[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                       EMPOWERING ENTREPRENEURS:
                      REMOVING BARRIERS TO CAPITAL
                      ACCESS FOR SMALL BUSINESSES

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 8, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 118-4
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
52-359 PDF                  WASHINGTON : 2023                    
          
-----------------------------------------------------------------------------------     
                  HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    Subcommittee on Capital Markets

                    ANN WAGNER, Missouri, Chairwoman

FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                DAVID SCOTT, Georgia
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania             SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice     WILEY NICKEL, North Carolina
    Chairman                         STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York                EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 8, 2023.............................................     1
Appendix:
    February 8, 2023.............................................    35

                               WITNESSES
                      Wednesday, February 8, 2023

Conwell, McKeever E. II, Founder and Managing Partner, RareBreed 
  Ventures.......................................................     5
Ellenoff, Douglas, Partner, Ellenoff Grossman & Schole LLP.......     6
Gladney, Deborah, CEO and Co-Founder, WorkTorch..................     8
Howe, Darcy A., Founder and Managing Director, KCRise Fund.......    10
Thornton, Alexandra, Senior Director, Center for American 
  Progress.......................................................    11

                                APPENDIX

Prepared statements:
    Conwell, McKeever E. II......................................    36
    Ellenoff, Douglas............................................    41
    Gladney, Deborah.............................................    49
    Howe, Darcy A................................................    51
    Thornton, Alexandra..........................................    53

              Additional Material Submitted for the Record

Wagner, Hon. Ann:
    Written responses to questions for the record submitted to 
      Deborah Gladney............................................    60
Garbarino, Hon. Andrew:
    Written statement of the National Venture Capital Association 
      (NVCA).....................................................    61
    Written statement of the Small Business Investor Alliance 
      (SBIA).....................................................    63
Houchin, Hon. Erin:
    Written responses to questions for the record submitted to 
      McKeever E. Conwell II.....................................    65
Lawler, Hon. Mike:
    Written responses to questions for the record submitted to 
      Deborah Gladney............................................    70
Meuser, Hon. Dan:
    Written statement of the Center for American Entrepreneurship    72
    Written statement of the U.S. Chamber of Commerce............    74
Waters, Hon. Maxine:
    ``An Iowa Farmer Tried to Dodge Stock-Market Turmoil. It Cost 
      Him $900,000.'', dated January 13, 2023....................    78
    North American Securities Administrators Association (NASAA) 
      Report and Recommendations for Reinvigorating Our Capital 
      Markets,'' dated February 7, 2023..........................    84
    Written statement of Public Citizen..........................   138
Ellenoff, Douglas:
    U.S. Securities and Exchange Commission's Office of the 
      Advocate for Small Business Capital Formation's Annual 
      Report Fiscal Year 2022....................................   143

 
                       EMPOWERING ENTREPRENEURS:
                      REMOVING BARRIERS TO CAPITAL
                      ACCESS FOR SMALL BUSINESSES

                              ----------                              


                      Wednesday, February 8, 2023

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Lucas, Sessions, 
Huizenga, Hill, Emmer, Mooney, Meuser, Garbarino, Lawler, Nunn, 
Houchin; Sherman, Vargas, Gottheimer, Casten, Nickel, Lynch, 
and Cleaver.
    Ex officio present: Representative Waters.
    Chairwoman Wagner. The Subcommittee on Capital Markets will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Empowering Entrepreneurs: 
Removing Barriers to Capital Access for Small Businesses.''
    I now recognize myself for opening remarks.
    Eleven years ago, the Jumpstart Our Business Startups 
(JOBS) Act of 2012 was enacted into law by a divided Congress, 
with the intention of increasing access to capital for small 
businesses and entrepreneurs in the United States. The purpose 
of the JOBS Act was to provide greater opportunities for small 
business owners and entrepreneurs to grow their companies and 
create jobs in their communities.
    Despite the successes of the JOBS Act, there are still 
significant regulatory barriers that impede the growth of small 
businesses and hinder the competitiveness of job growth in the 
United States. Small businesses, which make up 99 percent of 
all enterprises and employ almost half of the U.S. workforce, 
are disproportionately affected by these barriers. The lack of 
access to capital makes it challenging for small business 
owners to grow and expand their companies, which can limit job 
creation and, of course, economic growth.
    For this reason, I am thrilled to convene this hearing 
today and to discuss policy reforms that will reduce the 
obstacles and improve access to capital for small and private 
businesses and entrepreneurs across the country, not just in 
the financial centers on our nation's coasts but in every 
State.
    The decline in small business loan approval rates from 81 
percent before the COVID-19 pandemic to 68 percent in 2021 
underscores the importance of maintaining and enhancing our 
private markets as a viable option for small business capital 
needs.
    If we limit access to capital in our private markets, as 
SEC Chair Gensler intends to do, where will small businesses 
turn for funding, considering the decrease, in particular, in 
loan approval rates? The need for access to capital is 
critical, and small businesses must have options available to 
them to secure the funding they need to grow and create jobs.
    Republicans on this committee believe that entrepreneurs 
and founders should raise money with as little friction as 
possible. As a result, Congress and regulators must adopt 
common-sense, forward-thinking policies that reduce barriers 
and increase access to capital, raising opportunities for 
American entrepreneurs.
    The proposed legislation that we are discussing today will 
lead to increased competitiveness and more opportunities for 
companies on Main Street to thrive. Healthy public and private 
markets can coexist, and we should work together to pursue 
policies that make both markets attractive places to raise 
capital and spur economic growth.
    As the Chair of this subcommittee, I am eager to tackle 
these regulatory barriers that prevent small businesses and 
entrepreneurs from accessing capital. Today's proposals will 
enable all entrepreneurs, including those who have been 
overlooked and underserved, to create jobs and grow their 
businesses, regardless of their background or location. Our 
goal is to ensure that small business owners and entrepreneurs 
have the resources they need to succeed and create jobs in 
their communities.
    In conclusion, the JOBS Act of 2012 was a step in the right 
direction, but there is still much work to be done to improve 
access to capital for small businesses and entrepreneurs. The 
regulatory barriers that exist must be addressed and policy 
reforms must be implemented to reduce these obstacles and 
enhance access to capital. This will enable small businesses to 
grow and create jobs, contributing to the overall economic 
growth and competitiveness of the United States.
    I am committed to working with my colleagues in this 
subcommittee to achieve these goals and to make the American 
Dream a reality for entrepreneurs.
    The Chair now recognizes the ranking member of the 
subcommittee, Mr. Sherman, for 5 minutes for an opening 
statement.
    Mr. Sherman. I'm glad we are having this hearing, our 
second hearing today. I am a little jealous of Chairwoman 
Wagner, for she is in a situation where she is allowed to hold 
two hearings in one day. Sometimes, you are not allowed to hold 
two hearings in the same month, under some circumstances.
    We are talking about removing barriers to private 
placements and small businesses. Keep in mind that sometimes 
barriers are good, and sometimes they are not. We are always 
told the barrier prevented you from investing in Apple. Maybe 
it prevented you from investing in Pear, Banana, or Kumquat.
    And when a barrier successfully prevents an investor from 
investing in a bad or fraudulent investment or an investment 
where there is not enough information to evaluate it, that is 
not just good for that one investor, it is good for our overall 
capital markets. The willingness of Americans to invest is 
dependent upon the protections they enjoy.
    And our present system is not working all that poorly when 
the private placement market raised $4.45 trillion from July 1, 
2021, to June 30, 2022, and it did so without the biggest 
frauds and disasters that we are aware of coming to mind. I 
remember when the biggest failures were WorldCom and Enron. 
Today, the biggest failures or most famous ones that come to 
mind are FTX and Luckin Coffee, not subject to U.S. regulation. 
If you send your money to China, or you send your money to the 
Bahamas, you cannot then complain that Gary Gensler did not 
protect you.
    We should be drafting statutes that help genuinely small 
businesses. When people in my district think of small 
businesses, they think of Casa Vega on Ventura Boulevard, not 
some company with a $2-billion capitalization. That doesn't 
mean we shouldn't draft statutes that help medium-size 
businesses, but we shouldn't paint a picture of a pizzeria and 
then draft a bill for a $2 billion enterprise. We need the 
right picture when we are drafting the bill.
    As I think all of you know, I am old. Even before I came to 
Congress, I was in the business world as a CPA and attorney. 
And back then, banks lent money to small businesses even when 
there was a chance of failure and without taking a note on the 
owner's home. They would make a prime plus 3, a prime plus 4, 
or a prime plus 5 loan, and that was a fair loan because that 
loan had a 4 or 5 percent chance of a default. The business 
might have a 4 to 5 percent chance of failing. And if that were 
to happen, the bank might recoup only half of the money that it 
lent.
    Today's bank examiners won't let you do that, so banks, the 
traditional way a small business gets financed, aren't 
available. I made that point in this room, not at our hearing 
but at our Financial Institutions and Monetary Policy 
Subcommittee hearing this morning. What we need is for our 
banks to able to have a portion of their loans, a portfolio 
with some risk of default and some risk of loss.
    A second source of capital is a small business investment 
company. Last year, along with Mr. Huizenga, I introduced a 
bill that would help those companies get capital and then put 
their capital into small businesses. Due to a quirk, investment 
index mutual funds can't really invest in business development 
companies (BDCs) because of the way the SEC defines the 
expenses of the mutual fund that is making the investment.
    BDCs are a vital source of capital to the genuinely small 
business. We are going to reintroduce this legislation. We are 
looking for cosponsors who want to be originals. We will 
probably reintroduce it tomorrow. It is the Access to Small 
Business Investor Capital Act.
    I am told that between the two hearings today, and the one 
we will do in early March, that we will be considering 30 
bills, including discussion drafts. As far as I know, the 
Access to Small Business Investor Capital Act will be the only 
one that has an official Democratic chief author, although I am 
thrilled to have Mr. Huizenga working with me on the bill. And 
I am hoping that we won't just be talking about 30 bills, but 
even more with Democratic chief authors.
    I look forward to working with you both in the morning and 
the afternoon to have a balanced approach to making more 
rational our private offerings, not with the goal of reducing 
or increasing regulation, but making it more rational.
    I yield back.
    Chairwoman Wagner. Thank you, Ranking Member Sherman.
    We have offered, after the notification of this hearing, 
bills to be put forward for consideration. I am sure there will 
be a lot of Democrat co-leads on many of our bills. So, we look 
forward to working together. And I promise I will make you work 
morning and afternoon, but rarely nights. So, here we are.
    I want to welcome our witnesses. First, we are going to 
hear from Mr. Mac Conwell. Mr. Conwell is the founder and 
managing partner of RareBreed Ventures, an emerging venture 
capital (VC) fund located in Baltimore, Maryland. Mr. Conwell 
is a former software engineer and two-time founder. When he 
started his first fund, he did not have a network of limited 
partners, so he raised money on Twitter under the Rule 506(c) 
reforms implemented by the JOBS Act of 2012. Welcome.
    Second, Mr. Doug Ellenoff--a regular here, I believe--is a 
partner with Ellenoff Grossman & Schole LLP. His practice 
focuses mostly on business transactions, mergers and 
acquisitions, and corporate financings. During his career, he 
has represented numerous broker-dealers, venture capital 
investor groups, and many corporations involved in the capital 
formation process. Welcome.
    Third, Ms. Deborah Gladney is the CEO and is co-founder of 
WorkTorch. Ms. Gladney is an entrepreneur with more than a 
decade of experience designing communication strategies and 
programs. Prior to co-founding WorkTorch, an education tech 
company in Wichita, Kansas, she managed stakeholder engagement, 
media relations, reputation management, and strategic 
positioning for corporations and nonprofit organizations. 
Welcome.
    Fourth, Ms. Darcy Howe_who now hails from Kansas City, 
Missouri, but she used to be a constituent of mine in Kirkwood, 
Missouri_is the founder and managing director of the KCRise 
Fund. Ms. Howe has been an angel investor for 20 years. She is 
a founding member of a private banking and investment group of 
Merrill Lynch in Kansas City, which grew from 30 advisers to 
350, with $240 billion in assets under management and over $1 
billion in revenue before her retirement in 2015. She started 
KCRise Fund after recognizing the need for local economic 
growth in middle-income areas in the greater Kansas City 
region. Welcome.
    And finally, Ms. Alexandra Thornton is the senior director 
of Tax Policy with the Center for American Progress. Prior to 
joining the Center for American Progress, she worked as the 
executive vice president for policy, planning, and business 
affairs at the Jane Goodall Institute, and was a tax policy 
adviser to a U.S. Senator who served on the Senate Finance 
Committee, where she provided counsel on trade, banking, and 
securities issues.
    I want to thank all of you for taking the time to be here. 
Each of you will be recognized for 5 minutes to give an oral 
presentation of your testimony. We are going to have a tight 
gavel here today, so pay attention to the clock, please.
    And without objection, each of your written statements will 
be made a part of the record.
    Mr. Conwell, you are now recognized for 5 minutes for your 
oral testimony.

   STATEMENT OF MCKEEVER E. CONWELL II, FOUNDER AND MANAGING 
                  PARTNER, RAREBREED VENTURES

    Mr. Conwell. Thank you. Chairwoman Wagner, Ranking Member 
Sherman, and members of the subcommittee, thank you for the 
opportunity to testify today on the importance of creating 
better access to capital for both entrepreneurs and those who 
fund their amazing companies.
    My name is McKeever Edward Conwell II, and I am the founder 
and managing partner of RareBreed Ventures, or RareBreed, which 
I am representing today. RareBreed is a venture capital, or VC, 
firm that invests in and supports innovative startups in the 
earliest stages.
    I want to first say that I am here to address the much-
needed Improving Capital Allocation for Newcomers (ICAN) Act, 
due to my personal experience in raising a fund and my 
expertise, but I am in full support of all seven bills being 
addressed today.
    In 2020, I launched RareBreed Ventures as a response to the 
lack of access to capital for founders of color and founders 
outside of major investment hubs, as well as a response to a 
lack of cultural competency from many VCs when it came to 
investing in founders who didn't look like them or didn't come 
from similar backgrounds.
    These two issues came to me in the form of Shawna Stepp-
Jones, a Black single mother from Baltimore who was creating a 
dryer for wigs. I immediately got what she was creating, but 
other investors didn't. So after 3 years of getting noes from 
folks who didn't look like her, she decided the only way for 
her to get access to capital was to become a surrogate mother, 
even knowing that Black women are 3 times more likely to die 
from pregnancy-related causes.
    This is why I started RareBreed Ventures, but I didn't have 
a network of wealthy folks to raise the funds from, so it 
forced me to get creative and use two regulations to help. The 
first was Rule 506(c) of Regulation D, which allows for public 
solicitation of a fund's offering, but requires that every 
investor in that fund be an accredited investor. And the second 
was an amendment to Section 3(c)(1) of the Investment Company 
Act of 1940, which allows a fund of $10 million or less to have 
up to 250 investors instead of 100.
    The first regulation allowed me to use social media, 
Twitter mainly, to meet with many potential investors. Thanks 
to this, I was able to have 1,128 meetings in my first 90 days 
and more than 4,000 meetings in total. The second regulation 
allowed me to offer investors to invest as little as $10,000, 
compared to the $100,000 I would have had to ask them to invest 
before the amendment.
    This led to me having 194 investors in RareBreed. Of these 
investors, 83.5 percent invested $50,000 or less. Many of these 
investors are people of color and/or first-time investors in a 
fund, because they hadn't had access to make such an investment 
or couldn't risk the high minimum threshold for funds. This 
means that before, they were limited to investing in companies 
either directly, where there is a much higher risk of them 
losing all of their money, or investing in stocks of publicly-
traded companies, which the average venture fund has 
historically outperformed, according to the Harvard Business 
Review.
    But unfortunately, without the ICAN Act, almost all of 
these small-dollar investors, who make up 83 percent of our 
investors, will not be able to invest in RareBreed Ventures 
Fund II, that is 162 out of 194 investors, since our new 
minimum will have to be at $250,000 or more.
    The current rules limit the amount of capital and sources 
of capital for small and new investment funds, leading to less 
capital to help drive innovation, economic growth, and job 
creation, especially when we are talking about companies 
started by founders of color, because we know that, in 
particular, Black-led funds are 4 times more likely to invest 
in Black-led companies. Also, keeping in mind that almost all 
of the Black-led venture funds in America would fit under the 
new rules of the ICAN Act, because most of us have funds that 
are less than $150 million.
    With the ICAN Act, such limiting factors would be greatly 
reduced, allowing more accredited investors to have 
opportunities to participate in the asset class. With lower 
minimums, investors can potentially invest smaller amounts of 
money into more VC funds to spread out their risk and better 
diversify their investments.
    Today, many funds have to turn away investors because of 
these current limits. This results in the loss of millions of 
dollars in potential funding for future innovation and job 
creation, while also excluding investors from being able to 
truly diversify their own investments and limiting their 
ability to wealth creation.
    Even more so, those who do have enough wealth to continue 
to participate in the venture asset class are almost 
exclusively from a non-diverse population. This only serves to 
further widen the racial and gender wealth gap here in America 
and puts limits on the types of innovation we see in this 
country.
    In conclusion, I am excited to see Congress working through 
issues that impact access to capital and drive innovation. As 
someone who has spent my entire career in venture capital as an 
advocate for access to capital and reducing barriers, I look 
forward to supporting and assisting this committee in any way 
possible.
    Thank you for the opportunity to testify today, and I look 
forward to your questions.
    [The prepared statement of Mr. Conwell can be found on page 
36 of the appendix.]
    Chairwoman Wagner. And we thank you.
    Mr. Ellenoff, you are now recognized for 5 minutes to give 
your oral testimony.

  STATEMENT OF DOUGLAS ELLENOFF, PARTNER, ELLENOFF GROSSMAN & 
                           SCHOLE LLP

    Mr. Ellenoff. Good afternoon, Chairwoman Wagner, Ranking 
Members Sherman and Waters, and members of the Capital Markets 
Subcommittee. It is a pleasure to be a part of this important 
hearing.
    I was last here in front of this subcommittee on September 
11, 2019, for the hearing examining private market exemptions 
as a barrier to IPOs and retail investment. There have been 
significant developments in the capital market since, and we 
are now back to an environment where entrepreneurs need further 
assistance from Congress. I trust that you will seriously 
consider the proposed bills, all of which I support.
    My name is Doug Ellenoff. I am a partner in the New York-
based law firm of Ellenoff Grossman & Schole. I am a corporate 
and securities lawyer and have been practicing for over 35 
years. My law firm has been in business for more than 30 years, 
has nearly 130 lawyers, and we are regularly one of the top 10 
IPO law firms in the country, and we do an equal number of 
other types of financings. We are market leaders in several 
alternative finance programs, including crowdfunding, special 
purpose acquisition companies (SPACs), private investments in 
public equity (PIPEs), and registered directs.
    I have spent nearly 10 years after the passage of the JOBS 
Act working with the leadership of the crowdfunding movement, 
traveling extensively domestically and abroad, including dozens 
of trips to D.C., to provide our views on the proposed and 
final Regulation Crowdfunding and various JOBS Act rules and 
regulations.
    I am legal advisor to the Association of Online Investment 
Platforms, the leading voice in D.C. for the industry. I am 
also a cofounder of two legal technology companies catering to 
the broader crowdfunding industries, one called LawCloud and 
the other called GUARDD.
    My comments are my own and not on behalf of my firm, my 
clients, or the associations with which I am affiliated.
    Given today's volatile market conditions where capital is 
scarce for entrepreneurs, not unlike the period right before an 
overwhelmingly-bipartisan congressionally-enacted JOBS Act, the 
timeliness of today's hearing is more important than it has 
been in the last decade.
    According to the data published by Crowdfund Capital 
Advisors, from the inception of crowdfunding in 2015, to 2019, 
my last testimony here, there was $193 million raised in the 
aggregate. From 2019 until today, $1.4 billion has been raised. 
That is a sevenfold increase, which clearly demonstrates the 
commercial acceptance and viability of what Congress 
collectively put into motion in 2012 with the JOBS Act.
    There have been over 4,300 funded transactions, 3,500 just 
since 2019. We have empowered a nationwide footprint of 
entrepreneurs to access capital to fund their American Dreams 
and create jobs, several of whom are with us. And it is 
exciting to meet them and see their vision come into reality, 
quite frankly.
    We have created 225,000 jobs. Although the studies are 
limited, the data indicates that of these funded transactions, 
55 percent of them have at least one woman or minority founder, 
have an 81 percent success rate, and represent nearly 48 
percent of all capital raised.
    We can all be very pleased with the results of 
crowdfunding, which would not have been implemented without the 
support of all constituents represented here. Regulators were 
decidedly uncomfortable with the idea of crowdfunding, and many 
of their stated concerns did not materialize.
    Had we not proceeded and acted together, our economy 
wouldn't have benefited and, more importantly, these 
entrepreneurs would not have been funded and been able to hire 
employees. It is a wonderful example of Congress taking action 
that has had a very positive real world impact.
    On a personal note, since my last testimony, my fellow 
panelist, Renee Jones, left her professorship at Boston College 
Law School to be appointed Director of the Division of 
Corporation Finance at the Securities and Exchange Commission; 
and Mike Piecek finished his time as head of the Department of 
Financial Regulation of the State of Vermont to be elected as 
the State's Treasurer.
    As you might suspect, I am a little disappointed that my 
status remains unchanged, but I remain hopeful that my 
testimony here today may have a similar impact on my 
professional resume as it has for my esteemed colleagues.
    I look forward to sharing my views on many of the proposals 
that will be discussed at today's hearing, and I thank Chairman 
McHenry for hosting this important hearing today. Thank you.
    [The prepared statement of Mr. Ellenoff can be found on 
page 41 of the appendix.]
    Chairwoman Wagner. And we thank you.
    Ms. Gladney, you are now recognized for 5 minutes to give 
your oral testimony.

  STATEMENT OF DEBORAH GLADNEY, CEO AND CO-FOUNDER, WORKTORCH

    Ms. Gladney. Chairwoman Wagner, Ranking Member Sherman, and 
members of the subcommittee, thank you for the opportunity to 
appear here today.
    My name is Deborah Gladney, and I am the CEO and co-founder 
of WorkTorch. We are a career platform for service workers 
based in the heartland of Wichita, Kansas. I am honored to be 
here today with my sister and co-founder sitting right behind 
me, Angela Muhwezi-Hall, and to be present for such a critical 
agenda that impacts entrepreneurs like us from across the 
country.
    When we started our company at the peak of the pandemic, we 
had no idea our company would take us to the places we have 
been, help the people we have helped, or allow us to see the 
things we have seen, things such as the extreme disparities in 
access to resources and capital amongst entrepreneurs.
    Last year, startups with all-women founding teams like ours 
received just 1.9 percent of all venture dollars. And as Black 
founders, we received just a mere 1 percent. As if the odds 
aren't stacked up against us enough, 75 percent of all venture 
capital investments go to just three metro areas, and I can 
promise you that Wichita, Kansas, isn't one of them.
    According to the data, my sister and I, as Black women 
founders in Kansas, should not be here in front of you today. 
What made the difference, you ask? We had our first example of 
hard work from our parents. They came to this country from 
Uganda and worked hard to obtain their doctorate degrees, all 
while raising their five children, with no support or 
generational infrastructure built in this country.
    They were our first example of what it means to be an 
entrepreneur, to build something out of nothing, to be scrappy 
and resilient, even if you are told no a hundred times a day, 
to take risks, even if it means leaving what feels comfortable, 
for the chance at building something big, even if it means me 
walking away from a comfortable salary while 8 months pregnant 
to build WorkTorch, or even if it means my sister leaving an 
esteemed university in beautiful Los Angeles to live in my 
basement with her husband as we built our company.
    We did it because we knew building WorkTorch not only had 
the power to change our lives but the lives of service workers 
and their families. Every single day, our company helps people 
find fulfillment in life while being rewarded for what they do. 
But without our parents' example, I don't think my sister and I 
would have made it this far.
    When we started WorkTorch, we had no connections or family 
or friends we could lean on for capital. We cold-pitched 379 
investors, and we received 379 noes. We had to pull money from 
our own 401(k)s to build our product. But with our little 
money, we created a platform that garnered over 1,000 users in 
the first few weeks without receiving a dollar from anyone.
    The scrappiness our parents taught us is what got us to the 
point of eventually becoming the first Black women in Kansas to 
raise over $1 million in venture funding. But we also had to 
come to the table with twice as much to often receive twice as 
less.
    It is also hard for us to be proud of the fact that in 
2023, we are still seeing a lot of firsts for minority and 
rural entrepreneurs. Access to capital is literally stunting 
the ability of many businesses like ours to grow, and this is 
why today's proposed bills are so important.
    Wouldn't it be great if more people who looked like me 
could invest in more people who look like me? The simple fact 
of the matter is that who gets funded depends a great deal on 
who is doing the investing. As a nation, we know the benefits 
of encouraging entrepreneurship across backgrounds. We create 
jobs, we spark innovation, and we allow America to maintain its 
position as the most-competitive nation on the planet.
    So it is in our nation's best interest to foster more 
firsts like my sister and I and create more seconds and thirds 
and fourths and beyond to where we won't even have to count 
anymore. It is my hope you will be on the right side of 
entrepreneurial history today, and I look forward to your 
questions.
    [The prepared statement of Ms. Gladney can be found on page 
49 of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Gladney. I am so glad 
that you and your sister are here with us today. 
Congratulations.
    Ms. Howe, you are now recognized for 5 minutes to give your 
oral testimony.

   STATEMENT OF DARCY A. HOWE, FOUNDER AND MANAGER DIRECTOR, 
                          KCRISE FUND

    Ms. Howe. I have heard this story a lot, and I am still 
verklempt.
    Chairwoman Wagner, Ranking Member Sherman, and 
distinguished members of the Subcommittee on Capital Markets, I 
am Darcy Howe from America's heartland, Kansas City, 
Congressman Cleaver's territory--go Chiefs--and I have seen 
barriers to capital access firsthand.
    As Deborah said, 75 percent of the venture capital to 
invest in technology startups comes from three States: 
California; New York; and Massachusetts. There are bold, 
innovative ideas to solve business and societal challenges in 
every county in this country, and they have gone unfunded, and 
that was a contributor to the slow economic growth of my region 
in Kansas City.
    In 2015, Kansas City business leaders realized that after 
the 2008 downturn, we did not bounce back as well as peer 
cities like Indianapolis and Nashville. Many in our community 
set out to bring solutions to the region. And my volunteer 
assignment was to understand what was happening in 
entrepreneurship.
    What I learned was that 70 percent of all net new jobs in 
the Kansas City area come from someone who is starting a 
business: 70 percent. But those starting high-growth technology 
businesses were leaving the area because capital was on the 
coast. Further, I learned that most rural entrepreneurs, people 
of color, and women were not getting funded at all.
    So, what did we do to bring inclusive capital to Kansas 
City? With friends, we started an angel investing group to 
invest in women-led businesses called Women's Capital 
Connection. Then, I decided to retire from a successful 32-year 
career as a wealth manager and devote these past 6 years to 
raising capital and funding amazing innovators like Deborah and 
Angela in our region through the KCRise Fund.
    Illustrating success when capital and innovators are 
connected, in 6 years, the 46 portfolio companies in our fund 
have created more than 1,000 jobs at an average wage of 
$98,000. And, by the way, the average wage in Kansas City is 
$45,000, which is our starting wages. If our 46 companies were 
one company, we would now be the 40th largest company in our 
region, and virtually none of these thousand jobs even existed 
7 years ago.
    In the past 3 years, 62 percent of our investments included 
at least one founder from at least one underrepresented 
demographic. Fifty-one percent of the employees--people think 
about founders, but think about the employees' generational 
wealth that they are building in skills_of our portfolio 
companies came from an underrepresented demographic. These 
inclusive statistics far exceed coastal venture-backed 
businesses.
    You have now met one of our amazing founders, Deborah 
Gladney, and can see why investing in WorkTorch was not a hard 
decision for me and my partners, Ed Frindt and Liam Reilly. 
KCRise Fund invested $400,000 and made introductions to venture 
capital firms in other parts of the country, which led to 4 
more firms investing, for a total of $1.1 million. And I will 
add parenthetically, Steve Case from here in D.C. was one of 
them.
    As the eyes and ears of our region for VCs around the U.S., 
our support was validating to other venture firms in our 
network, which made her raise successful.
    So, tell me again why we need these seven bills if all of 
this is working so great. I can speak to the DEAL Act, SEED, 
HALOS and ICAN.
    ICAN is the bill which would unlock the most access to 
capital for small venture funds like KCRise. Our first fund was 
$19 million and it took me 2 years to raise. Limited to 99 
accredited investors, I had to find people willing and who had 
the resources to invest an average of $200,000.
    For Fund II, we wanted to increase capital in the region so 
we set out to raise $40 million, and now our investors had to 
have $400,000, on average. Not every small venture fund manager 
has a network like I have built over 30 years, and even I had 
trouble raising for startups, a type of investment that most 
people in the Midwest had never done before.
    Please don't confuse us with the big-time private equity 
bunch with mountains of money. There are hundreds of small 
funds like ours springing up in smaller markets, and we would 
all benefit from raising the limit on our total number of 
investors.
    It would accomplish three things_I realize I am getting 
close on time. First, it would allow more folks to participate. 
Funds could take smaller investors, really bring democratizing 
capital and be more inclusive. Second, being able to take more 
investors, we can more easily build a larger fund. And third, 
more people would get off the sidelines like me to do it. Funds 
are expensive. We have back office, we have rent, we have 
audits. Making a fund a little bit larger would make it 
possible to have a small team to help entrepreneurs.
    More-inclusive capital is the lifeblood of new jobs in all 
counties over this country. And we are seeing already in our 
region in Kansas City that generational prosperity is 
broadening due to our focus and increased capital.
    [The prepared statement of Ms. Howe can be found on page 51 
of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Howe, very, very much.
    Ms. Thornton, you are now recognized for 5 minutes for your 
oral testimony.

 STATEMENT OF ALEXANDRA THORNTON, SENIOR DIRECTOR, CENTER FOR 
                       AMERICAN PROGRESS

    Ms. Thornton. Chairwoman Wagner, Ranking Member Sherman, 
and esteemed members of the subcommittee, thank you for the 
opportunity to appear before you today to discuss capital 
access for entrepreneurs and small businesses.
    My name is Alexandra Thornton. I am a senior director 
focusing on financial regulation and tax policy at the Center 
for American Progress, an independent nonpartisan policy 
institute dedicated to improving the lives of all Americans.
    Today, more businesses have raised more money from 
borrowing, selling equity, and selling debt securities than 
ever before. In fact, banking regulators are worried about a 
collapse, securities regulators are worried about the 
proliferation of frauds, and investors are worried that many 
private company valuations are unjustifiable and unsustainable.
    In addition to seeking a loan from a bank, small businesses 
today can turn to the capital markets. After decades of 
deregulation by Congress and the SEC, a company can raise an 
unlimited amount of money from an unlimited number of 
sophisticated investors without making any meaningful 
disclosures about its financials, governance, operations, or 
risks.
    Moreover, unlike banks and their employees, private equity 
and venture capital firms that raise capital and invest in 
businesses are generally not expected to follow regulator-
mandated standardized documentation requirements and regulatory 
oversight of their capital allocation decision-making or the 
fees that they charge.
    Venture capital and private equity funds are larger than at 
any time in history. Small businesses ought to have no problem 
obtaining capital in this environment. The problem is not that 
the rules prevent small businesses from obtaining capital. It 
is that the rules today allow companies with billion-dollar 
valuations, billions in revenues, and thousands of investors to 
continue raising private capital without providing basic 
information to investors, regulators, or the public, and 
private funds to raise billions of dollars from underlying 
investors without basic information about their procedures 
around capital allocation and portfolio management or the fees 
they charge.
    SEC Chair Gensler said very recently that there may be as 
much as $250 billion in fees in private funds each year, and 
much of that money isn't going to portfolio companies, 
including small businesses. There is also no regulatory 
requirement that these billion-dollar companies and funds 
provide investors with basic audits to ensure that financial 
information is accurate and reliable.
    When Congress established the Federal securities laws in 
the wake of the Great Crash of 1929, it concluded that without 
basic information about a company, capital will be misallocated 
and wasted. So, it established the fundamental bargain that 
companies that want to raise capital from the public must first 
provide basic information to investors and the public, 
including the company's financials, governance, operations, and 
risks.
    Today, these disclosures, along with robust audits, improve 
price discovery, make markets more fair, more orderly, and more 
efficient, and protect investors from abuses.
    It goes without saying that even the most-sophisticated 
investors can't exercise their superior knowledge and expertise 
if they don't have reliable information about a company's 
financials, operations, and risks.
    For decades after the securities laws were first adopted, 
offerings to even a single person or to a small number of 
employees were deemed to be public offerings in need of 
registration. But beginning in 1982, with the promulgation of 
Regulation D, Congress and the SEC began expanding the number 
of exemptions from the public disclosure framework, often with 
the stated intention of providing more access to capital for 
small businesses, just as many of the bills before the 
subcommittee today are saying.
    But in reality, those exemptions, along with a few other 
provisions in the law, have enabled virtually any company of 
any size to obtain capital from the public without complying 
with the public disclosure framework. A growing number of 
companies are choosing to remain private, and the majority of 
capital today is exempt from the public disclosure framework.
    Today, more than 650 U.S. private companies are worth more 
than a billion dollars each in the private markets, and they 
too rely on these exemptions. They compete with similar 
publicly-traded companies and sell products and services to a 
broad swathe of the American public without making meaningful 
disclosures. They can pose huge risks to their investors, who 
include the teachers, firefighters, municipal workers, 
students, professors, and many others who have a significant 
amount of their hard-earned college and retirement savings 
invested in the private markets. Failure of any of these 
unicorns could have catastrophic consequences for these 
investors.
    Expanding exemptions from public offerings will only make 
the wealthiest private investors richer, and it certainly won't 
help truly small businesses in underserved communities.
    There are many steps that Congress and the SEC can take to 
rebalance the public and private markets and make more room for 
capital for small businesses. I look forward to discussing 
those with you. And thank you again for inviting me to testify 
today.
    [The prepared statement of Ms. Thornton can be found on 
page 53 of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Thornton, very much.
    And thanks to all of our witnesses for your testimony 
today.
    We will now move into the questioning portion of the 
hearing, and I will recognize myself for 5 minutes.
    Mr. Ellenoff, as I am sure you are aware, Democrat SEC 
Commissioner Crenshaw gave a very concerning speech last week 
in which she cited growth in our private markets as a reason to 
increase disclosure and impose other regulatory obligations on 
private companies. In our view, her comments demonstrate how 
Democrats would rather force companies to go public than reduce 
barriers to capital formation for all, all companies.
    Mr. Ellenoff, if the Democrat-led SEC moves forward with 
and eventually finalizes proposals that increase burdens on 
private companies, as it likely will in its forthcoming 
proposed rulemaking to revise Regulation D and Form D, can you 
explain how that would harm the millions of businesses that 
remain private?
    And what I am really trying to get to is, would it make it 
harder for them to raise capital, create jobs, raise potential, 
or would these policies considered today, on the other hand, 
make it easier for small businesses to grow?
    Mr. Ellenoff. It is a troubling coordinated narrative that 
we are hearing. I think there is no doubt that increasing 
disclosure and pre-filing submission requirements on those 
issuers would be very problematic for a marketplace that has 
been around since 1982 and has operated efficiently, and 
successfully, by the numbers that we heard from Representative 
Sherman earlier, a $4 trillion marketplace.
    I don't know why we would even consider going about 
regulating it in a similar manner to what we did with our 
public company universe. These companies chose, tactically, to 
not go to the public markets because of the overregulation 
within the public market sphere and particularly over the last 
year.
    I think you would end up seeing a reduction in the capital-
raising process. I think the securities offering supply chain--
yes, I will take credit for that term--would become bogged 
down. I think it would be unwise, and I would steer clear of 
it.
    And the thought process that somehow you can--as a 
securities lawyer, it would be a boon for me. So, when a 
securities lawyer is telling you not to do something, even 
though it would benefit me personally, I think you should take 
that under advisement.
    I think to force large companies that choose to remain 
private, which is the same conversation we had in 2019, so the 
question is, how do you incent them to become public? And the 
thought process to burden private companies more is the 
incentive to get them to become public seems misguided to me 
and quite troubling.
    Chairwoman Wagner. Thank you very much.
    Ms. Howe, as an angel investor, you have helped countless 
early-stage companies in my home State of Missouri and beyond 
raise the capital that they need to grow. In doing so, you have 
supported founders and their communities. You have also 
witnessed some of the barriers that exist which prevent 
startups from reaching their potential.
    From your experience, could you provide examples showing 
how the policies considered today would benefit the early-stage 
companies in which you invest?
    Ms. Howe. First, maybe going back to Ms. Crenshaw's report, 
and maybe addressing Ms. Thornton, I hear a lot of, 
``unicorn,'' and, ``billion dollars.'' These are companies that 
we are investing in them at $5 million to $10 million or $15 
million, and they will probably sell somewhere between $50 
million and $400 million as a bolt-on to some other business.
    The kind of businesses that we invest in tend to start 
smaller and they exit smaller as well. And so it is a different 
mindset than maybe some of the understandable concerns about 
regulating much-larger companies.
    I would also say that we turn down investors. We had 
investors who were much more diverse, frankly, both in age and 
gender and ethnicity, because they couldn't afford to invest in 
a fund that had an average need of $400,000 per investor. So by 
broadening it out, I think we would have much more inclusive 
capital.
    And I would also say that one of the things that is 
troubling to me and I agree with the protections for--I was in 
the financial services business for 32 years. We need 
protections. But a fund format like we have, like all of these 
small funds that are being formed--by the way, and we have 
audits as well. But a fund format is a more diversifying, 
derisking way for people to invest and to participate in their 
neighbors, their kids, the people they want to invest in who 
are in their own local community.
    Chairwoman Wagner. Thank you very much, Ms. Howe.
    I have a fantastic question for you, Ms. Gladney. I am 
going to submit it for the record since my time has expired.
    I now recognize the ranking member of the subcommittee, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Some have said that sometimes the system 
doesn't fund somebody's business idea. I would say that is 
actually a good thing. Most ideas shouldn't be funded. I have a 
dozen ideas every day, most of them bad. And if you take a look 
at the bills submitted here in Congress, most of them shouldn't 
be passed.
    The chairwoman says that there are millions of companies 
that are private that should stay private. I couldn't agree 
more. But there are a few dozen, just a few dozen that we 
should encourage to become public that are large enough to 
easily deal with the cost of being a public company.
    If these companies become public, then we get more 
information about them, both in terms of trying to look at our 
society but also for investors. They can afford to do it. And 
then, the retail investor can get the liquidity of a publicly-
traded company, the information, the analysis of a publicly-
traded company.
    We are here trying to decide whether to in some cases 
liberalize or in some cases tighten the rules for what it is to 
be a private placement or a non-public offering. We dealt with 
one of those this morning, changing the definition of, 
``accredited investor''_we had a whole hearing focused on that.
    Doug, can you identify one other proposal that you would 
have to liberalize or to make tighter the rules here for 
private placements?
    Mr. Ellenoff. For private placements, I think there are 
several proposals before us in terms of increasing the caps. If 
you are asking about me to freewheel and come up with a new 
idea on rules to make private placements better--
    Mr. Sherman. It doesn't have to be your original idea. Pick 
one idea you like, even if it is--most ideas are stolen from 
someone else.
    Mr. Ellenoff. I think we all can take a collective pat on 
the back for what we did in the JOBS Act in 2012. I think that 
is directionally what we ought to be doing.
    Mr. Sherman. I now want to go to Ms. Thornton. You might 
have opposed the JOBS Act. I voted for it. I didn't think it 
was perfect, but I think it has done relatively well.
    Can you identify one or two specific ways in which we 
should tighten it a bit without eliminating its basic concept?
    Ms. Thornton. Sure. Thank you, Congressman Sherman. I think 
one of the most important things would be to change the holder 
of record definition, because in the JOBS Act it was increased 
from 500 to 2,000. And when Section 12(g) was enacted in 1964, 
there wasn't a whole lot of difference between shareholders and 
holders of record.
    But over time, because of technology and so forth, holder 
of record can now mean--one holder of record could be an 
intermediary that holds tens of thousands of shares from 
thousands of investors. And that is one holder--
    Mr. Sherman. Now, it is one thing if you have an investment 
fund. Berkshire Hathaway might own a piece of a company, and we 
would count that, I would think, as one shareholder of record, 
because they are really making the decisions, even though I 
might own a share of Berkshire Hathaway stock.
    But in a circumstance where, say, I have an account at 
Merrill Lynch, and so do 100 other people. They have all 
invested. We are all making our own individual decisions. And 
you are saying that if 100 Merrill Lynch customers are all in a 
stock, that it could be identified as one holder of record?
    Ms. Thornton. I believe that is right. And the thing about 
this threshold is that once you go above 2,000 holders of 
record, the company has to make significant public disclosures. 
And that is as it should be, because they are obviously a big 
company. This is the way that Facebook remained private for so 
long.
    Mr. Sherman. And we might just set dollar amounts, say, we 
don't care if you only have 50 owners, if you are worth half-a-
trillion dollars, you can afford it. We want the information. 
Your shareholders might benefit from it. And also, we are 
trying, in some cases, to push public companies in the right 
direction.
    I know what is controversial is ESG. What is probably less 
controversial is an idea I proposed on the House Floor 
yesterday, and that is for companies to disclose and analyze 
how they would be affected if we had a breakdown of our 
relationship with China, because there are a lot of companies 
out there who are--what should I say?--pre-balloon in their 
thinking.
    So, there is a benefit to companies going public when they 
are big enough to deal with the cost.
    And I yield back.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from Arkansas, Mr. Hill, who is also the Chair of our 
Subcommittee on Digital Assets, Financial Technology and 
Inclusion, and the Vice Chair of the full Financial Services 
Committee.
    Mr. Hill, you are recognized for 5 minutes.
    Mr. Hill. Thank you, Madam Chairwoman.
    And thank you again for continuing this theme of how we 
enhance capital formation for businesses of all sizes. I 
thought this was such an interesting group of legislative 
proposals and such an informed, excellent panel. Thank you all 
for being here.
    Before I was in Congress, I spent a lot of time doing Reg D 
investments, and I thought many of these reflected some of the 
things that we have seen over the last decade, after the JOBS 
Act, of what we could tweak and fine-tune even better.
    And on the subject of going public, look, it has just 
gotten so expensive to be a public company, and the liability 
is so high that, sure, the market cap has just gone up and up 
and up. When I first started my career, if somebody had a $250-
million market cap, they could easily be public and bear the 
cost, and we had more than double the public companies that we 
have now.
    That is why you see so many enormous market caps, and I 
think that is why you see a big incentive for so many growth 
companies to stay private longer. I don't know if it is a 
chicken and egg thing. I take Ms. Thornton's point. I started 
my career in 1979, so I remember the 1982 amendments and I know 
where she is coming from, but I don't think that is a chicken 
and egg thing. I think that, really, it is the cost that has 
driven market caps up and the number of public offerings down, 
personally.
    Entrepreneurs and small business folks are the backbone of 
all of our small towns, and I am so glad we have Missouri so 
well-represented here. I represent Little Rock, Arkansas, and I 
work with our venture ecosystem throughout central Arkansas.
    And it is frustrating when you recognize that the top 20 
metros in the country get 88 percent of the venture capital 
funding in the country, but due to the Kauffman Foundation in 
Missouri, and Steve Case's evangelism, this idea of making sure 
that we have a venture ecosystem open to all investors of all 
types has really seen a renaissance in the last decade.
    The best ideas in this country are not reserved to the 
salons of Palo Alto or New York. Last year, Arkansas companies 
raised $107 million in venture capital funding, 3 times higher 
than 2020. And while that is dwarfed by many States, it is 
indicative of the fact that our angel investor groups and our 
venture ecosystem is growing and growing successfully around 
the University of Arkansas at Fayetteville, and certainly in 
Little Rock, in and around The Venture Center, and accelerator 
programs that we have in Conway, Little Rock, and North Little 
Rock.
    Unfortunately, entrepreneurs in many parts of the country 
face challenges to raising the capital they need. We just had a 
bill on the House Floor last week that we all supported which 
enhanced the SEC's studying, what are the barriers to rural 
capital-raising for people who are not even in a metro area? 
And I think your comments on that have been very, very helpful.
    So, Ms. Howe, with your 2 decades of experience both in the 
brokerage business and now as an angel investor, how do these 
ideas today directly help a start-up dreamer in Kansas City or 
Little Rock?
    Ms. Howe. Our networks are only so large to be able to 
raise capital from our own personal network. And one of your--
if you are speaking to the fund of funds bill as one example, I 
can give you an example.
    Bringing Steve Case back up, 6 years ago, Steve Case and 
his whole Rise of the Rest came out to the Midwest and invited 
20 of us who were brand-new fund managers to D.C. to learn from 
one another and support one another. And he asked us, how can 
we help you? And every one of us--by the way, nobody had ever 
raised more than $30 million. That was our ceiling in our 
markets. And all of us said, ``Steve, if you would just invest 
in our funds, you would give the Good Housekeeping seal of 
approval. And then, other people would understand and they 
would believe it and then we would get people who have never 
done this before, who were accredited investors, of course, off 
the sidelines.''
    So, this idea of the fund of funds would be really dreamy 
for all of us, because there will be investors that are in 
other parts of the country who would probably love to invest in 
WorkTorch, but they can't find them. And the way they could 
find them is through funds like us, who are boots on the ground 
finding--
    Mr. Hill. Thank you very much.
    Ms. Howe. --and helping entrepreneurs.
    Mr. Hill. I am glad to see a Morgan State Bear here. That 
is good. I co-Chair the Historically Black Colleges and 
Universities (HBCU) Caucus here in the House, so it is good to 
see Morgan State represented.
    These ideas to expand crowdfunding_any thoughts on how you 
think that would benefit entrepreneurs in your world?
    Mr. Conwell. There are a lot of entrepreneurs who don't 
have networks, especially entrepreneurs who look like me. When 
I started my first company in 2010, I didn't know what an 
investor was. I didn't know where to go. I didn't know where to 
meet them. And when I did, I didn't know how to talk to them.
    But that has no bearing on an entrepreneur's ability to 
execute. An entrepreneur can go to crowdfunding and say, hey, I 
have executed. I have done well. Who would like to take part in 
what I am building?
    Mr. Hill. Great response. Thank you so much. And I thank 
all of you for being here today.
    I yield back.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from California, Mr. Vargas, for 5 minutes.
    Mr. Vargas. Thank you very much.
    Madam Chairwoman, what are we doing after dinner? We have 
had two hearings so far, one after breakfast, and one after 
lunch. I assume we will have one more meeting after dinner. It 
has been, again--
    Chairwoman Wagner. I will buy.
    Mr. Vargas. Okay. Great.
    And I hate to challenge my good friend, Mr. Sherman, but 
Mr. Sherman used a term that he didn't define, and I think it 
would be very hard to define at the moment, and that is, ``pre-
balloon.'' We don't know exactly how long the balloons have 
been flying over our country, so we don't know exactly when the 
pre-balloon era started.
    Mr. Sherman. If the gentleman would yield, I will point out 
we are now post-balloon.
    Mr. Vargas. We are post-balloon now. Okay. That makes more 
sense to me.
    Again, this has been very exciting, actually, to listen to 
all of you, and I appreciate it very, very much. I do have some 
questions obviously.
    Ms. Thornton, you said we should re-balance the public-
private market, I believe. And how should we do that?
    Ms. Thornton. One way is the way that I mentioned to 
Congressman Sherman about modifying Section 12(g) to say that 
holder of record is actual shareholders, beneficial owners of 
securities.
    Another, of course, would be what he alluded to, which is 
to say that large companies that have a certain value are 
subject to the public disclosure framework, or you could say 
that companies that have a certain number of employees would 
need to comply with the public disclosure framework.
    And aside from that, I think that it is really important 
for policymakers, for Congress, and for the SEC to look at the 
existing exemptions and consider whether they really are doing 
what we think they are doing and what we want them to do.
    When you look at what is going on right now, just because 
an exemption is expanded to allow retail investors who are less 
wealthy to participate and to invest in these funds, doesn't 
guarantee that there will be more investment in businesses run 
by women and minorities.
    Doubling down on a system that_we have had, I think I 
counted 14 expansions of the different exemptions since 1982, 
including the 1982 Reg. D. And doubling down on a system that 
is already shown not to promote women and minorities is 
unlikely to help. So, I would encourage you to think about that 
and to look at the different exemptions and consider how they 
might be scaled back.
    Mr. Vargas. Mr. Ellenoff, I think it would be appropriate 
to give you an opportunity to respond to that. What would you 
think about those?
    Mr. Ellenoff. I appreciate the opportunity. I have in front 
of me the Annual Report from the SEC's Office of the Advocate 
for Small Business Capital Formation, and they have two bubbles 
in crowdfunding that I think may be instructive and responsive 
to that comment.
    Forty-one percent of crowdfunded issuers that raised $1 
million or more had minority founders. Another thought bubble: 
46 percent of crowdfunded issuers that raised $1 million or 
more had women founders.
    And I would encourage everybody on the committee to go and 
review this annual report, and I think you will see outstanding 
statistics that support not only that underrepresented people 
raise money much more effectively, pursuant to these JOBS Act 
exemptions, including Reg A+, 506(c), but if you look at the 
geographic dispersion in their charts, along with what is on 
Crowdfund Capital Advisors site, you will see that almost every 
State in the Union is represented, as opposed to what happens 
with 506(b) venture deals.
    Mr. Vargas. Thank you.
    I do want to challenge one premise that I think is 
underneath all of this--or not challenge it, but ask about it, 
and that is the issue of returns, that the private markets have 
better returns, in general, than the public markets. Back in 
2019, we had Professor Elisabeth de Fontenay testifying that 
that is not the case, to my understanding.
    Could you comment on that, Ms. Thornton?
    Ms. Thornton. Sure, I would be happy to. When you look at 
the private markets, private market participants don't have to 
disclose information. So, that should be a red flag right 
there. Even the financials that they do disclose are not 
necessarily audited by independent auditors. And the 
information often isn't timely. There is information given to 
some investors that is not given to others.
    What does this create? This creates an environment where 
valuations can be inflated. And there is copious evidence that 
valuations are inflated in the private markets.
    What happens is these companies, when they go public, that 
becomes--they stay in the private markets for a long time 
because they can raise a lot of capital now that there are all 
these exemptions. But when it comes time to cash out, when the 
original investors want to cash out, they do an IPO, and the 
retail investors invest, and they are the ones who lose out 
because the company was overvalued.
    There is evidence--I think Goldman Sachs did a study which 
showed that something like 28 percent of the companies that 
went through IPOs like this declined in value tremendously.
    Mr. Vargas. My time is up. Thank you very much.
    Thank you, Madam Chairwoman.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from West Virginia, Mr. Mooney, for 5 minutes.
    Mr. Mooney. Thank you, Madam Chairwoman.
    Nearly 20 percent of the U.S. population lives in rural 
areas, and yet businesses in rural areas raised under 2 percent 
of the total capital over the last 3 years. In my home State of 
West Virginia, no city even has a population greater than 
50,000 people, in the entire State.
    So, Ms. Howe, can you elaborate on some of the capital-
raising trends for small businesses in rural areas versus those 
in big cities? And as a followup to that, why is there such a 
large discrepancy in the trends?
    Ms. Howe. I'm sorry. Can you repeat the follow-up question?
    Mr. Mooney. The second part of that is, why is there such a 
large discrepancy in the trends?
    Ms. Howe. First, my brother played basketball for West 
Virginia.
    Mr. Mooney. Okay.
    Ms. Howe. I am not sure I completely understand the 
question about the trends, but the trends clearly, in our 
market, when--and what I see in my other fellow small-fund 
folks who are building small funds in other States, because we 
are co-investment models, so we have to have another venture 
investor in our realm in order to invest.
    And what I have seen is it has broadened out who--people 
like me--I am 66-years-old, female--are starting funds. They 
are not all young, White males. So, we all have different 
experiences, and I think these smaller funds are being started 
by people who then are broader in thinking in how they look at 
the kinds of deal flow they might look at.
    There is one proposal I have seen regarding angels and demo 
days, and I would like to address that in some of those smaller 
areas.
    The reason why Silicon Valley became Silicon Valley is 
because of the network effect. They knew each other. They were 
in a small community. It was like a small town where the 
investors and the entrepreneurs got together and helped one 
another, funded one another. We need that in our smaller towns. 
And demo days are a very important way for angel investors, 
curiosity seekers, people who want to help these entrepreneurs, 
again, who are their neighbors, or their kids, or their 
friends' kids, or whomever, to help them.
    So, I think the basket of proposals that I see here each 
help in a little different way. I don't think you could 
prioritize them, because I think a place like West Virginia, 
where you have demo days--a demo day in a small town where you 
have two or three entrepreneurs who are starting something who 
just want to get a forum and get their idea out there and see 
if there is somebody who can help them is critical to them 
getting funded and finding resources and advisors and people 
who will help them.
    Does that answer your question?
    Mr. Mooney. Yes. Thank you very much. I was just trying to 
get an idea of what you think the trends are and what is 
happening.
    My next question is for Ms. Gladney. What are some of the 
unique challenges rural small businesses face and what can be 
done to address them?
    Ms. Gladney. Thank you for the question, Congressman.
    The biggest thing that I have experienced and I have 
witnessed is that this is a relationship-based industry. So, if 
you are living in an area that does not have an established 
ecosystem or established network, then you have no network.
    And unfortunately, the way that the system is currently set 
up right now, it doesn't bring people in; it keeps people out. 
And that is what is happening to rural entrepreneurs. If you 
are not connected to the ecosystem, if you don't have that 
within your community, then it is extremely difficult for you 
to infiltrate the system.
    Mr. Mooney. Thank you.
    I assure you, rural poverty is real. It is not just in the 
big cities. Internet connectivity is an issue, especially the 
high-speed internet. The bases of population where you can 
crowdfund may be harder to find.
    Last week, the House--and thank you for the bipartisan 
support--passed my bill, the Expanding Access to Capital for 
Rural Job Creators Act. It simply requires the Securities and 
Exchange Commission's Small Business Advocate Office to 
identify and report the challenges that rural small businesses 
face when trying to access our capital markets.
    That is only one step. We must do more. So, I look forward 
to working with this committee to make sure rural small 
businesses aren't left behind as we face these challenges in 
West Virginia.
    Thank you, Madam Chairwoman. And I yield back.
    Ms. Howe. May I add to that about the State Small Business 
Credit Initiative (SSBCI)? Thank you so much for SSBCI, because 
SSBCI coming down to the States_the State of Kansas, as an 
example, is using that. There is a lot of rural Kansas, right? 
They have 105 counties of rural everything, and they are using 
the SSBCI money to do all of the things to find and to support 
entrepreneurs in each county. So, thank you all very much for 
that money.
    Chairwoman Wagner. The gentleman has yielded back.
    I now recognize the gentleman from Illinois, Mr. Casten, 
for 5 minutes.
    Mr. Casten. Thank you, Madam Chairwoman. And thanks to all 
of our witnesses.
    Ms. Howe, I have been sitting here reading your resume and 
thinking that in another life you and I might have run across 
each other. Before coming to Congress, I raised a lot of 
capital for privately-held companies.
    When you were--I just want to understand a little bit about 
your background--at Merrill Lynch's private banking practice, 
was that primarily for--I assume that is like wealthy families 
and family offices who were your clients, is that right?
    Ms. Howe. Yes. My investors were families of wealth.
    Mr. Casten. Okay. And was there a minimum size that you 
were targeting or a typical size? Just help us understand who 
your clients were, typically?
    Ms. Howe. Back then, my minimum size was $10 million and 
up.
    Mr. Casten. Okay. And were they investing primarily equity, 
or were you advising them across the whole capital structure, 
debt, mezzanine instruments, and everything else?
    Ms. Howe. The entire capital structure, including their 
philanthropy and multi-generationally.
    Mr. Casten. Okay. And if they were investing in debt or 
mezzanine, were you actually negotiating debt deals, or was 
this where you would be negotiating covenants, or were you 
primarily backing into other, previously-syndicated deals?
    Ms. Howe. No. Merrill Lynch was pretty much a distribution 
of other people's investment ideas, so--
    Mr. Casten. Okay. And did you make many direct investments 
outside of the public? Were you doing real estate? Would you 
ever advise them to make a direct investment in a new business 
like we are talking about here today?
    Ms. Howe. I made none on behalf of our clients, but I made 
personal angel investments.
    Mr. Casten. Okay. I am thinking of this from the 
perspective of a family that has minimum $10-million wealth. I 
am assuming they have some direct investments, whether through 
funds of funds, or they have a buddy they went to college with 
who is--the things you do as a private wealth manager.
    Would you help with the diligence on those investments for 
them?
    Ms. Howe. Did I help with diligence?
    Mr. Casten. Yes.
    Ms. Howe. Absolutely.
    Mr. Casten. If you have a wealthy family saying, I need to 
do this, but I don't understand the financials and should I 
trust this auditor, those sorts of things that one gets into 
where they need a neutral party?
    Ms. Howe. Happily, it gave me 32 years of education to read 
financial statements because I am now on 11 boards of our 
portfolio companies, so yes.
    Mr. Casten. I sometimes say that the best preparation I 
ever made for running for Congress was running a private 
equity-backed company because I learned to live with the fact 
that I was going to be surrounded by really smart 20-somethings 
telling me how to do my job. That is the nature of this line of 
work.
    I ask all of those questions because I don't know how 
somebody who has $10 million in personal wealth makes an 
informed judgment about how to invest in a privately-held 
company without having someone of your talents. It is just too 
complicated. Right? And, yet, now we are having this 
conversation saying, should we make it easier for people who 
can't afford to hire someone like you to run through those 
investments?
    My question for Ms. Thornton is, as we talk about expanding 
access in private markets to people who can't afford to hire 
Ms. Howe, who are not worth $10 million, who don't pass 
anybody's existing definition of a sophisticated investor, is 
it not our obligation as Congress to provide them with the 
protections that they would otherwise get from someone like Ms. 
Howe?
    Ms. Thornton. Absolutely. In fact, I would submit that 
probably they shouldn't be going into the private markets. But 
if one is going to expand exemptions, it is really critical 
that that information be provided. And the bigger the 
exemption, the more information should be provided.
    There is a reason why we have the public markets and why we 
have the disclosures. In the private markets--I'm sorry, did I 
say private? I meant to say the reason why we have public 
markets is for disclosure.
    But what happens in the private markets is that there is no 
information. Values are inflated. The original people, Ms. 
Howe's clients, who originally came in and put money into that 
investment, whatever it is, can actually cash out, because we 
are also seeing an expansion of secondary markets in the 
private markets. They can cash out, and all those new retail 
investors who came in, who really couldn't afford to lose their 
money and, have bills to pay and can't afford a catastrophic 
loss, they are the ones who lose out. They don't get the 
benefit of the high valuation.
    Mr. Casten. In the 25 seconds I have left, there are a 
number of bills that have been noticed and you have reviewed 
for this hearing. All would seem to make it easier for 
companies to access money from smaller investors.
    Are there any of those bills, in your judgment, that 
provide greater protection along the lines that Ms. Howe used 
to provide?
    Ms. Thornton. I skimmed through them. I didn't have a lot 
of time between when I saw them and this hearing to go into 
detail.
    I guess I would just say that, basically, the committee 
should look very carefully at what they are going to 
accomplish, actually, for small businesses.
    Mr. Casten. Thank you. I yield back.
    Chairwoman Wagner. The Chair recognizes the gentleman from 
Oklahoma, Mr. Lucas, for 5 minutes.
    Mr. Lucas. Thank you, Madam Chairwoman, for holding this 
hearing, and thank you to the witnesses for testifying.
    Businesses use both private and public markets to raise 
capital, and the committee is dedicated to ensuring both 
avenues are healthy for both companies and investors.
    Public markets have enormous benefits to a wide range of 
investors and I will continue to support policies that 
strengthen public markets and encourage businesses to utilize 
public offerings. I also recognize that healthy private markets 
support our robust public markets and benefits both companies' 
investors.
    That said, Mr. Ellenoff, could you discuss the advantages 
to companies' investors of having access to both public and 
private markets?
    Mr. Ellenoff. The democratization of access to deal flow, 
which is what the JOBS Act really did, established a mechanism 
by which investors from around the country could invest in 
deals in other parts of the country that they would never 
otherwise had the social networks to know that those deals were 
looking for money. And they post those deals on websites called 
funding portals that are staffed by investment professionals 
who do extensive due diligence on the deals and respond to some 
of the concerns that were raised previously. And those deals 
are vetted so the investors can have access and invest in those 
deals.
    Having access to early valuations, like is being suggested, 
is a problem in that if you don't get in on the earlier deals 
while they are private, you won't benefit from the increased 
valuations over time.
    I think retail investors having access to both the public 
markets, which they do through their Merrill Lynch or E-Trade 
account, where they don't have other people doing diligence for 
them necessarily, is equally important to learning how to 
invest.
    What is great about the crowdfunding provisions generally 
is there are caps in Reg CF that limit the amount of exposure 
that retail investors have. And as far as I know, after a 
decade, neither regulators nor commercial participants have 
been upset by the results over the last decade, which is a 
reason why we continue to liberalize.
    Mr. Lucas. Continuing along that line, Mr. Ellenoff, we are 
10 years from the passage of the JOBS Act. Could you give us 
your perspective on what we are seeing in the economy that 
should encourage Congress to revisit provisions of the JOBS 
Act?
    Mr. Ellenoff. I will give you a statistic. I spoke to 
Sherwood Neiss, who is the godfather of crowdfunding, if you 
remember him traipsing through these halls in 2012. When we 
increased Reg CF from $1 million to $5 million, which we had 
wanted from the beginning, $5 million, 435 companies in the 
last few years have now raised more than the $1-million cap, 
which increases jobs, funding for entrepreneurs, helps 
individual States across the country and, again, minorities and 
women. Forty-five of those companies raised the $5 million max.
    So, why would we not increase it further in order to get 
more companies to raise more money to carry out the empowerment 
of the American Dream for entrepreneurs?
    Mr. Lucas. Thank you. Very insightful comments.
    I yield back, Madam Chairwoman.
    Chairwoman Wagner. The gentleman yields back.
    The Chair now recognizes the ranking member of the full 
Financial Services Committee, the gentlewoman from California, 
Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much.
    I would like to address Ms. Thornton.
    Ms. Thornton, when most Americans think about our capital 
markets, they think of the New York Stock Exchange and stocks 
sold by large companies like Apple, Ford, or GE. However, many 
would be surprised to learn that the private markets now dwarf 
the public markets. And as I understand it, historically, the 
private markets were where small businesses raised capital. But 
today, even the largest companies now raise much of their 
capital there.
    Can you provide a little more context as to how these 
changes have affected small businesses trying to raise capital 
and the impact on public markets? What do you think Congress 
should do or should encourage the SEC to do to support small 
businesses through capital markets?
    Ms. Thornton. Thank you, Ranking Member Waters. I 
appreciate the question.
    I think that, historically, for about 5 decades after the 
securities laws were enacted, after the stock market crash of 
1929, we had a situation where the courts interpreted, 
``public,'' very broadly. So, sometimes in situations where 
there was one shareholder, a few of those companies were 
required to make public disclosures.
    Then, with all of these proliferations of exemptions, the 
private markets grew. And as you said today, the private 
markets raise more annually than the public markets do. And the 
problem with that is there is no incentive for a company to go 
public, and that has serious ramifications for not just the 
people who invest in a company that is private, a company that 
doesn't disclose financials that are independently audited, and 
so forth, but it also has ramifications when that company gets 
large and it sells products to American consumers. And if it 
runs into financial difficulties because it hasn't been 
overseen by regulators, that can actually cause systemic 
problems in the capital markets.
    That is another big part of the SEC's mission. So in 
addition to ensuring that investors and companies have adequate 
information when they invest in those companies, the SEC also 
needs to be aware of the potential for systemic problems.
    And we need to consider whether the situation we have 
gotten ourselves into needs to be rolled back a little bit. I 
think it makes a lot of sense to look at these exemptions and 
consider how they can be trimmed back, whether we really need 
or want big companies in the private markets, and whether we 
shouldn't have a lot more disclosure for much of what goes on 
in the private markets.
    Ms. Waters. Let me continue.
    Today, large private equity firms and multibillion-dollar 
tech companies have taken advantage of exemptions originally 
meant for small businesses. For example, between 2009 and 2017, 
pooled investment funds, most of which are private equity 
funds, have raised $8.9 trillion of new capital through 
Regulation D offerings compared to $1.42 trillion raised by 
non-funds.
    What are your views on the uses and misuses of the 
exemptions originally meant for small businesses? Should 
multibillion-dollar private firms and private equity firms be 
able to use them?
    Ms. Thornton. Absolutely not. It is basically an abuse of 
the system, if you will, when these really large--when these 
unicorns, who have so much in assets and so much ability to 
raise capital, are using something like Reg D to raise funds. 
And I think Commissioner Crenshaw just a week ago mentioned 
this as well, how much of Reg D is actually unicorns seeking 
additional capital. It just creates risks for, as I said, the 
markets and also for the many people who invest.
    Ms. Waters. Thank you.
    I am going to go to Chairwoman Wagner before I continue 
with these questions.
    I would like to ask unanimous consent to submit a report 
for the hearing record that was released by the North American 
Securities Administrators Association entitled, ``Report and 
Recommendations for Reinvigorating Our Capital Markets.''
    Chairwoman Wagner. Without objection, it is so ordered.
    Ms. Waters. I have a few minutes left here, and I just have 
a statement I would like to make.
    Constantly, all that we hear from small businesses is, ``I 
just don't have access to capital. If only there was a fair way 
to get access to capital, I know I could do well. I could 
expand. I could provide more goods, more services. I could do 
all of these things.'' And so, as we confront this issue, we 
have to find out what we can do.
    Quickly, during the pandemic, with PPP, in that small 
period of time where we raised that money to get to small 
businesses, I want to tell you how helpful it was, how thankful 
they were, and how they were able to keep their employees, on 
and on and on.
    With that, I yield back, because I could talk about that 
all day. Thank you.
    Chairwoman Wagner. The gentlelady yields back.
    I now recognize the gentleman from Pennsylvania, Mr. 
Meuser, for 5 minutes.
    Mr. Meuser. Thank you very much, Madam Chairwoman.
    Madam Chairwoman, first, I would like to request unanimous 
consent to enter into the record several letters: a letter from 
the U.S. Chamber of Commerce; and a letter from the Center for 
American Entrepreneurship.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Meuser. Thank you.
    And thank you very much to our witnesses. It is quite 
informative. I appreciate it.
    But I also appreciate our Chair of this Subcommittee, as 
well as our Chair of our Full Committee, Mr. McHenry, for this 
focus on and prioritizing of capital formation, especially for 
small businesses, and really working to build off of the JOBS 
Act.
    I spent most of my life in small business, growing small 
businesses into a large business, and working with customers 
that were all small businesses, or virtually all of them. And I 
also sit on the House Small Business Committee, so these topics 
are extremely important to me.
    Access to capital, cash flow is the lifeblood of a 
business, as we all know. Yet, all data continues to show, even 
this morning in a hearing, that only 13 percent of households 
of those who want to invest have the ability to be an 
accredited investor, and as well, only 19 percent of small 
businesses would state that they have adequate access to 
capital. So, we clearly have work to do.
    And as well, last year, there was an enormous decline in 
IPOs, as you know. The numbers I have show 74 IPOs. Now, 
granted, the year before was quite high, but that is 3 times 
less than the typical average over the last 10 years.
    So, what is going on? We need to remove these barriers or 
we can begin to start thinking about how many new-growth 
businesses, technology businesses, what have you, will not be 
created here and could be created elsewhere.
    Ms. Howe, I would just like to ask you first, the 
Developing and Empowering our Aspiring Leaders (DEAL) Act of 
2023, that was introduced last year, decentralizing 
investments, is this something that you think is very 
important?
    Ms. Howe. I'm sorry, that is the fund of funds act, right?
    Mr. Meuser. It is.
    Ms. Howe. I am getting all of these confused.
    Mr. Meuser. Yes.
    Ms. Howe. I think I addressed that a little bit earlier. 
The funds of--we are the most entrepreneurial country on the 
planet. How do we figure out how to continue to keep in our 
genius zone? And that is by broadening the access.
    Broadening access in our world, in Kansas City and Kansas 
and Missouri, is to have other people know what kind of great 
entrepreneurs we have here. And having fund of funds have the 
ability to find--they won't invest directly into WorkTorch, but 
they would invest in our fund. And our little fund could use 
the extra capital. We have turned away hundreds of other 
investors.
    Congressman Sherman is correct that there are a lot of 
deals that shouldn't get funded. But there are a lot that 
should, that don't get funded because we don't have the capital 
and we don't--we build syndicates of folks from outside our 
region. And the best way for us to build syndicates is what we 
do now, we just go out and we find other VC firms that might be 
interested, and we go out and sell the deal to other folks.
    But in this case, for fund of funds, it would be so much 
easier for people to develop a fund because you get the Good 
Housekeeping Seal of Approval of a Steve Case, or whomever 
else, that would say, yes, this is a venture firm that has a 
good track record, they know what they are doing.
    Mr. Meuser. Okay. Thank you. So, you are positive about 
that.
    And the Improving Capital Allocation for Newcomers (ICAN) 
Act of 2023, expanding the eligibility for capital 
contributors?
    Ms. Howe. We are on our third fund. We have raised $27 
million of the $40 million that we would like to raise, and we 
are already up to 70 investors. And we have a list of folks who 
would love to get in for $50,000, but I don't know that we can 
take them, because we don't have room for them under the 99. 
So, if we had more room for investors, we could take much 
smaller investors.
    And in a fund format, by the way, that is de-risking the 
riskier part of the capital stack. I believe strongly in 
smaller investors should be in funds.
    Mr. Meuser. There is no question, VCs--there is a saying: 
It is easy to count the seeds in an apple but not so easy to 
count the apples in a seed. So, I definitely commend the work 
that you are all doing. And we are very interested in hearing 
more from--I am just about out of time--all of you on what else 
this committee needs to do. I appreciate your time.
    And I yield back, Madam Chairwoman.
    Chairwoman Wagner. The gentleman yields back.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Nickel, for 5 minutes.
    Mr. Nickel. Thank you, Madam Chairwoman.
    And thank you so much to the witnesses for being with us 
here today.
    Small businesses are the backbone of our economy and of my 
district. In Congress, I am doing everything I can to ensure 
that they have adequate access to capital. Additionally, retail 
investors need the protections of our securities laws to ensure 
they have access to vital financial information. If a company 
is underperforming, these non-professional investors would 
likely have a hard time accessing this information.
    Ms. Thornton, how would removing disclosure requirements 
harm retail investors that our small businesses, especially our 
minority-owned small businesses, rely on for capital?
    Ms. Thornton. I think it is important to remember that if 
you are a small business, you are actually going to prefer 
having just a handful of really sophisticated, really 
experienced investors that you can go to when you need more 
capital. Having a lot more investors, retail investors, people 
who don't really know as much and really can't afford to lose 
their funds, can actually be harder for the small business if 
they have to respond directly to them, and also, if those 
retail investors need to pull out of their investment; 
typically, in the private markets, investments are locked up 
for some time. So, it is very difficult for retail investors in 
that case, and it is bad for the small business.
    I think that the disclosures that we are talking about, 
making more disclosures is actually good good for the both the 
small business and the retail investors.
    Mr. Ellenoff referred to democratization and how much due 
diligence is being done and all of that in his firm or the 
firms he works with. But, in reality, that is not required at 
all. It is not mandated. It is not overseen by the SEC. The SEC 
doesn't have that information.
    But, also, if companies are doing this due diligence 
anyway, if funds are, if companies are providing the 
information to the funds that hold them or whatever, there 
shouldn't really be any problem with adhering to the public 
disclosure framework. They should be able to disclose more 
information.
    Mr. Nickel. Thanks.
    Ms. Thornton, as you said in your testimony, if a company 
can raise all the capital it needs in the private markets 
without making disclosures, developing robust operational 
safeguards, subjecting itself to audits, or subjecting itself 
to SEC oversight and potential class-action plaintiffs, why 
would it go public?
    Does the current exemption framework incentivize companies 
to stay private, therefore depriving investors of information 
that is important and meant to protect them?
    Ms. Thornton. Absolutely. It definitely, definitely 
encourages companies to stay private, to grow in the private 
markets and, really, never to go public unless, for example, 
the founders or original investors want to cash out.
    And so, basically, we have a perverse, distorted system 
where capital now is being invested with no information, which 
is basically the situation we had before the stock market crash 
of 1929.
    Mr. Nickel. Thank you so much. And I yield back.
    Chairwoman Wagner. The gentleman yields back.
    The Chair now recognizes the gentleman from Iowa, Mr. Nunn, 
for 5 minutes.
    Mr. Nunn. Thank you, Madam Chairwoman. And I am privileged 
to have another Midwesterner sitting up here. Your appreciation 
for capital outside the venture capital bubbles of certain 
communities is much appreciated, and I think is something that 
we would like to talk about today.
    As we sit here today, roughly 11 years after a divided 
Congress passed the Jumpstart Our Business Startups (JOBS) Act 
of 2012, we are still faced with similar challenges to help all 
entrepreneurs, many of you here in this room, as well as our 
Main Street shops, our small farmers, and the small businesses 
that grow off of them.
    And, unfortunately, my perspective time and time again, is 
that D.C. has added costly bureaucratic red tape that 
interferes with my constituents' abilities to come here and 
serve well in this.
    The House is determined to reduce regulatory burdens for 
small businesses and entrepreneurs at home. In my great State 
of Iowa, a record number of more than 33,000 new businesses 
were started in the last year alone, post-COVID. It is our 
responsibility to provide adequate funding opportunities for 
those who take this amazing leap of faith, as you have on this 
panel today.
    Mr. Conwell, I would like to begin with you. When the JOBS 
Act was passed, one of the things that critics were most afraid 
of was that the law would dramatically weaken investor 
protections and increase fraud in the securities market. But 11 
years on in the JOBS Act, those predictions have not come to 
pass. Congress has continued to work on bipartisan issues to 
build upon the JOBS Act.
    In your view, how would a small business and entrepreneurs 
today in a State like mine, in Iowa, benefit from some of the 
new bills we are considering today?
    Mr. Conwell. One, you are now allowing for angel investors 
to be more active. And when you are talking about rural parts 
of the country, are you talking about States outside of the 
major tech hubs?
    Mr. Nunn. Right.
    Mr. Conwell. They are all funded and backed and supported 
by those local individuals. It is so important for the angel 
investors to have the ability to do more.
    Then, when we talk about the ICAN Act, it allows for more 
newcomer investors to have more opportunities to raise capital.
    I wouldn't be able to raise capital if it wasn't for the 
JOBS Act and the 506(c) designation. And because of that, I now 
have investors in my fund from all over the country, and I am 
investing in companies from all over the country. Every 
investor is not going to do that, but it gives us the 
opportunity to have more investors with more ideas and more 
different ways to go about investing.
    Mr. Nunn. I love that innovative spirit. Well done, and 
compliments on everything you have done there.
    Ms. Gladney, I would like to speak with you on this as 
well. According to the SEC's Office of the Advocate for Small 
Business Capital Formation, small businesses have accounted for 
66 percent of the employment growth over the past 25 years. 
However, 89 percent of entrepreneurs claim that access to 
capital is limiting their small business. In fact, 78 percent 
claim it is limiting their day-to-day operations, which is very 
scary for a small entrepreneur.
    Could you please talk about your experience during your 
early stages with WorkTorch? And specifically, in Kansas, what 
was one of the most difficult parts for you to able to be start 
WorkTorch?
    Ms. Gladney. Congressman, thanks for your question. And I 
was born in Ames, Iowa, so fun fact.
    Mr. Nunn. There you go. Cyclone territory.
    Ms. Gladney. Yes. And I appreciate that question, because I 
think so much--we talk about startups and small businesses once 
they are past that zero-to-one phase. That zero-to-one stage is 
so difficult.
    So when my co-founder and sister, Angela, and I decided to 
start WorkTorch, we had so many barriers when it came just to 
even knowing or understanding. It was very clear that we were 
outsiders. We didn't even know there was an ecosystem that 
existed. So, of course, we didn't know the players. We didn't 
understand the language. We didn't understand any of that.
    Even trying to get from zero to one was so challenging, 
which is why we had to do something so risky as taking our 
money out of our 401(k)s, because we were seen as outsiders.
    The more that we can support entrepreneurs in those earlier 
stages, I think a lot of--unfortunately, a lot of businesses, 
they die in that zero-to-one ideation stage.
    Mr. Nunn. I would agree with you on that.
    Let me be quick on this, because I think this is an 
important thing for entrepreneurs like you across the country. 
As you know, Reg A or the Mini-IPO offering process is less-
intensive and less-costly than the traditional initial public 
offering.
    Do you think, based on your experience, it is time for 
Congress to revise Section A? Specifically, House Republicans 
are advocating that we raise the amount to $150 million from 
the current $50 million and include an inflation adjuster.
    Would this have helped you?
    Ms. Gladney. Absolutely. Just increasing the access, of 
course, absolutely, it would help.
    I see that the time is running out, so I just want to keep 
it brief.
    Mr. Nunn. Thank you for your service.
    I yield back.
    Ms. Gladney. Thank you.
    Chairwoman Wagner. The gentleman yields back.
    I now recognize the gentleman from the Kansas City, 
Missouri, area, the soon-to-be Super Bowl champs, the Kansas 
City Chiefs, my fellow delegation member, Mr. Cleaver, for 5 
minutes.
    Mr. Cleaver. Thank you for that opening objective analysis 
of the coming game.
    I was going to ask Ms. Howe, before you said anything about 
the game, it doesn't mean we are bragging about anything. If 
you win, you are not bragging. And we are hoping that the rest 
of the committee members will come in and celebrate, at the 
next hearing, the Kansas City Chiefs as world champions.
    I am glad we have some folks who have taken advantage of 
this. I have been on the Financial Services Committee for 18 
years, but this is my first time on the Capital Markets 
Subcommittee. So in trying to get up to speed on it, I thought 
people are going to run away. A shareholder of record does not 
denote the current owner of stock. Instead, it suggests who 
owned it 2 days prior.
    Now, if you tell somebody who is wanting to participate and 
go into business, won't they start getting a headache? Am I 
interpreting that correctly? Is that correct?
    Mr. Ellenoff. May I?
    I think there is a misunderstanding here. Shareholder of 
record for public companies, it is true that often on a central 
ledger system called CD, multiple shareholders are centralized 
as one shareholder for purposes of calculating for proxy rules 
under the public company laws. For private companies, that is 
not really accurate. It is one-to-one.
    I think if you ask any of the entrepreneurs or venture 
people here, you will find that the shareholders that are 
listed are their record holders. And while I can't say that is 
true in all cases, I can say it is in the predominance of 
cases.
    The concern that I have when I hear questions like that is 
if the route the SEC intends to use to force private companies 
to go public is by playing games with 12(g), I think that is 
problematic.
    Mr. Cleaver. I appreciate that. Thank you.
    Ms. Howe, and Ms. Gladney, can you speak to the challenges 
in fundraising for start-up companies, particularly those who 
are pre-revenue, thereby making bank capital largely 
inaccessible?
    Ms. Gladney. Thanks for the question, Congressman. 
Definitely, the pre-revenue stage was the most challenging 
stage for us. And, again, not being an insider, you go to the 
websites of a lot of these investment firms that will say, hey, 
we invest at day zero. So we think, hey, we are at day zero, 
and we try pitching. And come to find out, more than likely 
they definitely--they don't, or it is not for people who look 
like me or people who don't have that existing connection.
    So, it is extremely challenging, which is why it tends to 
put a lot of founders like Angela and I in a corner, where it 
is either we let this idea die or we pull out money that we 
probably shouldn't pull out to make it work.
    Once we get the revenue in, at least we can start saying we 
have traction, and it mitigates some of the risk, and you will 
start to see more people come. But it is still even challenging 
at that point for founders like myself.
    I will let Darcy kind of chime in before time runs out.
    Ms. Howe. Pre-revenue companies are the purview of angels. 
Angels are more predominant in markets where they have already 
made money and they are, ``on house money.'' So, they can 
afford to take the risk of giving $20,000 or $30,000 to Angela 
and Deborah.
    I don't think that is the right place for early, early 
investors, frankly. That is the place for people who are more 
sophisticated and who can help these young, young, young 
companies, if that answers the question.
    Mr. Cleaver. It does. Thank you.
    Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman yields back.
    The Chair now recognizes the Vice Chair of the 
subcommittee, the gentleman from New York, Mr. Garbarino, for 5 
minutes.
    Mr. Garbarino. Thank you, Madam Chairwoman, and thank you 
very much for hosting this important hearing today. And thank 
you to our witnesses.
    Madam Chairwoman, before I ask questions, I request 
unanimous consent to enter into the record several letters: a 
letter from the Small Business Investor Alliance; and a letter 
from the National Venture Capital Association.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Garbarino. Thank you very much.
    Mr. Ellenoff, I am going to start discussing Regulation A 
with you. Title IV of the JOBS Act directed the Securities and 
Exchange Commission to adopt rules examining securities 
offering up to $50 million within a 12-month period from 
Securities Act registration requirements.
    Upon implementation, the SEC created two different tiers: 
Regulation A, Tier 1, caps at $20 million; and Tier 2 allows 
for the sale of $50 million, which was later raised to $75 
million.
    The benefit of having Regulation A is that it provides an 
opportunity for small and medium-sized private companies to 
access capital on a scale more appropriate for their needs with 
limited disclosure requirements.
    Despite these benefits, you mentioned in your written 
testimony that Regulation A still needs to find its footing.
    Can you explain why Regulation A has been underutilized? 
And how would amendments to Regulation A help small businesses 
raise capital? And would more companies benefit if Regulation A 
raised its offering cap?
    Mr. Ellenoff. First off, we have to recognize the great 
State of New York together, okay. If everybody else can do it, 
we should be doing it just because we are a big urban center.
    Reg A+ is a more-involved disclosure document, not unlike a 
traditional IPO on an S-1. It is on what is called a Form 1-A, 
and it has extensive legal work, and accounting work involved. 
It takes months to prepare or weeks, in many cases, if it is an 
earlier stage company.
    The good news--and I spoke to one of the founders of the 
big platforms this morning--is in the last few years, $5 
billion has been raised in Reg A+. So, it is an exemption that 
is getting traction. It is just not as much as I think 
regulators would like it to be.
    And many of the major investment banks, the Mini-IPO, don't 
tend to follow in that direction. I think increasing it to $150 
million, which is the proposal from $75 million, would be 
advantageous in that it may attract a higher quality number of 
Silicon Valley-based companies that may choose to use it.
    The cost of doing a Reg A+ deal and the time and the 
sophistication kind of necessitate larger deal sizes in order 
to pay for the diligence that is being questioned here about 
whether or not these deals are providing enough disclosure so 
that investors can make an informed decision.
    When you are targeting retail investors, which Reg A+ does, 
you need more involved disclosure. What has not been discussed 
today, and the reason large companies shouldn't be required to 
put disclosure--and it has been conventional wisdom in the 
capital markets for 70, 80, 90 years--is that you have the 
largest institutions who do the due diligence with people like 
Ms. Howe at their side. So, you don't need that level of 
disclosure or diligence because somebody is doing it.
    There have only been a few hundred deals that have been 
done on Reg A+, and its average raise size is $2.2 million, but 
we do not need to utilize it more and find a utility for it.
    Mr. Garbarino. And you think raising the cap could get more 
companies involved?
    Mr. Ellenoff. I spoke to several of the platform managers, 
and they agreed that there are times when they speak to some of 
the companies who feel that the $75 million as a top limit 
makes it unattractive to them, so they won't do a deal on Reg 
A+.
    Mr. Garbarino. I have some more questions, but they are 
much more detailed--
    Mr. Ellenoff. Oh, one last thing, if I may?
    Mr. Garbarino. Sure.
    Mr. Ellenoff. It has not been discussed, and I am not 
really supposed to go here, but I think that if crypto was to 
become a regulated vehicle, as has been suggested by our 
regulator community, Reg A+ is the perfect onramp for it. So 
far, the regulators have not been accommodating for that 
conversation. But had they been, then $75 million would 
definitely be utilized on a regular basis.
    Mr. Garbarino. Thank you. And I do have other questions 
about this, but I will have to send them to you.
    I do want to ask you also about finders. Right now, there 
is no suitable framework for finders which, because of this, 
they are treated as broker-dealers by the SEC.
    Is this a problematic framework for those seeking to make 
connections between investors and private companies? If so, can 
you expand upon that? And would changing this and creating a 
framework benefit rural and underserved areas?
    Mr. Ellenoff. Yes, yes, and yes. It has been sitting out 
there for 25 years and it is just getting fumbled all the time. 
And there is no good reason not to have finders be able to 
qualify under the old, ``Paul Anka'' sort of test or some 
expanded no-action letter like that.
    Mr. Garbarino. So, this is really affecting access to 
capital and we need to fix it?
    Mr. Ellenoff. Without question. Small businesses need 
people to help them identify appropriate investors.
    Mr. Garbarino. Thank you very much. I yield back, Madam 
Chairwoman.
    Chairwoman Wagner. The gentleman yields back.
    I think we have completed our questioning time period. I 
would like to thank all of our witnesses for their testimony 
today. So much of it was just absolutely inspiring, and I thank 
each and every one of you, as does our committee.
    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.
    The hearing is now adjourned.
    [Whereupon, at 3:49 p.m., the hearing was adjourned.]

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                           February 8, 2023
                           
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