[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
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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.]
A P P E N D I X
February 8, 2023
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