25 minutes. That puts a special
    onus on the remaining questioners to ask brilliant and incisive
    questions, which is why I now recognize Mr. San Nicolas.
        Mr. San Nicolas. Thank you, Mr. Chairman, for the
    introduction. That is very kind of you.
        I wanted to address my question to Professor Rodrigues. As
    I am listening to this whole conversation about SPACs, I am
    brought back to the old days when I was in the investment
    industry and we had to learn about the different types of
    management companies, and I wanted to see if you could really
    help us to understand the difference between a SPAC as we are
    discussing it today, and a closed end equity fund that would
    typically be somewhat similar in its function of pulling
    together investors and making specific investments or
    acquisitions.
        Ms. Rodrigues. Well, I don't know that I can. I think a
    closed end equity--if you could describe a closed end equity
    fund a little more to me, then I can probably take it from
    there. But thank you for the question very much.
        Mr. San Nicolas. I just wanted to put it out there. Maybe
    Mr. Deane can elaborate, perhaps, on what the differences are
    between a closed end equity fund and a SPAC.
        Mr. Deane. Again, I am not--as I understand it, there are
    closed end mutual funds. I am not quite sure. But if that is
    what you are asking, they would own assets. They would buy--
    they would invest in different things. It would be closed end,
    but it would still be--other than that, it would be like a
    mutual fund, and it would have diversity. It would probably
    have a diversified portfolio, and you could look at it and see
    what those assets are.
        Now, in a SPAC, it is different because first, at the very
    beginning of the IPO, the SPAC is just saying, we are out
    there, give us some money, and we are going to go find a great
    deal, trust us. There are no assets other than the money that
    comes in.
        And a second point, they do find a merger market, but at
    that point it is just one company, a private company that they
    are taking public. It is not a diversified portfolio. It is
    just a risk on one company.
        That is really the best I can do to respond.
        Mr. San Nicolas. When a SPAC is being formed, do the
    investors in the SPAC know what company is being targeted for
    acquisition?
        Mr. Deane. No, Congressman, they do not. A SPAC might say,
    we are going to look at EV, electric vehicles, or we are going
    to do something in the tech space or biotechnology. So, you
    might have an idea of what sector it is. But if the question is
    do they identify a specific company that they plan to take
    public, the answer is no.
        Mr. San Nicolas. So why would an investor invest in a SPAC
    prior to its IPO if they have no idea what they are investing
    in?
        Mr. Deane. That is a great question.
        Mr. San Nicolas. The reason I am asking is that there are
    really only one of two answers. Either, one, they do know what
    they are going to invest in, and then we are talking about some
    serious potential insider trading; or they don't know what they
    are going to invest in, but they are investing because of the
    management team of the company, but then we are talking about
    open-ended or closed-ended management companies that really
    should be under the regulation of the Investment Company Act of
    1940.
        So, I am sitting back and I am looking at SPACs, and it
    doesn't really make any sense to me as to why they would be
    treated as a typical IPO, a typical company that is being
    formed under the equity markets. They really sound like they
    are forming under the status of management companies and trying
    to skirt around the Investment Company Act of 1940; or two,
    they actually know what they want to invest in, in advance, and
    then we are talking about insider trading and a bunch of
    investors knowing what they are going to go after and kind of
    structuring the entire acquisition in a manner that is going to
    guarantee that all the players are going to make a certain
    amount of margin at the expense of retail investors.
        Professor Rodrigues, do you have anything that you perhaps
    would like to add to that analysis?
        Ms. Rodrigues. Yes, that was very helpful. Thank you to Mr.
    Deane and to you.
        The idea, in theory, is that it is a bet on management,
    that the management either has this experience in private
    equity that makes it able to identify some attractive target or
    it has public company operating experience that can help
    shepherd the company once it is identified.
        I will say that in the study I am doing right now,
    sometimes there are multiple targets that wind up being
    acquired. It isn't just one company. It is two or even three
    that are sometimes related and sometimes not.
        Mr. San Nicolas. And just to close, because my time has
    expired, Mr. Chairman, perhaps we need to regulate SPACs as
    management companies and not as equity IPOs.
        Thank you, Mr. Chairman. I yield back.
        Chairman Sherman. The Chair will advise Members that if I
    cannot see your face on screen, I cannot call on you when your
    turn arrives. But Mr. Emmer's face is definitely on screen and
    he is now recognized.
        Mr. Emmer. Thank you, Mr. Chairman.
        Participation in the IPO process has significantly slowed
    over several years. The number of IPOs declined more than 63
    percent in the 1990s to the 2000s, and then it stayed flat up
    until 2020.
        What is interesting is that at the same time, the United
    States has doubled the regulatory compliance costs a business
    has to take on for going public in a traditional IPO. It costs,
    on average, $2.5 million for a company to achieve initial
    regulatory compliance for going public, and an additional $1.5
    million annually thereafter. These are the SEC estimates.
        This is just not feasible for our small and emerging growth
    companies. These businesses are turning to more streamlined
    approaches to access capital like SPACs, direct listings, or
    even staying private. An overly burdensome IPO process hurts
    American consumers by eliminating their access to the markets
    and ensuring that only institutional investors can invest in
    these innovative emerging growth companies. It is critical that
    our capital market structure meets the needs of American
    companies regardless of their size or type.
        I am excited that we are going to reintroduce my bill, the
    Main Street Growth Act, which passed out of the House in the
    115th Congress, and passed out of this committee unanimously
    thanks to my colleagues on the other side of the aisle, many of
    whom are present with us today. This bill will allow the SEC to
    provide for the creation of venture exchanges. These
    specialized securities exchanges offer streamlined regulation
    and strong investor protections which will help small and
    emerging growth companies gain access to capital, create jobs,
    and help the economy rebound.
        Mr. Kupor, in your testimony you note that fewer small
    companies than ever are going public. But the good news for
    capital formation is that there are now multiple choices for
    companies that are considering going public--traditional IPOs,
    direct listings, and SPACs. Given the current landscape and the
    importance of having new companies join the marketplace, can
    the creation of venture exchanges help incentivize more
    emerging growth companies to go public?
        Mr. Kupor. Thank you, Mr. Emmer. I appreciate that. You and
    I have discussed this a little bit before.
        The concept of a venture exchange, I think is a very good
    concept, the basic idea being how can we address from a
    regulatory perspective, and then, importantly, from an after-
    market perspective things like liquidity and volume of trading
    that impacts small-cap stocks. So, the concept makes a lot of
    sense to me. I think the devil is in the details, as you and I
    have discussed.
        We want to make sure that we don't create kind of adverse
    selection risks associated with companies that might choose to
    list on a venture exchange relative to the traditional market,
    and again these are issues that you and I have talked about
    before. Some of the experience, for example, in the A markets
    in the U.K. have exposed some of those challenges. So making
    sure that the venture exchanges don't create that and that
    there is a seamless opportunity for companies to effectively
    graduate over time from a venture exchange into a more
    traditional national market exchange, as we have today, I think
    would be important to ensure high-quality issuances in those
    markets.
        Mr. Emmer. Just following up on that, can you elaborate a
    little bit more and speak to the importance of facilitating a
    competitive marketplace where small and medium-sized companies
    can be attractive to investors, since that marketplace is
    currently dominated by larger-cap companies?
        Mr. Kupor. Yes, it is really important, and I think the
    issue goes back to something one of your colleagues mentioned,
    which is that we have taken a bit of a one-size-fits-all
    approach to regulating companies. Many things that have worked
    well for large companies just don't work well for small
    companies, so we really need to do that.
        And look, to me, competition is great. I mentioned before
    that we are already seeing changes in how underwriters are
    doing pricings in traditional IPOs as a result of direct
    listings and SPACs being viable alternatives. We are seeing
    reforms around how people think about lockups, which also, as I
    mentioned, create strange trading dynamics in these companies.
    And you would expect that also may impact pricing, quite
    frankly, and the fee structure, which I know many people have
    talked about on this committee.
        So, I think the last thing we want to do is restrict
    choice. Clearly, we should make sure that things are
    regulatory-compliant and are available to others. But if we do
    something that kind of constricts the choice for issuers, I
    think we will lose on a lot of these great opportunities.
        Mr. Emmer. I appreciate that.
        Mr. Chairman, I yield back the balance of my time.
        Chairman Sherman. Thank you.
        I now recognize the new Vice Chair of our subcommittee, who
    brings tremendous business and financial experience to that
    role, for his first questions as Vice Chair, Mr. Casten.
        Mr. Casten. Thank you so much, Mr. Chairman. I am looking
    forward to the responsibilities you will be assigning me.
        It strikes me that on this subcommittee, we talk about
    trends in capital markets as if the investors were static and
    they only reflect changes in companies' access to capital. We
    all know that is not true. In the last 3 decades, we have seen
    transformative changes in the institutional sector, the pension
    funds, the endowments, which used to have all of their capital
    in Treasuries and utility stocks and have now created these
    whole investor classes, alternative investment classes and real
    estate investment trusts (REITs) and private equity and
    venture, and that is awesome. It has completely changed the
    market. It has created opportunities where companies, like the
    company I used to run, that were really too small to go after
    private markets, still had access to capital, and that is a
    good thing.
        It has also created an entirely new class of actors in our
    financial markets. They used to be owners of wealth and people
    who needed wealth, and now we have custodians of wealth in the
    middle, and some of them have done a great job. Some of them
    haven't, but it has changed the dynamics. There is nothing
    wrong with that.
        I sort of view SPACs and PIPEs as things that live in that
    continuum, right? Because every company that has a single,
    large, sophisticated investor would love to still have the
    access to capital with the less sophisticated investor. It
    makes your life easier as a manager. And I think the challenge
    of regulation is always trying to figure out how to ensure that
    access to capital survives, while at the same time, not taking
    advantage of unsophisticated investors.
        So my first question for you, Mr. Park, is you mentioned
    that the challenge with SPACs is that they are putting their
    trust in a sponsor rather than the company. Isn't that
    essentially the same thing that happens when investors invest
    in a private equity fund? Is there any fundamental difference
    there?
        Mr. Park. Representative Casten, the major difference
    between the SPAC and a private equity fund is that, again, with
    the private equity fund there is going to be a debt investment
    where the investor has some security that they have, versus in
    a SPAC they are the junior most if there is other debt type of
    investor there.
        I should also point out that there are some significant
    differences between how SPACs work and also some of these
    private equity funds. Again, part of the business model for a
    lot of these SPACs is that you need a lot of marketing and a
    lot of hype around them in order to attract investors. That is
    why you see the SEC warning a number of investors, don't just
    buy a SPAC just because they hire a celebrity to go and promote
    them, right? That is a major concern there.
        Mr. Casten. Sure, and I take your point. I am really just
    talking about the equity investors in both, that if you view it
    as along a continuum, the equity investor is taking a bet on
    the sponsor in both cases. I take your point, and I don't mean
    to criticize. I just want to run through some other questions.
        Mr. Deane, you mentioned in your testimony that there is
    pressure to deploy capital in a SPAC before the window closes.
    Is that fundamentally different from a private equity fund that
    is nearing the end of its lockup period, that has committed
    capital that is still undeployed?
        Mr. Deane. I would say it is the same, except that maybe a
    private equity (PE) firm might have more years. Maybe it will
    have 7 years, or 5 years to do it. The SPAC is usually either
    18 months or 2 years.
        The other difference, if I could, is that a PE firm will
    often have a diversity of targets, a diverse portfolio, whereas
    the SPAC is usually, if not always, one firm, one target.
        Mr. Casten. Okay. And I want to be clear that I am in no
    way meaning my questions to be leading and saying one way or
    the other. But we have all seen the statistics that the
    overwhelming majority of returns in the alternative asset class
    base is driven by a tiny number of firms, and there are
    actually a lot of people who are thought of as sophisticated
    investors, who are losing their shirt on that side.
        I guess I will start with you, Mr. Deane, because I still
    have you on the screen. But capital markets are going to
    continue to evolve. They will evolve in response to what we do
    from a regulatory perspective. And if the issues are the
    compensation structure and the incentives, let's make sure we
    think about where those guardrails should be. If the issue is
    that there is a specific class of investment that we want to
    prohibit, okay, then let's do that. I just want to make sure
    that in thinking about the compensation structure of SPACs, the
    lockup period, the deployment, I want to make sure we are
    focusing on the right issues.
        So if you were looking at the broader space of money going
    into somewhat less conventional structures, are there
    guardrails that cross that whole continuum we should be
    thinking about, or is this just a SPAC issue?
        And I see I am out of time, so perhaps we will have to take
    that offline, but I would appreciate any of your thoughts in
    writing after the hearing is over on that question.
        Mr. Deane. Saved by the bell. But I would be happy to
    respond afterwards.
        Mr. Casten. Thank you.
        Chairman Sherman. We look forward to your written response
    to that question, and we all look forward to the questions of
    Mr. Steil, who is now recognized for 5 minutes.
        Mr. Steil. Thank you. I appreciate you holding this
    hearing, Mr. Chairman.
        Mr. Kupor, as you know, most venture startups are emerging
    growth companies. Can you walk us through your analysis of some
    of the benefits of EGC status?
        Mr. Kupor. Yes. Thank you, Mr. Steil. There are several
    things.
        Number one, which we have now extended more broadly, is the
    idea of confidential filings and the idea of test-the-waters
    are very, very important, because this really gives the
    companies an opportunity to talk to investors before they have
    to kind of make a final determination, quite frankly, of what
    the right path is, and it really is beneficial.
        Number two is, as we have talked about before, the idea of
    reduced regulatory burdens, the ability to have different
    Sarbanes-Oxley-related requirements and other things that are
    generally geared towards smaller companies. So, effectively,
    think of it as an on-ramp to becoming a public company. If we
    make that on-ramp a little bit easier, we are more likely to
    see public companies go out.
        Mr. Steil. And maybe you could comment about bringing more
    companies into the public markets, how that EGC structure
    assists companies in accessing capital? Can you comment on
    that?
        Mr. Kupor. Yes. At the end of the day, what it means is
    that if you are an investor, it just means that there is more
    money that the company is going to have access to on their
    balance sheet that can go towards research and development or
    other important initiatives they are doing, versus that amount
    of money being diverted towards regulatory expenses. It has
    been very beneficial--particularly, you see this in the biotech
    market, which has been very robust over the last several years.
    That tends to be a bit of a smaller-cap market, at least
    relative to the IT markets, and I think those companies have
    substantially benefitted from the ability to deploy capital in
    the most promising areas versus on regulatory structure.
        Mr. Steil. We are talking about how companies enter. How
    about companies that are already in EGC status, and
    particularly those that have either already lapsed through the
    5 years or that are approaching that lapse, what are the
    implications of losing EGC status for some of those key
    companies?
        Mr. Kupor. Yes. I think it is really the same. If we could
    extend that time period from 5 years to 10 years, or whatever
    this body thinks is appropriate, I think it has the same
    beneficial impact. Think of it as you have a fixed pot of money
    on your balance sheet, and the question is, where are you
    deploying those resources? The more we can divert those towards
    productive research and development-related expenses, I think
    that is beneficial for the economy, and it is beneficial for
    those issuers, as well.
        Mr. Steil. So in your view, if we extend the EGC status,
    there are going to be benefits not only to the companies but
    really to the R&D ecosystem, to employees, and all the way down
    that entire pipeline for those EGC companies and their
    stakeholders?
        Mr. Kupor. Yes, I do believe that, Mr. Steil.
        Mr. Steil. I appreciate it. And I appreciate you joining us
    today.
        And I appreciate you, Mr. Chairman, for holding today's
    hearing. With that, I will yield back.
        Chairman Sherman. Thank you.
        We now turn to the distinguished gentleman from Missouri,
    Mr. Cleaver, who is also the Chair of our Housing, Community
    Development, and Insurance Subcommittee, for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        I just have one question. I think most of the issues that I
    was concerned about have been raised by the members of the
    intelligentsia of your committee.
        What I wanted to just say is that I am amazed by the
    notoriety of our celebrity culture in this country. It is just
    absolutely amazing. Shaq played basketball, and now he is in
    the middle of giving financial advice to folks. He made a lot
    of money, so maybe he learned a lot about money.
        But back in March, the SEC issued an investor alert
    regarding celebrity involvement in SPACs. In the notice, the
    SEC warned individuals never to invest in a SPAC based solely
    on a celebrity's involvement.
        I don't know if that will stop anybody from doing it, but,
    Mr. Park, would you agree that this trend reinforces the fact
    that SPACs generally represent a very speculative investment?
        Mr. Park. Absolutely, Congressman Cleaver, and that is a
    great point that you raise. What I find really noteworthy about
    how SPAC sponsors are relying on celebrities to promote
    themselves is that they are implicitly saying that by doing so,
    they think that they can attract retail investors to invest in
    their SPACs just merely by the association alone rather than on
    their business model, their financial statements, or really
    looking at it in any kind of substantive way.
        What is kind of notable about this too is that hiring
    celebrities really isn't a new strategy. We have seen
    celebrities being used time and time again to promote different
    types of financial products, whether it is reverse mortgages,
    annuities, and lately different cryptocurrencies too, right?
    So, I think that is very noteworthy.
        What I would also point out is that sometimes the issuers
    can also have a bit of a celebrity status of their own, and
    that can also lead to some poor investments that way.
        I think that for SPACs, the perfect type of investment that
    goes wrong is that a company is very heavily hyped, you have a
    compelling narrative around the founder, and it also really
    appeals to our desires for a product or a company that will
    really improve the world. But the problem is that sometimes we
    can find that it is fraud. The example that comes to mind for
    that is Theranos, which kind of meets all of the criteria of
    that, and unfortunately just bilked a bunch of different
    investors, some of whom were more sophisticated than your
    average retail investor.
        Mr. Cleaver. Thank you very much. This is an all-day
    conversation, at least for me, because I am just amazed at what
    goes on. I am not sure that the statement issued by the SEC is
    going to do anything in and of itself. We are almost worshipful
    when it comes to celebrities in this country.
        Anyway, thank you very much, Mr. Park.
        And I yield back, Mr. Chairman.
        Chairman Sherman. I want to thank all of my colleagues for
    participating in this hearing, particularly those who were here
    at the very end. And I want to thank our witnesses for their
    testimony.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
    With that the hearing is adjourned. Thank you.
    [Whereupon, at 1:53 p.m., the hearing was adjourned.]

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