[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:]
[GRAPHIC] [TIFF OMITTED] T9636.007
[GRAPHIC] [TIFF OMITTED] T9636.008
[GRAPHIC] [TIFF OMITTED] T9636.009
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.]
APPENDIX
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