    [House Hearing, 119 Congress]
    [From the U.S. Government Publishing Office]

     .                               ------
           THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC AND
               PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND
                         FACILITATING CAPITAL FORMATION

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

                                    HEARING

                                   before the

                        SUBCOMMITTEE ON CAPITAL MARKETS

                                     of the

                        COMMITTEE ON FINANCIAL SERVICES
                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED NINETEENTH CONGRESS

                                 FIRST SESSION

                                   ----------

                               FEBRUARY 26, 2025

                                   ----------

                                Serial No. 119-6

           Printed for the use of the Committee on Financial Services

           [GRAPHIC(S) NOT AVAILANLE IN TIFF FORMAT

            THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC AND

               PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND

                         FACILITATING CAPITAL FORMATION

            THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC AND
               PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND
                         FACILITATING CAPITAL FORMATION

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

                                    HEARING

                                   before the

                        SUBCOMMITTEE ON CAPITAL MARKETS

                                     of the

                        COMMITTEE ON FINANCIAL SERVICES
                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED NINETEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 26, 2025

                                   __________

                                Serial No. 119-6

           Printed for the use of the Committee on Financial Services

                                www.govinfo.gov
                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        FRENCH HILL, Arkansas, Chairman

    BILL HUIZENGA, Michigan, Vice        MAXINE WATERS, California, Ranking
        Chairman                             Member
    FRANK D. LUCAS, Oklahoma             SYLVIA R. GARCIA, Texas, Vice
    PETE SESSIONS, Texas                     Ranking Member
    ANN WAGNER, Missouri                 NYDIA M. VELAZQUEZ, New York
    ANDY BARR, Kentucky                  BRAD SHERMAN, California
    ROGER WILLIAMS, Texas                GREGORY W. MEEKS, New York
    TOM EMMER, Minnesota                 DAVID SCOTT, Georgia
    BARRY LOUDERMILK, Georgia            STEPHEN F. LYNCH, Massachusetts
    WARREN DAVIDSON, Ohio                AL GREEN, Texas
    JOHN W. ROSE, Tennessee              EMANUEL CLEAVER, Missouri
    BRYAN STEIL, Wisconsin               JAMES A. HIMES, Connecticut
    WILLIAM R. TIMMONS, IV, South        BILL FOSTER, Illinois
        Carolina                         JOYCE BEATTY, Ohio
    MARLIN STUTZMAN, Indiana             JUAN VARGAS, California
    RALPH NORMAN, South Carolina         JOSH GOTTHEIMER, New Jersey
    DANIEL MEUSER, Pennsylvania          VICENTE GONZALEZ, Texas
    YOUNG KIM, California                SEAN CASTEN, Illinois
    BYRON DONALDS, Florida               AYANNA PRESSLEY, Massachusetts
    ANDREW R. GARBARINO, New York        RASHIDA TLAIB, Michigan
    SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
    MIKE FLOOD, Nebraska                 NIKEMA WILLIAMS, Georgia
    MICHAEL LAWLER, New York             BRITTANY PETTERSEN, Colorado
    MONICA DE LA CRUZ, Texas             CLEO FIELDS, Louisiana
    ANDREW OGLES, Tennessee              JANELLE BYNUM, Oregon
    ZACHARY NUNN, Iowa                   SAM LICCARDO, California
    LISA McCLAIN, Michigan
    MARIA SALAZAR, Florida
    TROY DOWNING, Montana
    MIKE HARIDOPOLOS, Florida
    TIM MOORE, North Carolina

                          Ben Johnson, Staff Director

                                     ------

                        SUBCOMMITTEE ON CAPITAL MARKETS

                         ANN WAGNER, Missouri, Chairman

    ANDREW GARBARINO, New York,          BRAD SHERMAN, California,
        Vice Chairman                        Ranking Member
    FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
    PETE SESSIONS, Texas                 DAVID SCOTT, Georgia
    WARREN DAVIDSON, Ohio                JUAN VARGAS, California
    BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
    MARLIN STUTZMAN, Indiana             SEAN CASTEN, Illinois
    MIKE LAWLER, New York                STEPHEN F. LYNCH, Massachusetts
    ANDY OGLES, Tennessee                EMANUEL CLEAVER II, Missouri
    ZACH NUNN, Iowa                      JOSH GOTTHEIMER, New Jersey
    LISA McCLAIN, Michigan               CLEO FIELDS, Louisiana
    MARIA SALAZAR, Florida               JANELLE BYNUM, Oregon
    TROY DOWNING, Montana
    MIKE HARIDOPOLOS, Florida
                             C  O  N  T  E  N  T  S

                                  ----------

                          Wednesday, February 26, 2025
                               OPENING STATEMENTS

                                                                       Page
    Hon. Ann Wagner, Chairwoman of the Subcommittee on Capital
      Markets, a U.S. Representative from Missouri...................     1
    Hon. Brad Sherman, Ranking Member of the Subcommittee on Capital
      Markets, a U.S. Representative from California.................     3

                                   STATEMENTS

    Hon. French Hill, Chairman of the Committee on Financial
      Services, a U.S. Representative from Arkansas..................     4
    Hon. Maxine Waters, Ranking Member of the Committee on Financial
      Services, a U.S. Representative from California................     4

                                   WITNESSES

    Mr. Andrew Barnell, CEO and Co-Founder, Geneoscopy...............     5
        Prepared Statement...........................................     8
    Mr. McKeever E. Conwell II, Founder and Managing Partner,
      RareBreed Ventures.............................................    11
        Prepared Statement...........................................    13
    Ms. Rebecca Kacaba, CEO and Co-Founder, DealMaker................    70
        Prepared Statement...........................................    72
    Ms. Anna T. Pinedo, Partner, Mayer Brown.........................    88
        Prepared Statement...........................................    90
    Ms. Alexandra Thornton, Senior Director of Financial Regulation,
      Inclusive Economy, Center for American Progress................   105
        Prepared Statement...........................................   107

                                    APPENDIX

                       MATERIALS SUBMITTED FOR THE RECORD

    Mr. Andrew Barnell
        Testimony submitted to the Ways and Means Committee..........   150
    Hon. Frank D. Lucas:
        MetLife......................................................   156
    Hon. Pete Sessions:
        Mr. Teague Egan, Founder and CEO of an Energy Explorations
          Technologies, Inc. (EnergyX)...............................   158
    Hon. Ann Wagner and Hon. Warren Davidson:
        Accredited Investor Alliance (AIA)...........................   162
    Hon. Marlin Stutzman:
        American Securities Association (ASA)........................   164
    Hon. Mike Lawler:
        Innovation Ecosystem Coalition...............................   167
    Hon. Lisa McClain:
        Startup Founders, Investors And Members Of The Innovation
          Ecosystem Letter...........................................   170
    Hon. Andrew Garbarino:
        Scroobious...................................................   176
    Hon. Brad Sherman:
        North American Securities Administration Association (NASSA).   179

                       QUESTIONS SUBMITTED FOR THE RECORD

    Written responses to questions for the record from Representative
      Ann Wagner
        Ms. Rebecca Kacaba...........................................   221
    Written responses to questions for the record from Representative
      Brad Sherman
        Ms. Alexandra Thornton.......................................   224
    Written responses to questions for the record from Representative
      Maxine Waters
        Mr. Andrew Barnell...........................................   226
        Ms. Rebecca Kacaba...........................................   228
        Ms. Anna Pinedo..............................................   229
        Ms. Alexandra Thornton.......................................   230

                                  LEGISLATION

    H.R. ----, the Fair Investment Opportunities for Professional
      Experts Act....................................................   235
    H.R. ----, the Accredited Investor Definition Review Act.........   239
    H.R. ----, the Improving Access to Small Business Information Act   243
    H.R. ----, the Small Entity Update Act...........................   246
    H.R. ----, the Equal Opportunity for All Investors Act of 2025...   250
    H.R. ----, the Encouraging Public Offerings Act of 2025..........   254
    H.R. ----, a bill to amend the Securities Exchange Act of 1934 to
      specify certain registration statement contents for emerging
      growth companies, to permit issuers to file draft registration
      statements with the Securities and Exchange Commission for
      confidential review, and for other purposes....................   259
    H.R. ----, a bill to amend the Federal securities laws to specify
      the periods for which financial statements are required to be
      provided by an emerging growth company, and for other purposes.   261
    H.R. ----, the Enhancing Multi-Class Share Disclosures Act.......   264
    H.R. ----, the Senior Security Act of 2025.......................   267
    H.R. ----, the Middle Market IPO Underwriting Cost Act...........   276
    H.R. ----, the Promoting Opportunities for Non-Traditional
      Capital Formation Act..........................................   280
    H.R. ----, the Improving Disclosures for Investors Act of 2025...   282
    H.R. ----, the Helping Angels Lead Our Startups (HALOS) Act of
      2025...........................................................   291
    H.R. ----, the Increasing Investor Opportunities Act.............   296
    H.R. ----, the Retirement Fairness for Charities and Educational
      Institutions Act of 2025.......................................   301
    H.R. ----, the Remove Aberrations in the Market CAP Test for
      Target Company Financial Statements............................   308
    H.R. ----, the Helping Startups Continue to Grow Act.............   310
    H.R. ----, the SEC and PCAOB Auditor Requirements for Newly
      Public Companies...............................................   312
    H.R. ----, the Expands Protections for Research Reports to Cover
      All Securities of All Issuers..................................   315
    H.R. ----, a bill to exclude QIBs and IAIs From the Record Holder
      Count for Mandatory Registration...............................   317
    H.R. ----, a bill to expand Well-Known Seasoned Issuer
      Eligibility....................................................   319
    H.R. ----, the Smaller Reporting Company, Accelerated Filer, and
      Large Accelerated Filer Thresholds.............................   321
    H.R. ----, the Unlocking Capital for Small Businesses Act of 2025   325
    H.R. ----, the Small Business Investor Capital Access Act........   333
    H.R. ----, the Improving Capital Allocation for Newcomers (ICAN)
      Act of 2025....................................................   335
    H.R. ----, the Small Entrepreneurs Empowerment and Development
      (SEED) Act of 2025.............................................   337
    H.R. ----, the Regulation A+ Improvement Act of 2025.............   342
    H.R. ----, the Developing and Empowering our Aspiring Leaders
      (DEAL) Act of 2025.............................................   344
    H.R. ----, the Improving Crowdfunding Opportunities Act..........   347
    H.R. ------, the Amendment for Crowdfunding Capital Enhancement
      and Small-business Support (ACCESS) Act of 2025................   353
    H.R. ----, the Restoring Secondary Trading Market Act............   355
    H.R. ----, the Risk Disclosure and Investor Attestation Act......   357
    H.R. ----, the Investment Opportunity Expansion Act..............   359
    H.R. ----, the Accredited Investors Include Individuals Receiving
      Advice from Certain Professionals Act..........................   361
    H.R. ----, To permit a registered investment company to omit
      certain fees from the calculation of Acquired Fund Fees and
      Expenses, and for other purposes...............................   364

              THE FUTURE OF AMERICAN CAPITAL: STRENGTHENING PUBLIC

             AND PRIVATE MARKETS BY INCREASING INVESTOR ACCESS AND

                         FACILITATING CAPITAL FORMATION

                                  ----------

                          Wednesday, February 26, 2025

                         U.S. House of Representatives,
                       Subcommittee on Capital Markets,
                               Committee on Financial Services,
                                                       Washington, D.C.

        The subcommittee met, pursuant to notice, at 10:02 a.m., in
    room 2128, Rayburn House Office Building, Hon. Ann Wagner
    [chairwoman of the subcommittee] presiding.
        Present: Representatives Wagner, Lucas, Sessions, Davidson,
    Steil, Stutzman, Garbarino, Lawler, Ogles, McClain, Salazar,
    Downing, Hill, Sherman, Scott, Vargas, Gonzalez, Casten, Lynch,
    Bynum, and Waters.
        Chairwoman Wagner. All right. Good morning. The
    Subcommittee on Capital Markets will come to order.
        Without objection, the chair is authorized to declare a
    recess of the committee at any time.
        This hearing is titled ``The Future of American Capital:
    Strengthening Public and Private Markets by Increasing Investor
    Access and Facilitating Capital Formation.''
        Without objection, all members will have 5 legislative days
    within which to submit extraneous materials to the chair for
    inclusion in the record.

        OPENING STATEMENT OF HON. ANN WAGNER, CHAIRWOMAN OF THE
      SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM
                                MISSOURI

        Chairwoman Wagner. Chairman--I now recognize myself, as
    chairman, for 4 minutes for an opening statement.
        Good morning, and welcome to our very first Capital Markets
    Subcommittee hearing. I want to thank you all for joining us
    today. We are going to be discussing ways to strengthen both
    public and private markets by expanding investment
    opportunities and reducing regulatory barriers to capital
    formation.
        Securing funding is essential for small businesses, yet
    many entrepreneurs face roadblocks. While the bipartisan JOBS
    (Jumpstart Our Business Startups) Act of 2012 was a landmark
    step in making capital more accessible, significant regulatory
    barriers remain. If we fail to act, we risk stifling innovation
    and economic expansion.
        One of the most pressing challenges is the restrictive
    definition of ``accredited investor.'' Current regulations
    primarily allow only high-net-worth individuals to invest in
    private markets, shutting out many financially knowledgeable
    Americans who have the expertise but perhaps not the wealth to
    participate in these opportunities. Expanding investment
    opportunities beyond the limited few who qualify under this
    narrow definition will unlock new sources of capital,
    benefiting both businesses and investors.
        Small businesses also face growing obstacles when seeking
    funding. Traditional bank loan approval rates have dropped
    significantly, leaving many entrepreneurs with limited options.
    No business should be forced to rely solely on financial
    institutions when alternative sources of capital are available.
        Expanding investor access to private markets and
    streamlining regulatory requirements for raising private
    capital will create more opportunities for businesses to secure
    funding and for investors to participate in economic growth.
        These challenges are not just theoretical. This is the
    reality faced by American entrepreneurs. My constituent Andrew
    Barnell, who is here today, and his sister, Erica, are perfect
    examples of why access to capital matters. Their
    entrepreneurial journey demonstrates the power of American
    innovation, but they, like too many founders, especially those
    in communities outside traditional financial hubs, have faced
    barriers that limit their ability to expand and create jobs.
        Across the country, countless small businesses and
    entrepreneurs face similar roadblocks, preventing great ideas
    from becoming successful, job-creating enterprises. As Acting
    Security and Exchange Commission (SEC), Chair Uyeda recently
    said, and I quote, we should be encouraging, not restricting,
    the ability of companies to raise capital.
        Regulations should protect investors, but they should not
    suffocate market access or drive companies overseas. We must
    ensure both public and private markets remain viable funding
    options, giving businesses the flexibility to grow in the way
    that best suits them.
        The reforms that we discuss today build upon the foundation
    by the JOBS Act. By reducing regulatory barriers, increasing
    access to capital, and safely expanding investor access, we can
    ensure that innovation and economic growth continue to
    flourish.
        To ensure that we get this right, after today's hearing,
    the committee will be requesting feedback from stakeholders on
    legislative proposals aimed at strengthening our capital
    markets, and we want to hear directly from investors and
    entrepreneurs, small businesses, and all market participants
    about how we can improve access to capital without sacrificing
    investor protection.
        After this hearing, we will put out a press release that is
    going to be requesting feedback via this press release and a
    list of prompts on the Financial Services Committee website, so
    go to FinancialServices.house.gov.
        Access to capital is not a partisan issue. It is about
    ensuring that businesses and investors and workers have the
    tools that they need to succeed.
        I want to thank you all, and I look forward to today's
    discussion.
        The chair now recognizes the ranking member of the
    subcommittee, the gentleman from California, Mr. Sherman, for 4
    minutes for an opening statement.

     OPENING STATEMENT OF HON. BRAD SHERMAN, RANKING MEMBER OF THE
      SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM
                               CALIFORNIA

        Mr. Sherman. The SEC oversees our capital markets, which
    are the nerve center of global capitalism. Virtually all of the
    most powerful companies in America and, really, the world
    function with one goal: increasing the value of their
    companies' securities in our capital markets. Our capital
    markets are the envy of the world, and the securities traded
    there are worth over $100 trillion.
        I do not think it is a good idea to let ``Big Balls'' just
    take a whack at it. Whether it is crime in the streets or crime
    in the suites, we should not defund the police. The SEC more
    than pays for itself. It has a $2 billion budget; it secured
    over $8.2 billion in fines last year and returned $3.2 billion
    to investors.
        One thing I am concerned about is insider trading. We saw
    this when, for 1 week--everybody knew when Trump got elected
    crypto would go up a bit. Bitcoin went up 22 percent in that
    first week and Dogecoin went up 135 percent. During that week,
    there were only a couple of people who knew that this
    commission would get this weird name designed to advertise one
    crypto coin. I do not know who knew that. I do know that Elon
    Musk is more powerful than any one Member of Congress--I am
    humble enough to say that--but Musk does not file any of the
    financial reports that we have to file.
        We will see a couple of years from now whether we see $8.2
    billion a year returned by the new SEC in fines and $3.2
    billion to investors. If not, it will not be because there are
    no crooks on Wall Street. The wolves of Wall Street are not
    going to become lambs. It will be because the SEC was defanged
    and/or defunded.
        Business needs capital, particularly small and medium-size
    business. Traditionally that was banks, but we have told all
    the banks they cannot even make any prime plus 3, prime
    plusloans. We need to focus on bank regulation. We
    need to allow credit unions to make more business loans. We
    need to allow the Business Development Companies (BDCs) to play
    their role in developing businesses.
        That is why I got the Access to Small Business Investor
    Capital Act, which I introduced in the 116th, 117th, and 118th
    Congress. I will be reintroducing it in the 119th Congress and
    looking for as many cosponsors as possible.
        Finally, our banking system discriminates against business
    loans by saying that if the banks instead deploy their money
    into marketable securities, they do not have to mark--to market
    their losses, particularly those securities they list as being
    ones they plan to hold to maturity.
        As to the ``accredited'' definition, ``accredited
    investor'' definition, it needs work--but not just expansion,
    but also contraction. The idea that somebody is high-income
    because they have $200,000--keep in mind, Members of Congress,
    if they get reimbursed for their living expenses here in
    Washington, are listed as having incomes of $200,000. Not a
    single one of my colleagues has said that the congressional pay
    package represents high-income and a million dollars does not
    make you wealthy in the current system.
        When we passed these laws, it was back in the 1970s. Prices
    have gone up by a factor of 7.7, so we have seen an erosion of
    the definition of ``accredited investor'' when based on wealth
    to the tune of 7.7 times.
        We need to change those numbers on the one hand and, as the
    chairwoman points out, also account for the fact that people
    who do not have high income, do not have high wealth, may have
    high knowledge and ought to be listed as accredited investors.
        I yield back.
        Chairwoman Wagner. The gentleman yields back.

      STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON
        FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS

        The chair now recognizes the chairman of the full
    committee, the gentleman from Arkansas, Mr. Hill, for 1 minute.
        Chairman Hill. I thank my friend and colleague, our
    chairwoman, Mrs. Wagner, for hosting today's hearing.
        I look forward to working aside you, Chair Wagner, as we
    work to ensure America's capital markets remain the strongest
    and the most competitive in the world.
        Capital formation is the bedrock of our economic growth. It
    fuels innovation, empowers small business, and creates
    opportunities for everyday Americans to build a nest egg and
    wealth.
        Yet, in recent years, we have seen an alarming trend. Fewer
    companies are entering the public markets, and when they do,
    they face skyrocketing regulatory burdens, stifling growth and
    job creation.
        At its peak, the Wilshire 5000 index, a benchmark for the
    entire stock market of the United States, had 7,500 companies.
    Today, that number has been cut in half. If we do not act now,
    America's public markets will continue to shrink.
        Committee Republicans are committed to reversing this trend
    by building on our JOBS Act work, and I look forward to working
    with you, Madam Chair.
        I yield back.
        Chairwoman Wagner. The gentleman yields back.
        The chair now recognizes the ranking member of the full
    committee, the gentlelady from California, Ms. Waters, for 1
    minute.

        STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE
      COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM
                               CALIFORNIA

        Ms. Waters. Thank you very much, Chair Wagner.
        Democrats have always championed small businesses. In the
    117th Congress, we passed landmark laws--the Inflation
    Reduction Act, the Creating Helpful Incentives to Produce
    Semiconductors (CHIPS) Act, and the American Rescue Plan--that
    bolster small business and economic growth.
        We know that when markets are fair, disclosures are honest,
    financial intermediaries act in investors' best interests, and
    the Securities and Exchange Commission enforces the law,
    business confidence and investments flourish.
        Trump and unelected Co-President Elon Musk are looking to
    defang, defund, and defame Wall Street's cop on the block, the
    Securities and Exchange Commission. Fiddling with requirements
    in our securities laws seems to miss the mark when the arbiter
    of those laws is on the chopping block.
        I yield back.
        Chairwoman Wagner. The ranking member yields back.
        Today, we would like to welcome the testimony of our five
    witnesses.
        First, we have Mr. Andrew Barnell. Mr. Barnell is the CEO,
    and Co-Founder of Geneoscopy--``Geneoscopy'' I guess that is
    how you pronounce it. Yes. He is also one of my constituents,
    with whom I have had the pleasure of meeting many times. From
    their office in St. Louis, Mr. Barnell's business has developed
    an innovative and lifesaving colorectal cancer screening
    technology.
        Next, Mr. McKeever Conwell. Mr. Conwell is the Founder and
    Managing Partner of RareBreed Ventures, an emerging venture
    capital (VC) fund located in Baltimore, Maryland.
        Next we have Ms. Rebecca Kacaba. Ms. Kacaba is the CEO and
    Co-Founder of DealMaker, a global leader in online capital
    raising.
        Next on deck is Ms. Anna Pinedo. Ms. Pinedo is a Partner in
    Mayer Brown's New York office and Co-Leader of the Global
    Capital Markets practice.
        Last but not least is Ms. Alexandra Thornton. Ms. Thornton
    is the Senior Director of financial regulation for Inclusive
    Economy at the Center for American Progress.
        We thank each of you for taking the time to be here today.
        Each of you will be recognized for 5 minutes to give an
    oral presentation of your testimony, and, without objection,
    your written statements will be made part of the record.
        Mr. Barnell, I believe you also have your wife with you
    today.
        We welcome you, Mrs. Barnell.
        You are now recognized, sir, for 5 minutes for your oral
    remarks.

      STATEMENT OF ANDREW BARNELL, CEO AND CO-FOUNDER, GENEOSCOPY

        Mr. Barnell. Chairwoman Wagner, Ranking Member Sherman,
    members of the subcommittee, thank you for inviting me to
    testify today.
        As a native of St. Louis and the CEO of Geneoscopy, a life-
    sciences startup company headquartered in St. Louis, I am
    especially proud to be here today before our Member of
    Congress, Chairwoman Wagner.
        At Geneoscopy, we are developing innovative diagnostic
    tests for gastrointestinal health. We are in the process of
    bringing our first product, ColoSense, to the U.S. market so
    more individuals can access lifesaving screening options for
    colorectal cancer.
        I am here today to share my experience with respect to
    raising capital for our company, a journey that began in 2015
    when my sister called to inform me, she developed a technology
    that could save countless lives and that we would be founding a
    company together to do just that.
        At the time, I was an MBA student at the Wharton School,
    and my sister was an M.D./Ph.D. student at the Washington
    University School of Medicine in St. Louis. I jumped at the
    opportunity. It was a logical extension of my coursework in
    business and healthcare and my early professional career in the
    financial services industry.
        Ten years ago, we started as two students with an idea. We
    have since cultivated our business into a company with over 50
    employees; we have raised over $150 million of venture capital
    and are poised to bring a novel solution to market to address
    the second deadliest yet most preventable cancer in our
    country.
        Today, I have three topics to highlight: the importance of
    startups to our economy, the challenges that exist for startups
    when raising capital, and how good policy can help facilitate
    access to capital.
        Startups are critical economic-growth drivers in the United
    States. In 2023, over 5 million businesses were started in the
    United States alone. Small businesses, defined as having fewer
    than 500 employees, have accounted for 71 percent of total job
    creation in the current business cycle, and new startups alone
    account for 26 percent of total job creation.
        Serving for centuries as the global epicenter of innovation
    has made America's economy the strongest in the world. Looking
    forward, as we move into new phases of disruptive change, it is
    critical for our country to continue to support startups
    through a strong workforce, support infrastructure, good
    government policy, and a culture of entrepreneurship and risk-
    taking.
        Approximately 90 percent of startups fail. In one study of
    failed startups, the top reason cited for failure was running
    out of cash or failing to raise new capital. Startups need
    capital to cover the initial costs of launching and operating
    their business, supporting expenses such as product
    development, marketing, hiring, office space, inventory, and
    research.
        Fundraising is a constant challenge for founders. It is
    estimated that venture capitalists fund fewer than 1 percent of
    the pitches that they receive. At Geneoscopy, we have navigated
    the full spectrum of capital raises--friends, family, angels,
    all the way through institutional venture capital--and we have
    seen all of these challenges firsthand. We also count ourselves
    as fortunate, having the background to overcome being young,
    first-time entrepreneurs raising capital outside of Silicon
    Valley.
        Given the importance of startups to our economy and the
    challenges that exist for startups in raising capital, it is
    critical that government policy facilitates and does not stifle
    access to capital. Our experience highlights the importance of
    the legislation under consideration by this subcommittee.
        Early stage investors like to deploy capital locally, and
    areas such as the Midwest see significantly less capital and
    venture capital investment per capita than other areas, such as
    the West Coast. Lessening the burden for angel investors,
    lowering the barriers for venture fund formation, and making
    crowdfunding more pervasive would all help startups access
    vital growth capital.
        Geneoscopy will require additional capital to grow and is
    preparing to access the public markets. However, disclosure
    requirements and the regulatory burden can be daunting.
    Alleviating these barriers for emerging-growth companies makes
    sense.
        Lastly, included here, appended to my written testimony, is
    a copy of written testimony that I submitted to your colleagues
    on the Ways and Means Committee last October describing the
    ``valley of death'' that life-sciences startups often face
    after Food and Drug Administration (FDA) approval but before
    Medicare coverage and inclusion in quality metrics.

        [The referred information can be found in the appendix:]

        Beyond the topics of access to capital I have highlighted
    today, improved Federal policies that streamline Medicare
    coverage and payment and more nimble Federal agencies that
    embrace innovation are the key ingredients that life-sciences
    startups like Geneoscopy require to cross the valley of death
    and, in turn, boost the economy, increase job growth, and save
    lives.
        I thank you all for your attention to these issues and for
    the important work you are doing on this subcommittee to ensure
    access to capital. Thank you again for the opportunity to
    provide testimony and for your consideration of my
    recommendations. I stand ready to serve as a resource for you
    and your colleagues and welcome any questions.

        [The prepared statement of Mr. Barnell follows:]
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        Chairwoman Wagner. Thank you, Mr. Barnell.
        Now, Mr. Conwell, you are recognized for 5 minutes for your
    oral remarks.

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

        Mr. Conwell. Chairwoman Wagner, Ranking Member Sherman,
    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, which I am
    representing today. RareBreed is a venture capital firm that
    invests in and supports innovative startups at the earliest
    stages.
        In 2020, I launched RareBreed Ventures in response to the
    lack of access to capital for founders of color and founders
    outside of major investment hubs like New York and California,
    as well as a response to lack of cultural competency from many
    VCs when it comes to investing in founders who do not look like
    them and do not come from similar backgrounds.
        These two issues came to me in the form of one
    entrepreneur, a woman by the name of Shawna Stepp-Jones, a
    Black single mom from Baltimore who was creating a dryer for
    wigs. I immediately got what she was creating, but other
    investors did not.
        After 3 years of watching her get nothing but noes from
    folks who did not look like her and did not understand what she
    was trying to do, she decided the only way for her to get
    access to capital was to become a surrogate mother, even
    knowing that Black woman are three times more likely to die
    from pregnancy-related causes. This is nothing to say about her
    three degrees and the fact that she was a former patent
    examiner.
        This is why I started RareBreed, but I did not have a
    network of wealthy folks to raise from. That forced me to get
    creative and use two regulations to help. First was rule 506(c)
    of Regulation D, which allows for public solicitation for fund
    offerings but requires that every investor in that fund be an
    accredited investor. The second was an amendment to section
    3(c)(1) of the Investment Company Act of 1940 which allowed for
    a fund of $10 million or less to raise from up to 250 investors
    instead of only 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 traditional
    $100,000 they would have had to put up before the amendment.
    This led to me having 194 investors in RareBreed. Of those
    investors, 83.5 percent invested $50,000 or less.
        Many of these investors were people of color and first-time
    investors in funds because they had not had access to make such
    an investment and could not risk the high minimum thresholds
    for a fund. This means that, before, they were limited to
    investing in companies either directly, where there is a much
    higher risk of losing all of their money, or investing in
    stocks of publicly traded companies, which the average venture
    fund has historically outperformed, according to Harvard
    Business Review.
        Unfortunately, without something like the Improving Capital
    Allocation for Newcomers (ICAN) Act almost all of those small-
    dollar investors, who make up 83.5 percent of my 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 $250,000-plus.
        The current rules limit the amount of capital and sources
    of capital for smaller and newer investment funds, leading to
    less capital to help drive innovation, economic growth, and job
    creation, especially when talking about companies started by
    founders of color, because we know that, in particular, Black-
    led funds are four times more likely to invest in Black-led
    companies. Also keeping in mind that almost of the Black-led
    venture funds in America would fit under the new rules in the
    ICAN Act because most of our funds are under $150 million.
        With the ICAN Act, such limiting factors would be greatly
    reduced, allowing more accredited investors to have the
    opportunity to participate in this asset class. With lower
    minimums, investors can potentially invest smaller amounts of
    money into more venture 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 millions of dollars, if
    not billions, in potential funding for future innovation and
    job creation, while also excluding investors from being able to
    truly diversify their own investments and limiting the ability
    of 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 in America and
    put limits on the type of innovations we see in this country.
        I am excited to see Congress working through issues that
    impact the access to capital that drives 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 being supportive and assisting this committee in any
    way possible.
        Thank you for the opportunity to testify today. I look
    forward to any of your questions.

        [The prepared statement of Mr. Conwell follows:]
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        Chairwoman Wagner. We thank you, Mr. Conwell.
        Next we will hear from Ms. Kacaba.
        You are recognized for 5 minutes for your oral remarks.

       STATEMENT OF REBECCA KACABA, CEO AND CO-FOUNDER, DEALMAKER

        Ms. Kacaba. Chairwoman Wagner, Ranking Member Sherman, and
    members of the subcommittee, thank you for the opportunity to
    testify before you today.
        My name is Rebecca Kacaba. I am CEO and Co-Founder of
    DealMaker, the leading platform in online capital formation. To
    date, DealMaker has facilitated over $2 billion in capital
    raised for over 900 American companies, creating up to 40,000
    new jobs.
        I come from a family of entrepreneurs and am a former
    practicing attorney, having spent over a decade in private
    practice in the capital markets.
        The team at DealMaker have the distinct honor of working
    with founders building businesses they love. We see firsthand
    the difficulties of the entrepreneurs' journey and how much
    they and their families sacrifice to grow a business and create
    jobs in America. We know the founder who slept on the storeroom
    floor for a year until he could get his business funded. We
    know the founders who stake their personal relationships and
    reputations, raising money from friends, family, and
    colleagues, in order to get the idea, they believe in off the
    ground.
        The very hope, vision, and purpose of our founders is why
    we do what we do. This is the essence of the American Dream and
    what drives job creation.
        Every day, our team is privileged to serve these founders
    in the most fundamental way possible, and we take this
    responsibility seriously. We do this by implementing Congress's
    pioneering vision of the JOBS Act itself. In the spirit of this
    vision, we submit three proposals designed to ignite economic
    growth and create new American jobs.
        The first proposal is to remove the offering caps that
    inhibit growth and interfere with job creation.
        Reg A is capped at $75 million. At DealMaker, we regularly
    see companies who could raise more than $75 million. We ask
    Congress to remove the offering cap altogether. In the modern
    internet era, a cap on Reg A officially constrains growth.
    Because of the cap, companies are using alternative structures,
    like donations, tokens, or institutional funding.
        Removing the Reg A maximum creates a pathway to bringing
    unregulated capital-formation activities into a regulated
    space. To grow this space, we need to change the perception
    that only small companies can use the exemption.
        Reg CF (Regulation Crowdfunding) is currently capped at $5
    million, which should be increased to $10 million. The 2020
    increase in the Reg CF cap from $1.25 million to $5 million
    stimulated market activity by 250 percent.
        The Reg CF ecosystem is maturing, with a growing prevalence
    of broker-dealer participation as opposed to just funding
    portals. Companies are regularly reaching the $5 million cap on
    Reg CF offerings. When companies hit this maximum, they face
    two suboptimal choices: either return to traditional funding
    sources or prematurely transition to a more costly Reg A.
        Our second proposal is to harmonize the Reg CF and Reg A
    regimes.
        Today, Reg CF and Reg A exemptions are being used for
    similar purposes. Investors are investing in both types of
    offerings interchangeably. Accordingly, the rules between the
    two should be harmonized. The best elements of each regime can
    be combined and shared. This would be easier for businesses,
    investors, and market participants to understand and lead to
    better compliance.
        Three places where harmonization would remove significant
    friction are Rule 12(g), Rule 5110, and the marketing rules. We
    have cited a number of the bills tabled where these
    harmonizations can be addressed.
        Finally, the third proposal is to expand the availability
    of Reg CF and Reg A to more participants to grow the space and
    create more jobs.
        Currently, Reg CF restricts the amount of money companies
    under common control can raise. This restriction differentiates
    Reg CF from traditional capital-raising mechanisms and Reg A,
    which do not have such limitations.
        If the common-control prohibitions are removed; it would
    allow more VC-backed companies to enter the space. This would
    capitalize more mature funded businesses and could also
    increase the survival rate of venture-backed businesses.
        In conclusion, let us reflect on how far we have come.
    Since Congress enacted the JOBS Act in 2012, Reg A and Reg CF
    have raised $3.7 billion. Reg CF has outpaced venture capital
    growth by 4.4 times as compared to 1.3 times.
        The capital markets have been diversified, as Congress
    intended, to weather economic down-market conditions. During
    the worst year of the recent down-market cycle, in 2023, the
    online capital markets stayed over 40 percent stronger than the
    VC markets. Companies we supported survived and thrived when no
    one thought it would be possible.
        By increasing the offering limits, harmonizing the rules,
    and allowing for more capital markets participation in the
    space, Congress will unlock even more growth in online capital
    markets, leading to further job creation.
        The work that Congress is doing is critical and core to the
    job-creation ethos of America. As a result of your work, we
    have the privilege of seeing firsthand our customers' factories
    in new communities that are overlooked by Silicon Valley and
    Wall Street and the pride that it brings them.
        We are grateful for the opportunity to be a part of this
    hearing.

        [The prepared statement of Ms. Kacaba follows:]
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        Chairwoman Wagner. Thank you, Ms. Kacaba.
        Next on deck is Ms. Pinedo.
        You are recognized for 5 minutes for your oral remarks.

       OPENING STATEMENT OF ANNA T. PINEDO, PARTNER, MAYER BROWN

        Ms. Pinedo. Chairwoman Wagner, Ranking Member Sherman, and
    subcommittee members, thank you for inviting me. I appreciate
    this opportunity.
        I have been a Securities Lawyer for over 30 years, and I am
    a partner at Mayer Brown. My comments today reflect my own
    views.
        I began practicing in the early 1990s, when initial public
    offerings (IPOs), including IPOs by smaller companies, were
    quite plentiful. That gave me the opportunity to work on many
    IPOs for companies of all sizes. It was a time when the
    financing trajectory for companies was quite well-understood
    and predictable. Within 5 to 7 years of inception, a company
    generally sought a liquidity event, and usually that liquidity
    event was an IPO.
        Historically, an IPO allowed a company to raise a
    significant amount of capital--more capital than it could raise
    through any other means. An IPO was also regarded as an
    achievement for founders and for the company's investors.
    During that period of time, there was also an infrastructure
    that supported these companies.
        Over time, the market has evolved, as we have discussed.
    Exempt offerings have become more significant, with increased
    use of shelf registration statements, promulgation of various
    safe harbors, and shortening of the Rule 144 holding period. At
    the same time, there has been a proliferation of additional
    investors in the private markets--hedge funds, private credit
    funds, private equity funds, and other investors.
        The shift away from IPOs and the public markets has
    occurred as a result of market structure changes and increased
    regulation, with Sarbanes-Oxley and the Dodd-Frank Act, and the
    costs associated with being a public company. In recent years,
    more prescriptive disclosure requirements have arisen that add
    to this list. Recently adopted disclosure requirements have
    moved away from the bedrock principles of our securities
    framework, that of materiality.
        What is the upshot of all of this? We have fewer public
    companies now than in the 1990s. The overall number of IPOs has
    declined, based on historic levels. Smaller public companies
    are disproportionately impacted by the costs of being public.
        Once they are public, they benefit less from their
    publicness. What do I mean by this? I mean that once a company
    becomes public, historically it was always the case that it
    should be easier for these companies to raise money in the
    secondary market, that they would have liquid stock, that there
    would be research analyst coverage for them, but the historic
    promise of being public is not being realized for our smaller
    and medium-size companies. They are bearing the costs of being
    public, but they are not reaping the benefits. We should fix
    this.
        Reliance on funding in the private markets has outpaced
    reliance on registered offerings. Regulators and legislators
    have expressed concerns regarding the growth of the private
    markets and their opaque character.
        As I noted when I previously appeared before this
    subcommittee, it would be a really grave mistake to look at the
    private markets as being suspect and in need of regulation and
    the public markets, by contrast, as being transparent and as
    being the best and the only solution for most companies.
        Regulating the private markets out of existence is not
    going to magically bring back institutional investors who are
    going to support micro-cap and small cap stocks, nor is it
    going to magically bring back equity research coverage for
    small and micro-cap stocks that would be forced to become SEC
    reporting companies before they are ready to do that.
        It is important to recognize that the markets have changed
    in really significant and irreversible ways and not to respond
    with reactionary responses.
        Most private investments are limited to accredited
    investors. Only 19 percent of U.S. households qualify as
    accredited investors. However, in practice, I can tell you that
    most investments are limited to institutions and not to
    accredited investors. Most of the bills under consideration
    today would fix this.
        In addition, they would strike the right balance and reach
    a new equilibrium between private and public and address other
    changes, including providing access to a broader group of
    individuals through potentially registered funds and providing
    greater access to capital formation for BDCs and other
    registered funds that address capital formation.
        In my testimony, I suggest a number of other
    recommendations for consideration.
        I thank you for your attention.

        [The prepared statement of Ms. Pinedo follows:]
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        Chairwoman Wagner. Thank you, Ms. Pinedo.
        Ms. Thornton, you are now recognized for 5 minutes for your
    oral remarks.

     STATEMENT OF ALEXANDRA THORNTON, SENIOR DIRECTOR OF FINANCIAL
      REGULATION, INCLUSIVE ECONOMY, CENTER FOR AMERICAN PROGRESS

        Ms. Thornton. Thank you.
        Chairwoman Wagner, Ranking Member Sherman, and members of
    the subcommittee, thank you for the opportunity to testify
    today.
        Capital markets work best when there is an informed bargain
    between the seller and the buyer of securities. Investors
    seeking returns provide their capital to businesses and funds,
    who in turn put that capital to use.
        Information is an essential part of that bargain. Without
    it, there would be significant investor loss and economic
    waste. U.S. capital markets are the most robust in the world,
    in large part because they require those seeking to raise
    capital from investors to provide basic information to
    investors.
        The government does not block investors. It does not
    approve or disapprove of investments. Congress decided long ago
    that investors needed the government to ensure they had
    fundamental accurate information and basic rights, and, with
    those tools, investors would be empowered to drive our capital
    markets and economy forward.
        The disclosure of information improves price discovery,
    makes the markets more fair, more orderly, and more efficient,
    and protects investors from abuses, such as information
    asymmetry. Even the most sophisticated investors cannot
    exercise their superior knowledge and expertise if they do not
    have reliable information about a company's financials,
    operations, and risks.
        Many of the bills before the committee today, however,
    would expand the ability of private market companies and funds
    to sell securities to a broader range of investors without
    providing accurate information about operations, management,
    risks, and financial position--the amount and type of
    information that potential investors and other participants in
    the public markets receive.
        This is not expanding or improving capital formation, it is
    increasing risks for more investors and tilting the bargain in
    favor of the private party seeking capital. It is expanding the
    reach of those hidden risks into potentially millions of
    American homes.
        The timing for many of these proposals seems particularly
    ill-advised. Private markets are becoming ever larger. Without
    mandated information, asset prices frequently become detached
    from the underlying intrinsic values of the assets themselves,
    especially among large, highly valued private firms, or
    unicorns. Private company and private fund stakes are
    frequently being sold in loosely regulated secondary markets at
    fractions on the dollar. Different groups of investors are
    frequently treated differently and provided with different
    information or none at all. While there is strong evidence that
    fraud occurs, it is difficult to police.
        Introducing to these markets' nonprofessional investors,
    who do not have dedicated accountants, lawyers, risk officers,
    or investment professionals or billions of dollars that they
    can afford to leave locked up for 10 years at a time, is
    extremely risky and will likely lead to extensive losses for
    those investors and waste of capital. It could facilitate the
    ability of private companies, funds, and their founders and
    early investors to offload their riskiest, worst opportunities
    onto a less discerning customer. That is not improving or
    forming capital, it is simply enabling a wealth transfer away
    from the retail investors who lack information.
        Worse, the Securities and Exchange Commission, which
    ensures this essential bargain between companies, funds, and
    investors, is facing significant changes right now that could
    hamper its ability to protect investors.
        When the securities laws were first adopted and, in the
    decades thereafter, offerings to even a single person or to a
    small number of employees were deemed to be public offerings in
    need of being registered. Beginning in 1982 with the
    promulgation of Regulation D, there has been a proliferation of
    exemptions from the public disclosure framework.
        The stated intention of those exemptions, and their
    subsequent expansions has been to provide more access to
    capital for small businesses, but the reality is that those
    exemptions, along with a couple of loopholes in the law, have
    enabled virtually any company of any size to obtain capital
    from the public without complying with the public disclosure
    framework.
        As a result, a substantial and growing number of companies
    are choosing to remain private as they raise capital and often
    only end up coming to the public markets to cash out
    significant investors and founders.
        The result of Congress and the SEC creating and expanding
    exemptions from the Federal regulatory disclosure framework is
    that the vast majority of capital raised is exempt, and that
    explosive growth of the private markets has come at the expense
    of public markets.
        The problem is not that the rules prevent small businesses
    or startups from obtaining capital. It is that the rules today
    allow companies with billion-dollar valuations, billions in
    revenues, and thousands of investors to never provide basic
    information to investors, regulators, and the public, and
    private funds to raise billions of dollars from underlying
    investors without basic expectations, like timely,
    comprehensive, and reliable disclosures about their finances,
    governance, and operations.
        This situation enables capital distortion, like inflated
    valuations, lax internal controls, inconsistent disclosures
    across investors, and potential fraud and abuse. Today, there
    are more than 1,200 private companies with more than a billion
    dollars each.
        In my written testimony, I have included several
    recommendations for how to rebalance public and private
    markets.
        I want to thank you for inviting me to testify today. I
    look forward to answering question.

        [The prepared statement of Ms. Thornton follows:]
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        Chairwoman Wagner. I thank you, Ms. Thornton, for your
    testimony.
        We will now turn to member questions. I recognize myself
    for 5 minutes for questioning.
        Mr. Barnell, access to venture capital funding is not
    evenly distributed, with most funding concentrated in
    California, Massachusetts, and New York. Entrepreneurs in other
    parts of the country, such as St. Louis, where you and I come
    from, face greater difficulties in raising the capital
    necessary for scaling.
        Can you discuss some of the difficulties you faced early on
    in raising capital?
        Mr. Barnell. Absolutely. We faced no shortage of
    challenges. We were two students, first-time entrepreneurs,
    raising capital in an industry that is highly regulated and
    technical.
        I would say, hands down, the biggest challenge we had early
    on was that in St. Louis, there are only a handful of early-
    stage venture firms. Raising those first couple rounds is
    always the most challenging and so raising that capital was
    definitely the biggest challenge.
        Chairwoman Wagner. Have you ever met with VCs in
    California, for instance? What was your experience trying to
    gain investor interest in your company?
        Mr. Barnell. Extensively. We spent a lot of time, even
    early on, going to the coasts, and one of the things that we
    found, particularly for early-stage investment, angel/seed, is
    that investors like to invest in their own backyard.
        I remember an angel investor who ran a fund out in San
    Francisco telling me, ``We love what you are doing. We love the
    technology you have built but why would we invest in you when I
    can invest in 25 companies just like you in San Francisco?''
        Chairwoman Wagner. Mr. Barnell, can you discuss how the
    policies discussed today and the bills that we are putting
    forth, some 36 of them, can improve access to capital for
    startups in areas like St. Louis?
        Mr. Barnell. Yes. One of the other things I wanted to
    highlight from my experience--and I will focus on our early
    rounds as well--there is no shortage of people that want to
    invest in innovation, want to invest in companies like ours,
    the next big growth companies in the country, but I can say,
    coming from St. Louis versus traditional VC hubs, we do not
    have as many of those systems and infrastructures to do it.
    There are not as many demo days and incubators----
        Chairwoman Wagner. Uh-huh.
        Mr. Barnell [continuing]. and angel funds for people to
    join and participate in.
        As I mentioned in my written testimony, things such as
    making it easier for venture funds to form, making it easier to
    make venture investments, crowdfunding, being thoughtful about
    the ``accredited investor'' definition--all of those things
    really would help companies like ours.
        Chairwoman Wagner. Thank you, Mr. Barnell.
        Ms. Pinedo, retail investor access to pooled investment
    vehicles that invest in our private markets seems to be overly
    restrictive, whether it be through closed-end funds or other
    types of funds.
        Do you believe that such restrictions on retail access are
    justified?
        Ms. Pinedo. I agree that retail access is overly
    restrictive, in particular into interval funds, closed-end
    funds, and other funds.
        To address some of the concerns that Ms. Thornton alluded
    to, it would be prudent to look at modernizing the regulation
    of funds and fund access for retail investors. That is included
    in my testimony, including specific recommendations along those
    lines.
        It would be a way to allow access to other investors in a
    very controlled way within the framework provided by the
    Investment Company Act and with information requirements. It
    would address many of the concerns that Ms. Thornton
    recommended.
        Currently, for example, many funds can only be sold to
    qualified clients. Many funds are limited in their ability to
    invest in private funds or in private securities. A number of
    the bills under consideration address the restriction----
        Chairwoman Wagner. Would address that, correct.
        Now, let me ask you, would removing the limitations on
    closed-end fund investments in private securities help address
    this issue?
        Ms. Pinedo. It would address, in part, the issue of
    directing more--of increasing or promoting capital formation.
    And----
        Chairwoman Wagner. Is there anything in the closed-end fund
    proposal discussed today that would remove investor
    protections?
        Ms. Pinedo. Not one thing.
        Chairwoman Wagner. Why are private markets significant to
    capital formation, and why should we pursue policies that make
    private markets an attractive place to raise capital? Do such
    reforms have to come at the expense of making our public
    markets more attractive?
        Ms. Pinedo. We should not see it as a zero-sum game. It
    would be entirely wrong for us to see these as in conflict with
    one another.
        The SEC's Office of Advocate for Small Business, which
    takes into account and has as its goal investor protection,
    makes it quite clear that the private markets should not be
    seen as competing with the public markets. We need vibrant----
        Chairwoman Wagner. Thank you.
        Ms. Pinedo [continuing]. private markets.
        Chairwoman Wagner. Thank you, Ms. Pinedo.
        Ms. Pinedo. You are welcome.
        Chairwoman Wagner. The chair now recognizes the ranking
    member of the subcommittee, Mr. Sherman, for 5 minutes for
    questions.
        Mr. Sherman. As our first witness pointed out, 90 percent
    of these startups fail, but it is a national interest to see
    them funded, because the 10 percent that succeed can
    revolutionize our society. That is why we need to make sure
    that these companies are able to get bank loans, that BDCs are
    able to invest, and that individual investors can invest. We
    want to protect the individual investors.
        Republicans have often said that there has been a decline
    in the number of public companies and, therefore, there should
    not be--and that is because we put too many burdens on public
    companies. If you want to register securities, it is not that
    easy.
        Another reason why there are fewer public companies is that
    we have made it easier to stay private. Nothing is a greater
    example of that than the definition of ``accredited investor,''
    which in effect has been over 90 percent repealed. You might
    ask, ``Well, the statute is the same.'' Yes, the statute says a
    million dollars makes you wealthy, because it was passed in the
    1970s. That today would be $7.7 million.
        We have, by inaction--I think any statute that we pass that
    does not have an inflation adjustment in it is a mistake and
    this one is a big mistake. It has not been adjusted for a long
    time, so we have made it much, much easier to be an accredited
    investor on the wealth and income standard, assuming that is
    even the right standard.
        Ms. Thornton, we have another rule, and that is, a company
    becomes public if it has 2,000 beneficial owners, but we have a
    giant loophole. First of all, we allowed the SEC to take that
    from 500 to 2,000. Arguably it should be taken back.
        When we count beneficial owners, if there are 5,000
    customers of Merrill Lynch who all have chosen to invest in a
    single security, those 5,000 people, how many do they count as
    under this rule?
        Ms. Thornton. Probably one.
        Mr. Sherman. One. That is new math taken to a whole new
    level.
        If we are going to have a limit on beneficial owners--and I
    think we should--we have to see through the street name. It is
    convenient to hold the security in street name, but we can
    count the beneficial owners.
        As to accredited investors, a lot of our discussion here is
    on how to reform that. We have now a standard based on wealth
    and income. Really, we set those standards in the 1970s, so
    they are crazy, but wealth and income--even why are those
    relevant? They either connote knowledge, on the theory that
    rich people know a lot about money--sometimes--or ability to
    absorb the loss.
        I would say that we ought to devise standards that are
    focused on knowledge--MBA, CPA, maybe attorneys, or the
    advisory team, then it must be truly independent--and focus on
    ability to absorb a loss.
        Because our current rule makes you an accredited investor
    to invest 5 or 10 percent of your money in one of these
    startups or 120 percent of your net worth in one of these
    startups. We value your wealth based on how much money you
    have, independent of your home. Then we say, you can put a
    mortgage on your home now that you are an accredited investor
    to invest in a company with a 90 percent likelihood of failure.
        I look forward to working with a definition of ``accredited
    investor'' that focuses on limiting the percentage of one's net
    worth or income that you are investing in any one issuance,
    limiting what you put into all private companies, and focusing
    on knowledge of the investor or their truly independent
    advisory group or advisors.
        To have wealth or income--the idea that somebody has an
    income of $200,000 and therefore is highly knowledgeable and
    expert? Again, my colleagues have incomes of $200,000 just for
    working in Congress, and only some of them are geniuses.
        I look forward to working on that, and I yield back.
        Chairwoman Wagner. The gentleman yields back.
        The chair now recognizes the gentleman from Arkansas, Mr.
    Hill, who is also the chair of our full Committee on Financial
    Services, for 5 minutes.
        Chairman Hill. Thank you, Chairwoman.
        Again, thanks to the panel for great testimony. We
    appreciate you being with us today.
        Ms. Kacaba, I wanted to talk about the SEC's estimates on
    the cost of being a public company. These are the same numbers
    that I have in my notes from 2015, so they do not seem very
    updated to me. They say that, to go public, a traditional IPO
    has upfront costs of about $2.5 million and annual compliance
    costs of $1.5 million thereafter.
        I was the interim chair of a small cap public company
    before I came to Congress, probably 10 or 13, 14 years ago, and
    our quarterly bill from just the accounting firm was $400,000 a
    quarter.
        Those numbers seem super-out-of-date to me. Do you think
    they are accurate?
        Ms. Pinedo. If it is okay, I will volunteer and answer
    that.
        Chairman Hill. Yes, I directed it to you, so you----
        Ms. Pinedo. Oh. I am Anna Pinedo.
        Chairman Hill. Okay.
        Ms. Pinedo. Yes.
        Chairman Hill. I cannot see your name from over here.
        Ms. Pinedo. That is quite all right.
        You are absolutely correct that those are quite low. The
    average cost of going public for a company these days is more
    in the line of, just for--is probably more around $4 million,
    without counting the underwriters' spread, which is usually 7
    percent of the amount that is offered, and then the cost of
    being public.
        In the SEC's Office of Advocate for Small Business, the
    costs are estimated in the study that the SEC put out in
    December 2024, and the costs are significantly higher, just as
    you have recounted.
        What is even more significant and more troubling, as noted
    in the SEC's Advocate study, is that the costs were
    disproportionately borne by smaller----
        Mr. Hill. Yes.
        Ms. Pinedo [continuing]. and medium-size businesses,
    particularly the costs associated with----
        Mr. Hill. Right.
        Ms. Pinedo [continuing]. Sarbanes-Oxley (SOX) compliance.
        Chairman Hill. Yes, this has been a 25-year race to the
    bottom for encouraging companies to be public in this country.
    We can do that in a safe and sound way, but the company that I
    served as an interim chair of so many years ago just could not
    possibly do this. It had a market cap at the time of, like, $75
    million to $100 million, and they were spending $6 million--
    their profitability was probably $6 million to $10 million in
    earnings before interest and tax, and they were spending what I
    just said $2 million of that, a third, on being public. It was
    a preposterous idea, and they went private, as you can imagine.
        We do not have 5,000 companies in the Wilshire 5000
    anymore. We have 3,700, so we do not even have enough
    qualifying public companies to be in the Wilshire 5000 index.
    We only have 3,700, and that is because these costs are out of
    control--in addition to the benefits of being private.
        I am for--if people want to be private, those costs have
    come down, the compliance burden is better. You can get to be a
    much larger-cap company with private financing. No problem. For
    people who want to access the public markets, we have built a
    wall that is ridiculous.
        Let us say we want these costs you are talking about to be
    1 percent of total expenses. You would have to be making, by my
    calculation, $500 million before tax to warrant being public.
    That is ridiculous. We are choking off the golden goose that
    lays the golden egg for pension funds, labor pension funds,
    individual retirement accounts (IRAs), 401(k) accounts.
        Ms. Pinedo. Yes----
        Chairman Hill. I hope, Madam Chair, that we can do
    something about this ongoing cost and work with the Securities
    and Exchange Commission and those commissioners to bring it
    down to give more opportunities to our businesses seeking
    liquidity that way.
        Let us talk about accredited investors briefly. Do you
    think my idea of people that have professional qualifications
    in their area of expertise merits them being considered an
    accredited investor?
        Ms. Pinedo. Consistent with some of the changes that the
    SEC made in 2020 of adding professional qualifications, yes.
    This goes to what Mr. Sherman was saying, of financial
    sophistication.
        Chairman Hill. Right.
        Ms. Pinedo. Financial sophistication has always been at the
    root of the definition.
        Chairman Hill. Thank you very much for that.
        Madam Chair, my time has expired. I yield back.
        Chairwoman Wagner. The gentleman yields back.
        Yes, we have a number of bills that we hope are going to
    help increase access to our public markets. America has fallen
    behind.
        The chair now recognizes the gentlewoman from California,
    Ms. Waters, who is also the ranking member of the full
    committee, for 5 minutes.
        Ms. Waters. Madam Chair, thank you so very much.
        While a lot of time has been spent on what is and what is
    not happening with the SEC, I am reminded that Democrats have
    really been in the forefront of providing access to capital in
    support of small businesses. Democrats have a long history of
    promoting capital formation both for small businesses and for
    communities that have been historically shut out of our capital
    markets and banking system.
        Now, if you will recall, during the pandemic and after, it
    became clear that the Paycheck Protection Program (PPP) was
    only serving megabucks and concierge clients. When we put that
    money together and some of the biggest corporations, et cetera,
    went after the money and we were able to put more money into
    it--Nydia Velazquez and I put another--I think it was about $60
    billion--into the small businesses, the community banks, et
    cetera, et cetera. What I realized during PPP was how good it
    is for us to be able to make capital available to small
    businesses.
        When I travel around the country, and I ask the small-
    business people how many participated, their hands go up,
    because they remember, and it saved their businesses. It helped
    them to keep their personnel, et cetera, et cetera.
        Additionally, in December 2020, I worked with Secretary
    Mnuchin--who happened to be a Republican--and Democratic
    colleagues to secure $12 billion in capital investments and
    grants for Community Development Financial Institutions
    (CDFIs).
        Now, CDFIs are very important. We have worked very hard,
    and I want to know whether or not the opposite side of the
    aisle are going to support us as we go for increases for CDFIs
    so that we can have more money for small businesses. It really
    has done a great job in helping them to have access to capital.
        I want you to know that the CDFIs and these minority
    depository institutions could be leveraged up to $120 billion
    in new financing for small businesses.
        In the American Rescue Plan, I led the effort to provide
    $10 billion to the State Small Business Credit Initiative to
    support tens of billions of dollars in new loans, investments,
    and technical assistance to support small businesses.
        We have several pieces of legislation, like my bill
    entitled ``Promoting and Advancing Communities of Color Through
    Inclusive Lending Act'' to authorize $4 billion in additional
    support for CDFIs and minority depository institutions.
        We have done a heck of a lot for small businesses.
        It is time to stop talking about ``we have to do more''--
    ``the only thing we can do is get rid of regulations that
    protect people.'' The SEC is our cop on the block, and they
    protect these investors. It is time to talk about what we are
    all willing to do to make sure we have access to capital. We
    have avenues by which we can appropriate money into in order to
    do what we talk about we want to do.
        I am going to have a whole package of bills, more bills, on
    how we can support access to capital for small businesses, and
    I want some support from the opposite side of the aisle, okay?
        I am sorry I did not have any questions for you. We have
    been talking about this for years. I am trying to help
    everybody to understand this. It is time to act. Capital
    formation should be at the top of our agenda.
        I yield back.
        Chairwoman Wagner. All right. I thank the gentlelady. She
    yields back, and I thank her for her passion and fervor on this
    issue.
        It is--capital formation is the basis of who we are, in
    terms of the American economic system and capitalism. We passed
    36 capital formation bills across the House floor last year,
    many in a bipartisan way, and we hope to get Senate support
    this time around.
        I now recognize the gentleman from Oklahoma, Mr. Lucas, who
    is also the Chair of the Task Force on Monetary Policy,
    Treasury Market Resilience, and Economic Prosperity.
        You are recognized for 5 minutes, sir.
        Mr. Lucas. Madam Chair, before I begin, I would like to
    submit for the record a letter of support from MetLife on my
    bill with Mr. Gottheimer, Mr. Foster, and Mr. Barr, the
    Retirement Fairness for Charities and Educational Institutions
    Act.
        Chairwoman Wagner. Without objection.

        [The information referred to can be found in the appendix.]

        Mr. Lucas. Thank you, Madam Chair.
        Thank you to our witnesses for testifying today.
        The United States has the most robust capital markets in
    the world. Businesses, investors, the whole economy benefit
    when private and public markets are strong, resilient, and
    attractive. I think we all agree on that.
        Mr. Barnell, could you continue to talk for a moment about
    why we should focus on improving access to markets,
    particularly in capital-intensive industries? I am from
    Oklahoma, and so agriculture and energy are near and dear to my
    heart, but they are incredibly capital-intensive.
        Mr. Barnell. Absolutely.
        Speaking to our experience and speaking to St. Louis in
    particular, there are so many great ideas coming out of
    academic institutions, but capital is needed early on. We hear
    a lot about minimum viable products and beta testing. In
    capital-intensive industries, you need capital to prove out the
    concept before you can take the next step. Ensuring we have
    policy that does that is critical.
        Mr. Lucas. During the previous administration, the SEC
    pursued an aggressive rulemaking agenda. The breadth and depth
    of those rules were simply unprecedented. We have never seen
    anything like it. I have made the point that the former Chair
    seemed to value speed and scope over quality during his tenure.
        In my view, the SEC should prioritize robust public
    engagement so we can trust that rulemakings are bolstering our
    markets, not stifling them.
        Ms. Pinedo, how can this administration differ in its
    regulatory approach to strengthening both public and private
    markets? Please.
        Ms. Pinedo. We have already seen a very different tone from
    the Acting Chair of the SEC. He has articulated in a speech
    just yesterday that the SEC intends to engage the public and
    solicit comments from the public and intends to prioritize
    capital formation, which is very welcome, and intends to
    solicit comment from the public on rulemakings, again,
    returning to the SEC's historic tradition.
        In terms of the bills that are before the subcommittee
    today, I think that they strike an appropriate tone in
    considering the realities of the private markets and
    acknowledging that we are not going to roll back time, and we
    need to really do what we can to foster robust private markets
    while doing so in a way that acknowledges the importance of
    investor protection.
        Whether that is promoting changes to the ``accredited
    investor'' definition that recognizes that there are additional
    financially sophisticated parties that can be accredited
    investors. For example, if they are chaperoned by registered
    broker-dealers, by registered investment advisors, if they are
    advised by others in making those decisions, if they pass a
    test that is administered by the SEC or by Financial Industry
    Regulatory Authority (FINRA), those are good qualifications and
    are wholly consistent with the mission of identifying investors
    that can fend for themselves. Those are not loopholes. Those
    are good, viable ways to qualify somebody as an accredited
    investor.
        Likewise, a lot of the changes that are considered in the
    bills today that would modify, for example, the rules relating
    to business development companies, that would reverse the SEC's
    policy from 2006 relating to acquired fund fees, that would
    bring more investors into business development companies, that
    is an important change. It would bring more capital and more
    investors into BDCs, and that would promote capital formation.
        We spoke a little bit about closed-end funds previously
    when Chair Wagner asked about it. That would allow closed-end
    funds to be sold to investors that are not accredited
    investors--again, an important change that would be beneficial
    yet protective of investors, because closed-end funds are
    regulated under the Investment Company Act of 1940 and under
    the Securities Act of 1933. All of those things are very
    positive.
        Mr. Lucas. Thank you for those insights.
        It is important we listen to stakeholders once in a while,
    is it not, Chairman?
        Chairwoman Wagner. Hear, hear.
        Mr. Lucas. I yield back.
        Chairwoman Wagner. Hear, hear. We are going to have a great
    opportunity, FinancialServices.house.gov, right following this
    hearing, so everyone, all stakeholders, can give their 2 cents.
        The chair now recognizes the gentleman from Georgia, Mr.
    Scott, for 5 minutes.
        Mr. Scott. Thank you, Madam Chairman.
        Now, Ms. Thornton, the equity market has been transformed
    by an explosive growth in the private equity space. Twenty-five
    years ago--just think--we had 7,000 listed public companies in
    the United States and less than 1,000 companies owned by
    private equity investors. Today, more than 10,000 are owned by
    private equity investors and just 4,000 are now publicly
    listed.
        How do you account for this?
        Ms. Thornton. Basically, it is because the rules have been
    changed since around 1982, as I said in my testimony, and
    expanded the exemptions to the public disclosure framework and
    the need for companies to be public companies and comply with
    that framework.
        We also have an erosion of the 12(g) limit on company size
    when they can be in the private markets. Now companies whose
    shares are held by an institutional manager of some sort can
    basically count as one share, and so, when you have that 2,000-
    shareholder limit, it is kind of meaningless when you have that
    situation and you have huge companies in the private markets.
    Now, basically, companies can grow huge in the private markets.
        Mr. Scott. Uh-huh.
        Ms. Thornton. We have 1,200, as I said, worldwide in the
    private markets. Over 600 of those are U.S.-based companies.
    Many of them are multibillion-dollar companies.
        They are not mandated to disclose information, which is--I
    hear comments about how much disclosure has to be made when you
    go public. The reality is that when companies do fill out all
    that IPO information and for the first time in perhaps years
    disclose their financials and those financials are audited by
    an independent auditor, of course information comes out about
    the true value of the company.
        I think it is incumbent upon us to insist that, for new
    investors especially, that information be disclosed. It is
    critically important when a company has not been disclosing for
    many years.
        Mr. Scott. Thank you.
        Now, we are always concerned about the two anchors that
    weigh here: interest rates on one hand, inflation on the other.
        How do you see that having an impact, those two?
        Ms. Thornton. I am not--I am not really sure about that,
    but I think that, as long as we make the rules such that people
    have a lot of options for raising money, then they should be
    able to do so.
        We may need to provide more opportunities for small
    businesses, for example, to actually get loans and to have more
    funding, through CDFIs or whatever. We also need to make sure
    that public companies--all companies disclose what the impact
    of those changes in interest rates and changes in inflation
    have on their company, on their financials.
        It is critically important, for example, that we have the
    Public Company Accounting Oversight Board, which makes sure
    that the auditors who audit financials of public companies
    actually are doing everything right.
        I think that is maybe how it is connected. I have kind of--
    --
        Mr. Scott. Uh-huh. Yes.
        Ms. Thornton [continuing]. danced around it here, but I
    think that is really how it is connected. We need to keep all
    that structure in place to make sure that investors have
    information about the impacts of these market factors.
        Mr. Scott. Yes, you are absolutely right, because right now
    these are the two parameters we are dealing with----
        Ms. Thornton. Yes.
        Mr. Scott [continuing]. interest rates and inflation. Our
    Administration is dealing with this. We are dealing with it. We
    are moving to downsize the Federal Government. We are doing
    things right now that have never been done and restructuring
    it. We have to be careful, and I like your points on what we
    have to do.
        Thank you very much.
        Ms. Thornton. Certainly.
        Chairwoman Wagner. The gentleman yields back.
        The chair now recognizes the gentleman from Texas, Mr.
    Sessions, for 5 minutes.
        Mr. Sessions. Madam Chairman, thank you very much. This is
    the most interesting hearing on not just capital formation but
    the development of small-business IPOs and all the things that
    lend themselves to America's future.
        Madam Chairman, I would like to ask unanimous consent to
    enter into the record a letter from Mr. Teague Egan, founder
    and CEO of an Energy Explorations Technologies, known as
    EnergyX, where he talks about ``The Future of American Capital:
    Strengthening the Public and Private Markets by Increasing
    Investor Access and Facilitating Capital Formation.''
        I ask that it please be entered in the record.
        Chairwoman Wagner. Without objection.

        [The information referred to can be found in the appendix.]

        Mr. Sessions. Madam Chairman, we heard from Andrew Barnell,
    who is from St. Louis, Missouri, where I used to live. I know
    St. Louis pretty well. He spoke about not just the need for
    IPOs and new economic drivers for small business but talked in
    his testimony to us about maybe being isolated in a market that
    was not as robust for raising money.
        I would like to go, if I can, to Ms. Pinedo and talk with
    her about--and I read in her bio about how she brings a lot of
    money from overseas to America, foreign financing that is here.
    I would like to drill down on some of this because you talked
    about a balance that was necessary between private and public
    registered funds.
        Specifically, I would like to talk about the role of
    engaging finders within the broker-dealer community. We do
    legislation here and if you have any ideas about exempting
    finders from registration maybe in certain areas but adding to
    this marketplace in cities that may be out of large investor
    areas, I would like to ask you to please help us along that
    thinking, please.
        Ms. Pinedo. Sure.
        The SEC has considered and various advisory committees to
    the SEC have considered a finders' exemption and have suggested
    a framework for an exemption for finders for a number of years
    now. The Small Business Forum that the SEC hosts every year has
    suggested and recommended that the SEC adopt a framework for
    finders.
        I think that a limited framework for finders from the
    exemption for registration from broker-dealers would be
    something that would be advisable. However, it should be a
    limited framework in light of the fact that we do have a need,
    both at the State level and at the Federal level, to register
    persons who are providing services that are broker-dealer-
    related.
        I would look at the language that the Securities and
    Exchange Commission has considered previously in terms of the
    finders' exemption and the language that the advisory
    committees to the SEC have previously considered in terms of
    what would be appropriate by way of a finders' exemption.
        Along those lines, I would also consider adopting finally--
    you brought up the topic of foreign activity. I would consider
    adopting the--or encouraging the SEC to undertake a study
    regarding adopting the amendments to 15a-6, which are
    exemptions for foreign--for certain--the activities by foreign
    broker-dealers for limited activities in the United States.
        These were amendments that were proposed by the SEC. They
    were well-received, generally, by practitioners and by others,
    and they were languished. They relate largely to the activities
    of foreign broker-dealers with major institutional investors.
        Mr. Sessions. This is all, I think, good news, at least to
    me, because we found that there are people that want to
    overregulate not only broker-dealers. They want to come in with
    other areas of government and hold people necessarily
    accountable about factors that were beyond their control--
    perhaps inflation, perhaps interest rate changes. I think it is
    very important.
        I want to thank each of you for being here today.
        I think, Madam Chairman, that gives us lots of room to work
    within a well-regarded idea, and I want to thank you for
    holding this hearing today.
        I yield back my time.
        Chairwoman Wagner. Thank you.
        The gentleman yields back.
        The chair now recognizes the gentleman from California, Mr.
    Vargas, for 5 minutes.
        Mr. Vargas. Thank you very much, Madam Chair, and I
    appreciate very much this hearing today. I thank the ranking
    member also.
        Most of us are interested in protecting investors without
    sacrificing opportunities to generate wealth, and I think that
    is what we have been talking about today. I do think that
    constant disclosure, as has been mentioned many times here--you
    have to place that against, versus the information that you
    need, the accurate information to protect investors. That is
    one of the issues I want to talk about.
        The second one is--and I do not want to put words in
    anyone's mouth, but I did hear someone say that there really is
    no conflict between the private and the public market. I am not
    sure that is true. If it is, I would like to see it because it
    does seem that one benefits off the other a little bit.
        Then, lastly, about the accredited investor, because I do
    agree with Mr. Sherman that it is not only wealth or assets,
    but also knowledge--although I would almost challenge him to
    tell us which one of our colleagues is not a genius. In fact, I
    would give him a few seconds here if he wants to name names.
        Anyway, let us start with the cost of disclosure.
        Ms. Thornton, you heard it here, and I think it is true: If
    you have a company that is making $6 million a year and $2
    million of it has to go for all these disclosures, that is an
    impossibility.
        What do you say to something like that, the example that
    was given by the chair of the full committee?
        Ms. Thornton. Perhaps we should think about what we require
    of those companies. It is always important to look back at
    regulations and rules and make sure that they accomplish what
    you want them to accomplish.
        On the other hand, when you talk about small businesses and
    startups, there are risks there. There is a reason why, if they
    go to a bank, the bank requires a lot more from them than they
    would from a much larger, well-established company that has for
    years disclosed audited financials and so forth.
        I am not an expert on the different costs that are charged,
    and there may be fees that are excessive that are charged when
    this happens. I am not sure.
        Mr. Vargas. Let me----
        Ms. Thornton. I would look at all those.
        Mr. Vargas. Let me ask Mr. Barnell.
        You obviously have a company here that you are starting,
    and I hope you do have success. It certainly is a very noble
    cause. What about those costs we were just talking about?
        Mr. Barnell. We are still a private company----
        Mr. Vargas. Right.
        Mr. Barnell [continuing]. and we do robust reporting, and
    we do Public Company Accounting Oversight Board (PCAOB) audits,
    and so we have financials and all those sorts of things.
        As a private company who is preparing to be public at some
    point--I do not have all the details of who we talked to,
    investment bankers and others. We know that there are several
    million dollars of annual costs as well as a number of hires
    that would need to be made within the company solely to deal
    with public reporting. So----
        Mr. Vargas. Is it a barrier that you think is
    insurmountable? Or do you think it is a barrier that is
    reachable?
        Mr. Barnell. I think it is not--nothing is insurmountable,
    right? I think it is certainly a consideration that would
    delay--it is a consideration that--we might go public later as
    opposed to earlier if we take those costs into consideration.
        Mr. Vargas. Okay.
        Let us, then--talking about the private versus the public,
    why do we not go back to you, Ms. Thornton. You heard that--
    and, again, I do not want to put--I hate when people put words
    in my mouth, but I did think I heard there is really no
    conflict. Is that true?
        Ms. Pinedo, you were shaking your head. I will give you the
    opportunity too----
        Ms. Pinedo. It is not that there is no conflict. What I
    said is that, as a legislative and as a regulatory matter, we
    should be encouraging both a thriving private market and a
    thriving public market, not that there is no conflict. That
    would be reductionist.
        There are reasons why some companies choose to be private
    and why we have private markets, and there are good and
    sufficient reasons why we should be encouraging companies to go
    public----
        Mr. Vargas. Okay. Let me give Ms. Thornton a chance to
    challenge that potentially.
        Go ahead.
        Ms. Thornton. Yes. I would say two things.
        One is, the companies that grow extremely large in the
    private markets, they are doing a couple of things. They are
    looking at public companies to try to justify their valuations
    rather than providing detailed information about their
    financials and everything else to justify their valuation.
        By the way, in a public company that discloses a lot of
    information, is having market participants look at the company,
    look at the information that is disclosed, and they are
    analyzing it. That provides a lot of support for other
    investors who are looking at that company to invest.
        You have large private companies that are competing with
    similar companies in the public markets and that does not
    seem----
        Mr. Vargas. Okay. My time has expired, and I yield back,
    and I thank the chair.
        Chairwoman Wagner. The gentleman yields back.
        The chair now recognizes the gentleman from Ohio, Mr.
    Davidson, who is also the Chair of the Subcommittee on National
    Security, Illicit Finance, and International Financial
    Institutions, for 5 minutes.
        Mr. Davidson. I thank the chairwoman.
        I thank you, our witnesses, for being here today and for
    your work in this field.
        I ask unanimous consent to submit this letter from the
    Accredited Investor Alliance supporting our work to expand
    market access.
        Chairwoman Wagner. Without objection.

        [The information referred to can be found in the appendix.]

        Mr. Davidson. America is home to less than 5 percent of the
    world's population, but we account for nearly 25 percent of
    Global Gross Domestic Product (GDP). Even better, our capital
    markets account for more than 50 percent of the world's
    invested capital. Unfortunately, this abundance is not easily
    accessed by most Americans.
        Now, as investors, Americans benefit more than most
    countries because our retirement savings are overwhelmingly
    deployed and invested in our capital markets, and this is not
    the case around the world. Even in Europe, it is not as common.
        However, when American companies want to raise capital,
    they often confront substantial barriers, as you all have
    highlighted today.
        One of the most basic problems is the ``accredited
    investor'' limitation. Essentially, unless you are already
    rich, it is harder to get rich. This paternalistic approach
    from government limits individual freedom to invest your own
    money. It is supposed to protect investors, but the reality is,
    in practice, it protects deal flow for the donor class. For
    simplicity, current law equates wealth with sophistication.
        The problem is especially acute for entrepreneurs who need
    to access capital to grow their businesses. Generally,
    businesses have no ambition to build the sort of scale that it
    takes to access traditional capital markets. An initial public
    offering, as Ms. Pinedo highlighted, costs millions and can
    take millions more in compliance and recurring costs.
        It is entirely unsuited to small and mid-market firms,
    particularly those who want to remain private. While large
    companies can take on debt outside of banks by accessing the
    bond market, small and mid-market firms generally have no such
    market access.
        We should make it far simpler to raise equity and debt from
    private capital.
        All investors take on risk with a rational expectation of a
    risk-appropriate rate of return. Anyone who acknowledges those
    risks and knows what they are investing in should not be
    prevented from doing so via government-enforced restrictions.
    After all, the right to transact is fundamental. It is not a
    permission granted by government.
        That is what we have turned it into, as a complete
    contradiction of our Constitution, our Bill of Rights,
    recognizing that our rights are endowed by our creator. In
    limiting the government's ability to infringe upon these, we
    act as somehow the government is the giver of our ability to
    transact.
        My bill for this protects accredited investors, who would
    simply say that they certify to the issuer of securities that
    they understand the risks of investment in private issuers.
    This would have the effect of providing more opportunities for
    all investors.
        Ms. Pinedo, could you expand on how such a change would
    improve capital formation?
        Ms. Pinedo. ``Pinedo.'' Yes.
        I think, again, one has to go back to the fundamental
    purpose of the ``accredited investor'' definition, which is to
    allow investors that are able to fend for themselves to invest
    in opportunities that do not require the protections associated
    with registration. That would be investors that are financially
    sophisticated, and we have to ascertain the financial
    sophistication through some means----
        Mr. Davidson. You still support the framework that the
    government could be the giver of the rights and----
        Ms. Pinedo. No.
        Mr. Davidson [continuing]. if we deem you sufficiently----
        Ms. Pinedo. No.
        Mr. Davidson [continuing]. sophisticated----
        Ms. Pinedo. No.
        Mr. Davidson [continuing]. using some alternative legal
    criteria, then, okay, we will let you do it?
        Ms. Pinedo. That might include any of a number of the bills
    that are presented today for the subcommittee's consideration.
        Mr. Davidson. I believe that will move--be progress, but I
    do not think that you can proceed from that premise.
        Maybe, Mr. Conwell, when you look at your challenges, what
    are you seeing in the market? What is the challenge that
    venture firms like you are trying to do when you want to
    increase the ability of people that want to participate in the
    markets but also the people that are trying to raise capital?
    What are you confronting?
        Mr. Conwell. We are confronting a limiting of sources,
    right? As you are raising a fund, right now, if you are raising
    $10 million or less, you can raise from over 250 people, right?
    The moment you go over that, it is only 100 people, so it
    becomes really easy to figure out the math of what is the
    minimum amount you can take from an investment. If I am raising
    $40 million, the minimum check I can take is $250,000.
        Mr. Davidson. Wow.
        Mr. Conwell. That means the amount of people I can go to
    raise that capital is very limited and that means I have to fit
    in their framework for my fund to work. That is very limiting.
        Mr. Davidson. Thank you so much.
        My time has expired, and I yield back.
        Chairwoman Wagner. The gentleman yields back.
        The chair now recognizes the gentleman from Illinois, Mr.
    Casten, for 5 minutes.
        Mr. Casten. Thank you, Madam Chair.
        Mr. Barnell, I appreciated your comments because they were
    giving--well, I sort of appreciated them. They were giving me
    flashbacks, because, before coming here, I had raised a couple
    hundred million from private equity and always felt that
    tension where I did not want one more person in my office who
    represented my majority investor telling me what to do--I see
    Mr. Conwell laughing--but we had not quite gotten big enough to
    have the full reporting requirements to go public. I am
    sympathetic to that tension.
        I also think that every debate we have on this committee is
    fundamentally about the tension between capital market access
    and investor protection. Push more in one direction, you go the
    wrong way on the other. I think that it is healthy to talk
    through it, but I want to try to highlight that.
        Mr. Conwell, how much did you say you are currently
    managing in your current fund?
        Mr. Conwell. Currently, it is $9.3 million.
        Mr. Casten. Okay. Is that your first fund?
        Mr. Conwell. First fund, yes.
        Mr. Casten. How many Limited Partnerships (LPs) do you have
    in there?
        Mr. Conwell. 194.
        Mr. Casten. Okay.
        When you make an investment in one of your target
    companies, do they all have to sign off on the investment, or
    do you have a deal arrangement with them that they have agreed
    to be in the fund and then they trust you to make those
    investment decisions?
        Mr. Conwell. It is an agreement where they fully trust me
    to make the investments----
        Mr. Casten. Okay.
        Mr. Conwell [continuing]. in the fund. They are given all
    the documentation up front----
        Mr. Casten. Sure.
        Mr. Conwell [continuing]. to let them know how I invest and
    what I----
        Mr. Casten. Yes, which is fine, and that was my experience.
    My point is that none of those investors essentially get any
    disclosure other than, when you come back to raise your next
    fund, you are going to have to describe your fund performance,
    but you are not providing those investors with disclosure--as
    you should not, because----
        Mr. Conwell. No, I do. I do. I do provide them with the
    disclosures.
        Mr. Casten. Compare, if I was doing a public listing, I
    would have to provide 3 years of audited financials. I would
    have to provide details on my management team. I would have to
    do all that stuff. Your----
        Mr. Conwell. I give them all the infor----
        Mr. Casten. Your LPs do not--let me move on. Your LPs do
    not have to go through doing that disclosure. Which is fine. I
    am just flagging that there is a question of where the
    protections are for the LPs as accredited investors because we
    trust they have this, and they do not.
        Ms. Pinedo, there has been a lot of talk by my colleagues
    across the aisle, which is just wrong, so I am hoping you can
    correct it.
        Can you talk about the trend line in total capital
    available for investments, public and private, over the last
    couple years? Rising or falling?
        Ms. Pinedo. In my testimony, I have data regarding the
    amount of capital that has been raised in public offerings,
    which has declined by comparison to the amount that----
        Mr. Casten. No----
        Ms. Pinedo [continuing]. has been raised----
        Mr. Casten. Yes, but----
        Ms. Pinedo. Sorry.
        Mr. Casten [continuing]. the total available has surged,
    right?
        Ms. Pinedo. The total available has surged.
        Mr. Casten. Broadly speaking, that has been because private
    equity has really surged and taken off?
        Ms. Pinedo. Absolutely. Yes.
        Mr. Casten. The idea that there is a shift--and just on
    that point, do you know what the total market cap is of all
    private equity funds versus the total market cap of public
    traded----
        Ms. Pinedo. Oh, it vastly--it vastly is--yes, it----
        Mr. Casten. Yes, it was like $56 trillion of private--of
    market----
        Ms. Pinedo. Yes.
        Mr. Casten [continuing]. cap in public funds----
        Ms. Pinedo. Absolutely. Yes.
        Mr. Casten [continuing]. versus 3 1/2----
        Ms. Pinedo. Private equity and private credit in recent
    years as well.
        Mr. Casten. Yes.
        Ms. Pinedo. Yes.
        Mr. Casten. Essentially, the surge of private equity has
    created pockets of capital that early-stage companies that are
    worth less can access thanks to people like Mr. Conwell----
        Ms. Pinedo. Yes.
        Mr. Casten [continuing]. and we still have public markets
    on the back end for exits, which is where the huge value
    creation is.
        Ms. Pinedo. That is right.
        Mr. Casten. The story that people are fleeing public
    markets is really a story about, there has been a huge surge in
    alternative types of capital that are available----
        Ms. Pinedo. Yes.
        Mr. Casten [continuing]. that people like my company Mr.
    Barnell, you would not have had that--you could not have gone
    public when you were two kids out of college. Nobody would have
    given you money. You found people to give you money. That is
    awesome, right? Thanks to people like Mr. Conwell. Like, that
    is--let us celebrate what that is.
        Back to my initial question. I have never met a CEO, myself
    included, who does not want dumber money. Dumb money is
    awesome. If you do not have accountability, you can do what you
    want. It is fantastic.
        Ms. Thornton, should we be concerned that the Trump
    administration is laying off tons of people at the SEC,
    including all of the directors who were responsible for making
    sure that there were appropriate disclosures of Mr. Musk's
    purchase of Twitter?
        Ms. Thornton. Yes----
        Mr. Casten. That seems like working backward on investor
    protection, right?
        Ms. Thornton. Absolutely.
        Mr. Casten. Should we be concerned that all of my
    Republican colleagues are trying to say that, if you tokenize a
    security, you should not have to--it would have to be regulated
    by the SEC, which is the disclosure-based organization. You
    should just--all of a sudden, you are a commodity, magically?
        Ms. Thornton. We should be very, very concerned about that,
    because people have an expectation of profit when they invest.
    There are people who are new to this type of investing, and
    they could lose a lot. They could--when Sam Bankman-Fried did
    his thing----
        Mr. Casten. Yes, and I am----
        Ms. Thornton [continuing]. we saw----
        Mr. Casten [continuing]. sorry to cut you off, because I
    have 15 seconds. I just want to get one----
        Ms. Thornton. Yep.
        Mr. Casten. Are there any proposals before the committee
    today that would increase investor protection?
        Ms. Thornton. I do not recall seeing any when I did my
    initial review of the 36----
        Mr. Casten. That is exactly my point. There is a healthy
    tension. There is an effort going on in the Trump White House
    to fleece the investment in public. I welcome----
        Chairwoman Wagner. The gentleman's time has expired.
        Mr. Casten [continuing]. the tension but let us not deny
    what is going on here.
        Chairwoman Wagner. The gentleman's time has expired.
        The chair recognizes the gentleman from Indiana, Mr.
    Stutzman, for 5 minutes.
        Mr. Stutzman. Thank you, Madam Chair.
        I ask for unanimous consent to submit for the record a
    letter from the American Securities Association regarding the
    hearing today.
        Chairwoman Wagner. Without objection.

        [The information referred to can be found in the appendix.]

        Mr. Stutzman. Thank you.
        First of all, thank you to all of you. This has been a
    fascinating hearing.
        I was absent from Congress for the last 8 years and was an
    entrepreneur and looking to raise capital to start companies or
    to revitalize companies or to grow companies, and so, Mr.
    Conwell, your story is fascinating. Congratulations, on one
    hand, but I know you have, probably, some scars to show for how
    you got to where you are, as well as Mr. Barnell.
        I would like to ask a little bit about--and I appreciate
    the gentleman's comments. We are really in that balance between
    access to capital but protecting investors. I have been in many
    meetings where you are trying to explain the project and say,
    this is why we believe it is going to be successful, and we
    would love your participation and investment as well.
        It really--it is--as he mentioned, there is dumb money out
    there. That is unfortunate but we also--people are wanting to
    participate, because they are doing--they are working on it in
    their daily job, they are raising their family, but they are
    also feeling like, I have a little bit of money here, I would
    like to participate somewhere. How can I do that? What is the
    easiest way to do that?
        I guess, a question for Mr. Conwell: Could you touch on
    maybe crowdfunding just a little bit and how that is playing in
    today's fundraising and capital formation?
        Mr. Conwell. If you would not mind, I would like to cede
    that question to Ms. Rebecca. She deals with crowdfunding, and
    she is the expert here.
        Mr. Stutzman. Okay. All right. That is fine with me.
        Ms. Kacaba. Could you repeat the question?
        Mr. Stutzman. Can you talk a little bit about crowdfunding?
    It has been around for a little while, but, with technology and
    easier access, could you talk a little bit about where
    crowdfunding is playing in capital formation in today's markets
    and fundraising?
        Ms. Kacaba. Yes. It is incredibly important. The technology
    that we have built at DealMaker and that a lot of our
    colleagues have built in this space is foundational to help
    more entrepreneurs get funded in today's day and age.
        We can do that, especially for jurisdictions that are not
    Silicon Valley or Wall Street, by getting deals like Mr. Andrew
    Barnell's in front of people in all different regions. We can
    draw from the communities, and we can help form businesses that
    are not based in those city centers.
        Mr. Stutzman. What about investor protections through that
    avenue? What are some of your thoughts on that? Is there enough
    protection? Is there enough information disclosed for----
        Ms. Kacaba. The legislation is incredibly well-designed. We
    have Form C. We have the 1-A.
        What we have actually seen is that, with that standardized
    disclosure, more junior investors can become more
    sophisticated, because every deal they look at, there is the
    same format, where they can read the same information. It is
    actually desirable that the whole exempt markets move in that
    direction.
        Mr. Stutzman. Yes. Okay.
        Mr. Barnell, Congratulations on your success. I know that,
    as an entrepreneur, you are always looking forward. Sometimes
    it is good for us to always just take a glance back and look at
    how far we have come, but there is always more work to do.
        Could you talk a little bit--you mentioned in your remarks
    about the difficulty of raising funds in the Midwest. I guess I
    am just curious, because I come from Indiana, and I would agree
    with that comment, but I am kind of curious about your
    experience and why you mentioned that in particular. Do you
    have any ideas, what could be done to change that?
        Mr. Barnell. Yes, absolutely.
        There is one stat I always like to cite. It is not that
    there is an absence of industry or capital to deploy, right? I
    think sometimes it is that the infrastructure does not exist.
    If you look at the data, 20 percent of the GDP in the country,
    20 percent of the jobs are in the Midwest, but only 4 percent
    of the venture capital is deployed there.
        Mr. Stutzman. Yes.
        Mr. Barnell. It is not an absence of the capital; it is an
    absence of the means to make it happen.
        Which is why I think things such as making it easier for
    venture funds to form--because we have fewer venture funds per
    capita than other places--easier to crowdfund. Those are the
    ways we solve the solution and make it easier and provide the
    knowledge for people to invest in companies when they want to
    and when they see the opportunity.
        Mr. Stutzman. Is it just a matter of connecting those who
    have funds to those who have projects?
        Because, I know that--in the Midwest--Congressman Steil and
    my district are some of the heaviest manufacturing districts in
    the country. A lot of these folks, maybe they came off the
    farm, know how to build a widget, but they do not necessarily
    know how to finance something.
        Is that something--are there places out there that we try
    to connect people to be able to fund projects like that?
        Mr. Barnell. I do not know all the solutions, but I could
    speak to some of our experience. We are a colorectal cancer
    screening test. Early on, we had a lot of doctors and
    gastroenterologists say, ``I want to invest in this. I have
    never done it. How do I do it? Is this like buying a stock?''
    Right?
        I think it is the education; it is the funds. I think there
    are a lot of things that we need to do to make it happen, but I
    think, if you move in that direction, over time, you are going
    to be in a much better place from a capital-formation
    perspective.
        Mr. Stutzman. Yes.
        Thank you, Madam Chair.
        Chairwoman Wagner. The gentleman's time has expired.
        The chair now recognizes the gentleman from Wisconsin, Mr.
    Steil, who is also the Chair of the Subcommittee on Digital
    Assets, Financial Technology, and Artificial Intelligence, for
    5 minutes.
        Mr. Steil. Thank you very much, Madam Chair. Thanks for
    holding today's hearing.
        I would like to start with you, if I can, Ms. Pinedo.
        Emerging growth companies. How do we get companies on-
    boarded, navigating through the capital raise and particularly
    in early formation?
        As we look at the number of companies that are choosing to
    go public, we continue to see that decrease. Emerging growth
    companies and the regulatory environment in that space are
    trying to lighten that burden to encourage early-stage
    companies to move forward, to access the public markets, and to
    use the public markets as a vehicle for growth.
        I know you are familiar, broadly, with this space. I would
    love you to comment on it. In particular, what types of
    industries are uniquely utilizing this?
        Mr. Stutzman correctly noted both of our districts have a
    history of capital-intensive manufacturing. There are also a
    lot of tech companies, whether or not it is biotech or other
    areas. What type of industries or companies might be uniquely
    interested in emerging growth companies?
        Ms. Pinedo. Almost all of the companies that have gone
    public since the JOBS Act was adopted have qualified as
    Emerging Growth Companies (EGCs). The JOBS Act has been a
    resounding success.
        It would be--I take issue with the subcommittee member who
    said that the bills under consideration today would eviscerate
    investor protection. That is simply not true. The framework for
    disclosures by EGCs is robust. There are some disclosure
    accommodations that are made for EGCs, but there are strong
    investor protections. The EGCs----
        Mr. Steil. Are there certain industries that are uniquely
    inclined to look to the emerging growth company?
        Ms. Pinedo. It is a wide array of industries that have
    utilized the IPO on-ramp, and that includes tech companies,
    life-sciences companies, industrials, consumer products
    companies. It is a very broad representation, and it has been
    very dependent on the market and what the market is receptive
    to.
        Mr. Steil. Should Congress extend the IPO on-ramp, the EGC
    threshold?
        Ms. Pinedo. Absolutely. Without question, it has been a
    success. It will continue to be a success, and it will continue
    to attract companies.
        Mr. Steil. I appreciate you saying that. I have legislation
    that would do just that.
        Ms. Pinedo. Yes.
        Mr. Steil. A final comment on this. Is there stuff--are
    there rules, regulations, adjustments that should be made at
    the SEC, without acts of Congress, as it relates to emerging
    growth companies?
        Ms. Pinedo. The Acting Chair referenced in his speech that
    the SEC intends to look at rightsizing regulation and looking
    at the disclosure accommodations for different size companies--
    smaller reporting companies and other companies--and looking at
    the disclosure burdens that are applicable to different
    companies.
        Among the bills under consideration today are looking at
    the definition of ``smaller reporting company, accelerated
    filer, large, accelerated filer.'' All of those things are
    appropriate measures and good things for capital formation----
        Mr. Steil. Thank you very much. I just want to be cognizant
    of the time, because I want to come back over to Mr. Conwell
    and Mr. Barnell in particular.
        As Mr. Stutzman referenced, I am from Wisconsin, he is from
    Indiana--a manufacturing base, but a long way from Silicon
    Valley, New York City, or other traditional VC hubs.
        In your testimony, Mr. Conwell, you referenced some of the
    challenges you face in obtaining capital.
        Mr. Barnell, you have talked about this as well.
        Are there specific policy changes or adjustments that you
    would like to see?
        I will start with you, Mr. Conwell.
        Then I will come to you, Mr. Barnell.
        Mr. Conwell. For me, I am very focused on this limited
    partner, limit in funds. Currently it is 100, which, including
    yourself, makes it 99.
        In the JOBS Act, when they increased the limit for funds
    that were $10 million or less to have up to 250, that is what
    allowed me to raise my funds. If not for that, this does not
    happen. In the 47 companies I invested in, probably more than
    half of them would not exist, right?
        Now that I am going to higher than a $10 million limit,
    those individuals are--I can no longer raise from them, and, if
    they feel like I have done a good job, they can no longer
    participate with me.
        Mr. Steil. Thank you very much.
        Fifteen seconds, Mr. Barnell. Anything jump to mind?
        Mr. Barnell. Just very briefly, for us, it really was
    investors like to invest locally, right, especially at an
    early-stage. Facilitating that, I think, is important.
        Mr. Steil. The answer is, everyone should move to Wisconsin
    and, as a backup plan, Indiana.
        Thank you very much. I appreciate your being here.
        Madam Chair, I yield back.
        Chairwoman Wagner. Do not leave St. Louis, Missouri, out,
    Mr. Steil.
        The gentleman yields back.
        The chair now recognizes the gentleman from New York, by
    the way, Mr. Lawler, for 5 minutes.
        Mr. Lawler. Thank you, Madam Chair.
        I have a letter to submit, without objection, on behalf of
    the Innovation Coalition.
        Chairwoman Wagner. Without objection, so ordered.

        [The information referred to can be found in the appendix.]

        Mr. Lawler. Thank you.
        It is ingenuity in the generations of entrepreneurs and
    innovators utilizing emerging technologies that have built
    America and will be crucial looking forward. Entrepreneurs and
    small businesses drive the American economy. In 2019, the Small
    Business Administration calculated that close to 44 percent of
    our GDP was a result of small businesses.
        We should be doing everything we can to promote investment,
    promote entrepreneurship, and foster small-business growth,
    whether it be cutting red tape, providing additional access to
    capital, or simply getting government out of the way.
        That is why I introduced the Helping Angels Lead Our
    Startups (HALOS) Act to promote access to investment capital
    for small companies and ensure that startups can continue to
    generate interest and connect with investors.
        This would ensure that demo days, pitch competitions, and
    community economic development events where there is no
    specific investment offering are not considered general
    solicitation under Reg D.
        The HALOS Act, which is noticed with this hearing, is one
    of a number of commonsense legislative reforms we should be
    taking to ensure that startups and businesses have the
    resources they need to develop, to grow, and thrive.
        The JOBS Act directed the creation of regulation
    crowdfunding to build on crowdfunding as a new and innovative
    way for startups and small businesses to raise capital,
    typically over the internet. The number and size of regulation
    crowdfunding offerings has continued to increase over time.
    Noticed with this hearing is proposed legislation from my
    colleagues including a measure that seeks to build on that
    success.
        Ms. Kacaba, I know you touched on this briefly, about the
    benefits, but how would enhancements to regulation crowdfunding
    help small businesses raise capital? Would it be beneficial to
    expand the number and range of investors that can participate
    in crowdfunding offerings? Are there additional enhancements
    that you believe we should make to improve the utility of it?
        Ms. Kacaba. Yes, absolutely, and thank you for the
    question. I agree with what you said. The JOBS Act, since its
    inception, has helped so many small businesses form and so many
    jobs be created.
        There are very simple, small adjustments that we can make
    so that the online crowdfunding space can flourish to allow
    more growth and more jobs to get funded. Those are in our
    written statement that we advocate for. The HALOS Act is an
    incredible step in that direction.
        Mr. Lawler. I appreciate it.
        Any of you care to comment as well?
        No? Okay.
        I think, from the standpoint of additional enhancements,
    Ms. Kacaba, what would you say are the necessary steps?
        Ms. Kacaba. I think it is important to remember that non-
    accredited investors are looking to build wealth. Studies show
    that younger generations do not believe they are going to build
    their wealth from their direct jobs. They are looking for other
    ways in the gig economy, and they are looking to make
    investments.
        If you regulate them out of a space where we are doing bad-
    actor checks, we are doing background checks, we are doing
    disclosure documents, you are just forcing them to put their
    money into other sectors, like crypto, like Non-Fungible Tokens
    (NFTs), like the public markets, and there are no caps in those
    spaces.
        Under the JOBS Act, there is a cap on how much they can
    invest in every single offering, and so the JOBS Act is well
    designed that way. If we remove the cap on Reg A, we can grow
    the space, we can grow online offerings, and we can grow the
    ecosystem and communities of people that want to invest in
    businesses they love.
        We have a customer, Monogram. It was started by two
    doctors. They saw the need for a robotic knee replacement
    surgery arm. VC was not interested in funding that business but
    there are a lot of people out there that know someone that has
    had knee surgery that thought that was a really interesting
    business. Now that company is public on National Association of
    Securities Dealers Automatic Quotation System (NASDAQ).
        If we can grow the online capital formation space by
    increasing the caps and streamlining the way Reg A and Reg CF
    work together, we can get more businesses funded.
        Mr. Lawler. I appreciate it.
        With that, I yield back.
        Chairwoman Wagner. The gentleman yields back.
        The chair now recognizes the gentlelady from Michigan, Mrs.
    McClain, for 5 minutes.
        Mrs. McClain. Thank you, Madam Chair.
        Before I get started, I would like to enter for the record
    a letter from Engine, which is a nonprofit group advocating for
    tech startups.
        Chairwoman Wagner. Without objection.

        [The information referred to can be found in the appendix.]

        Mrs. McClain. Thank you.
        I am going to piggy-back a little bit off my colleague from
    New York, Mr. Lawler, in what we have been talking about.
        I love economic growth. It is the backbone of our great
    country in which we live in. We must remember that it is our
    economic system that gives us our social programs. I find it
    sometimes ironic that some Members across the aisle from us are
    for growth, they are just not for public growth--they are only
    for public growth. They are not for growth in the private
    sector.
        We have to do more to incentivize growth in the private
    sector, right? Not just the government, but--private sector is
    good. Entrepreneurship is good. That is what this country was
    built upon, so I am here to advocate for more private-sector
    growth that all Americans can participate in.
        I have a little bit of experience. I have had a business
    for 35 years in the financial-planning sector. Just out of
    curiosity, with all of the departments that I had, anyone wants
    to guess where I had the most resources, in terms of people and
    money, what department maybe that was?
        Think of maybe the processing. We did about 13 billion.
    Maybe the processing sector?
        Ms. Pinedo. Legal and compliance.
        Mrs. McClain. Compliance. Spot-on. Every year, right?
        Now, I do agree regulation is needed. I would say
    guardrails are needed, right? At some point in time, we have to
    let the businesses run, right? We have to have a little bit of
    faith in people, and over-regulations do more harm than good on
    the consumer, because we want competition. Competition is good,
    right? It lowers the prices.
        In order to achieve this economic growth and development,
    though, we need a strong and healthy capital formation. We have
    to get this, ideologically. If we are not allowed to invest in
    our future, my company would have never been able to survive.
    We have to reinvest. It is critical.
        Ms. Pinedo, what are some of the most burdensome
    regulations that prohibit capital formation, in your opinion?
        Ms. Pinedo. It is not so much that they prohibit capital
    formation as that they make being public less appealing than in
    past times. A lot of that is related to Sarbanes-Oxley 404
    attestations so that is certainly something. One of the bills
    under consideration which addresses SOX attestation for low-
    revenue issuers would be very helpful.
        Another would be looking at the disclosure burdens and the
    standards for disclosures as it relates to different types of
    companies or companies of different sizes----
        Mrs. McClain. Sure.
        Ms. Pinedo [continuing]. so that disclosures are more
    rightsized, if you will. That would address whether companies
    that are smaller reporting companies or accelerated reporters
    and so on could address the disclosure burdens depending on
    their size. That would be another issue.
        Likewise, a different but related issue that is not under
    consideration but probably ought to be is bringing back some of
    the ecosystem that once existed for companies that are public,
    and that would be addressing the regulation of research and
    addressing the regulations and the rules related to offering-
    related communications.
        I mentioned that our smaller public companies and our
    medium-size public companies no longer benefit from being
    public. A large part of that is because of the lack of research
    and the lack of liquidity in their stocks.
        Mrs. McClain. I think we would all agree that we have to do
    more to incentivize as opposed to disincentivize.
        In my last few seconds, what can we do, in your opinion, to
    ease some of the compliance and disincentives? What could we do
    immediately, in your opinion?
        Ms. Pinedo. Extending some of the JOBS Act benefits, which
    these bills do, would be a great start.
        Mrs. McClain. Thank you.
        With that, Madam Chair, my time has expired. I yield back.
        Chairwoman Wagner. The gentlelady yields back.
        The chair now recognizes the gentleman from Montana, Mr.
    Downing, for 5 minutes.
        Mr. Downing. Thank you, Madam Chair.
        First of all, I have a letter from Carta that I would like
    to submit for the record.
        Chairwoman Wagner. Without objection.

        [The information referred to was not submitted prior to
    printing.]

        Mr. Downing. Thank you, Madam Chair.
        I am really excited about the work we are doing on this
    committee. My previous job, I was the securities commissioner
    for the State of Montana, and one of our charges was capital
    formation. It was always an interesting project, because we
    have so much talent, so many entrepreneurs, and we also have
    money to try to find investments. Figuring out how to put the
    two together and do it within the regulatory framework, it was
    exciting work but obviously had its challenges.
        Now, Mr. Conwell, according to the Small Business
    Administration, 99.3 percent of businesses in Montana are
    classified as small businesses and employ about 67 percent of
    Montanans.
        Being a rural State and talking about the challenges that I
    had as a regulator, can you explain the challenges for rural,
    small businesses to find potential investors when they are
    located in places that lack any kind of capital-raising
    networks?
        Mr. Conwell. That is a compounding issue. It is one of--if
    you are in a community like that, there are going to be less
    funding companies already, so there is less information, there
    are less people you can go to learn from.
        When you are getting started, you start off just kind of
    fumbling off in the dark, running into walls, trying to figure
    out where to go, what is an investor.
        Once you figure that out, then you start going out in your
    community like, ``Well, where are they?'' Then you realize at
    some point, ``I have to go to New York or California, and that
    is what it is.'' That is what we see time and time again.
        Even though we talk about the coast--I am from Baltimore.
    My founders leave and go to New York all day, every day, all
    right? It is something that we see in all of these communities.
        A lot of it is because--well, some of it is because the
    information is not as widely out there of, like, these are the
    other ways you can get capital, people sharing that in their
    communities. You need more demo days, those accelerators, all
    of that.
        Then, also, incentivizing the folks there locally to
    participate, really the angel investors, at the early stages,
    getting people started. Having those individuals in your local
    community who know you, who believe in you, who have seen you
    grow, who have affinity with you, being able to put money
    behind you but with an incentive--tax credits, something like
    that--something to make people start thinking, ``Oh, like, this
    is a viable thing.''
        I believe something like that will start to buoy
    communities and rural communities, and we have seen something
    like that in Maryland. We have an economic development
    corporation, TEDCO, that does outreach into our rural areas
    specifically to do things like this.
        Mr. Downing. Right. Right.
        Moving on, I have struggled in a life, raising money
    basically under Reg D exemptions, alternative investments, and
    with the ``accredited investor,'' criteria. It has always--it
    bugged me when I was on that side of it because it did not seem
    to really correlate to your ability to make a decision on
    taking risks.
        I would think, if you were somebody inexperienced and
    uneducated who had a windfall, maybe you inherited some money,
    you are an accredited investor, but you could be a Ph.D. in
    economics and finance with $100,000 and you cannot invest that.
    It really limits folks that can participate in these.
        I am going to go to Ms. Kacaba.
        The current accredited investor standard limits investments
    in the private markets to individuals with an annual income of
    at least $200,000 or a net worth of over a million dollars. The
    median income in Montana is nearly $71,000, with only 8 percent
    of households making $200,000 or more.
        We have discussed throughout this hearing that the overly
    restrictive ``accredited investor'' definition denies small
    businesses access to a large pool of investors. It is no
    surprise that the investors that typically meet this standard
    live in urban areas. I am coming from a very rural district.
        Do you believe rural investors can be just as sophisticated
    as urban investors and should be allowed to more freely
    participate in private markets?
        Ms. Kacaba. Absolutely, yes, and thank you for the
    question. I think that is a really important point.
        They are looking to generate wealth creation. The rules
    that we have in front of us already prevent them from investing
    too much in any one offering, so the rules are properly
    structured for them already. We need to realize that, if we do
    not let them into the private markets, their money is going to
    go elsewhere. The private markets are well-regulated, and so
    they should be allowed to participate.
        Mr. Downing. Thank you.
        Can you maybe elaborate on or discuss how the current
    accredited investor standard unfairly denies rural investors
    growth in their retirement accounts, like a normal hardworking
    Montanan?
        Ms. Kacaba. Yes, because they are limited in the offerings
    that they can get access to. Even some of the changes that we
    have advocated for--removing common control--would allow them
    access to investment in VC companies.
        For example, there might be a VC with a portfolio of 10
    companies, and they want to do follow-on investment in 1. Nine
    of those companies are excellent companies. They do not hit a
    50-percent growth rate that a VC requires for follow-on
    investment, but maybe they are doing 35 percent. Lots of people
    in Montana could invest in that and make a good bit of money.
        Mr. Downing. Awesome.
        Thank you. I have run out of time but thank you for your
    responses.
        Chairwoman Wagner. The gentleman yields back.
        The chair now recognizes the gentleman from New York, Mr.
    Garbarino, for 5 minutes.
        Mr. Garbarino. Thank you, Chairwoman. Thank you very much
    for holding this hearing today.
        Before I start my questions, I would like to offer this
    letter from Scroobious, which talks about a virtual platform
    designed to connect early-stage founders, investors, and
    partners, for the record.
        Chairwoman Wagner. Yes, so ordered.

        [The information referred to can be found in the appendix.]

        Mr. Garbarino. Thank you. Thank you, Chairwoman.
        Business development companies, or BDCs, are an important
    source of capital to Main Street businesses, having a statutory
    mandate to invest in U.S.-based small and midsize companies.
        However, the SEC has applied a rule, known as the acquired
    fund fees and expenses, to BDCs that presents a misleading
    picture of the true costs of investing in a BDC. Because of
    this, BDCs were excluded from certain indices--indexes, causing
    an outflow of institutional investor dollars in BDCs.
        I am saying ``BDCs'' a lot.
        I have put forward a bill recently that would fully exclude
    BDCs from the acquired fund fees and expenses (AFFE)
    requirement to fix this problem.
        Ms. Pinedo, can you explain how the SEC's posture on AFFE
    has impacted BDCs, their investors, and portfolio companies?
        Ms. Pinedo. Sure.
        Just as you said, BDCs are filling an important gap. BDCs
    provide venture debt and other funds that banks are not
    providing to smaller and medium-sized businesses.
        When the SEC changed its policy in 2006 to require the
    presentation of AFFE, it now requires the presentation in the
    fee table of an artificial and kind of inflated percentage of
    fees over a period of time, over a 1-, 3-, 5- and 10-year
    horizon. As you indicated, when that change became applicable,
    it triggered BDCs from falling out of a number of indices.
    Because so many institutional funds are index trackers, it
    meant that institutional investors moved out of investing in
    BDCs.
        That meant that BDCs lost a tremendous amount of investor
    interest--in particular, institutional investor interest. We
    should be promoting investor interest in BDCs again, because
    BDCs provide capital to Main Street and provide capital and
    fill this gap that is no longer being served by banks. We
    should also be considering other important steps to modernize
    the regulation of BDCs.
        I wholeheartedly support reversing the AFFE policy and in
    my written testimony provide a number of suggestions for
    modernizing the regulatory framework relating to BDCs.
        Mr. Sherman. Will the gentleman yield?
        Mr. Garbarino. I have to get through this. I am sorry.
    Thank you.
        Mr. Sherman. Okay.
        Mr. Garbarino. In your view, exempting BDCs from the AFFE
    requirement would result in more accurate disclosures to
    investors?
        Ms. Pinedo. Yes, it would.
        Mr. Garbarino. Okay. Great.
        Alternative investments, which can include private credit
    real estate infrastructure, have shown value in recent memory.
    These vehicles help balance debts in portfolios, spur job
    growth, facilitate capital formation, and help provide more
    uniform investment returns for individuals.
        What role do you see, Ms. Pinedo, the alternative
    investments playing in capital formation?
        Ms. Pinedo. Alternative investments, including BDCs,
    interval funds, tender offer funds, target date funds--all of
    these different funds can provide an important role in capital
    formation in terms of supporting investments in other private
    funds and investing in securities of private companies.
        Again, we should be looking at ways to enhance and promote
    retail investment opportunities in private funds and in
    modernizing the regulation of these regulated funds, as well as
    in looking at ways in which we can further extend the reach of
    a lot of these regulated funds so that they can offer fund
    interest not just to qualified clients but also to a broader
    range of investors.
        Mr. Garbarino. Thank you.
        You talked about regulatory modernization in your answer
    before about BDCs. Would you agree that regulatory
    modernization is necessary to provide greater options to
    qualified and accredited investors as well?
        Ms. Pinedo. I do. I do think that is absolutely necessary.
        I think we have talked a little bit about potential changes
    to the definition of ``accredited investor'' during today's
    hearing. Many of the measures I do support. In the context of
    BDCs in particular, the AFFE change is important.
        I think many of the changes that--much of the relief that
    the Securities and Exchange Commission provided for BDCs during
    the pandemic, which did not sacrifice investor protection,
    should be extended and was important. Again, to the extent that
    BDCs are significant for capital formation, it would be helpful
    to extend it.
        Chairwoman Wagner. The gentleman's time has expired.
        Mr. Garbarino. Thank you.
        Mr. Sherman. Madam Chair, I ask unanimous consent to put
    into the record a letter from the North American Securities
    Administrators Association.
        Chairwoman Wagner. Without objection, so ordered.

        [The information referred to can be found in the appendix.]

        Mr. Sherman. I would also like to add to the record that
    the Business Development Company (BDC) bill is one that I
    introduced in the 116th, 117th, and 118th Congress and look
    forward to introducing----
        Chairwoman Wagner. I love it when we can play well
    together----
        Mr. Sherman. Yes.
        Chairwoman Wagner.--across both aisles. Lovely, lovely.
        I believe our last person to come forward with questions is
    our member, the gentleman from Tennessee, Mr. Ogles.
        You are recognized for 5 minutes, sir.
        Mr. Ogles. Thank you, Madam Chair.
        Thank you to the witnesses. I know sitting here through the
    hearing is arduous, but we appreciate you being here, because
    the information you provide is valuable to us but also to the
    American people.
        Mr. Barnell and Mr. Conwell, would you agree that over-
    regulation is a major barrier to entrepreneurial capital
    formation for American investors?
        Mr. Barnell. Yes.
        Mr. Conwell. Yes.
        Mr. Ogles. I want to put a pin in that for a moment.
        As we see the current Trump administration aggressively
    moving to try to rightsize government, as we see the Department
    of Government Efficiency (DOGE) initiative under Elon Musk
    digging and looking for areas of waste, there is only so much
    the American Government, the U.S. Government, can do to cut
    waste in spending. We have to do our jobs and that is tough but
    the future of our economy, the future of combating the $37
    trillion in debt, and growing, is the American economy.
        As we look at capital formation, the purpose of this
    committee, I want to ask the question: As we look to the
    future, capital formation, entrepreneurism, the future of
    saving the Republic, what role does the regulatory regime play
    in hindering that growth, that entrepreneurism, and, quite
    frankly, our future?
        I will start with you, Mr. Barnell.
        Mr. Barnell. What I will highlight--and I wholeheartedly
    agree that I think the foundation of our economy, job creation,
    innovation, it is all driven by startups.
        I think one of the things that I highlighted in my written
    testimony is, ultimately, we do see, as we continue to grow,
    the requirement potentially ultimately to access to public
    markets. One thing I highlighted a little bit earlier was that
    the disclosure requirements, the regulatory requirements that
    go along with that, is a challenge. It is a real challenge from
    a cost perspective as well as from a compliance perspective.
        That would be one thing that I would highlight that, as we
    continue to grow, would certainly be something that we would
    not want to hinder our ability to continue to save lives
    through our innovative technology and also drive job growth.
        Mr. Ogles. Madam Chair, we saw in the last administration
    the weaponization of the government, whether it is the Justice
    Department or the regulatory agencies, against the American
    people, against industry, against businesses.
        Again, I just to emphasize this role of getting regulation
    out of the way of the economy, getting regulation out of the
    way of those who want to start the next--the next whatever,
    right? The next Tesla, the next Facebook, the next whatever.
    Whatever is over the horizon that we cannot see and anticipate
    yet may very well be hindered by this regulatory regime that
    was put in place that is literally targeting the consumer by
    getting in the way of business.
        Mr. Conwell.
        Mr. Conwell. As I mentioned in my testimony, when I raised
    my fund, I raised $10 million, but I had been oversubscribed. I
    had gotten north of $30 million worth of interest. I turned
    away more than 200 investors who wanted to invest in my fund
    due to the limits, and I invested in 47 companies. Had I raised
    $30 million, I would have invested in over 100.
        Because I am one of the earliest investors, I am typically
    the first investor in many of the companies. Like a company out
    of Memphis, Tennessee, Blank Beauty. It was a little company
    making this cool robot that would make custom nail polish.
    Their first customer was Walmart. What they did is they created
    a vending machine that will make you a custom nail polish.
        Walmart also has this issue of people stealing things, and
    so they are putting stuff behind glass. They are looking to
    replace that glass with this really cool, fun, innovative robot
    that is increasing sales and getting more people in the door
    from a little company out of Memphis, Tennessee, that nobody
    had ever heard of or seen. I was the one to seed them and made
    sure that this could be a thing.
        Mr. Ogles. As someone who is a Congressman from Tennessee,
    we thank you for investing in our economy and the job growth,
    et cetera.
        I am running low on time, so I will catch the next two
    ladies really quickly.
        Ms. Kacaba.
        Ms. Kacaba. Yes.
        Mr. Ogles. Go ahead.
        Ms. Kacaba. Yes, I think the points you are raising are
    incredibly important. There are so many companies like Mr.
    Conwell highlighted that DealMaker backs and funds in rural
    jurisdictions.
        The written submission that we have submitted is just to
    get some of the regulations out of the way so that we can do
    more. If there are different nuances made--if the caps are
    improved, if 5110 is removed--there are different ways that we
    can get more entrepreneurs funded, more jobs created.
        Mr. Ogles. Madam Chair, imagine that: Less government is
    better.
        Ms. Pinedo, the last word.
        Ms. Pinedo. For all the reasons we discussed today, I
    support the bills that have been introduced.
        Mr. Ogles. Madam Chair, we thank you for your time, your
    leadership, and I yield back.
        Chairwoman Wagner. The gentleman yields back.
        Last but not least, just under the wire, the gentleman from
    Massachusetts, Mr. Lynch, is recognized for 5 minutes.
        Mr. Lynch. Thank you, Madam Chair. I appreciate it.
        As Mr. Barnell mentioned in his opening statement, he
    talked about the fact that 90 percent of startups fail. As
    Congress sees it, we question, should we allow more people to
    get into that--to invest in something where 90 percent fails?
    Should we allow small pension funds or individuals who might be
    investing their life savings or their retirement in an area
    where we are going to see 90 percent failure?
        That is what troubles us. We do want to energize and
    finance startups, because, as the ranking member has said, all
    you need is that 10 percent that succeeds, and you can change
    the world, right? We are trying to manage this balance.
        Ms. Thornton, are we doing that properly now? Are we
    protecting small investors? Would an expansion of ``accredited
    investor'' and opening up to a wider group be in the best
    interest overall of American investors?
        Ms. Thornton. I think your concerns are well-placed, about
    expanding who can invest in the private markets, because of a
    couple of things.
        First of all, there is no mandated disclosure in private
    markets, so even if you were a sophisticated investor, you
    would not know that much about these companies. In addition, in
    the public markets, information is disclosed publicly, a lot of
    information, and market participants analyze it, and there are
    all kinds of other market participants that help investors
    understand that company.
        The other big thing that I would be very concerned about is
    just that, if you expand it beyond the current people who
    invest in the private markets, you could be talking about
    people who have investment savings that they are planning on
    using for retirement. You could have pensions that have their
    rules replaced with allowing them to invest more in alternative
    investments. You could really see--these are very highly risky
    markets, and you could really see harm to people's retirement
    savings. It could be truly harmful to them.
        Mr. Lynch. Yes.
        The other thing I worry about, as you have mentioned, is
    pension funds. I think 67 percent of investments in private
    equity come from pension funds. It is the same thing with the
    hedge fund investors, I think somewhat less. Maybe 30 percent
    of the inflow on hedge funds is coming from pension funds as
    well.
        We have seen some situations where in recent collapses--I
    think it was one of--I think it might have been Silicon Valley
    Bank where California Public Employee's Retirement System
    (CalPERS)----
        Ms. Thornton. Yes.
        Mr. Lynch [continuing]. the California pension fund, was
    significantly invested in that, and it went south.
        The level of transparency that we would like to see and
    availability of that information to the public is just not
    there. It is just not there at all.
        Ms. Thornton. Yes.
        Mr. Lynch. Are there steps that we could take to rebalance
    this in a way that does not choke off investment, meaningful
    investment, to startups and other high-risk but worthy
    investments and yet give people an opportunity to, over the
    long term, earn sufficient interest on their pension fund
    savings?
        Ms. Thornton. I really think that the main thing is to get
    the big companies out of the private markets, to force them to
    comply with the public disclosure framework. There will then be
    more diversity in the public markets, by the way. Then the
    private markets will be better equipped for what they are
    appropriate for, which is small companies, small businesses and
    startups, that need long-term capital that is quiet, that are
    not worried so much about losing all their money.
        Mr. Lynch. What was your position on the private fund
    advisor rule that the SEC had proposed?
        Ms. Thornton. I thought that was a very well-done rule. I
    thought it was really important, because----
        Mr. Lynch. Okay.
        Ms. Thornton [continuing]. right now, investors are not
    getting good advice. They cannot be sure that they are. Let us
    put it that way, I thought there was some--they may be paying
    higher fees. They may be paying hidden fees that they are not
    aware of.
        Mr. Lynch. Okay.
        Madam Chair, thank you for your courtesy, and I yield back.
        Chairwoman Wagner. The gentleman yields back.
        I just want to thank all of our witnesses for their
    testimony today. We certainly had very robust participation by
    our members, which I am always glad and heartened to see.
        Without objection, all members will have 5 legislative days
    to submit additional written questions for the witnesses to the
    chair. The questions will be forwarded to the witnesses for his
    or her response.
        Witnesses, please respond no later than March 31, 2025.

        [The information referred to can be found in the appendix.]

        Chairwoman Wagner. This hearing stands adjourned.

        [Whereupon, at 12:19 p.m., the subcommittee was adjourned.]

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