[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
BEYOND SILICON VALLEY: EXPANDING ACCESS TO CAPITAL ACROSS AMERICA
=======================================================================
HEARING
before the
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
----------
MARCH 25, 2025
----------
Serial No. 119-10
Printed for the use of the Committee on Financial Services
[GRAPHIC(S) NOT AVAILANLE IN TIFF FORMAT
BEYOND SILICON VALLEY: EXPANDING ACCESS TO CAPITAL ACROSS AMERICA
BEYOND SILICON VALLEY: EXPANDING ACCESS TO CAPITAL ACROSS AMERICA
=======================================================================
HEARING
before the
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
__________
MARCH 25, 2025
__________
Serial No. 119-10
Printed for the use of the Committee on Financial Services
www.govinfo.gov
U.S. GOVERNMENT PUBLISHING OFFICE
59-939 WASHINGTON : 2025
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
C O N T E N T S
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Tuesday, March 25, 2025
Page
OPENING STATEMENTS
Hon. French Hill, Chairman of the Committee on Financial
Services, a U.S. Representative from Arkansas.................. 1
Hon. Maxine Waters, Ranking Member of the Committee on Financial
Services, a U.S. Representative from California................ 2
STATEMENTS
Hon. Ann Wagner, Chairwoman of the Subcommittee on Capital
Markets, a U.S. Representative from Missouri................... 4
Hon. Brad Sherman, Ranking Member of the Subcommittee on Capital
Markets, a U.S. Representative from California................. 4
WITNESSES
Mr. Steve Case, Chairman and CEO, Revolution LLC................. 5
Prepared Statement........................................... 7
Mr. Bill Newell, Senior Business Advisor & Former CEO, Sutro
Biopharma...................................................... 11
Prepared Statement........................................... 13
Ms. Candice Matthews Brackeen, General Partner, Lightship Capital 18
Prepared Statement........................................... 20
Mr. Joel H. Trotter, Partner, Latham & Watkins LLP............... 23
Prepared Statement........................................... 25
Ms. Amanda Senn, Director, Alabama Securities Commission......... 65
Prepared Statement........................................... 67
APPENDIX
MATERIALS SUBMITTED FOR THE RECORD
Hon. Troy Downing:
Institute for Portfolio Alternatives......................... 156
Hon. Maxine Waters:
North American Securities Administrators Association, Inc.
(NASAA).................................................... 159
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses for the record to Ranking Remember Maxine
Waters
Mr. Steve Case............................................... 165
Mr. Bill Newell.............................................. 167
Ms. Candice Matthews Brackeen................................ 168
Ms. Amanda Senn.............................................. 169
LEGISLATION
H.R. ------, the Fair Investment Opportunities for Professional
Experts Act.................................................... 181
H.R. ------, the Accredited Investor Definition Review Act....... 185
H.R. ------, the Improving Access to Small Business Information
Act............................................................ 189
H.R. ------, the Small Entity Update Act......................... 192
H.R. ------, the Equal Opportunity for All Investors Act of 2025. 196
H.R. ------, the Encouraging Public Offerings Act of 2025........ 200
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.................... 205
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....................................................... 207
H.R. ------, the Enhancing Multi-Class Share Disclosures Act..... 210
H.R. 1469, the Senior Security Act of 2025....................... 213
H.R. ------, the Middle Market IPO Underwriting Cost Act......... 222
H.R. ------, the Promoting Opportunities for Non-Traditional
Capital Formation Act.......................................... 226
H.R. ------, the Improving Disclosure for Investors Act of 2025.. 228
H.R. ------, the Helping Angels Lead Our Startups (HALOS) Act of
2025........................................................... 237
H.R. ------, the Increasing Investor Opportunities Act........... 242
H.R. 1013, Retirement Fairness for Charities and Educational
Institutions Act of 2025....................................... 247
H.R. ------, Remove Aberrations in the Market CAP Test for Target
Company Financial Statements................................... 253
H.R. ------, the Helping Startups Continue To Grow Act........... 255
H.R. ------, Public Company Accounting Oversight Board and the
Security and Exchange Commission's Auditor Requirements for
Newly Public Companies......................................... 257
H.R. ------, Expands Protections for Research Reports to Cover
all Securities of all Issuers.................................. 260
H.R. ------, a bill to exclude Qualified Institutional Buyers and
Institutional Accredited Investors from the Record Holder Count
for Mandatory Registration..................................... 262
H.R. ------, a bill to expand Well-Known Seasoned issuers
Eligibility.................................................... 264
H.R. ------, Smaller Reporting Company, Accelerated Filer, and
Large Accelerated Filer Thresholds............................. 266
H.R. ------, Unlocking Capital for Small Businesses Act.......... 270
H.R. ------, the Small Business Investor Capital Access Act...... 278
H.R. ------, the Improving Capital Allocation for Newcomers
(ICAN) Act..................................................... 280
H.R. ------, the Small Entrepreneurs Empowerment and Development
(SEED) Act..................................................... 282
H.R. ------, Regulation A+ Improvement Act....................... 287
H.R. ------, the Developing and Empowering our Aspiring Leaders
(DEAL) Act..................................................... 289
H.R. ------, Improving Crowdfunding Opportunities Act............ 292
H.R. ------, Amendment for Crowdfunding Capital Enhancement and
Small-business Support (ACCESS) Act............................ 298
H.R. ------, Restoring Secondary Trading Market Act.............. 300
H.R. 145, Risk Disclosure and Investor Attestation Act........... 302
H.R. ------, Investment Opportunity Expansion Act................ 304
H.R. ------, Accredited Investors Include Individuals Receiving
Advice from Certain Professionals Act.......................... 306
H.R. 2225, Access to Small Business Investor Capital Act......... 309
H.R. 1190, Expanding Access to Capital for Rural Job Creators Act 312
H.R.----, a bill to amend the Securities Exchange Act of 1934 to
establish Offices of Small Business within rule writing
divisions of the Securities and Exchange Commission to
coordinate on rules and policy priorities related to capital
formation...................................................... 314
H.R.----, a bill to amend the Investment Company Act of 1940 to
encourage startup venture funds, and for other purposes........ 316
H.R.----, a bill to amend the Securities Act of 1933 to expand
the ability of individuals to become accredited investors, and
for other purposes............................................. 319
BEYOND SILICON VALLEY: EXPANDING ACCESS TO CAPITAL ACROSS AMERICA
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Tuesday, February 25, 2025
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. French Hill
[chairman of the committee] presiding.
Present: Representatives Hill, Lucas, Sessions, Huizenga,
Wagner, Barr, Williams of Texas, Loudermilk, Davidson, Rose,
Steil, Timmons, Stutzman, Norman, Meuser, Kim, Donalds,
Garbarino, Fitzgerald, Flood, Lawler, De La Cruz, Ogles, Nunn,
McClain, Downing, Haridopolos, Moore, Waters, Velazquez,
Sherman, Lynch, Green, Cleaver, Foster, Vargas, Gonzalez,
Casten, Pressley, Tlaib, Garcia, Williams of Georgia, Bynum,
and Liccardo.
Chairman Hill. The Committee on Financial Services will
come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time.
This hearing is entitled ``Beyond Silicon Valley: Expanding
Access to Capital Across America.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the chair for
inclusion in the record.
I now recognize myself for 4 minutes for an opening
statement.
OPENING STATMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE
ON FINANACIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS
Good morning. I want to welcome our members today to a
hearing on expanding access to capital, and I really look
forward to this great panel's testimony. Over my financial
career prior to entering Congress in Arkansas and Texas, I have
seen firsthand the incredible entrepreneurial talent that is
alive and well outside traditional venture and financial hubs
like New York or San Francisco. Across our country, Americans
are building companies that can drive our economy forward, yet
too often, these promising startups lack access to local advice
and capital that they need to grow scale and succeed.
Right now, virtually all venture funding pours into just a
few coastal cities, leaving the innovators and entrepreneurs of
flyover country often overlooked and underfunded. When capital
circulates in this geographically concentrated eddy, investors
in the economy, at large, miss out on big ideas, innovations,
and economic breakthroughs that can and do emerge from the
labs, kitchen tables, and garages in Arkansas, Nebraska, or
Ohio. Talent and ambition do not stop at State borders, and
neither should investments. In Little Rock, we have seen
companies like Apptegy which started from scratch and grew into
a powerhouse by providing communication tools to schools
nationwide. That is the innovation born in Arkansas, benefiting
students everywhere. It is proof that when investments are made
outside of traditional hubs, incredible things can happen.
At the same time, the number of public companies in the
United States has declined dramatically from over 7,000 30
years ago to fewer than 4,000 today. In my view, threatened
litigation, excessive costs, and regulatory burdens have made
it much harder for small businesses to go public, shutting out
entrepreneurs and everyday investors alike. We must ensure that
local incubators and small business investors have the support
they need, and that those aspiring risk-taking teams,
regardless of where they are based, can succeed.
Our capital markets should work for everyone. That means
reducing barriers for startups to access funding, incentivizing
investment in regional businesses, and reforming outdated
regulations that improve access to growth capital to ensure
that a public offering is more of a viable option once again.
By incentivizing investments in regional startups, supporting
local incubators, and streamlining rules, we can create an
environment where more companies can scale, thrive, and
ultimately become public companies. For the means that we are
ensuring that we are not just creating opportunities for
companies to grow, but also expanding investment opportunities
for Americans that want to be part of that growth.
For too long, investment opportunities, particularly in
private markets, have been reserved for a select few. By
broadening access, we create more avenues for wealth creation,
allowing everyday investors to share in the long-term
prosperity that comes from innovation. Modernizing our
securities laws can help break down these barriers so that
every founder, regardless of background or location, has the
resources to support and build the next great American success
story. The policies we are discussing today will not only
expand across access to capital, they will strengthen our
economy and create lasting opportunities for millions of
Americans.
With that I yield back the balance of my time, and I
recognize the ranking member of our committee, Ms. Waters, for
4 minutes for an opening statement.
OPENING 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, Mr. Hill. Before I begin,
I want to comment about the outrageous national security breach
reported yesterday. It is my understanding that the details of
the attack were shared with someone who was not cleared,
putting the lives of those involved and the whole mission in
jeopardy. This latest breach follows unlawful access to the
critical payment systems and the data of Americans. Mr. Chair,
I hope you agree that enough is enough. I wish we had more
positive information to report on, but the incompetence of this
administration is glaring.
With that, I appreciate today's hearing on capital
formation. The reality is that our economic outlook is bleak
and is entirely of the President's own doing. Mr. Chair, I want
to take a moment to read excerpts that highlight the magnitude
of the economic crisis created by Donald Trump. From Reuters,
``More than $4 trillion in stock market values has evaporated
since Trump took office.'' From the Financial Times,
``Economists expect Trump's policies to slow economic growth
and fuel higher inflation.'' From Inc. Magazine, ``Trump's
Tariffs Are Causing Some Startups to Scrap Their IPOs.'' From
Reuters, JPMorgan's Chief Global Economist says the risk of a
recession will rise to ``probably 50 percent or above when
Trump's April 2 tariffs kick in.''
This is the State of our economy. As a result of Trump's
disastrous policies and dumb trade wars, our stock markets are
in chaos, and the strong economy he inherited from President
Biden is no more. Right now, instead of expanding their
business or investing in their workers, business owners are
dealing with a Trump-induced recession and are panicking at the
thought of higher prices for goods and raw materials from
overseas. All of this is slowing hiring, killing innovation,
and making it harder for American companies to compete
globally.
Trump's economic policies are not just hurting American
businesses and workers. No, Trump is an equal opportunity
destroyer of finances. People preparing to retire, people he
has forced to retire, and the people he has wrongfully fired
have all seen their nest eggs and hard-earned savings reduced
to rubble. Instead of displaying leadership, competence, and
care, Trump has been golfing at Mar-a-Lago, promoting his own
meme coin, and filming Tesla ads actually on the White House
lawn for the richest man on earth, Elon Musk. Unfortunately,
that is not all. This month, Trump signed an executive order
gutting the Community Development Financial Institutions Fund.
Mr. Chair, for over 30 years, Community Development
Financial Institutions (CDFIs) have been strongly supported by
Democrats and Republicans. We have had them in our districts
and have all seen firsthand the critical work they do in
supporting small businesses in underserved communities.
Eliminating CDFIs because they serve the underserved is a Make
America Great Again (MAGA) equivalent of cutting off your nose
to spite your face. The same executive order would also gut the
Minority Business Development Agency. Make no mistake, these
cuts to working-class families in underserved communities and
the small businesses that they serve are all designed to pay
for the only thing the Trump Administration actually cares
about: tax cuts for billionaires.
Chairman Hill. I thank the gentlewoman.
Ms. Water. I yield back.
Chairman Hill. She yields back. The chair recognizes the
Chair of the Subcommittee on Capital Markets, Mrs. Wagner from
Missouri, for a 1-minute opening statement.
STATEMENT OF HON. ANN WAGNER, CHAIRWOMAN OF THE SUBCOMMITTEE ON
CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM MISSOURI
Mrs. Wagner. I thank you, Mr. Chairman, and you know what?
I could not be more optimistic about our economy and the
direction that our country is moving. As the chairman noted,
talent and innovation are not confined to the coast, and
investments should not be either. This hearing is about giving
hardworking, everyday Americans access to the kinds of high-
growth opportunities that for too long have been reserved for
the wealthy, so Congress can help main street investors invest
and save for the future. We have done this before, Mr.
Chairman. The bipartisan Jumpstart Our Business Startups (JOBS)
Act showed how smart, balanced reforms can open up markets
without sacrificing investor protections. Now, it is time to
build on that success by helping more companies go public,
expanding access to capital for all and creating real wealth
building opportunities for millions of main street investors in
our congressional districts, the second congressional district
of Missouri and the Nation. Let us cut the red tape from the
rules and strengthen our markets because more opportunity means
a stronger, better economy for all, and I yield back.
Chairman Hill. The gentlewoman yields back. The chair
recognizes the Ranking Member of the Subcommittee on Capital
Markets, Mr. Sherman, for a 1-minute opening statement.
STATEMENT OF HON. BRAD SHERMAN, RANKING MEMBER OF THE
SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Mr. Sherman. I join the ranking member in noting that
everyone on that signal chat knew they were exchanging war
plans on a signal chat, not a system for classified
information. Then they added a journalist to the chat. Then the
Secretary of State lied about it, only to be corrected by
Trump's National Security Council.
The Securities Exchange Commission (SEC) oversees the
largest capital markets in the world, in the history of the
world. We are dealing with a hundred trillion dollars of
securities. Our entire economy, the world's economy, is
dependent upon it, so let us just let some guy, like, big balls
take a whack at it. Well, he did: $50,000 payout for everybody
at the SEC who leaves. What gaps does that have in enforcement?
What gaps does that have in the ability to approve a
registration of securities? We will not know because we do not
know who takes that buyout, but we do know that the people
taking the buyout are the ones that the private sector values
the most, and they are going to make a lot of money in the
private sector. I yield back.
Chairman Hill. The gentleman yields back. Today, we welcome
the testimony of Steve Case. Mr. Case is the Chairman and CEO
of Revolution, an investment firm backing entrepreneurs at
every stage of their development. His entrepreneurial career
began in 1985 when it co-founded America Online, AOL. Ms.
Candice Matthews Brackeen is the General Partner of Lightship
Capital, a Cincinnati-based venture capital fund that invests
in companies throughout the mid-west. Bill Newell: Mr. Newell
is the Senior Business Advisor and former CEO of Sutro
Biopharma, a biotech firm focused on the research, development,
and manufacturing of next-generation cancer medicines. Joel
Trotter: Mr. Trotter is the Co-Founder of Latham & Watkins'
national office. He was the principal author of the Initial
Public Offering (IPO)-related provisions in the JOBS Act of
2012. Amanda Senn: Ms. Senn is the Director of the Alabama
Securities Commission. We welcome all of you. Thanks for taking
time to be with us.
You will be recognized for 5 minutes to give an oral
presentation of your testimony, and without objection, your
written testimony will be made part of the record. Mr. Case,
you are recognized for 5 minutes.
STATEMENT OF STEVE CASE, CHAIRMAN AND CEO, REVOLUTION LLC
Mr. Case. Good morning, Chairman Hill and Ranking Member
Waters and members of this U.S. House Committee on Financial
Services. It is my pleasure to be here to discuss the future of
entrepreneurship in America. Indeed, it warms my heart to be
participating in a House hearing titled, ``Beyond Silicon
Valley: Expanding Access to Capital Across America.'' I want to
start by acknowledging that for decades, despite party
differences, legislation to encourage entrepreneurship and
expand access to capital for entrepreneurs has largely received
bipartisan support. Today's hearing underscores this
committee's commitment to prioritizing entrepreneurship and
innovation, and I thank you for your leadership in making this
a shared national effort.
Four decades ago, I co-founded America Online, AOL, a
company that helped usher in the internet revolution. AOL was
the first internet company to go public, and at its peak,
nearly half of all internet users went through the platform.
After AOL, I dedicated myself to backing the next generation of
entrepreneurs as Founder, Chairman, and CEO of Revolution.
Based here in Washington, DC, Revolution's mission is to build
disruptive, innovative companies that upend age-old industries
with a unique focus on startups based outside of the coastal
tech hubs.
Startups are indeed the lifeblood of our economy, driving
innovation, creating jobs, and fueling growth in red and blue
communities nationwide. Indeed, new businesses play a
significant role in net new job creation, according to data
from the National Bureau of Economic Research, yet
entrepreneurs, especially those outside of Silicon Valley,
Boston and New York, still face significant challenges in
accessing the capital they need to start and scale. In 2017,
when Revolution launched our Rise of the Rest Seed Fund, led at
the time by J.D. Vance, who is now our Vice President, roughly
75 percent of venture capital flowed to just three States--
California, Massachusetts, and New York--with 47 States left to
share the remaining 25 percent. We have made some progress,
but, unfortunately, the split remains largely the same today.
The Federal Government can help close this gap, and there
is strong precedent to do so. In 2011, I was part of the
President's Council on Jobs and Competitiveness with a number
of leaders from finance and tech. Our proposals eventually
became the bipartisan Jumpstart Our Business Startups Act, the
JOBS Act, which passed the House by a vote of 390 to 23. The
JOBS Act included, as you know, three key goals: first, make it
easier to launch and invest in startups via crowdfunding;
second, allow those seeking investment to make general
solicitation appeals; and third, create an IPO onramp for young
companies to make going public a little easier.
Given the success of the JOBS Act, as well as the outsized
role startups play in job creation and economic growth, it
makes sense for this committee to explore additional ways to
expand access to capital for entrepreneurs and enhance the
ability of more investors to participate in private markets.
First, on the IPO front, while late-stage companies have had
access to growth capital in recent years, that funding option
is not guaranteed, and more companies may need to consider
going public at an earlier stage in their development, which
makes having a viable path for IPOs critical. Additionally,
Revolution, partnering with PitchBook, found that between 2011
and 2021, more than 1,400 new venture firms emerged from
smaller ecosystems across the country. These firms are crucial
because they are much more likely to invest in local and
regional startups. This committee can take steps to support and
sustain these regional funds, including by expanding the pool
of potential investors and by streamlining the regulations that
apply to up-and-coming venture funds.
To be clear, none of the reforms proposed should come at
the expense of appropriate investor protection, which is, of
course, important, but at the same time, we need to make sure
we strike an appropriate balance. If we want more capital
funding more entrepreneurs, we need to make some changes, some
of which could create some risk. At the same time, if we make
no changes and we just maintain the status quo, we are, in
fact, constraining the pool of investors and of entrepreneurs
that we need to ensure that we continue to have a robust
innovation economy, not just on the coast, but across the
country.
We all know that talent exists everywhere. This committee
is in a unique position to pass legislation to support the next
generation of entrepreneurs and investors and create more
opportunity for places that often feel left behind. I applaud
the efforts you are taking today to level the playing field
and, as we approach the 250th anniversary of our Nation next
year, empower entrepreneurs nationwide to write the next
chapter of the American story. Thank you for the opportunity to
join you today. I look forward to your questions.
[The prepared statement of Mr. Case follows:]
[GRAPHIC(S) NOT AVAILANLE IN TIFF FORMAT
Chairman Hill. Thank you, Mr. Case. Mr. Newell, you are now
recognized for 5 minutes.
STATEMENT OF BILL NEWELL, SENIOR BUSINESS ADVISOR & FORMER CEO,
SUTRO BIOPHARMA
Mr. Newell. Chairman Hill, Ranking Member Waters, and
distinguished members of the House Committee on Financial
Services, I am honored to appear before you today to discuss
capital formation in the United States and the need for reforms
that support entrepreneurs, protect investors, and promote
innovation. My name is Bill Newell, and I am a Senior Business
Advisor with Sutro Biopharma. I have been at Sutro since
January 2009, until recently serving as its CEO. I also serve
on the board of the Biotechnology Innovation Organization and
chair BIO's Capital Formation Working Group. I want to commend
the members of this committee for working on a bipartisan basis
to improve access to capital through targeted reforms that
protect investors and rightsize needed regulations. In the last
Congress, this committee advanced a number of measures, and I
hope that this Congress will be able to move that legislation
into law.
Sutro Biopharma focuses on research, development, and
manufacturing of next-generation cancer medicines. Our company
is 22 years old. I was an employee in 19, and until recently,
we had over 300 employees. In many ways, Sutro's corporate
journey is a microcosm of the small biotech experience. We were
initially financed by private investors, including venture
capitalists. We IPO'd in 2018, benefiting from the JOBS Act of
2012 that makes it easier for small companies to go public. All
told, Sutro has raised almost $1.6 billion in the company's
history. That eyebrow-raising figure and our over 20-year
company journey is, unfortunately, very typical of the small
biotech experience in bringing a product to market.
Bringing a new medicine to approval is very, very expensive
and risky. In this environment, many companies in our industry
have had to downsize and end programs because of limited
capital availability. Unfortunately, Sutro is no exception. It
takes, on average, 10-and-a-half years for a candidate entering
phase one to reach approval. The average research and
development (R&D) cost to progress a new pharmaceutical from
discovery to launch is $2.3 billion. Drug discovery is
expensive. That is why access to capital is so crucial. We are
in a constant race against time to develop a lifesaving drug
before funding runs out.
Thirteen years ago, this committee passed the Jumpstart Our
Business Startups Act. The JOBS Act rightsized regulations for
small and emerging growth companies, and we need to build off
the success of the JOBS Act. Private markets play a crucial
role in the growth and success of small biotech firms. A
company often starts with just angel investors. Angels are the
critical first dollars that bridge the valley of death for the
biomedical innovation ecosystem. We need more angels, not
fewer. The Equal Opportunity for all Investors Act expands the
pool of angel investors. The current definition for accredited
investor is not based on the assessment of investment risks,
how to evaluate opportunities, or conduct due diligence.
Rather, the current standard is entirely predicated on wealth
and the ability to absorb total loss. This bill directs the SEC
to create a thorough accredited investor exam that allows more
people who understand investing to participate in the
marketplace.
We have the deepest, most liquid, and most competitive
equity markets in the world, but fewer companies are going
public these days for a variety of reasons. It is expensive to
be a public company. Funds must be diverted away from critical
research and development, clinical development, and scientists,
and more toward regulatory filings, paperwork, quarterly
reporting, and accountants and lawyers. The emerging growth
company (EGC) designation is a critical reason why the JOBS Act
was so successful at incentivizing IPOs, especially from
smaller companies. The EGC's status currently lasts for 5
years. The 5-year timeline is simply too short for small
biotechs. It is like having a tax system based on age instead
of income, which makes no sense. The Helping Startups Continue
to Grow Act allows for an additional 5-year extension of the
EGC exemption.
The SEC needs to report on and revise the definition of
``small business.'' The non-controversial Small Entity Update
Act does just that. It passed this committee 42 to nothing last
Congress and passed the House 367 to 8, so we appreciate the
strong bipartisan support for this legislation. The SEC also
needs to update their public float threshold triggers. Chairman
Tim Scott included a provision in his bill, Empowering Main
Street in America Act, that would require the SEC to revise
thresholds for smaller reporting companies to account for a 12
months' rolling average of $700 million or less for their
public float. By converting public floats to a rolling average
trigger, it avoids surprise expenses for companies that may
have a small temporary blip in their stock price.
In conclusion, I support transparent and reliable capital
markets, both private and public, that allow companies to
efficiently graduate or transition from funding structures
while minimizing overlap and reporting and disclosure burdens.
Thank you for inviting me to provide my perspective on these
issues, and I welcome the committee's questions.
[The prepared statement of Mr. Newell follows:]
[GRAPHIC(S) NOT AVAILANLE IN TIFF FORMAT
Chairman Hill. Thanks, Mr. Newell. Ms. Matthews Brackeen,
you are now recognized for 5 minutes.
STATEMENT OF CANDICE MATTHEWS BRACKEEN, GENERAL PARTNER,
LIGHTSHIP CAPITAL
Ms. Matthews Brackeen. Thank you very much. Chairman,
Ranking Member Waters, and members of the committee, thank you
for inviting me here today. My name is Candice Matthews
Brackeen. I am the Founding Partner of Lightship Capital and
CEO of Lightship Foundation and a native Ohioan. Recently, my
team and I launched a fund of funds called Anchor, but really
to understand why we launched that fund of funds, let me first
start with the journey that brought us here.
Lightship started as a nonprofit, focused with one goal:
helping entrepreneurs in communities that often get overlooked.
While our early work had great successes, we soon realized that
helping individual businesses just was not enough. The larger
system around them still needed fixing. To truly support
entrepreneurs, we had to build something bigger. Through
acquisition, we expanded our work by bringing together three
nationally recognized programs: NewMe Accelerator, Black Tech
Week, and FounderGym. Each had strong educational resources in
support of communities. Black Tech Week, in particular, has
been running for 11 years as a major tech conference that is
now located in Cincinnati, Ohio.
By combining these organizations under the Lightship
Foundation, we gave them the resources and structure needed to
grow and support even more entrepreneurs around America. We
could not do this alone. However, we have been supported by
amazing public and private partners like JobsOhio, who share
our vision for economic development and growth. We then created
our own venture fund to invest directly in talented
entrepreneurs who were overlooked by traditional investors, but
even as we saw success, we discovered an even bigger problem.
Venture capital is still mostly focused in coastal cities like
New York and San Francisco. Talented founders like us in the
Midwest and South and other regions are just still left out,
and that is why we started Anchor.
Anchor originally began with a series of meetings around
the country with groups of experienced fund managers who were
frustrated by the barriers we were all facing. Even though we
had proven ourselves, we struggled to raise money because we
were not from traditional venture capital markets. This created
what we call emerging manager redlining, an unintentional bias
against new and regional funds, particularly outside of the
major coastal cities. By blocking first-time and emerging
funds, we unintentionally support geographic bias, limit
opportunities for promising managers, and miss out on
potentially great returns. Anchor directly tackles this market
failure. Our fund of funds help support promising new managers
across the Heartland, Midwest, and South. We provide resources
they need to succeed and generate strong returns for their
investors.
We have introduced three key innovations at Anchor. First
of all, Anchor has recently received an Small Business
Investment Company (SBIC) green light from the Small Business
Administration, a crucial first step that signals confidence
that the Small Business Administration (SBA) is our anchor
investor, and it helps attract further investment. Second, our
fund structure helps investors benefit from successful startups
while reducing the risk of large losses across the entire
portfolio. Last, we eliminated the double fees that are common
in traditional fund of funds, making Anchor more affordable and
more attractive to institutional investors like pension funds
and endowments.
However, there are still policy barriers that we need to
address. Right now, venture capital funds benefit from certain
exemptions under the Investment Advisers Act, but fund of funds
like ours do not. We have to register. Extending these
exemptions equally to all venture funds, including fund of
funds, would remove unnecessary hurdles and modernized
investment rules. Second, current law also limits venture funds
to just 250 investors, and with inflation, this just does not
work. So for a $2 billion fund like ours, that means each
investor must contribute around $8 million on average,
effectively excluding 99 percent of Americans. Increasing the
investor cap from 250 to something like 2,000 as proposed by
the Developing and Empowering our Aspiring Leaders (DEAL) Act,
would dramatically lower the entry point, allowing more
Americans to participate.
Finally, we suggest one more policy improvement. Public
investment funds, like public pensions and endowments, should
be required to review proposals from first-time and emerging
managers. They do not have to invest, but they should not be
allowed to have rules to automatically exclude new managers,
many of those managers being in the middle of the country. This
simple change would significantly reduce geographic bias and
democratize access to venture capital across the country.
Building and supporting fund of funds like Anchor is the key
solution to addressing capital inequality in America's
underserved regions. Reducing barriers to these funds is not
just helpful, it is essential. It is how we ensure economic
growth and innovation in every part of our country.
Thank you for your time, and I look forward to your
questions and continuing the conversation.
[The prepared statement of Ms. Matthews Brackeen follows:]
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Chairman Hill. Thank you very much. Mr. Trotter, you are
recognized for 5 minutes.
STATEMENT OF JOEL TROTTER, PARTNER, LATHAM & WATKINS LLP
Mr. Trotter. Chairman Hill, Ranking Member Waters, and
members of the committee, it is good to be with you here today.
Based on my experience as a leader at the IPO Task Force, I am
pleased to share my perspectives on reforms to expand access to
capital across America.
The JOBS Act of 2012 is a bipartisan success story and a
model for the innovative solutions you are now considering.
Thirteen years ago, Congress enacted our IPO onramp proposal by
an overwhelming bipartisan majority, and President Obama signed
it into law. Title I has been called the most successful title
in the JOBS Act, and academic research has concluded that the
IPO onramp provisions significantly increased IPO volume. The
JOBS Act succeeded, and the proposals under consideration today
bear the same hallmarks of that success.
I fully support the committee's efforts to enact balanced
reforms in Federal securities regulation, and I urge your
support for the proposals listed in my written remarks. These
proposals represent measured, carefully calibrated solutions to
facilitate capital formation. With that said, I would like to
make three points.
First, the JOBS Act changed none of the robust antifraud
provisions of the Federal securities laws, and neither would
any of the proposals before you today. I cannot overstate the
importance of this point. There is a long list of liability
provisions and compliance obligations that apply to all public
companies. They are extensive and rigorous, and they will
remain in full force and effect, undiminished by any of the
proposals before you.
Second, the JOBS Act used a balanced approach that scales
the regulatory burden to a company's size and maturity. The IPO
onramp concept allowed the regulatory burden to scale to the
size of the company, a simple but powerful concept borrowed
from SEC rules. In the debate over more versus less regulation,
this is a compelling way forward. Rather than more versus less,
balanced regulation that scales over time, this approach
encourages capital formation while maintaining a much greater
level of securities regulation for mature public companies.
That greater regulation includes the internal controls audit of
Sarbanes-Oxley Section 404(b), which will continue to apply to
larger public companies.
Critics of scaled regulation overlook this point when they
cite the high-profile accounting scandals that led to the
enactment of the Sarbanes-Oxley Act. It is important to
remember those companies were huge, mega-cap Fortune 50
companies that would never have been eligible for any of the
relief from Section 404(b) of Sarbanes-Oxley. Neither the JOBS
Act nor any of today's proposals would give regulatory relief
to companies of that size. Even if you pass every proposal
before you today, every public company must undergo audit by a
Public Company Accounting Oversight Board (PCAOB)-registered
auditing firm and comply with all of the robust antifraud
provisions of the Federal Securities laws. Also, all of the
largest U.S. public companies representing nearly all of total
U.S. market capitalization would remain subject to Section
404(b) of the Sarbanes-Oxley Act.
That brings me to my third and final point. Of the
proposals before you, two in particular stand out: extending
the IPO onramp and expanding the category of well-known
seasoned issuers. I discussed both of these proposals at length
in my written remarks. They build on decades of successful
experience promoting capital formation without compromising
fundamental investor protections. They would have the greatest
impact of the proposals before you, and I urge you to adopt
them, along with the many other excellent proposals under
consideration today.
You have the opportunity to build on the success of the
JOBS Act and its lessons. Given the direct connection between
capital formation and job creation, the opportunity is
compelling. I welcome your questions. Thank you.
[The prepared statement of Mr. Trotter follows:]
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Chairman Hill. Thank you, sir. Director, you are recognized
for 5 minutes.
STATEMENT OF AMANDA SENN, DIRECTOR, ALABAMA SECURITIES
COMMISSION
Ms. Senn. Good morning, Chairman Hill, Ranking Member
Waters, and distinguished members of this committee. Thank you
for inviting me to share with you the perspective of State
securities regulators or regulators if you are from the South.
It is a privilege for me to be here today, and I hope that you
will consider our important roles as you continue deliberations
on the legislation before this committee. My testimony will
focus on preserving the role of States in overseeing our local
markets, in facilitating responsible capital formation, and I
will underscore our critical role in protecting investors.
The States are proud to be part of a team of regulators
responsible for promoting stability in our financial markets
and protecting investors. This heavy responsibility grew out of
a recognized need by a State legislature over a century ago to
promote transparency and honesty in our markets. Many of the
principles first crafted by States were adopted at the Federal
level to address the abuses that led up to the stock market
crash of 1929. In the decades since, the U.S. capital markets
have flourished, both providing extraordinary capital for
businesses and safe opportunities for investors to build sound
financial futures.
For the past 100 years, the United States of America has
stood out before all other nations as the greatest economy and
strongest engine for growth in history. There has never been
anything like it before, and, in my opinion, never will be
again. This, while being subjected to reasonable regulation, it
is the foundation of our success. History has also shown us
that we must constantly examine our regulatory framework and,
where needed, adjust. Again, States have been leaders in this
effort, including by developing new regulatory frameworks for
capital formation, while also serving as the early warning
detectors for new and emerging threats to investors.
As Congress examines further revisions to the Federal
securities laws, including legislation aimed at capital
formation in rural areas, we urge you to strongly consider and
embrace the State's important role in capital formation and
continue to promote our ability to oversee local markets. This
ensures that smaller offerings, the kind most likely to reach
main street investors, are being reviewed by us, that we are
able to exclude bad actors from our markets, and that we can
keep supporting our entrepreneurs and small businesses, all so
that investors can continue to trust the local markets in which
they invest.
It is hard to talk about capital formation, though, without
mentioning the potential for fraud and abuse. I have witnessed
firsthand the aftermath of the devastation brought about by bad
actors. My first few cases as a young lawyer followed the 2008
financial crisis, triggered by the collapse of the subprime
mortgage market. During the course of the investigation, I met
with defrauded investors from all walks of life. I heard their
stories, and their pain was palpable. I knew these people. They
lived in our communities, and they turned to us for help. Many
of our victims were small business owners that had turned to
private markets for funding when lenders were pulling back.
Fraudsters exploit every opportunity. Through the years, I
have met with thousands of investors across Alabama and the
U.S. I have sat with them in their living rooms as they
tearfully shared the details of bad investments that ultimately
caused them to lose their life savings. The 2008 crisis left
investors distrustful of our markets and our regulators, and we
have worked hard for years to rebuild that trust. While States
responded to the concerns of investors, Congress worked hard to
provide stronger regulatory frameworks to re-strengthen our
markets and restore the trust of Americans.
Over 2,000 years ago, Euripides said, ``They say the gods
themselves are moved by gifts, and gold does more with men than
words.'' While I still believe, and I know you do, too, that
people are good, we are not infallible, and missteps can have
major consequences. History has shown us over and over again,
but it has also shown us that strong oversight and
accountability have a significant deterrent impact, and that is
why I urge you to consider the States' critical role in
ensuring that our financial industry players are subject to
some level of oversight and that they can be held accountable
when the public demands they should be.
In closing, I want to emphasize that we do understand and
share the same goals as the Members of Congress who support our
robust public markets, and as we seek ways and opportunities
for investors to strengthen these public markets, consider the
States' important role. Thank you again, and I look forward to
your questions.
[The prepared statement of Ms. Senn follows:]
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Chairman Hill. Thank you very much, Director. We will turn
to member questions, and I will yield to myself 5 minutes for
starting that process.
Ms. Matthews Brackeen, from your experience, I really
enjoyed your testimony about small, first-time fund managers. I
know that firsthand, and I know how the consulting system is
biased against first-time managers going to institutional
investors, so I really appreciate your testimony. I think that
is informative to the committee. You talked about your priority
on regional diversity as well, and you talked about two
principal reforms you thought that would be helpful for smaller
funds: the fund of funds approach and the limitations there and
then the limitation on total number of investors. Would you
just reiterate that point and compare it to the work you are
doing?
Ms. Matthews Brackeen. Yes, absolutely. The minimum viable
fund size is really around $50 million, right, and so in order
to kind of get to that number, you have to bring in a group of
investors that can write a certain size check. The bigger the
check, the easier it is to kind of chunk that down. For a fund
of funds, it is a much bigger fund, so for us, we are raising a
$2 billion fund. Even if we are raising a $1 billion or $500
million, it is a pretty significant check size that you need in
order to kind of close the fund.
For us, what we are asking here as we are talking about the
DEAL Act, in particular, is to kind of shrink that number down.
If we are raising, like I just said, $2 billion, we need people
to write $8 million checks or lots of people who can write $100
million or $200 million checks. I would bet almost every person
in this room who has fundraised knows exactly who those people
are in this country. It is a very small number of people. What
we are looking to do is to give more people that opportunity.
Beyond that, I know we kind of both talked about kind of
the number of investors, but I also kind of mentioned pension
funds and public investment funds. Right now, our universities,
our teachers' unions, they are sending their dollars to the
coasts, and each time they do that, they are building wealth on
the coasts, and that money stays there long term. Now, does
some of the money come back with returns? It absolutely does,
but those fund managers make money. The families then grow
there in those individual cities. We find angel investors
growing there and then spending more money on companies there.
We are also seeing those tech companies grow and thrive, and it
is not coming back to the center of the country.
Chairman Hill. Thank you very much for your views on this
important set of measures. Mr. Case, she makes the case that
you have been talking about in terms of the bias toward the
Rise of the Rest, of the halo effect, the gravitational pull
back to the coast, despite your best efforts on mentorship,
availability of directors, coaching, and funding from the work
you have done over the past 2 decades. What are we missing?
What incentive system do you think that we should change?
Mr. Case. As I said in my testimony, it is a mix of things,
but some of it is creating a sense in these communities and all
the country that they really have an opportunity to participate
in the innovation economy. A lot of people, as you well know,
in places like Arkansas and others, feel like they need to
leave. They go to Silicon Valley or some other place. One great
story I mentioned in my written testimony is an entrepreneur
who was actually at a hedge fund in San Francisco when he came
up with an idea for a platform called AcreTrader, and he moved
back to Arkansas, to Fayetteville, to start that company. He
left Arkansas to go to the coast because he did not feel like
he could kind of find his way if he stayed. He was an exception
that came back to start the company there.
How do we create more of those where fewer people are
leaving? There is less of what some have called a brain drain
of people leaving different cities in all the country to go to
the coast, and how do you create a boomerang of people
returning? It requires time. It does not happen overnight. But
having venture capital in those communities to back the next
generation of companies, having some of those companies
graduate to be successful enough to go public and create wealth
for all the investors, but also the employees, some of whom
then want to start other companies, some of whom then will
become angel investors in other companies. It creates this
ecosystem and sort of a positive cycle. That is what we are
trying to do. I think we have made some progress in some of
these cities, but I do think we need to continue to build on
it. The 37 different bills that have been proposed by this
committee are--I have read through some of them--I think are
steps in the right direction.
Chairman Hill. Thank you. I have certainly seen that with
the work of Startup Junkie and the small business incubators.
The Kauffman Foundation's work has been dramatic, both in
Fayetteville and in Little Rock, in creating an angel investor
cohort and a startup environment. Mr. Newell, I want to
conclude by just asking you to submit for the record your views
on the lack of participation in the Reg A proposals from the
work you did in JOBS Act and more bias toward Reg D. I mean--I
am sorry--Mr. Trotter, but I am going to yield back and call on
the ranking member for her 5 minutes of questions.
Ms. Waters. Thank you very much, Mr. Chairman. Mr. Case, I
appreciate your leadership with the Rise of the Rest and your
work during the JOBS Act. Through your investments across the
country, you have been seeing firsthand what works for small
businesses in underserved communities. Democrats on this
committee have consistently delivered results for small
businesses. During the pandemic, I worked with Ranking Member
Velazquez to secure $60 billion in Paycheck Protection
Program--that is, the PPP program--loans specifically for
community financial institutions to reach small businesses left
behind by big banks.
We also worked with Republicans during Trump's first term
to secure a historic $12 billion for community development
financial institutions and minority depository institutions in
2020, which is projected to support more than $130 billion in
new financing for underserved communities over the next decade.
Additionally, committee Democrats worked with the Biden
Administration to renew the State Small Business Credit
Initiative, which is already providing billions of dollars in
new capital access for small businesses. As I said today and at
the prior hearing, I look forward to working with Chairman Hill
to advance sensible reforms that support small businesses and
our public markets while keeping investors and consumers top of
mind.
Nevertheless, Mr. Case, no doubt you have seen reporting
that the Trump-Musk Administration is trying to shut down the
Community Development Financial Institution Fund and the
Minority Business Development Agency. Based on your extensive
work with entrepreneurs and overlooked communities, what
specific economic damage would occur if the current
administration eliminates these and other small business
support programs through your Rise of the Rest bus tour? I
understand you have traveled 11,000 miles across the country.
Which regions and demographics would be most severely impacted
if these critical capital sources disappeared? You know what
the CDFI Fund is.
Mr. Case. Thank you, Ranking Member Waters, for your
leadership on these issues over, obviously, a long period of
time. We have, with Rise of the Rest, traveled quite
extensively around the country, and we have ended up making
investments now in over 200 companies in over a hundred
different cities, so it is fairly broad. I think it is 38
States, so we have seen a lot. We have impacted a lot of
entrepreneurs, which is a reminder that there are great
entrepreneurs building great companies everywhere. It just
takes a little more effort to identify them and back them and
mentor them and support them.
In terms of your specific question, I am on the side of
more capital going to more entrepreneurs in more places, and
programs like CDFI and others, I think, are helpful in that
regard. I have not seen the specific proposals to modify that
or change that but in general, at this juncture, I think we
need to be kind of reaching out, trying to level the playing
field in as many ways as we can.
Ms. Waters. Okay. If you do not really know what is going
with CDFI, if you find out that it is going to be eliminated,
would you support CDFI?
Mr. Case. I do support CDFI.
Ms. Waters. Thank you very much. On to Mr. Trotter. Elon
Musk is currently being sued by the Securities and Exchange
Commission for allegedly swindling Twitter's investors of over
$150 million and previously was penalized for $40 million for
misleading Tesla investors. Now through Department of
Government Efficiency (DOGE), he potentially has access to the
SEC's confidential information and have already demonstrated
their utter disregard for data privacy, including gaining
access to the data of Musk's competitors at the Consumer
Financial Protection Bureau. Also it is alarming that Mr. Musk
cannot even secure his own website, which has been hacked. The
SEC possesses nonpublic information about pending IPOs,
mergers, whistleblower complaints, and ongoing enforcement
actions, including against Musk-owned companies and
competitors.
You have long advised public and private companies that
engage in capital-raising activities. Could you discuss the
sensitivity of the information shared with SEC, and what would
happen if that information were to fall into the hands of
competitors or leak prematurely into the markets, and could,
for example, there be a conflict of interest with someone
accessing the internal deliberations of the SEC if that person
also is pending litigation? Mr. Trotter.
Mr. Trotter. The SEC has, in recent years, been very
focused on its own cybersecurity. One way in which I have seen
as a practitioner, their approach has changed on confidential
information that comes into the SEC, the confidential treatment
request process during SEC registration. The SEC has worked to
make that self-executing so that information does not go to the
SEC unless and until they request it. That is one example that
comes to mind when you raise this issue of cybersecurity at the
Agency.
Chairman Hill. Thank you, sir. Now we call on the gentleman
from Michigan, the vice chair of the full committee, Mr.
Huizenga, who is the sponsor of the Accredited Investor
Definition Review Act and Improving Disclosures for Investors
Act. Mr. Huizenga, you are recognized for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman, and I want to echo
on a sentiment that I have heard from many already about that
Congress should further expand the accredited investor
definition to include a wider range of potential investors.
According to the SEC, 19 percent of U.S. households qualify as
under the definition of an accredited investor in 2022--19
percent. That is locking out 81 percent of our population from
ever having the opportunity to invest in those small
businesses.
This was brought really to the forefront that we had a
witness at the last Congress. Her name was Omi Bell, and if I
recall, she was here from D.C., who founded an organization
that assists African-American female founders in securing
funding to develop and grow their businesses. Ms. Bell spoke
about the challenges she faced as a young entrepreneur
receiving her first investment from her mother, who was not an
accredited investor, and how updating that accredited investor
definition would actually expand the opportunities for those
businesses who are trying to raise capital.
I see Ms. Matthews Brackeen nodding her head quite a bit. I
am going to go to you first then. How would expanding this
accredited investor definition to include criteria besides
wealth and income, how would that expand opportunities for both
prospective investors and for those entrepreneurs, especially
in those underrepresented communities?
Ms. Matthews Brackeen. Yes, absolutely. Right now anyone
over 18 can sports bet. They can go and play the lottery. They
can go on to lots of apps and buy cryptocurrency with very
little education. What they cannot do is go and invest in
companies that have years and years of documentation and
financials because they have been blocked out by rules and
regulations against them. What would that change? It would
bring in new investors, new angel investors because right now
you have to have such an incredible amount of net worth. There
are lots of people that work for my team that are not able to
be investors. They are not accredited investors, but they know
much more than the general American public.
Mr. Huizenga. What you will hear from critics of expanding
this is that, well, see, there is not going to be any sort of
safety net. There is not going to be any sort of review. These
people are just going to be caveat emptor. They are going to
get hosed. We know it is going to be there, and it is only the
Federal Government's definition of who should not be investing
that is saving them from themselves. Do you buy that?
Ms. Matthews Brackeen. I think that we could probably set a
rule around the percentage of money that you are using every
year. I think that could be fairly simple. That is something we
could do for all of those things that I mentioned in the past.
Mr. Huizenga. Some reasonable things that are----
Ms. Matthews Brackeen. Very reasonable.
Mr. Huizenga. The assumption that bothers me, Mr. Chairman,
is that if we were to change this Federal definition of what an
accredited investor is, that means there is no definition or no
guardrails to any of this investing, which simply is not the
case. Actually, Mr. Case and Newell, if you could really super
quickly answer this. I am curious how the current investor
definition, as Ms. Matthews Brackeen was talking about, how
that really limits private capital for entrepreneurs, and what
does that mean for the economy and society.
Mr. Case. There are a lot of people who have ideas in terms
of starting companies. Many do not have the commitment to
follow through.
Mr. Huizenga. It is hard.
Mr. Case. It is definitely very hard and definitely risky,
and you put your career often at risk, but there are many who I
have found who do have the desire to go farther but do not have
access to the capital to get going. They do not have the money
themselves. They do not necessarily have in their network
friends and family who can write the checks, which is why it is
so important to open it up. Yes, we need to protect people, but
we also need to enable people who have ideas and want to pursue
the American Dream, start a company, to have a path to do that.
Investors have a path to also invest, so it is not just
essentially because of the current income rules, other rules
related to credit investors. It is kind of the rich getting
richer. How do we kind of level the playing field for investors
as well?
Mr. Huizenga. That is a problem, the rich getting richer on
this. Sorry, I have 22 seconds left, and I have to move on to
Mr. Trotter very quickly. Current law, issuers using Rule
506(c) are permitted to engage in general solicitation before
filing a Form D, as long as they verify that all purchasers are
accredited. If the SEC were to mandate advanced Form D filings
before any general solicitation, how does that affect
materially delaying capital raises and deter issuers like
AngelList, Carta, others, from using that Rule 506(c)?
Mr. Trotter. Given the amount of time to comment, I will
just say, it is not a good idea. I would not support it.
Mr. Huizenga. Okay. Maybe we can expand that in writing.
Mr. Trotter. I appreciate it.
Mr. Huizenga. With that, Mr. Chairman, I yield back.
Chairman Hill. The gentleman yields back. The chair
recognizes the gentlewoman from New York, the Ranking Member of
the Small Business Committee, Ms. Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Ms. Matthews, I
would like to remind you and everyone in this room that the
funds to funds dynamic you are speaking so highly of was a
proposal proposed and finalized by the SBA under the Biden
Administration, and I am very proud to support it. I am the
Ranking Member of the House Small Business Committee as the
chairman referred to, and I am here to tell you that expanding
our private markets and engaging in private market offerings is
not the only way for small businesses to acquire equity
capital. The SBA's SBIC program, as of 2024, have deployed more
than $130 billion of capital to more than 194,000 small
businesses. The CDFI Venture Capital Fund also responsively
invests equity capital to underserved and undercapitalized
small businesses, yet the Trump Administration's executive
order does exactly the opposite. We need to be discussing ways
to strengthen, not destroy, these type of programs.
Ms. Senn, the title of today's hearing is, ``Beyond Silicon
Valley: Expanding Access to Capital Across America.'' While the
title is certainly correct, the actions by the Trump
Administration and congressional Republicans tell a different
story. President Trump recently issued an executive order that
aims to curtail the non-statutory work of the CDFI program. If
we are going to broaden the reach of capital beyond Silicon
Valley, is not this exactly the type of public-private program
we should be promoting?
Ms. Senn. Thank you for the question. I am glad you guys
included Alabama beyond Silicon Valley. You cannot get much
further. While our office does not directly administer CDFI
programs, I did reach out both locally and nationally to my
colleagues in banking and credit unions, and they discussed at
length the impact that those programs have had on their
communities. As a matter of fact, in Alabama alone, there are
10 CDFI credit unions--were fairly rural--40 percent, that
serve over 300,000 members, supporting $2.9 billion in loans
and $3.7 billion in deposits. They have extended nearly $18
million in total financial benefits to the underserved
communities in Alabama. Our credit union friends are here, too,
and they can provide further information to me if they would
like.
Ms. VVelazquez. Thank you very much. Ms. Senn, the U.S.
capital markets have seen tremendous growth over the past
decade, with a disproportionate share of the growth seen in
private markets. Some of us are concerned that large private
companies and private funds have misused securities exemptions
to effectively stay private indefinitely, avoiding the
transparency and accountability obligations to which many
similarly situated public counterparts must adhere. Is this a
concern you share?
Ms. Senn. It is a concern in every industry that some bad
actor is going to exploit some opportunity to defraud somebody.
In Alabama, we have a law enforcement agency, and I am mindful
of the fact that I am here for all 50 States, and I talk to my
colleagues at least twice a week. We do see fraudsters
exploiting the Form D and the regulatory offerings, the forms
that are provided to investors, and they use those to create an
appearance of legitimacy at times. We want to preserve the
integrity of those exemptions while also deterring fraud. On
the State level, we see so much, and we see the people that are
engaged in the transactions within our borders, and it is so
critically important because we are able to help prevent some
of that, and those bad actors that are misusing those forms to
defraud our main street and retail investors, we are in a
position to be able to put a stop or at least deter that
conduct.
Ms. Velazquez. Thank you. In your opinion, how do we
appropriately balance the need for small businesses to have a
less expensive method for raising equity capital through a
private offering with the transparency needs of investor? Do
you feel these balances are currently tailored appropriately?
Ms. Senn. We are always going to advocate for more investor
protections. Exemptions are a privilege, and these businesses
that are able to take advantage of it, it is because we believe
that those mechanisms are trusted or there is some oversight
generally by another agency, for example, a banking authority.
On a local level, though, many of these opportunities are, at
least on the Form D for the States side, in favor of the
businesses. Just in Alabama, as a reference, and I know my
colleagues in other States, we offer programs to help small
businesses get started.
With our guidance on a State level, and we connect each
other, we have a huge network of resources in Alabama, but we
are able to help them to build a foundation that enables them
to be successful as they do continue to grow. Many of our
communities, we are beyond Silicon Valley, but we have so many
people that are excited about investing within their
communities, and so we help at the Securities Commission to
facilitate those resources and get them on a good level ground.
Chairman Hill. Thank you.
Ms. Velazquez. Thank you. I yield back.
Chairman Hill. The gentlewoman yields back. I like that,
you all, and I like the Alabama accent. I can understand it.
Mr. Sessions from Texas, you are recognized for 5 minutes.
Mr. Sessions. Chairman, thank you very much. Chairman Case
and Ms. Matthews Brackeen, I am going to primarily ask your
opinion in just a few minutes. The entire panel here are
champions of capitalism, and this committee appreciates and
respect not only the words that you bring to us, but really the
ideas about us getting stronger. I note, Chairman Case, in your
conversation with the committee and your testimony, you talk
about a Texas company, Anduril, that added 4,000 jobs because
you got in and became an investor and helped them. I also note
that in your testimony, Chairman Case, you talk about 75
percent of venture capital flowed to three States--California,
Massachusetts, and New York--with 47 States left to share the
remaining 25 percent, and your data is up to last year, 2024,
which means that it would be current.
I want to ask your opinion about the things that we have
been attempting to do to meet the challenge in Texas. We know
that we have enormous growth and opportunity, that we have to
meet the challenge in Texas, not only from the promise of these
companies, whether it be large data centers, chip manufacturers
that probably already have the funding or sources that they
need, but maybe the hundreds of small companies that might be
suppliers and add to that robust development.
Our Governor, Greg Abbott, has convened two champions of
capitalism and influence in the State of Texas--Ross Perot,
Jr., and Harlan Crow, both of Dallas, Texas--and they have
started a strategic Texas fund. It has the balance of the
support of government through the Governor of the State of
Texas, and then the entrepreneur leaders. We have always heard
if business leaders lead, others can follow. Can both of you
take in the 2 minutes and 40 seconds left and give us perhaps a
1-minute analysis about things that you have learned about
doing this that may help them be successful, things that might
be important for me as a member, and give us your viewpoint
about Texas trying to break into that outside of the 25 percent
with 47 other States? Chairman Case?
Mr. Case. Sure. First of all, thank you for the question
and the insights around what is happening in Texas. We have now
done a number of things, investing in a number of different
cities in Texas, and there is a lot of momentum, but there is
still a lot of work to do. I think the last number I recall
seeing is the State of Texas, which, as you know, is a pretty
big State with pretty big cities, was getting somewhere between
2 percent and 3 percent of venture capital. California was
getting over 50 percent. The reason for that is because you
create this positive cycle I talked about earlier. People want
to be there, so people move there. The investment then backs
companies there. The success of those companies then ripples
through the economy there. I saw this even in Northern
Virginia. AOL started in Tysons Corner, Virginia, and we went
public in 1992. That created kind of wealth in the community.
You saw the benefits of that backing other startups in the
corridor toward Dulles Airport.
Momentum begets momentum, and the leadership of people in
the community, successful entrepreneurs, successful business
leaders, is very important. Actually, when we were there with
our Rise of the Rest bus in Texas, Harlan Crow hosted us for an
event, and we have also spent time with Ross Perot, Jr., people
like that stepping up to say we need to do more to support
entrepreneurs in our communities. We do not want them to leave,
to go someplace else. We want them to stay, and if they did
leave, we want them to come back, and we want to create a sense
of possibility in our communities so people really do believe
they can start and scale a significant company here.
Mr. Sessions. Thank you. Ms. Matthews Brackeen?
Ms. Matthews Brackeen. Yes. In the State of Ohio, we have
done the same thing, public-private partnerships to help our
venture capital industry grow. First, through Ohio Third
Frontier, that helped to seed multiple funds around the State,
part of it being seeded by State Small Business Credit
Initiative (SSBCI) more than 10 years ago. We have also
launched a new fund, the Ohio Fund, which is kind of just what
you are talking about in Texas, primarily focused in our State,
bringing together lots of our larger research and development
organizations around the State and seeding lots of new funds
and new innovations. We also have an Ohio Growth Fund that is
funded by JobsOhio. That comes from a bond issue as well as
dollars that come in from Ohio Liquor and beyond. That is a way
for our State to kind of create new jobs, bring in new revenue,
and attract new dollars into the State and really spur growth.
Mr. Sessions. Thank you very much. Mr. Chairman, it is my
hope that every member of this committee will listen and learn
that economic growth and development is good for their people
back home, that capitalism works, and we are at a time now that
can be a golden age for America. Mr. Chairman, I yield back my
time.
Chairman Hill. Thank you, Mr. Sessions. The chair
recognizes the gentleman from California, the Ranking Member of
the Capital Markets Subcommittee, Mr. Sherman, for 5 minutes.
Mr. Sherman. Ms. Matthews Brackeen, I think you are right
that The Federal Deposit Insurance Corporation (FDIC) insurance
limit ought to be higher, at least for checking accounts that
are used for operations by small business. Mr. Trotter, you
tell us that we can rely on these antifraud provisions, but we
are offering $50,000 buyout for every SEC employee that
enforces those provisions. Then we are closing all the regional
offices, including the one in Los Angeles, that enforces those
provisions. We cannot relax the rules in reliance on the basic
antifraud provisions if we will not enforce the antifraud
provisions. Crime in the suites will grow if we follow the rule
of DOGE and defund the police.
Mr. Huizenga, you are right, the accredited investor
definition is crazy. It is based on the idea, several ideas,
each of which are stupid. One is that a couple with $300,000 is
rich, $300,000 income, and second, that rich people should be
the ones that are accredited. We should, as Ms. Matthews
Brackeen points out, look at the percentage of the assets that
the person is investing in that investment and perhaps in all
private offerings combined. I think, Mr. Huizenga, there are a
number of bills that look at what knowledge the investor has,
and we ought to look at the truly independent advisors
available to the investor.
Another definition that we have that makes no sense is that
we say that you become a public company when you have 2,000
holders of record, okay? Two thousand investors, that is a
public company, but in counting to 2,000, we count all Merrill
Lynch customers as one. I am a Merrill Lynch customer. They got
hundreds of thousands of people. I have not met them. They are
not part of my family. We have this weird math where 2,000 can
mean 200,000.
One of our witnesses says that when you make an accredited
investment, you have years and years of financial information,
sometimes, but not necessarily. Look, I have been on the
business side of this, helping companies raise capital. Last
century, I realized every investor protection is experienced by
the business people involved as a hassle and a barrier, but if
we do not have investor protections, we will not have vibrant
capital markets. If capitalism worked best without investor
protections, then Uzbekistan, with no capital investor
protections, would be doing better than Wall Street. I want to
thank Chairman Hill for including in the list of bills that we
are dealing with today the Access to Small Business Investor
Capital Act. I introduced this bill in the 116th, 117th, 118th,
and now the 119th Congress. I believe the 4th time is the
charm. I am honored to be joined by Mr. Huizenga, Mr. Garbarino
and Ms. Bynum in that effort.
Mr. Trotter, why is it important that we have vibrant
Business Development Companies (BDCs) and that we not have this
peculiar provision in calculating their expenses that keeps
them out of the indexes?
Mr. Trotter. My area of focus is really on corporation
finance and the part of the SEC that registers IPOs. I do not
really have much to say about that question. If I may, I would
say on your enforcement question, the private securities
litigation is very active.
Mr. Sherman. I recognize that, but an awful lot of times
the person you are suing is bankrupt, but certainly by the time
you get the private securities regulation. Mr. Trotter, what do
we do so that we have public and private capital markets at
every stage? Is private capital part of that effort?
Mr. Trotter. I would say, absolutely, yes, private capital
is certainly a part of that effort. I think Regulation D is an
important part of that regulation environment. One other thing
is, on your issue of a major broker-dealer, accounting is one
holder of record. That really only happens once a company has
already gone public, and that method of accounting usually does
not come into play.
Mr. Sherman. I would disagree with you and look forward to
talking to you about it.
Mr. Trotter. Sure.
Chairman Hill. The gentleman yields back. The gentleman
from Oklahoma, the Chairman of the Task Force on Monetary
Policy, Mr. Lucas, is recognized for 5 minutes, and he is also
the sponsor of H.R. 1013, the Retirement Fairness for Charity
and Educational Institutions Act.
Mr. Lucas. Thank you, Mr. Chairman, and thank you to our
witnesses today. I, too, want to express my appreciation to the
chairman for attaching that very bill, the Fairness Retirement
for Charities and Educational Institutions Act to this hearing.
My bill would allow teachers, charity workers, and other
nonprofit employees participating in 403(b) retirement plans
access to the same investments available to workers with 401(k)
plans or 457(b) plans. This bipartisan bill provides fairness
investment opportunities for non-profit employees, so I am glad
to see that noticed today.
Shifting my focus, I would like to discuss the disturbing
trend we have seen in recent decades of fewer and fewer
companies entering public markets. When I came to Congress,
there were over 8,000 public company listings in the United
States. Today, there are fewer than 4,000. Healthy public
markets allow companies to receive lower cost funding while
giving investors opportunities to deploy their capital and seek
a return. We should make sure our companies have the option to
go and stay public without burdensome prohibitive regulations.
Mr. Trotter, can you talk about the regulatory barriers that
companies face when looking to raise capital through public
markets?
Mr. Trotter. They are extensive. Again, I think one of the
big problems in this area is that if you think of how total
market capitalization is distributed, you have only half of
U.S. market cap represented by about 50 companies. If you
extend it to the largest 500, that is the vast majority of
market capitalization, and you have regulations that are
designed to apply to all public companies as if they are each
the same size. They are simply not, so the great thing about
the JOBS Act and the Emerging Growth Company definition was to
provide that kind of onramp relief, which should be extended.
Mr. Lucas. Thank you. All of those barriers that you
mentioned are particularly challenging for businesses who do
not have access to all this capital early on, or for those with
high input costs, like agriculture (AG) and energy, in my home
State. This is also a challenge in our private markets. If you
cannot raise Series A capital, it is difficult to secure Series
B or C or D funding. Private markets have experienced sustained
growth for the past decade, but that growth is concentrated in
places like California and New York. Ms. Matthews Brackeen, why
is it important that private markets are accessed in
geographically diverse areas? Why do we all need to be able to
tap these resources?
Ms. Matthews Brackeen. Yes, I am actually going to answer
that by also saying 44 percent of our kind of U.S. economy is
generated by small businesses, right? So these tech companies
are those companies. If we are concentrating all of the capital
in three major cities, as Mr. Case said, then we cannot grow
businesses. Not all businesses are started in a garage. Some of
them are started in laboratories. One of those was an
antihistamine at the University of Cincinnati, and they made
Benadryl. Those things are made other places, and we have to
have the capital to put into those firms.
Mr. Lucas. Mr. Case, would you like to comment on that as
well? Why is it important that companies across a broad array
of diverse experiences and industries have access to funding,
not just those with Ivy League founders?
Mr. Case. For a couple reasons, one is, as we have all been
discussing and you all know, these new companies, these
startups are the big job creators, the big economic drivers, so
we have that only happening in a few places. We do not have a
diverse innovation economy. We have a lot of communities that
feel like they are being left behind. We have a lot of
communities where they are seeing job loss due to disruption
without getting any of the job gains that can also come from
new companies, so that is a key part of it.
Another key part of it, though, is entrepreneurs
fundamentally see a problem and decide to do something about
it, create a company to do something about it. The problems you
see in rural America are different than the problems you see in
New York City, for example. In the area of agriculture
technology, ag tech, you are likely to find an entrepreneur
with an insight into the future of farming in Nebraska more
than you are in Silicon Valley, and so we need to make sure we
get all of those ideas on the table. We have more shots and
goal, if you will, as a country, and that requires getting more
people from more places into the innovation economy.
Mr. Lucas. Clearly, we need to modernize our security laws
with incremental reforms to make capital formation through
public and private markets so it is attractive to business of
all types, all sizes, all locations. Thank you for this very
important hearing today, Mr. Chairman. I yield back.
Chairman Hill. The gentleman yields back. The gentleman
from Massachusetts, the Ranking Member of the Digital Assets,
Financial Technology, and Artificial Intelligence Subcommittee,
Mr. Lynch, recognized for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman and the Ranking Member,
and thank you to our witnesses for your willingness to help
this committee with its work.
When I talk to most business leaders today in the current
environment, I find that the greatest obstacle that they talk
about to capital formation and launching new development is
actually President Donald Trump and his $1.4 trillion in
chaotic on-again, off-again tariffs on steel, on aluminum, on
lumber. As a former construction manager, it makes it very,
very difficult for banks and finance companies to quantify risk
on a loan when you have this threat out there of 25 percent to
50 percent tariffs on some of these basic building products. It
creates a lot of uncertainty, which is problematic in lending.
Mr. Case, do you agree this uncertainty is a problem?
Mr. Case. Yes. I think business looks for clarity, and
uncertainty and when there is confusion, they are less likely
to invest.
Mr. Lynch. Thank you. That is all I need. All right. Yes,
there you go. Thank you. I appreciate that. As far as private
versus public markets, I have some data here from Citizens
Bank. Since 2001, the number of private equity-backed companies
grew from 2,000 U.S. companies to 11,500 companies, and that is
a 400-percent increase. On the other hand, at the same time,
the number of publicly listed companies declined sharply from
7,000 to only 4,500.
Director Senn, while 9 out of 10 new ventures fail, I mean,
two-thirds of new private equity investments come from pension
funds, 30 percent are hedge funds investors, and 23 percent of
venture capital investors are pension funds. This means that a
substantial portion of pension funds, retirement savings of
teachers, firefighters, police officers, nurses, government
employees, construction workers, and other main street middle-
class folks are invested in private funds. I understand the mix
that pension fund managers are seeking, and I understand they
are searching for yield. Why is it important that we maintain
adequate regulatory requirements to keep investors safe, and
could lowering requirements, like changing the accredited
investor definition, endanger pension funds and other
investors?
Ms. Senn. Based on the information you provided from
Citizens Bank, it sounds like our private markers are doing
exceptionally well with the funding that they have now.
Mr. Lynch. Right.
Ms. Senn. The States do support modifications, some reforms
to the accredited investor definition, but what we are asking
for is also more transparent disclosures on these private
offerings. The public markets are out there for the entire
world to see, all of their financial records, and people are
able to scrutinize them across the globe. With the private
markets, it is important for all investors. I know some of
these are high-risk businesses that are given access to retail,
not just retail given access to the high-risk businesses. Many
of them are startups, nascent stage, but having those
disclosures on the other side as well are critically important
to allowing these people to invest and mitigate the risk.
Mr. Lynch. So that shift of investment, the flow of
investment to private equity, there is a lack of transparency
on that side when compared to public companies. Is that right?
Ms. Senn. It is a more opaque market than the public
market, certainly because all of the filings are out there for
the world to see. On the private side, what we see, and I
emphasize again the States' roles in all of this, especially
the smaller businesses and smaller offerings, when you have
somebody within the State, within those local markets helping
review documents with these companies that are getting off the
ground. This information, financials are not available to
everybody. Business plans are not available. They are filed
confidentially with us, and so, yes, investors do not have as
much information, near the information they have as they do
with public companies.
Mr. Lynch. One incident that we were faced with last year
was when Silicon Valley Bank failed. When we looked at the list
of investors in that company, CalPERS, California Pension Fund
was a significant investor. Do you have any thoughts on that?
Ms. Senn. I know in Alabama we do have a pension fund, and
we have a phenomenal team of advisors that do a great job of
keeping that fund healthy. I mean, pension fund, they can weigh
their own respective risks, but I know each State has an
opinion.
Mr. Lynch. Thank you. Thank you, Mr. Chairman. I yield
back.
Chairman Hill. The gentleman yields back. The chair
recognizes the gentlewoman from Missouri, the Chair of the
Capital Markets Subcommittee, Mrs. Wagner of Missouri. She is
sponsoring, attached to this hearing, the Small Entity Update
Act, the Encouraging Public Offerings Act, the Increasing
Investor Opportunities Act, and the Developing and Empowering
Our Aspiring Leaders Act, the DEAL Act. Mrs. Wagner, you are
recognized for 5 minutes.
Mrs. Wagner. I thank you, Mr. Chairman. Mr. Case, I am
going to get right to it here. You have spent years championing
entrepreneurship beyond Silicon Valley through the Rise and
Rest Fund. Can you explain why current capital formation
policies are failing entrepreneurs in rural areas and how the
proposed reforms could change that?
Mr. Case. Thank you for your question, and we have had
great success across the country, including Missouri. One of
the companies we backed in St. Louis, Summersalt, is doing
extremely well. The challenge for entrepreneurs in these Rise
of the Rest cities, in these places outside of the major
coastal tech hubs, is they generally do not have access to the
capital they need to get started. They do not have the friends
and family, and there is not enough local venture funds to
really give them that first start, and then as they expand,
they do not have the capital they need to grow the company.
Creating more opportunities for more entrepreneurs in more
parts of the country to get that initial capital is critically
important.
The kinds of things this committee is discussing, including
making it easier for accredited investors and encouraging more
angel investors and support. As I mentioned in my testimony,
the 1,400 regional funds that would start in the next 10 years,
how do we make sure the majority of those go forward and ways
to make it easier for them to raise capital so they can then
invest that capital in entrepreneurs in their backyards?
Mrs. Wagner. To that point, Mr. Case, venture capital
networks are often built on elite university ties and personal
relationships. How could allowing larger venture capital (VC)
funds to invest in smaller regional funds help break down these
barriers and distribute capital to more areas of the country?
Mr. Case. I agree with your hypothesis that in places like
Silicon Valley, it is obviously a very robust, very successful
ecosystem, but often it is sort of insular or maybe even a
little bit elite. They are generally focused on backing
entrepreneurs in Silicon Valley that came from Stanford or
worked at Google or some other company, and so getting some of
that capital focused on other parts of the country is
important. As you say, making it easier for them to invest in
some of these regional funds to support those funds, but also
to have some insights into what is happening in those markets,
some deal flow. Some of those small companies may then expand
and need the capital that they could then use their core funds
for.
Mrs. Wagner. Allowing a fund investment into these smaller
firms would not just benefit the venture capital firms and
their investors, correct?
Mr. Case. Correct.
Mrs. Wagner. Okay, what would the impact be on the
underfunded startups throughout the country?
Mr. Case. More capital going to more entrepreneurs and more
places will then result in more companies starting, more of
them getting to the point where they are scaling and can be
successful, which will drive, obviously, job growth and
economic growth.
Mrs. Wagner. Mr. Case, according to the SEC Small Business
Advocate, Rule 506(c), as created by the JOBS Act, is
disproportionately used by first-time and diverse fund managers
because it allows issuers to broadly solicit and advertise an
offering. Do you see a risk that an advanced Form D filing
requirement could create hesitation among entrepreneurs and
fund managers toward using this exemption out of concern they
might inadvertently run afoul of technical requirements?
Mr. Case. I think that is a concern. I did work on the JOBS
Act more than a decade ago, and as I said in my testimony, I
was delighted that it passed but also delighted it passed in a
bipartisan way. I think it did strike the right balance in
terms of enabling good things to happen, while also protecting
bad things from happening, and continuing to strike that
balance is obviously critically important.
Mrs. Wagner. Ms. Matthews Brackeen, what would be the real-
world impact on founders, particularly underrepresented ones,
if general solicitations had to be delayed due to a pre-filed
Form D requirement, and would that chill the use of the
exemption entirely?
Ms. Matthews Brackeen. Yes, it would have a chilling
effect. I do not see a reason to file a form before you have
gotten it done. It just would create another barrier that is
completely unnecessary.
Mrs. Wagner. I would tend to agree. Mr. Trotter, many
retail investors lack access to high-growth private companies
because they are not accredited. We talked about this, I am
sure, with lifting the cap on private investments within
closed-end funds, will provide a practical, regulated pathway
for broader retail exposure to private markets without
undermining investor protection.
Mr. Trotter. Yes, I think that is a fair inference and a
sensible approach.
Mrs. Wagner. Great. Thank you. I think we are all in
agreement. I appreciate you all being here, and we look forward
to it. We have up to 40 capital formation bills that the
Capital Markets Committee is advancing, and I look forward to
getting to a markup so that we can advance those to the floor.
Hopefully, get some support in the Senate, too. I thank you,
Mr. Chairman. I yield back.
Chairman Hill. I thank the Chairwoman. The chair recognizes
the gentleman from Missouri, the Ranking Member of our Housing
and Insurance Subcommittee, Mr. Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Ms. Senn, I do not
know. Maybe you or some of the other panelists are familiar
with the butterfly effect; that a little butterfly could alight
on your shoulder, and you take a bad step and the bad step
causes you to fall, and you fall and tear an ACL and then you
have to go to the hospital, and it goes on. Essentially, the
butterfly effect is that something seemingly inconsequential
can happen, but it could have significant impacts along the
way: the butterfly effect.
On March 14 of this year, the President issued an executive
order entitled, Continuing the Reduction of the Federal
Bureaucracy, in which President declared that certain agencies
are part of the Federal bureaucracy that is ``unnecessary'',
and the executive order (EO) eliminates non-statutory functions
and reduces the statutory functions of agencies that the
President calls unnecessary governmental entities. That is
seemingly just something happens, and they barely mention it on
the news, but one of those impacted agencies was the United
States Interagency Council on Homelessness. And all of us, my
experiences and life impacts my present attitude, my views, and
so I am convinced that maybe in second and third place, the
most significant domestic challenge we have is housing,
accommodating the people of this country in affordable and
decent housing.
One of the problems, that move by the President, is that it
impacts the MBDA, the Minority Business Development Agency, and
it also impacts the CDFI Fund. I represent an urban area
mainly, and this is going to help devastate an already
devastating problem impacting the country. Can you or somebody
tell me how we get rid of this? I mean, how can we undo the
butterfly effect? Is it possible in the real world, not the
political world where people try to say something to hurt
somebody else? This is a real problem. Can anybody help me?
Ms. Matthews Brackeen. Congressman, I am not sure if we can
undo it, but as I said earlier, if 44 percent of the U.S.
economy is generated by small business, we would not get rid of
funding for farmers because we need to eat, and we would not
get rid of funding for the military because we need to keep
each other safe. We should not make it more difficult to run a
small business in the middle of America because that is how we
drive the American economy. How do we undo it? It is with
conversations like this and making certain that we do not
defund the things that are running the U.S. economy.
Mr. Cleaver. Anybody else agree with that?
Mr. Case. I do agree with that, and I also would echo what
you said around the housing situation. I think it is a national
challenge to build more homes for more people at different
price points and with an eye toward affordability, that there
is much that can be done at the Federal level and a lot that
can be done at the local and State level to unleash really a
revolution in housing. I agree in the last several decades, we
have not really seen the innovation in that sector. That is
critically necessary, and there are a mix of things. Some of it
is regulatory policy, including some of the things at the local
level. Some of it is innovations around construction
technologies, but we have to figure out ways to get more people
in homes and get the affordability down. That is an issue in
almost every part of this country.
Ms. Senn. Yes, I will just add that as 40 percent rural
State here in Alabama, and our colleagues, we are boots on the
ground. These people are in our backyards. We see them across
our communities, and so by helping empower and grow our small
businesses, they can create jobs within our States, and we are
able to do that. With regard to your CDFI statement, I have
talked with our local banks and credit unions, and they have
very much so experienced the impact in those communities,
especially in rural Alabama.
Mr. Cleaver. Thank you, Mr. Chairman.
Chairman Hill. Thanks, Mr. Cleaver. The gentleman from
Kentucky, the Chairman of the Financial Institution
Subcommittee, Mr. Barr, is recognized. He is the author of the
Small Business Investor Capital Access Act. Mr. Barr, you are
recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. Mr. Case, excessive
compliance burdens should not prevent the flow of capital into
main street businesses, the driver of economic growth in our
country, and your testimony that roughly 75 percent of venture
capital flowed to just three States--California, Massachusetts,
and New York--with 47 States left to share the remaining 25
percent, that is alarming. It is alarming for Kentucky startups
that in flyover country do not have access to capital. The
Private Fund Investment Registration Act of 2010 exempts
private fund investors with less than $150 million in assets
under management from SEC registration, but that requirement
has not been changed in 15 years since it was enacted. As the
chairman pointed out, I introduced the Small Business Investor
Capital Act to address that issue, adjust it for inflation.
Would tying the exemption threshold for certain private fund
advisors to inflation help right size regulation for smaller
funds?
Mr. Case. Yes, I believe it would be a step in the right
direction. More capital going to more entrepreneurs and more
places, I think, will be helpful to those communities and
helpful to the country.
Mr. Barr. Talk a little bit more, and you have already
answered my colleagues' questions about this, but what are some
of the things we can do to build on the JOBS Act to attract
more capital to those other 47 States, like Kentucky, where you
do have startups that do not have access to a lot of capital?
We have a few private equity firms that focus on manufacturing.
That is great but does not really address those venture-stage
firms. We have a Bluegrass Angels group that does great stuff,
helping commercialization out of University of Kentucky. What
are some of the things that we can do to add to the JOBS Act to
attract capital to those startups in places like Kentucky?
Mr. Case. I would say mixed news on this front. The Big
Data in terms of how much capital is going to the 47 States,
the 25 percent, is still a little bit troubling, a little bit
sobering. At the same time, over the last decade, 1,400 new
venture firms have started in different parts of the country.
Part of the challenge is how do you get more funds like that
and how do you maximize the number of those funds to succeed to
their second fund and their third fund. Opening up more groups
of investors, including modifying the credit investor language
and rules, would be helpful in that regard.
Anything that could get more capital into more fund
managers in these communities because they are much likelier to
find the entrepreneur in their own backyard, back those
entrepreneurs, mentor those entrepreneurs, and then when they
scale, connect them to the other entrepreneurs in other regions
and other parts of the country. It really has to start locally.
If people cannot raise that capital locally, they often decide
they have to move to the coast, places like Silicon Valley, to
really have a shot at the American Dream.
Mr. Barr. Thank you for that testimony, and, Ms. Matthews
Brackeen, I want to ask you about the SBIC licensing process
and the experience you had with Lightship. We have some folks
in Kentucky who want to start SBICs. They have private capital
to help put up, but the licensing process seems to be very
cumbersome at the SBA, and when you talk about getting capital
to parts of the country that need it and do not have it, this
is a big impediment at the Small Business Administration. Do
you think that the licensing process is a barrier to new SBICs
being formed in the Heartland of our country? I am told by some
of these folks that want to start an SBIC that it is like in a
black box over there. People apply and then hear nothing. Until
they do, it could be months and months before they even get a
response on whether their application has any issues.
Ms. Matthews Brackeen. I would say that we had the opposite
situation. I feel as if there was a lot of transparency around
the process from start to finish, from deadlines to when we
would hear back on certain portions of the application. It is
an arduous process. There are Federal Bureau of Investigation
(FBI) background checks. There are background checks with lots
of different people. I will say step by step, that SBIC team
was equipped to say yes if they could, if we had the experience
necessary.
Mr. Barr. My experience with my constituents is that you
have to have experience with an SBIC in order to be approved,
and it is a chicken or the egg. How are we going to get more
SBICs if the SBA will not approve them for people who have
never done them before? We need to work on that with
Administrator Loeffler.
Finally, a quick question for Mr. Trotter. I introduced the
Regulation Advancement for Capital Enhancement Act that would
streamline Reg A, reducing the waiting period for offering
statements filed with the SEC under Reg A, expediting small and
medium enterprises like in the horse racing industry,
innovative companies that securitize thoroughbred racehorses,
democratizing horse racing so that all Americans can invest in
helping capital formation. When done in a manner that maintains
robust investor protection, Mr. Trotter, what are the benefits
of streamlining SEC filings under Reg A?
Mr. Trotter. I think your proposal is a great step in the
right direction. The difficulty in my mind with Reg A has
always been not necessarily the limitation on the amount that
you can offer, although that is certainly a factor. The
difficulty is that to do a Reg A offering, you are doing almost
all of the work of a regular way IPO, and so if you are going
to do almost all of that work, you might as well do a little
extra work and have a real IPO. That is the challenge that Reg
A has always faced, in my experience.
Mr. Barr. Thanks, Mr. Trotter. Thank you. I yield.
Chairman Hill. Thank you, Chairman Barr. The chair
recognizes the gentleman from Illinois, Mr. Foster, the Ranking
Member of our Financial Institutions Subcommittee, for 5
minutes.
Mr. Foster. Thank you, Mr. Chairman. I guess I would like
to start by congratulating the Trump Administration on
delivering from its campaign promise of using technology to
make the most transparent administration ever, that they are
really doing very well on that.
I want to say a little bit about trying to get geographic
diversity into investments because I guess I have a little bit
of seniority on Mr. Case since it was 5 decades ago that I
started my company with my little brother and 500 bucks from my
parents, and now manufactures the majority of the theater
lighting equipment in the U.S., about 1,500 employees. We
manufacture in Middleton, Wisconsin, and Mazomanie, Wisconsin,
and you are forgiven if you do not know those, but it strikes
me that there are two barriers to trying to make businesses
work in the heartland. One of them is capital, which we have
discussed a lot. The other one is access to people, and that
depends a lot on the nature of the business.
If you are trying to scale a chain of doughnut stores, you
have all the people you need in any city in the United States.
If it is a really high-tech firm, then there is trouble because
you often have to recruit both spouses, and this is a classic
part. It is called the two-body problem in academics, and it is
a huge thing. If you have a top-of-the-line software developer
or a biotech person, you can get them to move to Chicago or to
Madison or to Austin. You cannot get them to move to Dixon,
Illinois and it is a huge problem. Mr. Case, you have been
struggling with this, and I think that is part of the reason
why we have made so little progress on this. What is your
thinking on that second barrier?
Mr. Case. No, I totally agree with your assessment. Capital
is important, but in some ways, talent is more important. You
need the talent to get started, you need the talent to scale,
and it is more difficult to get that talent in certain parts of
the country. We have seen examples of successes, including in
Illinois, cities like Chicago, bigger cities, but even----
Mr. Foster. Oh yes, Chicago has been the number 1.
Mr. Case. I was going to say, as you well know, in normal
Bloomington Rivian has done quite well in scaling quite
rapidly. You need to find the opportunity that leads people to
not want to leave and creates a boomerang of people who want to
return because they really believe that is happening. Then you
start building that ecosystem and leveraging the national labs,
which are spread around the country, and the research
universities that are spread around the country. One company,
back in Atlanta called Hermeus is working on Mach 5 engine, is
in Atlanta because Georgia Tech is turning into a feeder of
talent, young engineers and others who can be part of that, so
the talent exists in these cities. It then tends to go to the
coast. We need to keep more of that from leaving and get more
of it to return.
Mr. Foster. Yes, I think we should just pay more attention
to that second issue and understand if that is something that
can really be overcome or just something we ought to design
around.
Now, the issue of accredited investors, it strikes me that
there are sort of two dimensions here, one of which is the
wealth, the ability to bear losses, and that is important. The
other one is the knowledge, and it strikes me there are
multiple dimensions to that knowledge test because there is the
knowledge of just the nature of investment, and there is a big
spread in the sophistication of investors. There is the
accuracy of the auditing of the financials, all right, and then
there is the understanding of the actual business model.
Mr. Newell, in the history of your company that you went
through in your testimony you had very sophisticated initial
investors from which you raised the first couple hundred
million bucks, and then you went public, and then you described
a big bubble in the valuation when a bunch of, frankly, dumb
money came sitting around during coronavirus disease (COVID),
sitting on the couch saying, biotech is interesting, I will
invest in biotech firms. I imagine most of those public
investors did not know the difference between an antibody drug
conjugate and a hole in the ground, but they just wanted to
invest in biotech.
Most of those investors, the money they put in has been
wiped out because now the sophisticated investors know you were
doing something that had a low probability of success and a
huge payout, and they provided a valuation. The public
investors had no idea. I was just wondering is there a reason
why we should maybe look at that second dimension of the sector
that you are investing in and have different thresholds in
different sectors, so that a chain of doughnut shops have a
very low threshold because everyone can understand it, and for
complex sectors, maybe a different set of qualifications?
Mr. Newell. Congressman, thank you very much for that
question, and I think that is an astute observation. The
biotechnology industry, which I have been in for over 25 years,
was not something that came to me naturally because I did not
take science in school, so I had to learn progressively, year
over year, what the industry is about, what the science is
about. I already had the business fundamentals because my
background is a corporate lawyer. I understood the business
aspect of it, and it is a unique issue where you see in the
capital markets, public, people who do not know anything can
invest, but in the private markets, people who do not know
anything can invest if they have a lot of money.
Mr. Foster. I am afraid my time is up, but if any of you
have thoughts on that, about having sort of different
thresholds for different sectors based on the complexity, I
would be interested in hearing.
[The information referred to was not submitted prior to
printing.]
Chairman Hill. The gentleman yields back. Thank you so
much, Mr. Foster. The chair recognizes the gentleman from
Texas, the Chairman of our Small Business Committee, Mr.
Williams, who is also the author of Expand the Protections for
Research Reports Covering All Securities of All Issuers. Mr.
Williams, you are recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman. Thank you
all of you for being here today. The JOBS Act made it easier
for broker-dealers to issue reports about small, growing
companies planning to go public by exempting these reports from
being treated as an offer to sell securities. This exemption
has been instrumental in facilitating access to research
coverage for small and emerging companies, helping them attract
investor interest in the IPO process. However, the current
provision is limited to emerging growth companies, leaving out
a vast number of potential issuers who could also benefit from
increased transparency and market insight. My bill would expand
the research report exemption to include reports about any
issuer that undertakes a proposed public offering of
securities. This would enhance market efficiency, providing
investors with more comprehensive information, ultimately
helping to level the playing field.
Mr. Trotter, could you explain how such an expansion would
benefit the marketplace without compromising investor
protection, especially as research analysts remain subject to
robust SEC and Financial Industry Regulatory Authority (FINRA)
regulations?
Mr. Trotter. Yes, this is a perfect example of how the IPO
onramp provisions can be extended, so you are building on an
existing exemption that is available for emerging growth
companies relating to their equity securities. Your bill would
expand that to all companies, regardless of their size,
regardless of whether they are emerging growth companies,
larger companies, and would apply not only to equity
securities, but also to debt securities. We have 13 years of
experience with the exemption. It has been very helpful for
emerging growth companies to have uninterrupted research
written on their companies, and it would be beneficial for all
companies to benefit from that as well. It is also based on an
SEC rule that is a little bit more limited than your provision,
but your provision would be very helpful.
Mr. Williams of Texas. Okay. Thank you. Access to capital
remains a critical challenge for many small businesses across
the country, particularly those in rural areas, and I represent
a lot of rural area in Texas, and many rural entrepreneurs are
still struggling to secure funding they need to grow and
survive, primarily because of regulatory and compliance
burdens. Despite the legislative efforts to ease these
barriers, there are still significant gaps when it comes to
ensuring small rural businesses have plenty of options to
access crucial capital. Ms. Matthews Brackeen, can you
elaborate on what challenges rural small businesses are
currently facing in assessing capital?
Ms. Matthews Brackeen. Absolutely. We service lots of
entrepreneurs and founders around the State of Ohio, especially
in rural areas. The capital is not there. They are many times
having to leave their cities or enter programs that are offered
by our State or the Federal Government so that they can access
capital. It is incredibly difficult, but it is possible. We
have met people in Youngstown, Ohio, building $14 million
companies, but it is possible, but incredibly difficult. I
think if left to our own devices, capital markets are really
going to go to concentrated areas here in the country, and
those people will be left out.
Mr. Williams of Texas. Okay. Now, small businesses are
facing an increasingly difficult environment when it comes to
securing capital. We have talked about, particularly, given the
rise in regulatory compliance costs, the concentration of
venture capital funding in States like California, New York,
and Massachusetts. For many small businesses outside of these
traditional investment hubs, the lack of capital resources and
difficulty of meeting regulatory requirements creates
significant obstacles to growth and sustainability. This
situation not only limits the small business growth potential,
but also hampers economic development in communities that could
greatly benefit from entrepreneurial investment. Mr. Case, from
your experience, or I am sorry, would any of the capital
formation policies discussed today make it easier for
unrepresented entrepreneurs or those from flyover States to
raise capital?
Mr. Case. Yes, it is always going to be a challenge to
start a company anywhere. It is a bigger challenge if you are
not in one of the major coastal tech hubs, and the legislation
that is being considered by this committee will be a step in
the right direction to make it a little bit easier for
entrepreneurs in places that are not where most of the capital
is right now to have access to capital to get started and scale
their businesses. I think there is some constructive
conversation. I have read every single one of the 37 bills that
have been proposed, but the summaries I have read have been, I
think, helpful and build on the work of the JOBS Act more than
a decade ago.
Mr. Williams of Texas. All right. Thank you very much, and,
Mr. Chairman, I yield my time back.
Chairman Hill. The gentleman yields back. The chairman
recognizes the gentleman from California, the Ranking Member on
our Task Force on Monetary Policy, Mr. Vargas, for 5 minutes.
Mr. Vargas. Thank you, Mr. Chairman. Again, I appreciate,
very much, this hearing. I want to thank all of the witnesses
here today. I have two lines of questioning today. I would like
to ask about risk and investors' protection and also about the
diversity of access to capital around the country. Mr. Trotter,
welcome back, by the way. Good to see you again.
Mr. Trotter. Thank you.
Mr. Vargas. I am tempted to give you more time to answer
the ranking member's question on Elon Musk's conflict of
interest, but I think I will skip that one for you, give you a
break, but I do want to ask about this. On page 3 of your
testimony and also your testimony today, you say a few things.
None of the proposals would alter any of the robust antifraud
provisions of the Federal Securities laws, then you go on to
the two key proposals. On the list of proposals, two are by far
the most important: extending the IPO onramp based on 13 years
of successful experience, just talked about that, and expanding
eligibility for well-known seasoned issuer status based on
decades of successful experience. You did mention the 500
largest companies, the market cap that they control, and I do
agree with much of what has been said, but how do you make sure
that these small investors, these new people coming into the
market, do not get screwed?
Mr. Trotter. Again, I would begin with the antifraud
provisions of the Federal securities laws, which are very
rigorously enforced by the private securities bar, frankly.
Class action litigation is a real thing. When your stock drops
significantly, you do get sued.
Mr. Vargas. We had Bill Lerach in San Diego, and very
familiar with that.
Mr. Trotter. Yes.
Mr. Vargas. You get Lerach'd.
Mr. Trotter. That is by far and away the most significant
source of discipline in our capital markets, and none of these
provisions before you, just like the JOBS Act, alter the
liability matrix under the 34 Act or the 1933 Act. It is very
robust, and that is----
Mr. Vargas. I mean, you talk about the 404(b) that you do
not have the independent auditor give them a little more time
for these small companies to onramp. How does that not get more
risk?
Mr. Trotter. Yes. The 404(b) is an internal controls audit.
It is separate and apart from the financial statements audit.
Every public company has an independent auditor that is PCAOB
registered, every single one. The JOBS Act did not change that.
The JOBS Act extended an onramp that already existed under SEC
regulations for new public companies that got a little more
time before they had to do 404(b) compliance. Again, my point
on that is, it is directly targeting the top of the market, the
high end, largest----
Mr. Vargas. just scaling.
Mr. Trotter. Exactly, scaling that regulatory burden.
Mr. Vargas. Okay. Thank you. Mr. Case, you are talking
about diversity of access to capital and entrepreneurship, and
thank you again for your efforts. One of the things we talked
about briefly here, is housing. I asked artificial intelligence
(AI) what is the price differential in homes from Silicon
Valley and Arkansas. In Silicon Valley, it is over $2 million
now. In Arkansas, it is $299,500. I mean, it seems to have a
natural opportunity there in Arkansas versus Silicon Valley.
Why you do not just have naturally reoccurring or the
occurrence of these investments in places where people can
afford to live?
Mr. Case. I do think there are some significant cost-of-
living advantages in many parts of the country, including, and
as you mentioned, in Arkansas. That is one of the reasons
people might consider staying where they are or moving back to
some place, but you still need to have that innovation engine
in that community. You still need to have enough startups,
enough critical mass to be able to have venture funds, have
enough venture fund success, so you can do kind of follow-on
investing, which then leads people growing up there, going to
school there, to stay there. Maybe even some of the people who
left for what they thought were greener pastures to return.
There are huge advantages all across the country in terms of
the cost of living, cost of doing business, huge advantage in
terms of understanding some of the legacy industries. Now that
we are moving into the third wave of the internet, agriculture
and many other sectors are being reimagined. Manufacturing is
being reimagined. The skill set around that does exist for the
most part.
Mr. Vargas. One of the things that you did not talk about,
though, is cultural also. It is interesting that on the coast
that everybody likes to beat up on. I live on the coast. I live
in San Diego. We are rather progressive in how we look at young
entrepreneurs, and also we have different types of
entrepreneurs. You have a lot of people from different
countries that have come to our State, and we do not
discriminate. Our gross State product now is over $4 trillion.
It is the 5th largest economy in the world if it was a country.
You go to some of these other States, they do not want
immigrants. They beat up on them all the time. These
universities, they go after them. They make fun of Ivy Leaguers
here and all of a sudden say, well, why these young smart kids
do not come to these States? Well, I wonder why. Anyway, with
that, I will yield back.
Mr. Steil [presiding]. The gentleman yields back. The
gentleman from Georgia, Mr. Loudermilk, is recognized for 5
minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. Thank you all for
being here to discuss this important topic, and, Mr. Trotter, I
want to ask you about the decline in initial public offerings
over the past decades. As you have mentioned, while the JOBS
Act of 2012 helped lower IPO barriers from a compliance
perspective, and we have seen some recovery in the IPO market
driven by large companies, small companies continue to see a
decline in IPO activity. To what extent is the underwriting
cost for IPOs a barrier to entry for would-be public companies?
Mr. Trotter. My focus is on the regulatory burden, which I
think is very significant, and I think Mr. Newell hit it on the
head when he said the easiest way to fix this is to extend that
IPO onramp concept that we already have.
Mr. Loudermilk. Okay. You brought up the regulatory
burdens, and how have they reduced a new company's willingness
to help take smaller companies public, or underwriters to take
small companies public rather?
Mr. Trotter. Sure. By reducing the regulatory burdens
associated with going public, and then by extending the
regulatory relief that you get as a new public company, you
make the whole process more streamlined.
Mr. Loudermilk. Okay. My understanding is underwriting fees
are the largest single direct cost associated with an IPO. Has
the current regulatory environment driven those fees up, and
could rightsizing a particular regulation help bring those fees
down?
Mr. Trotter. Again, I tend to think that those fees are
market driven, and the way that you can most effectively help
the system is, in terms of especially with IPOs, simply extend
the IPO onramp. We have 13 years of success. Make it a longer
period, not just limited to 5 years, but 10 years post IPO.
Mr. Loudermilk. Okay. Thank you. I want to kind of follow
up on something that my colleague, Mr. Vargas, had brought up,
and you have spoken before and here today, about the need to
extend the IPO onramp from the JOBS Act. One of the benefits of
onramp and emerging growth companies designation from JOBS is
that exemption from the Sarbanes-Oxley 404(b), as you were
discussing earlier. Can you expand on what is the provision in
Sarbanes-Oxley and why it is so difficult to comply with for
new companies?
Mr. Trotter. It is a provision that originally comes from
banking regulation, so it is focused more on the internal
control process that a company would have, and it is related to
ultimately safety and soundness concerns of a particular
company. What happened with Sarbanes-Oxley is that system was
imposed on the entire public company ecosystem, notwithstanding
the fact that what the best way to target that regulation would
have been to target it at the companies that pose the most
systemic risk. Again, total market capitalization is almost
exclusively much, much larger companies, so you can readily
give significant relief to newcomers, new entrants into the
system, and without any offsetting increase in systemic risk to
total market cap.
Mr. Loudermilk. Okay. Something else I would like for you
to elaborate on, you have made it clear in here that an
exemption from 404(b), an extension for EGC is safe. Why do you
feel that is safe?
Mr. Trotter. I would point you to 13 years of successful
experience with new IPO companies, and again, the IPO onramp
concept was borrowed from SEC rules. Even under SEC rules,
regardless of the size of a company, as a new IPO company, you
get until your second annual report before you have to comply
with section 404(b). That is just a recognition of the fact
that it takes a lot of time to put all those processes in
place. With companies that satisfy the EGC definition, as long
as they continue to do so, they have that relief. Again, Mr.
Newell's point, spoken like a CEO, that relief can and should
be extended based on 13 years of successful experience. It is
no longer experimental. We have the data. You have done it. It
succeeded fabulously. You should extend this concept.
Mr. Loudermilk. At that stage of a company's growth, 404(a)
is adequate as far as the internal management assessment?
Mr. Trotter. Yes, absolutely. Management is required to
maintain effective internal control over financial reporting.
They are required to assess the effectiveness of it and certify
to it. Mr. Newell has signed his name on the dotted line as to
that effectiveness. This is a very significant enforcement
mechanism on its own, but then to have, in addition to the
financial statement audit, which is a big undertaking, a
separate internal controls audit is a significant cost.
Mr. Loudermilk. Okay. Thank you. I yield back.
Mr. Steil. The gentleman yields back. The gentleman from
Illinois, the vice ranking member of the committee, Mr. Casten,
is recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chair. Thank you all for being
here. I think, and I am sure my colleagues will correct me if I
have this wrong. I think Dr. Foster and I are the only two
members of this committee who actually have entrepreneurial
experience in terms of taking a business from an idea, through
attracting talent, fundraising, making it into something that
was cash-flow positive, and ultimately selling on the back end.
I say that not to brag, but to say that it is important that
our Nation's CEOs have representation in Washington. They often
do not have a loud enough voice. Speaking as one myself, our
Nation's CEOs desperately would like more access to capital
without constraints. Certainly in my own expert experience, it
was a nuisance having young, whip-smart MBAs rifling through my
books and questioning my wisdom from the local private equity
fund. I also did not particularly want to get involved in all
the nuisance of public disclosure that the SEC would require
for investor protection.
If you are fortunate enough to have someone of Dr. Foster's
and my temperament and wisdom, you do not need investor
protection. All you need is our wisdom as entrepreneurs. Not
everybody has that, of course, and I say that because the
United States economy is the envy of the world because
historically we have balanced that tension between access to
capital for entrepreneurs and making sure we have deep capital
markets. We have the deepest capital markets in the world. We
also have robust investor protections.
If we have learned anything from the first 65 days of the
Trump Administration, arsonists can work a lot faster than home
builders do. Things take lifetimes to build, from our
relationships with our European allies, to basic decency, to
basic national security protocols, can be destroyed overnight
and take a long time to rebuild. We have seen, what, $4
trillion of collapse in equity values. We have seen a collapse
in mergers and acquisitions (M&A) activity. We have seen a
large number of private equity firms who are now raising debt
in order to pay dividends, which I think is banker speak for
let us kick the can down the road and hope that a future
administration will fix what just got broke. It feels to me in
this moment that we need to be doubling down on investor
protection because that is who is going to get hurt if we are
not careful.
To that end, Mr. Trotter, I would like to chat a little bit
about some of these fund-to-fund structures. My understanding,
and correct me if I am wrong, is that right now, if you are
going to set up a registered fund-of-funds, you have a
registered investment advisor (RIA) who has a fiduciary
obligation to the fund. Got that right? If you were to bring
retail investors into that structure, would that RIA have
provided investor protection for the retail investors, or would
that be treated as a separate class?
Mr. Trotter. That is outside of my area, so I would have to
get back to you on that.
Mr. Casten. Okay. Does anybody know the answer to that
question because the concern is you do not want to have like
multiple tiers in the capital structure that could run down.
Let me stay with you, Mr. Trotter. Right now it is also my
understanding that SEC staff positions have generally said that
fund of funds should not have more than 40-percent investment
in any fund to maintain diversity, but that is not a formal
rule. It is sort of general guidance. Do I have that right?
Mr. Trotter. I am sorry. My area is in the 1933 and 1934
Act, and that is my area of expertise. I am probably not the
right person to comment on 1940 Act----
Mr. Casten. Okay. I guess what I am asking is, it seems to
me like there is a benefit in diversity, and I think there is a
bipartisan agreement of increasing access to these vehicles. Do
retail investors have protections in those under current
structure? Do we have to add additional rules? I guess, Mr.
Case, I would turn to you. Do you think if we were to make this
expansion, that we should ensure that those fund of funds have
some kind of mandated diversity of funds or some additional
protection for retail investors who do not have the
sophistication that the fidelities of the world or the pension
funds do?
Mr. Case. A couple of points. First of all, I think in
terms of retail investors who might become able to invest in
companies or funds if there is a change in the rules around
accredited investors, actually investing in funds for most of
them might be the smarter way to go. It is a little bit why
investing in a stock market you can pick stocks so you can
invest in a fund manager who will manage it for you. You might
not get the full upside than if you pick them, but you also
sometimes can hedge some of the downside. So actually making it
easier for people to invest in more diversified funds that are
investing in multiple funds or multiple companies, I think, is
important.
Mr. Casten. I guess the concern, unless we put in the kind
of disclosures that public companies have, you have retail
investors who may not have the sophistication, do not
understand the liquidity issues, do not understand the way the
capital structure was set up, where they are going to be
underwater in most likely scenarios. How do we get that
protection if we do not have the kind of disclosures that we
have in a SEC environment?
Mr. Case. I do think the process of deciding what an
accredited investor should be and what kind of test should be
put in place other than just wealth. I think there are a number
of proposals being considered. I am sure the SEC can figure out
an appropriate way to strike that balance. Now having----
Mr. Steil. The gentleman's time has expired.
Mr. Casten. I am out of time but welcome any continued
comments. Thank you. I yield back.
[The information referred to was not submitted prior to
printing.]
Mr. Steil. The gentlemen yields back. The gentleman from
Ohio, the Chairman of the National Security, Illicit Finance,
and International Financial Institutions Subcommittee, and the
sponsor of H.R. 145, the Risk Disclosure and Investor
Attestation Act, Mr. Davidson is recognized.
Mr. Davidson. I thank the Chairman. I thank our colleagues
and our committee. To Mr. Casten, he and Mr. Foster may be the
only two Democrats with private sector experience, but,
thankfully, that is not true of the Republican side of the
aisle. I hope he gets to know some more of us better.
The witnesses do have lots of private sector experience. I
appreciate you guys being here, and, frankly, for some of you,
I have really admired what you have done, Mr. Case in
particular, who did not notice the rise of AOL and a lot of the
work you have done since, but I noted that you have ties back
to Cincinnati with Procter & Gamble, and, of course, Ms.
Matthews Brackeen, based out of Cincinnati. So great to see our
slice of America so well represented here today, and that is
part of the goal is America does so well. With less than 5
percent of the world's population, we have roughly 25 percent
of the world's Gross Domestic Product (GDP) but over 50 percent
of the world's invested capital.
Unfortunately, that capital is not all invested in
Cincinnati and Western Ohio and Ohio as well as it is in some
other slices of America, and I think it is great that we have
this hearing today to highlight how we can help see some of
that capital flow invested differently. Frankly, one of the
concerns I have had is for small and mid-market firms, in
particular, when they want to raise capital, they do not really
have as big of an offering. They do not even intend to build an
enterprise that is going to attract the kind of valuations that
do well in IPOs. You have to raise pretty substantial capital
to cover the regulatory barrier, and then if you want to even
solicit an offering, often that offering is shaped by rules
that are fundamentally, they say, to protect investors.
The reality is, we know it is really protecting deal flow
for a lot of people that are already wealthy and they get first
looks at some of the deals, and that is why I have introduced
the bill Mr. Steil referenced, which is the Risk Disclosure
Attestation Act, which is, since it is my money, let me
acknowledge the risks and make my own investments. While here
in Congress we might not have a path to do that, my hope is
that we could do that in Ohio. Ms. Matthews Brackeen, if we
could simply have that Act pass in Ohio with the limitation
that you are soliciting investment from Ohioans and not across
State lines, what would that do for a fund like what you are
operating in terms of the ability to raise capital and deploy
it in Ohio?
Ms. Matthews Brackeen. It would definitely help our fund
but also entrepreneurs around the State. The gentleman from
Kentucky earlier today referenced the Bluegrass Angels. That
group was formed from Kentucky tax credits, allowing investors
to invest and into companies from Kentucky. That was an
incredible program for them, and they saw lots of other new
angel groups pop up around the State. With what you are saying,
I think that Risk Disclosure Attestation Act would definitely
be helpful in the State of Ohio.
Mr. Davidson. Yes. We can hopefully do that for the whole
country, but if not, I have been talking with our lawmakers
that are State-based and saying, why cannot we do some of these
nice things for our own State, make Ohio a better destination
for capital. Mr. Case, in your opinion, what kinds of
opportunities are being missed by places like Ohio as so much
capital is flowing to three States that you highlighted in your
opening testimony?
Mr. Case. Mr. Davidson, my first job was in Cincinnati. I
enjoyed my time there. My second job was in Wichita, Kansas. I
enjoyed my time there. I was born and raised in Honolulu,
Hawaii, and then started AOL in Northern Virginia. Maybe that
helps inform some of my empathy and passion around the rise of
the entrepreneurs building companies in other places. I think
it is also worth noting that venture capital is a relatively
new concept. It did not exist 60, 70, years ago, then if you
had an idea, you went to the bank and got a loan, but banks
usually do not loan to risky startups unless there is a
personal guarantee, which also creates some risk. Venture
capital becomes a path for people to start companies if they do
not have capital or easy access to capital, and some of the
things that this committee is considering that will make it
easier for new venture funds to start and scale in places like
Ohio and other parts of the country, I think, is a step in the
right direction.
As these companies scale, making it a little easier to
consider going public as a young emerging growth company also
is important. That is obviously a key part of the JOBS Act that
I worked on more than a decade ago, I think. We have made
progress. We continue to be the most innovative,
entrepreneurial Nation in the world, but we can continue to
build on that and try to create a more inclusive innovation
economy so it is not just the coast. It is everybody
everywhere.
Mr. Davidson. Thank you for that. One area that I hope we
get to is debt, because whether companies want to do an initial
public offering or not, their ability to solicit debt outside
of bank debt because there are risk classifications that are
different, could really help capital formation. My time has
expired, and I yield.
Mr. Steil. The gentleman yields back. The gentleman from
California, Mr. Liccardo, is recognized for 5 minutes.
Mr. Liccardo. Thank you, Mr. Chair. Thank you all for your
testimony. It has been very informative.
Mr. Case, I really want to thank you for your pioneering
work in our innovation economy and for your work with Rise for
the Rest. It is important. I think we all recognize him from
Silicon Valley, but it is important that opportunity be broadly
distributed in our country. I appreciate your great work there,
as well as with President Obama's Council on Jobs and
Competitiveness, which ultimately resulted in the
recommendations we see that form the JOBS Act in 2012, which I
think has spawned great progress, though, obviously, we have
much more work to do.
In page 4 of your written remarks, as well as a little bit
in your testimony, we have heard a bit about your view of
talent that is not just about capital flows. In fact, talent
can be more important than capital. Specifically in page 4, you
talk about high-skill immigration, and I agree with your
assessment. Talent is evenly distributed in this world and
across the globe, and as we think about the imperative for
ensuring access to talent in our country. You mentioned
certainly the Heartland Visa, which is promising. Would not it
be true, also, that, generally, lifting the lid on immigration,
particularly high-skill immigration, would be a great boon for
the entire country? For example, if at the University of
Arkansas they could staple a green card to every diploma, a
graduate in science or tech, would not that do great wonders
for Arkansas?
Mr. Case. Yes. No, I have been vocal about this for 2
decades, testified in the Senate around immigration reform over
a decade ago. I believe part of the secret sauce that has
powered the American economy is being a magnet for talent,
people coming here from all around the world, which does not
mean we, of course, do not want to develop our own talent and
improve our education system and teach smart skills around
creativity, communications, collaborations, the things that are
critical for entrepreneurial success. We need to continue to
remain that magnet that attracts people because about 40
percent of our successful companies that are going public were
started by immigrants or children of immigrants.
I understand it is tied up in a much more complicated and
very sensitive, highly politically charged discussion around
immigration, but I think we do run the risk of losing our edge
now that we have seen a globalization of innovation, a
globalization of entrepreneurship, a globalization of the
capital markets. I think it is very important that Congress
continue to focus on this issue and figure out how to strike
the right balance so we can continue to attract people when
they graduate from our universities. As you say, staple green
card, make sure that we are keeping as many people here as
possible, attracting as many people to come here as possible
because the data is pretty compelling that these are not job
takers, but job makers. Having more entrepreneurs building more
companies that are creating more jobs and driving more economic
growth and doing it in more parts of the country, I think, is
essential as we think about this next chapter for America.
Mr. Liccardo. Thank you, Mr. Case. I appreciate that. As
you know, I come from a region of the country where more than
40 percent of our adults were born in a foreign country. I
think that has something to do with the secret of our success,
and more than half of our venture-funded startups, in fact,
have a foreign-born founder. I would like to see that happen
elsewhere in the country as well.
Mr. Newell, I really want to thank you for your leadership
in the Bay Area as a business leader, and certainly with BIO,
which is an incredibly important organization for biotech
industry. I agree with your fundamental notion that we need to
expand the definition of ``accredited investors'' to really get
a more sophisticated definition that focuses on the competence,
the capacity of the investor, not simply their wealth. You seem
to acknowledge that Mr. Foster's recommendation was not a bad
one of having actual sophistication applied to industries or
sub industries, but we are currently facing an administration
that is essentially defunding the financial police at the SEC.
How can we do that in a world in which we have fewer and fewer
folks to actually implement?
Mr. Newell. That is the conundrum, to be honest. In order
to expand access to capital, you need to expand the people who
we think are rightly able to assess the risk of an opportunity.
At the same time, as Mr. Trotter talked about, there are
fundamental laws that are necessary to protect the integrity of
the capital markets and to protect investors as well. If we
have lawyers leaving the SEC, we will have less enforcement,
and that allows for more fraud to occur. If we have reviewers
leaving the SEC who are not replaced, then your process of
actually getting your registration statement filed, processed,
and approved is going to take longer. It presently takes about
90 to 150 days in order to do that, so making it longer would
be harder.
Mr. Liccardo. Thank you, sir. I yield my time.
Mr. Steil. The gentleman yields back. The gentleman from
Tennessee, Mr. Rose, is recognized for 5 minutes.
Mr. Rose. Thank you, Chairman Steil, and I want to thank
Chairman Hill and Ranking Member Waters for holding this
important hearing, and thank you to our witnesses for taking
time to be with us today. I know it is a sacrifice when you
come to do this, and we appreciate it.
Most venture capital funding is concentrated, as we have
heard discussed today, in California, Massachusetts and New
York, despite these States having high individual income tax
rates. Meanwhile, my home State of Tennessee proudly boast no
State-level individual income tax, yet Tennessee lags behind
these other States in venture capital funding. Mr. Trotter,
what factors contribute to this disparity? I know we have heard
some of that today, and why States like Tennessee do not, which
would seem to foster interest from investors because of the tax
treatment, why do they have a significant economic advantage
over Tennessee and attract more venture capital funding?
Mr. Trotter. I think you are going to the heart of a lot of
what Mr. Case has spent a long time trying to solve. I would
defer to his insights on the answer to that question. My
perspective is simply to foster IPO activity. You want to
streamline that process and make it less burdensome, and you
want to make it less burdensome for a company, once it is
public, to begin life as a new public company, and extend the
period of relief that is available for those companies based on
13 years of successful experience.
Mr. Rose. I will take you up on your challenge, and, Mr.
Case, you might speak to that. It would seem it is, at least to
me, and as my friend, Mr. Davidson, pointed out, many of us on
this side of the aisle were successful in starting businesses,
and I certainly was and thankful to be in a State like
Tennessee, where we got favorable tax treatment. Speak to that,
if you will.
Mr. Case. There is a lot going on in Tennessee. I know it
pretty well. I actually have a couple grandkids growing up in
Nashville. We have investments in Chattanooga and other parts
of the State. Actually our first Rise of the Rest tour was over
10 years ago. Nashville was part of that visit, so the momentum
there and the cranes building, they are showing real momentum
in that city. As you say, though, a lot of it is attracting
bigger companies, in part, because of tax, but also the talent
pool and other kinds of things to be there. The question is,
how do you get more of the entrepreneurs staying there and
starting there, and that ties in with some of the things we
have been talking about today, having more regional venture
funds that are based in Tennessee matters. Having people focus
in the area, including things like the Startup Tennessee
efforts and having the National Entrepreneurship Center, helps
enable more momentum there. I think the momentum is building in
Nashville and Chattanooga and other parts of the State, but it
can go higher.
Obviously, Tennessee is a big State with a lot of
opportunities, but still, relative to other places like
California, New York, Massachusetts, are not getting access to
the capital. That does lead some of the people growing up in
Tennessee to decide to leave, to go the coast. We have to stop
that or at least slow that.
Mr. Rose. Is it about that critical mass? Is that really
the factor, or are there things that Tennessee and other States
are not doing that they should be doing to foster that?
Mr. Case. Well, a number of things. We have talked about
capital access. That is critically important. If you do not
have the ability to start the company, it is obviously not
going to get started. We have talked about talent, how do you
make sure you have a critical mass of talent, which is why
clustering in different cities makes sense. It does not just
have to be a few cities, though. We want it to be dozens and
dozens of cities. There are some cultural aspects. I think
Tennessee is doing a good job of this, but how do you make sure
entrepreneurs in your community recognize that you are
celebrating their risk taking, and if they fail, encourage them
get up again, try again in some communities that people would
then be branded to failure?
One of the great things about Silicon Valley is that it is
just viewed as a part of the process of becoming an
entrepreneur. Sometimes including me, I got it wrong the first
time before I got it right with AOL. So creating that culture
where people recognize the importance of entrepreneurs,
recognize they are the innovators, they are the pioneers, it
does take a lot of risk and be supportive of them, I think, is
critically important, but Tennessee is doing well.
Mr. Rose. You mentioned, Mr. Case, in your written
testimony, highlights of the importance of competing globally
with China by boosting investments in research and development
at our universities, and little time left here, but in my own
business startup, we eventually had to abandon the Chinese
market because they stole our intellectual property. We
ultimately decided there just was not enough upside there. In
the 10 seconds left here, how do we confront that? We make
these investments in developing IP, but do we really cash in on
them as a country if we do not protect our innovators?
Mr. Case. We do need to protect our IP, no question, with
other countries now competing in the variety of technologies,
AI, robotics and other kinds of things, and we need to continue
to invest in that R&D. My company, AOL, would not have been
possible without the government creating the internet through
the investments in Defense Advanced Research Projects Agency
(DARPA), so we need to make sure we are planting that seed corn
of new innovation.
Mr. Rose. Thank you. My time has expired. I yield back, Mr.
Chairman.
Mr. Steil. The gentleman's time has expired. Ms. Talib, the
gentlewoman from Michigan, is recognized for 5 minutes.
Ms. Tlaib. Thank you, Mr. Chair. Many people think that the
primary purpose of the stock market is to raise funds for
companies, but that is not actually the case. When companies
want capital for investment, they rely on retained earnings,
bank loans and corporate bond market, and then maybe the stock
market. Take the difference between primary and secondary
markets. Ms. Senn, I do not know if you know. Can you explain
the difference between primary and secondary stock markets?
Ms. Senn. Yes, if you are speaking about our very publicly
traded markets, National Association of Security Dealers
Automated Quotations (NASDAQ) versus over-the-counter type
markets, some of them over-the-counter markets have penny
stocks and higher-risk type investments versus our public
markets, who have to adhere to massive disclosures and other
requirements. Our smaller secondary markets also face the
investors. Their risk tolerances are different on the secondary
markets, I guess----
Ms. Tlaib. In 2022--I think that is why it is important--
the value of stocks traded in the United States was about $44
trillion, and then the value of new securities issued by U.S.
corporations that year--that is, the primary market--activity
was just at $71 billion. So mostly the stock market is where
early investors cash out and the wealthy speculate.
Ms. Senn. Okay.
Ms. Tlaib. Yes. I say that because the bottom 50 percent of
households in our country, ranked by wealth, corporate equities
and mutual funds share only 1 percent. The wealthiest 10
percent of those households, on the other hand, own 87 percent
of all corporate equities and mutual fund shares. I think it is
just really important to see, when we talk about this, where
the real impact is, but there are institutions whose sole
mission is to provide access to capital for the households and
companies that they need most.
For instance, I do not know if you are familiar with
CDFIs--community development financial institutions--providing
financial services and access to capital to low-income
individuals and communities, especially around affordable
housing. That is their purpose. That is the purpose of CDFIs.
However, earlier this month, the President issued executive
order eliminating much of the CDFI Fund. As the law allows, it
is being challenged. Can you explain what the CDFI Fund does
and what the impact in eliminating might be right now?
Ms. Senn. The State securities regulators do not directly
administer those funds. I did reach out to my colleagues in the
banking and credit union world, and they all were emphatic
about the impact that CDFIs have had on their communities.
Especially, I will speak for Alabama and the rural communities.
I know there was upwards of $18 million in financial impact in
our community, so they provided me success stories about the
program.
Ms. Tlaib. Yes. I know it is both rural and urban, but most
of it is even around addressing the housing crisis that we have
in our country right now. Many of the communities, the one in
your community, in your backyard, one in my backyard, in
Detroit, are starved for investment, and that is why CDFIs have
played an incredibly important role in providing that capital,
and the fund is effective. I think, on average, recipients
leverage each dollar awarded by the fund into $8 of funding
from the sources. It is important for my colleagues, the last
10 years CDFI Fund has helped finance over .5 million units of
affordable housing, 42,000 commercial real estate projects,
$17.9 million in personal loans, and $1.3 million in small
business loans. I do not know how we can talk about access to
capital in this committee when the President is trying to take
away from the very people it helps the most. CDFIs are
critical.
One last question for you, Ms. Senn. Last week, the new
director of the Federal Housing Financial Agency--FHFA--maybe
Bill Pulte. Is that Bill Pulte? Are you familiar with that new
director? He appointed himself the Chair of Fannie Mae and
Freddie Mac. Now the FHFA is the regulator of both agencies. Do
you understand? Is this a conflict?
Ms. Senn. Those decisions that were made at the executive
level are----
Ms. Tlaib. But we have a regulator that sits now on the
board, the very Agency he is supposed to regulate.
Ms. Senn. Those are decisions that are made at the
executive level from the States.
Ms. Tlaib. Is that not a conflict?
Ms. Senn. You know, I am not sure.
Ms. Tlaib. Common sense tells you it is a conflict of
interest. Those are decisions----
Ms. Senn [continuing]. make no sense.
Ms. Tlaib. Okay. Thank you, Mr. Chair. I yield back.
Mr. Steil. The gentlewoman's time has expired. I now
recognize myself for 5 minutes for questions. I want to start
with you, Mr. Newell, if I can.
In your opening testimony, you told the story of Sutro on
the evolution from startup to public company, and navigating
that is a challenge and something that we want more companies
in the United States to do, and making sure that those startups
have access to the public markets is essential. It was just
referenced that maybe they could use retained earnings. Can
startups use retained earnings? Maybe we just knock that
question out of the gates. Do you have retained earnings in
your startup?
Mr. Newell. We have no retained earnings. We have----
Mr. Steil. Of course not because it is a startup, right?
Mr. Newell. That is exactly right.
Mr. Steil. You are looking for figuring out where you have
finance in the capital markets are really, really important, in
particular in our startups, and you took advantage of the
emerging growth company status in that startup. Is that
accurate?
Mr. Newell. That is correct.
Mr. Steil. Would you have been able to go public in the
manner and the time frame that you did without the EGC status
that was available to you, and if not, why not?
Mr. Newell. It would have been much more challenging for us
to do that because the amount of financial resources that we
would have needed to front-end load to meet the requirements of
full disclosure under 404(b) would have been prohibitive. We
would have had to quadruple our accounting function and hope
that we still go public.
Mr. Steil. You would have had to triple it. Then the
reverse question would be, what happens when you lose EGC
status? Would you have to triple that then?
Mr. Newell. We lost EGC status because we went over the
public float threshold for a brief period of time, and it cost
us a million dollars in extra fees for accounting purposes.
Mr. Steil. So great. Would your view be that we should then
reexamine the current time limit on EGC status?
Mr. Newell. Yes, sir, and thank you for your leadership on
that.
Mr. Steil. I appreciate that. I am going to jump to you,
Mr. Trotter, if I can. Some have claimed that extending EGC
status have put investors at risk. We heard actually comments
from one of my colleagues here, but nothing in the JOBS or the
EGC bill would alter the application for existing antifraud
provisions, correct?
Mr. Trotter. Exactly right.
Mr. Steil. It would have no impact on EGC disclosures and
reporting obligations. Is that correct?
Mr. Trotter. Correct.
Mr. Steil. It would have no impact on corporate governance
standards. Is that correct?
Mr. Trotter. Yes.
Mr. Steil. It would have no impact on the reporting
obligations of officers, directors, and significant
stockholders, correct?
Mr. Trotter. That is right.
Mr. Steil. And so are investors at risk if we allow an
extension of the EGC status?
Mr. Trotter. Not at all.
Mr. Steil. So why should we have the EGC status then in the
first place?
Mr. Trotter. Again, it is about allowing the system to
scale the regulatory burden to the size of the company being
regulated, and the EGC definition shows you that there is an
opportunity to extend that.
Mr. Steil. I appreciate that. I just think it is so
important that we look at allowing startups to have an avenue
and access into the public markets, that we are encouraging
U.S.-domiciled U.S. employers to have access to those public
markets so that they can grow and grow here in the United
States, so that people can get good-and better-paying jobs than
they already have.
In my limited time left, I want to stay with you, if I can,
Mr. Trotter, and dig into the WKSI issue. Companies that
qualify as well-known seasoned issuers--WKSI--are granted more
flexibility in accessing U.S. public markets through automatic
shelf registrations. I have a bill that would expand the WKSI
status by updating the definition to apply to all companies
that otherwise satisfy the WKSI definition with a public flow
to $75 million instead of $750 million, again, driving that
access further down into the market. Can you discuss briefly
why expanding the WKSI eligibility would promote capital
formation while maintaining investor protections?
Mr. Trotter. Yes, and I am strongly supportive of this
measure that you have introduced. This is a category of issuer
that has been around now for more than 20 years. The SEC
introduced it in 2005. It has been incredibly successful. It
has been very helpful for companies going to market to take
advantage of opportunistic timing and to be able to control
more of their capital formation destiny as they go to market.
The eligibility for short-form registration was based in 1992.
The SEC looked at what companies have an efficient market in
their security. That was before the modern internet, and that
was before Electronic Data Gathering, Analysis, and Retrieval
(EDGAR), the SEC filings even became available online.
Obviously technology has drastically accelerated the
efficiencies there, and your bill merges those two categories.
It is a great step forward.
Mr. Steil. Thank you very much. I thank you all for being
here today. I think it is so important that we are making sure
that we have capital access available to startup companies
across the United States of America in big cities like New
York, that is fine, but also in States like mine in Wisconsin.
We are jumping over. I was going to say Indiana, but I will
yield back. We will come to you in a moment, my colleague from
Indiana. We now recognize the gentleman from Texas, the Ranking
Member for Oversight and Investment Subcommittee, Mr. Green.
Mr. Green. Thank you, Mr. Chairman, and, of course, we want
access to capital in Texas as well. I thank the witnesses for
appearing and would associate myself with the ranking member's
opening statement and would agree that what I am about to talk
about is beyond Silicon Valley. It is about expanding access to
capital, but it takes a slightly different twist because I
received this communique and it indicates within that you are
holding a real check for $1,250. Sure enough, there is a check
for $1,250, and it goes on to indicate that if I accept this
promissory note, then I should keep it for my records. I can
understand why because on the reverse side of this page, there
is information about what the consequences are of accepting
this promissory note. One of the items indicated that I will be
agreeing to is this: this has an annual percentage rate. I
assume all the witnesses are familiar with the term, ``annual
percentage rate.'' If you are not, would you raise your hand?
[No response.]
Mr. Green. Okay. Let the record reflect that they are all
familiar with it. It says the annual percentage rate would be
91.27 percent--91.27 percent. I see you all looking in dismay,
and I was, too. In fact, I was thunderstruck when I received
this: 91.27 percent, $1,250 loan, finance charge $700, total
repayment $1,950, says I will be paying $100 for an acquisition
charge, $600 for installment account handling charge, and by
the way, can be accelerated without notice. I think that this
is egregious, and I think that while we are concerned about the
businesses, and I am--I have many small businesses in my
district--I am also concerned about the consumers. This type of
loan, in my opinion, epitomizes what predatory lending is all
about, to receive this check, a live check, that I can cash,
and then receive this loan, or I might add this: it was sent to
me in English and in Spanish, the offer, but the actual
information concerning the contract, all of that is in English,
bait you in the language that you speak, and then have you sign
a contract in a language that you may not be as familiar with.
This causes me a good deal of concern because we have a
CFPB that is now wounded, and I am curious as to what consumers
who receive this type of predatory offer will do once they
conclude that they have been in some way harmed. Who do they
turn to without a Consumer Financial Protection Bureau, which
leads me to what I plan to do. I am going to ask the chair of
the committee to hold a hearing on predatory lending. It would
seem to me that this is very important to the consumer. I
appreciate what we are doing for the businesses, but the
consumer is also of paramount importance, and I will be making
this request, again, $1,250 loan, annual percentage rate 91.27
percent.
Just for edification purposes, would any of you accept a
loan that had an annual percentage rate in excess of 90
percent? If you would, raise your hand. [No response.]
Mr. Green. Okay. Let the record reflect that no hands have
been raised, and I will understand why. I will not put you on
the spot and ask you why you would not. I would simply say, for
me, it is quite egregious, and I do plan to ask the chairman to
convene a hearing on this type of predatory lending. This is
something that concerns my constituents. This is a kitchen
table issue. Some of these other issues that we confront, they
may be kitchen table issues, but they are not for the people
that I represent, for the most part. Perhaps for the
plutocrats, these are kitchen table issues, some of these other
things, but this is bread and butter for a lot of people in my
district. Mr. Chairman, I yield back the balance of my time.
Mr. Timmons [presiding]. Thank you. I now recognize myself
for 5 minutes for my questions.
First, I want to begin by thanking the witnesses for being
with us today, and before I get on to my thoughts, my mortgage
I am about to sign is 6.5 percent, and that is the annual
percentage rate. If I were to get a payday loan because I
needed money for a week at 2 percent, that would be 104 percent
APR, so it all depends on the length of time and the need of
the money. I think that we have to stop using Annual Percentage
Rate (APR) because it is not a good reflection of the value of
access to capital for shorter duration periods of time.
On to the topic at hand. Expanding access to capital for
American entrepreneurs, specifically venture capital funds, is
an important issue, not only for the startup ecosystem, but for
the economic environment in general. While venture capital
plays a vital role in fueling innovation and economic growth,
the reality is that most VC funding is concentrated in just a
few States, leaving many promising entrepreneurs across the
country struggling to secure the capital they need to scale.
This imbalance has real consequences. Entrepreneurs outside of
major tech hubs face significant challenges, particularly when
it comes to raising early stage funding, which is essential for
growth. Without access to Series A and B funding, many startups
never get the chance to reach their full potential. By reducing
regulatory hurdles and expanding opportunities for capital
formation, we can help create a more comprehensive and dynamic
startup landscape, one that supports innovation and job
creation in every corner of the country, not just in a handful
of cities.
Mr. Case, Section 3(c)(1) of the Investment Company Act of
1940 exempts funds with fewer than a hundred beneficial owners
from registration as an investment company. It also includes an
exemption for qualified venture funds with fewer than 250
beneficial owners and $10 million in aggregate capital
contributions and uncalled capital commitments. Can you
explain, based on your experience, the difficulty in complying
with these thresholds?
Mr. Case. Thank you for your question and your preamble
talking about the importance of, obviously, entrepreneurship
and making sure capital is available to entrepreneurs
everywhere. In terms of some of the specific rules on venture
funds, I think limitations, such as you talked about, would
result in, as venture firms start scaling, they would not be
able to accept new investors. I think opening up to a broader
range of investors, including re-looking at the accredited
investor roles, would be a step in the right direction to help
those venture funds that can then help invest in companies,
hopefully, in their regions.
Mr. Timmons. Thank you for that. Ms. Matthews Brackeen,
would raising the cap for the qualifying venture capital fund
exemption to $150 million and increasing the number of
allowable beneficial owners to 2,000 help VC firms, especially
smaller firms in underserved regions, to better support
entrepreneurs and drive investment?
Ms. Matthews Brackeen. Yes, it absolutely would. It would
open up a brand-new market for us. For a smaller firm, as I
said earlier, kind of like a $50 million minimally viable firm,
that would open up a lot of kind of smaller-dollar checks and
allow us to grow new funds across States in the middle of
America.
Mr. Timmons. Thank you for that. I am proud that my bill,
the Improving Capital Allocation for Newcomers, or ICAN Act,
was included in the chairman's Expanding Access To Capital
package last Congress and was once again considered in the
Capital Markets Subcommittee this session. The ICAN Act makes
it easier for South Carolina investors to support local
startups and entrepreneurs by raising the cap on qualifying
venture capital funds from $10 million to $150 million, and
increasing the investor limit from $250 to $600. We are
removing barriers that have held small businesses back for too
long. These changes will give overlooked entrepreneurs the
capital they need to grow, create jobs, and strengthen our
economy.
Ms. Matthews Brackeen, based on your experience, how
frequently do small businesses and entrepreneurs face exclusion
from the investment landscape due to excessive regulatory
hurdles or high barriers to entry?
Ms. Matthews Brackeen. Every day. It is an everyday thing,
especially in my State, the State of Ohio. We have, my
goodness, less than 20 large venture capital funds in our
State. If you are thinking about going to each of those
individual funds, some of them are only making five to 10
investments a year, and there are thousands of startups that
need support in capital.
Mr. Timmons. Thank you for that. The last 4 years, we have
gotten very out of balance with our regulatory schemes, and we
are not keeping up with the legal frameworks for businesses to
thrive. This country needs to be the best place to start a
business, to grow a business, and we are working here in
Congress with the administration to get us back in line so we
can continue to be competitive in the global economy. That is
what is driving a lot of the legislation. That is what is
driving all of the current administration's decision making,
and I think things are going very well, and I am very
optimistic for the future. With that, I yield back.
I now recognize the gentleman from Indiana, Mr. Stutzman,
for 5 minutes.
Mr. Stutzman. Thank you, Mr. Chairman, and thank you to all
for being here. This is a topic that I always enjoy discussing.
As an entrepreneur myself and have the experience of raising
capital over the last 8 years in the private sector, it is a
thrill, and sometimes it is not. It is an interesting time,
especially with all of the macroeconomics, not only here in the
United States, but around the world as well. There is the old
saying that capital is cowardly, and there are times that, I
mean, every project is a worthwhile project, but we also know
that not every project works out. In fact, the majority of them
do not work out, and so, we do have to be careful in that it is
not just loose and that there are people that are taken
advantage of, but at the same time, this is also what makes
America the greatest Nation on earth.
I have a bill that I would like to ask Ms. Matthews
Brackeen a question about. My bill is the Investment
Opportunity Expansion Act, which would allow an individual to
qualify as an accredited investor if their aggregate investment
is an unregistered securities offering if it is not more than
10 percent of the individual's net assets or the individual's
annual income, whichever is greater. How would expanding the
accredited investor definition, while limiting an investor's
risk exposure, benefit main street investors and ultimately
strengthening our capital markets?
Ms. Matthews Brackeen. It would give people an incredible
opportunity. I mentioned earlier there are lots of other things
that we can spend our money on. We can spend our money on
cryptocurrency, sports betting, you name it, but not
necessarily things that we can really generate wealth from.
That would be a wealth-generating opportunity for people across
the country. I think putting guardrails, to the earlier
Congressman's point, is necessary to protect people because we
are in a moment where consumers need to be protected.
Mr. Stutzman. Yes. Would anybody else on the panel like to
comment on accredited investors, the increase?
Mr. Newell. I think the way the accredited investor
definition works today, it really does not allow for
individuals who can understand and financially afford the risk
to take it. If you happen to be born rich, then you are
presumed to be a brilliant investor, but really, you were born
rich.
Mr. Stutzman. Yes. No. Well, and one of the things that I
often see is that a lot of folks in the Midwest, in Indiana,
where I am from, they want to invest in Indiana. It is also
nice to be able to see, wherever you place your money, that you
can drive down the street and go visit and ask questions, and I
think that is an important component to it as well.
Ms. Matthews Brackeen, I have another question as well
related to crowdfunding. We had a really good subcommittee
hearing on Capital Markets last month, in which we heard
several witnesses on how we can expand access to capital for
businesses, but many diverse founders and small businesses
outside the traditional capital hubs have found funding
opportunities through regulation crowdfunding. Why is this an
important tool? Is it an important tool moving forward, and is
there any particular comments you have to raising capital as a
crowdfunding mechanism?
Ms. Matthews Brackeen. No, crowdfunding definitely fills a
gap for folks that have difficulty around raising friends and
family rounds, so it gives that new opportunity. I will say
that it does not necessarily signal to professional investors,
however, that investment is a good investment, so there are a
lot of learning that have to be had around crowdfunding as
well. It is one thing to go out to the crowd, but likes do not
necessarily generate revenue for a company. It is all about
whether or not that company is sustainable over time, beyond
that moment of the big push of the crowdfunding campaign.
Mr. Stutzman. There was kind of a spike there in popularity
with it. Is it settling, or is it still a popular option? Where
do you think it is going right now?
Ms. Matthews Brackeen. I would say a year ago, it was much
more popular. I would say we are living in a moment right now
of volatility where people are not spending their extra cash on
crowdfunding campaigns.
Mr. Stutzman. Yes, I think the economy is really tight
right now. People just do not have disposable income because
either they could not spend it in investments, or they could
spend it on going out to eat, and I think we are seeing that it
is not happening in either one. Mr. Trotter, I would like to
ask you, I have a bill that is called the Regulation A+
Improvement Act, which would increase the amount that companies
can raise under Regulation A from $50 million to $150 million.
Any thoughts or comments, good, bad, indifferent?
Mr. Trotter. Step in the right direction. I think it is a
helpful move.
Mr. Stutzman. Okay. Very good. Thank you again to all of
you, and this is interesting times. Of course we have a lot of
decisions to make here in Washington that will affect our
economy, but those decisions do affect startups, affect growth,
and hopefully we make the right decisions that people will feel
confident that they can invest again and with certainty that it
is a good investment. Thank you, Mr. Chairman, I yield back.
Mr. Timmons. Thank you. The gentlewoman from Massachusetts,
Ms. Pressley, is now recognized for 5 minutes.
Ms. Pressley. Thank you. For today's hearing on the subject
matter, expanding access to capital, we do not need to search
far and wide for a new solution, and we do not need to start
reducing transparency requirements, loading up on investor
risks by deregulating. Instead, we should focus on improving
the institutions and regulations that help protect investors
and to support businesses. For example, venture capitals funds
play a significant role in directing capital to startups. Mr.
Case, you are a billionaire businessman who operates a venture
capital firm, so I am sure you would agree that VC funds can
provide an array of necessary supports for businesses from
monetary investments to technical assistance, et cetera.
Mr. Case. Yes. Venture capital firms can back entrepreneurs
and help start and scale the companies and create jobs and
drive economic growth.
Ms. Pressley. There is room for improvement. The venture
capital ecosystem is not perfect, and I do not want you to take
this personally, Mr. Case, but far too many VC firms look just
like you, and they mostly invest in startups by white men.
According to Forbes, 98 percent of venture capital goes to
white men, despite the fact that diverse-run businesses have a
25 percent higher return rate.
Mr. Chair, I would like to enter into the record this
September 2024 article titled, ``Building Venture Capital That
is More Inclusive Than The Boy's Club.''
Mr. Timmons. Without objection, so ordered.
[The information referred to was not submitted prior to
printing.]
Ms. Pressley. I believe it is time to start supporting
venture capital funds that are investing in diverse businesses.
For example, in my district, the Massachusetts' 7th, Mendoza
Ventures is a firm that is raking in profit in AI,
cybersecurity, and financial technology (fintech), with 90
percent of its portfolio consisting of startups led by
immigrants, people of color, and women. Now, this is one VC
doing this, but we need a hundred more. The status quo works
great for white men, but we need to expand capital access to
all entrepreneurs regardless of their race and gender. The
responsibility of recognizing and confronting the disparities
in capital access should not fall only on the shoulders of
venture capital funds. There are other organizations that are
designed to help underserved populations that this committee
should be uplifting.
Ms. Senn, can you talk about why Community Development
Financial Institutions, CDFIs, were created and what exactly
they do?
Ms. Senn. Thank you. While the State securities regulators
do not directly administer those programs, I have consulted
with my colleagues in the depository institution world, and
they have expressed and been emphatic about the impact that
CDFIs have had on communities. I know in Alabama, we are 40
percent rural. They cited several examples of where they have
been able to help those underserved areas.
Ms. Pressley. Thank you. Essentially, CDFIs invest capital
in businesses that would otherwise be neglected and under-
resourced. In the Commonwealth of Massachusetts, we have more
than 30 CDFIs, but I want to highlight one that is
headquartered in Boston, investing in the businesses in my
district. OneUnited Bank is the largest black-owned bank in the
country. It helps create economic opportunity for entrepreneurs
in chronically, economic-distressed neighborhoods. At the
height of the pandemic, many of the large and popular banks
were denying PPP loans to small businesses, but OneUnited and
other CDFIs made sure that local entrepreneurs and their
workers were able to make ends meet. I am firmly and proudly
pro-CDFI.
Unfortunately, Donald Trump is not. Trump signed an
executive order attacking the Community Development Financial
Institutions Fund, despite the fact that it is fully authorized
by Congress. He is doing the exact opposite of what this
hearing is about. Instead of expanding access to capital,
Trump's executive order will make it harder to access for all
businesses--urban, rural, from mom-and-pop shops to tech
startups--whether they are in Massachusetts or Alabama. This
committee cannot have a serious hearing about solutions to help
businesses succeed while Trump destroys the agencies that they
rely on, chokes off their capital funding, and then puts
tariffs in the way. I was hearing about these fears and
anxieties from small business owners throughout my district at
town halls this past week. It is time for my Republican
colleagues to grow a spine and obstruct these efforts, and
recognize that the real problem here is Donald Trump. I yield
back.
Mr. Timmons. The gentleman from Pennsylvania, the Chairman
of the Oversight and Investigation Subcommittee, Mr. Meuser, is
now recognized for 5 minutes.
Mr. Meuser. Thank you, Chairman. Thank you all very much
for being here and providing us with this information.
Appreciate it.
According to Forbes, the number of publicly traded
companies in the U.S. has dropped considerably since 1997.
During the Trump years, it was a 50-percent increase. Under the
Biden years, there was a decrease, although a slight decrease.
Meanwhile, the cost of going public now exceeds $12 million,
pricing out, obviously, small businesses and everyday
investors. President Trump, Secretary Bessent, and incoming SEC
Chair, Paul Atkins, are working to reprivatize the economy and
put capital back in the hands of the American people by
leveraging both public and private markets, making it simpler
to raise capital so everyday investors can have access to the
markets.
Mr. Trotter, Americans rely on closed-end funds for
retirement investing, yet SEC staff, a number of years back,
limited these funds to investing just 15 percent of assets in
private securities unless they are sold only to accredited
investors. Do you believe lifting this arbitrary cap safely can
expand access for everyday investors to high-growth private
companies?
Mr. Trotter. Yes, I do.
Mr. Meuser. Okay. What do you think it should be lifted to?
Mr. Trotter. I think expanding access is a good step.
Mr. Meuser. I agree. Is this typical for the SEC staff to
provide guidance? Again, it was back in the 1990s, but is that
something that is typical or do you think should be atypical?
Mr. Trotter. There are a number of areas where the SEC
staff provides its interpretive guidance, and that becomes an
important benchmark for private industry in figuring out how to
apply either the statute or a rule that the SEC has adopted.
Mr. Meuser. Okay. Hopefully the new administrator keeps an
eye on that. I think he will. Crowdfunding, issuers raising
$100,000 or less, provide independently viewed financial
statements, current law does not require crowdfunding under
$100,000. I plan on introducing the Augmenting Compatibility
and Competition by Enabling Service Switching (ACCESS) Act of
2025, which increases that amount to $500,000. I see you are
nodding your head. You think that is a good idea?
Mr. Trotter. I do.
Mr. Meuser. Ms. Matthews Brackeen, your thoughts?
Ms. Matthews Brackeen. No, absolutely. That is one of the
kind of biggest barriers to entry on the crowdfunding campaigns
is that those independent audits. Small firms do not have the
capital to do those each and every year to fundraise.
Mr. Meuser. Great. Primarily, you think that would be
beneficial to small business?
Ms. Matthews Brackeen. Yes.
Mr. Meuser. Great. Thank you. Mr. Case, nice to see you
again. Venture capital goes to businesses in large metro areas,
far more than rural areas, California, New York, Massachusetts,
et cetera. If we made it easier for venture capital funds to
operate, for example, by raising the $10 million limit, what
qualifies as a small fund, do you think that would help more
money reach startups in rural areas?
Mr. Case. Yes, it would.
Mr. Meuser. Okay. Good. That sounds easy enough, right?
Good on that one as well. Mr. Trotter, back to you. The average
cost of going public, $12 million. Do you think expanding the
current onramp relief for emerging companies, like requiring 2
years of financial statements instead of 3, would make it
easier for more companies to go public?
Mr. Trotter. Yes, I do. I am strongly supportive of that.
Mr. Meuser. Okay. We think just making things easier,
simpler, less regulations will be beneficial to businesses, to
our economy, to overall growth of small businesses and large
businesses?
Mr. Trotter. Yes, all of the above.
Mr. Meuser. That is very logical and makes a lot of sense.
The CFPB is going to go under reform. Many of us do not believe
that CFPB has been constructive. We think it has been the
opposite of constructive, perhaps destructive. Mr. Trotter, I
will go back to you. What are your thoughts on reforms to the
CFPB?
Mr. Trotter. I will have to leave that to others. That is
not my area.
Mr. Meuser. Okay. Not your area. Mr. Newell?
Mr. Newell. Sorry, Congressman, it is not my area.
Mr. Meuser. Okay. Ms. Matthews Brackeen?
Ms. Matthews Brackeen. No.
Mr. Meuser. No? Mr. Case, no comment on CFPB? All right. We
got plenty of comments on it, so we can handle minimal comments
there. Access to capital during the Biden Administration, these
reforms will create a great deal of improvement. Ms. Matthews
Brackeen, would you agree with that?
Ms. Matthews Brackeen. I would prefer not to comment on
that.
Mr. Meuser. Okay. Understood, but what we just discussed,
of course, would be reforms, improvements to what has existed
before, so that would create access to capital, so that is
really where I was going with that. I yield back, Mr. Chairman.
Mr. Timmons. Thank you. The gentlewoman from California,
Mrs. Kim, is now recognized for 5 minutes.
Mrs. Kim. Thank you, Chairman. I want to thank our
witnesses for testifying and appearing before our committee
today. You have heard that small businesses are the backbone of
our economy, and it is especially important for the
constituents and the businesses that I represent in Orange
County, Southern California. That is why last Congress, I
introduced the Improving Access to Small Business Information
Act with my colleague, Congressman Josh Gottheimer from New
Jersey. That bill would ensure that the process for collecting
public feedback from small businesses is streamlined and more
efficient at SEC.
Let me ask you a question, Mr. Newell. During your tenure
at Sutro, what struggles did you identify that small companies
had in getting the SEC to take their feedback into account?
Mr. Newell. Thank you, Congresswoman, for your question. I
think there are a number of ways in which we as a small company
interact with the SEC, from the initial stages of doing Reg D
offerings through public offering in and of itself. In a public
offering process, you do your level best to try to write your
registration statement so that it passes muster quickly and
that you can raise the capital as quickly as possible. I will
say that the regulatory response time frames are excessively
long, and the public capital markets do not wait for anyone. If
money is available, you take it, and if you take too long going
through a registration process, money that might have been
available may no longer be there. We are just a small cog as a
small company in the wheel, and we are all treated the same,
whether it is a public offering of General Motors or a public
offering of Sutro Bio, the same rules and regulations apply. I
do not think people understand their differences, and those
differences need to be taken into consideration.
Mrs. Kim. Thanks for that. I think the goal is if we want
our businesses, especially small businesses, to grow and become
more public, then we need to ensure that the SEC has no
difficulty in hearing back or feedback from the businesses. Let
me move on.
It is my fear that when venture capital firms engage in
pattern matching, I think we discussed that probably before,
but they overlook talented entrepreneurs who do not fit the
typical mold that have innovative ideas. Ms. Matthews Brackeen,
how often are you seeing these nontraditional founders
overlooked by venture capital firms because the founders do not
do the pattern match for stereotypical factors for success?
Ms. Matthews Brackeen. Yes. People have a tendency to
invest in people that they know, like, and trust, and sometimes
that is in the region that they live in. According to the Angel
Capital Association, women and their angel portfolios tend to
invest at a 70 percent rate in other women, right? If we apply
that to other markets, if we are able to diversify the
investors that are investing around the country, I think we
will see less pattern matching.
Mrs. Kim. How can we adjust our capital market regulation
to incentivize more venture capital investment in very diverse
founders?
Ms. Matthews Brackeen. I think it is still important to
make certain that we are funding and having programs like
SSBCI. I know that has helped our State incredibly in Ohio, and
those regulations and those have really helped to grow in
certain areas of the State that would have never had any
venture capital at all.
Mrs. Kim. Your firm, Lightship Capital, how have you
capitalized or utilized the enrichment programming to mentor
those founders?
Ms. Matthews Brackeen. We offer programming in 16 cities
around the country, and we help companies to grow the amount of
revenue that they are attracting, and, oh my gosh, $500 million
in capital has been attracted to our portfolio of companies.
Mrs. Kim. Thank you. Since COVID-19, we have seen a decline
of number of companies going public because economic conditions
have been unstable throughout the Biden-Harris Administration.
I want to ask the question to Mr. Case. Do you believe that the
long-term stable economic growth that we are seeing under
President Trump, who is aiming to deliver, will result in
increased initial public offerings?
Mr. Case. I continue to stay out of politics and focus on
policy. That has been my approach for 40 years and will
continue, but I do think figuring out ways to open up the IPO
market to more companies so when they have a need for capital,
if it is not available in the private market, they have a path
to go public makes sense. Some of the things that this
committee is considering, I think, are steps in the right
direction.
Mrs. Kim. Thank you. Thank you, all the witnesses, for
answering.
Mr. Timmons. The gentleman from Florida, Mr. Donalds, is
now recognized for 5 minutes.
Mr. Donalds. Thank you, Chairman. Witnesses, thanks for
being here. Really appreciate it. As we are having this
discussion on capital flow in the United States and really
trying to find ways to open up that flow, for people who
traditionally are not your accredited investor, I think it is
important to take a step back and realize something. When we
made this rule decades ago, it was the understanding that this
was to help protect your small net worth retail investor; but
if you look at just technology over the last generation and a
half, two generations, every American is walking around with a
supercomputer in their pocket.
Your average American has more information about companies
and more information about markets than they ever could have
possibly had at any other point in American history. Yet we
still have, in my view, a very archaic rule around what we
would designate to be an accredited investor to protect the
American people from the hardships of capital markets, and,
listen, capital markets are not a guarantee. They are never a
guarantee, but they do provide real opportunities for people to
build wealth in this country, especially as asset ownership
continues to be the driver of how people build wealth. Mr.
Newell, how detrimental has the current definition of
``accredited investor'' been to capital formation?
Mr. Newell. There is no question that if you limit the
number of people who can provide capital to a business, you are
making it much more difficult for that business to grow and
thrive and survive. I am in favor of a much broader statement
of accredited investor that really empowers individuals, as you
have suggested, to be making their own investment decisions,
and that is not what the current standard allows.
Mr. Donalds. What would be the economic benefit of
eliminating the accredited investor rule altogether?
Mr. Newell. Again, it democratizes, if you will, the
opportunity to invest in earlier-stage companies and
technologies, ones where you may have some acute insights as to
why that technology is going to be beneficial, not only to the
company, but to growing in the community in terms of jobs and
also growing your own personal wealth. If you are not
satisfying the current accredited investor decision, you are
locked out of that investment opportunity.
Mr. Donalds. Mr. Trotter, what are the regulatory
restrictions that have caused the recent shift away from public
offerings and toward private markets?
Mr. Trotter. There are many, and many of them are long-term
issues, but, again, I would say that the success of the JOBS
Act and 13 years of experience with the IPO onramp can and
should be extended, and you can significantly increase, expand
the category of emerging growth companies, and help IPO
activity.
Mr. Donalds. What are the factors contributing to the rise
of costs associated with going public?
Mr. Trotter. The disproportionate regulatory burden on
smaller companies trying to go public is definitely a factor.
The JOBS Act was an attempt to address that. I think it has
made a meaningful difference, but it could make a bigger
difference.
Mr. Donalds. Mr. Case, what are some of the unique
challenges entrepreneurs outside of the coastal venture capital
hubs? What are they really facing when it comes to capital
formation? Ms. Matthews Brackeen, if we have time, I would love
for you to answer the same question.
Mr. Case. As we have been talking about today, there are
big challenges. If you have an idea and you do not have capital
yourself, you do not necessarily have friends and family that
have capital to back you, many people will never start that
company. That company could have been the next big idea that
could have changed the world and created a lot of jobs and
driven a lot of economic growth. Access to capital, exactly
what this committee is focused on, is critically important in
making it easier for entrepreneurs who have ideas to take those
into the market, make it easier for them to raise capital, make
it easier for the venture funds, particularly regional venture
funds, to raise capital. All will contribute to trying to level
the playing field and create more opportunity for more people
in more places.
Mr. Donalds. Ms. Matthews Brackeen.
Ms. Matthews Brackeen. Yes, I would say we are seeing more
cities grow. In your great State of Florida, Miami is seeing a
lot of growth right now in the venture capital space, and that
is because the dollars came there kind of right around COVID
and sometimes in really a little bit before that. You have
dollars there, you have had the universities double down on
computer science so that the talent is there, and we have a
very diverse community of people from Latin and South America
who have come and helped to grow all of those companies.
Mr. Donalds. Thank you for mentioning that. I have been
talking a lot the last couple of weeks about Florida, in a lot
of respects becoming the financial capital of not just the
United States, but of the world, with a lot of the, whether it
is venture, digital assets, et cetera. The one thing I would be
remiss in not pointing out is that it is going to be critical
for the future of our economy and our Nation that people who
are at the bottom end of the economic ladder have real
opportunities to invest in some of these fledgling companies.
Imagine if a local waiter was able to invest in Snapchat, and
Snapchat became Snapchat.
Chairman Hill [presiding]. The gentleman's time has
expired.
Mr. Donalds. I yield.
Chairman Hill. I thank the gentleman from Florida. The
gentleman from New York is recognized. Mr. Garbarino is the
author of a bill to exclude qualified institutional buyers and
qualified accredited investors from the record holder account
for mandatory registration, a modestly named bill and the Small
Entrepreneurs Empowerment and Development, the SEED, Act. Mr.
Garbarino, you are recognized for 5 minutes.
Mr. Garbarino. Thank you, Mr. Chairman. Thank you for that
wonderful shout-out about these two wonderful bills that I am
lucky to sponsor. Thank you all to the witnesses for being here
today.
For more than 80 years, closed-end funds have provided
nearly 4 million investors, including many retirees, with
steady diversified income. As registered funds, closed-end
funds are subject to rigorous safeguards such as protections
related to valuation, disclosure, and conflicts of interest.
Thanks to Chair Wagner's leadership, the bipartisan Increasing
Investor Opportunities Act would allow retail investors to
easily access a more diversified pool of private investments
through strong protections of a registered fund. Mr. Trotter,
do you believe that closed-end funds could be a viable option
for retail investors looking to increase access to private
investments?
Mr. Trotter. Yes, I believe they could.
Mr. Garbarino. Why?
Mr. Trotter. I would support more open access to retail
investors generally on different products.
Mr. Garbarino. Thank you. As fewer companies go public,
there have become fewer investment opportunities for most
Americans. In recent memory, alternative investments have shown
value by facilitating capital formation and helping provide
more uniform investment returns for individual investors. I
asked this exact same question at a Cap Market Subcommittee
hearing last month, and I am going to ask it again because I
think it is important to get it on record. Mr. Case, can you
speak to what role alternative investments can play in capital
formation?
Mr. Case. First of all, on a personal note, I agree with
the nature of your question. When I took my company, America
Online, public in 1992, we raised $10 million, and the value of
the company that day was $70 million. That is why most
companies were able to access the growth capital they needed
because of the growth of the capital markets and more late-
stage capital being available as well as some of the challenges
of going public and being public. That does not happen anymore,
and so, as a result, the people who saw my company go from $70
million in value, at its peak, $160 billion, those were retail
investors who got the benefit of it. They have been deprived of
that for most of the innovation companies that exist today, so
figuring out ways to get companies on that path to being a
public company, if they choose to. Some prefer staying public,
staying private because they can take a longer-term strategy,
and some have access to that late-stage growth capital, but the
ones who want to go public, we need to make it just a little
bit easier for them to do it, a little less burdensome, a
little less costly.
Mr. Garbarino. That was my next question. You would agree
that regulatory modernization is necessary to provide greater
options to qualified and accredited investors than just the
public?
Mr. Case. Absolutely.
Mr. Garbarino. Wonderful. Thank you. Speaking of a
company's decision of whether to go public or stay private, it
is often one of the most significant inflection points in a
company's growth. In the case when companies deem that costs
associated with going public are too high and that regulatory
burdens of staying public are not worth it, we should ensure
that there is a private market framework that supports
companies throughout their lifecycle. I have a bill, as the
chairman mentioned, that would exclude qualified institutional
buyers and institutional credit investors from the mandatory
registration threshold of 2,000 or more holders of records. Mr.
Trotter, should these institutional investors be counted toward
this threshold, and if not, can you explain to us the benefits
that their exclusion could have in a company's ability to
remain private?
Mr. Trotter. I support your bill. I believe they should not
be. I think it is an important step in allowing a private
company to maintain flexibility on whether and when it becomes
a public company, and your bill would be an important step
toward that.
Mr. Garbarino. I think so as well, so I hope we have a
markup soon. I hope it passes unanimously. My last question as
I have some time left, small businesses and entrepreneurs
experienced significant losses during the first half of the
2020s, which are beyond their control. Microlending has a
demonstrated track record around the world for providing much-
needed capital to entrepreneurs, often women and minorities in
underbanked communities. This, in turn, helps them start and
grow their businesses. The proposed SEED Act includes micro-
offering exemption that allows companies to raise up to
$250,000 without any disclosure requirements, but subject to
antifraud and bad actor disqualifications. Ms. Matthews
Brackeen, can you explain how small businesses would benefit
from this exemption?
Ms. Matthews Brackeen. Today, many people across the
country do not have access to friends and family rounds. If you
do not come from a wealthy family, you do not have someone to
help you to get started. While I do not come from a wealthy
family, my father helped me to start my first business with a
$10,000 loan, and so being able to access up to $250,000 would
allow us to grow companies across the country.
Mr. Garbarino. Wonderful. I appreciate that, and I think
you are absolutely right, and we should pass the SEED Act as
quickly as possible. With that, Mr. Chairman, I yield back.
Chairman Hill. The gentleman yields back. The gentleman
from Wisconsin, Mr. Fitzgerald, is recognized for 5 minutes.
Mr. Fitzgerald. Thank you, Mr. Chair, and thanks to the
witnesses for hanging in there. I know it has been kind of a
long morning. Mr. Newell, you have seen firsthand the
regulatory burdens, and I know you spoke about this earlier. Do
the compliance costs and disclosure requirements push companies
to seek alternative paths, like mergers, private funding, or
even overseas markets?
Mr. Newell. The compliance costs of going public are
substantial. I think we have talked about it today. I know we
spent about $5 million in accounting just to satisfy the
accounting requirements to go public. When you know that money
is going to go out of pocket with no real benefit to you and
your business, you naturally think about alternative strategies
to finance the company and move it forward, and the ones that
you have suggested are things that happen. There is a process
called a dual track process that exists where oftentimes
companies will look to either raise capital through an initial
public offering or, at the same time, look to sell or merge
their company into another company, and that is because they do
not necessarily want the burdensome consequences of going
public and may be able to actually continue their journey as a
company, but in a different fashion.
Mr. Fitzgerald. Do you think if Congress extended kind of
the onramp period, what changes would be necessary to ensure
kind of that the companies themselves not only go public, but
also kind of thrive in the public markets long term?
Mr. Newell. Yes. Thank you, Congressman, for that question.
I think it is important that we have ways in which not only
companies avoid excess of costs that really do not contribute
to the growth of the company and are not necessary for investor
protections, but then look at ways in which we can expand the
access to capital to those companies. Oftentimes, just because
you go public, it does not mean you have all the capital in the
world that you need, and so you continually have to look for
new sources of capital. That is certainly very true in our
biotechnology industry. You need to keep going back and finding
new investors, and that means any limitation on who can invest,
the amounts they can invest, all of that is a barrier to your
being able to continue and succeed with your business.
Mr. Fitzgerald. Very good. Thank you. Mr. Case, expanding
and diversifying the pool of individuals who qualify as
accredited investors, as we know, is essential to unlocking new
funding opportunities, especially for entrepreneurs, right, and
founders in really small companies across the whole Nation.
Some of those current regulations as been discussed this
morning and this afternoon still pose significant challenges. I
mean, that is why we are here today, I think. How do current
regulations around accredited investors create barriers for
both the investors and the entrepreneurs. I know you have
discussed this again earlier, but what are some of the reforms
that would help expand access to capital while maintaining the
protections that investors are looking for?
Mr. Case. Obviously, we have to strike the right balance,
giving people the opportunity to invest, but in a way that is
safe and makes sense. It goes back to what I said before and
probably should have emphasized it more earlier. There has sort
of been a structural change in the capital markets in the last
several decades. In my era, when companies like my company,
AOL, was going public, but also when Microsoft was going public
and Amazon was going public, and many other companies were
going public in the 1990s, they generally raised capital much
earlier in the cycle. For example, the valuations at the time
were in the few hundred-million-dollar range.
Now nobody goes public until there are many billions of
dollars of valuation. What that essentially means is those
retail investors who believed in Microsoft or believed in
Amazon and were able to get in kind of on the ground floor, not
at the first venture capital level, but kind of on the ground
floor, were able to see the benefit of that, and it benefited
their families in terms of the appreciation of wealth. That has
largely been taken away because companies are not going public
until it is much later, and that is not entirely because of
regulation.
Some companies choose not to go public because they want to
take a longer-term attitude, but most of it is because they
have access to capital now to grow without going public, which
is different than 3 decades ago, and they are just worried
about the costs and complexities of being public. As a result,
the individual investors are being deprived of the opportunity
to participate in some of that upside, modifying the accredited
investor rule so they can invest in these high growth companies
when they are private would be a step in the right direction.
Mr. Fitzgerald. Very good. Thank you very much. I yield
back.
Chairman Hill. The gentleman yields back. The gentleman
from Nebraska, the Chairman of our Housing and Insurance
Committee, Mr. Flood. Let me just yield to Mr. Flood for 5
minutes.
Mr. Flood. Thank you, Mr. Chairman. This hearing topic is
near and dear to my heart. How to drive access to capital
outside of Silicon Valley and outside of the cities on the
coast is something I have worked on since I entered public
service in partnership with great State groups, like Invest
Nebraska. One of the elements that makes Silicon Valley the
pinnacle hub of entrepreneurial activity and investment in the
country is networks. If you are an aspiring entrepreneur with
an idea for a new project, you want to be in the same place as
the venture capital firms that could serve as a funding source
for you and the talented software engineers that could help you
build your project. In other words, a good hub provides both
the capital and the labor to make that dream a possibility. The
challenge for communities that are not already in that kind of
a hub is, to a certain degree, the name of the game. You can
have great schools that are graduating talented young people,
but if there is not the capital available near them, in many
cases, they will leave town and go to a hub that has it all in
the same place.
What we see is enormous value created in these hubs, vast
sums of wealth and opportunity driven in part by the best and
brightest young people that have left behind smaller
communities where they grew up. Lots of times, these hub
communities rebel against the very growth activity that they
enjoy. In some parts of the country, gentrification has become
a bad word used to reference out-of-towners who have driven up
the cost of goods and housing.
The great irony is that there are communities across the
country yearning for a fraction of the kind of investment in
economic activity that a hub like San Francisco enjoys. In the
past, I have been interested in how to build one of these hubs
in Nebraska. Folks like Brad Feld and Ian Hathaway's, ``The
Startup Community Way, Evolving an Entrepreneurial Ecosystem,''
serve as a potential blueprint on how to get that done, and I
have read them with great interest.
I think there is an even bigger picture question underlying
the entrepreneurial hub concept: at what point is a geographic
hub no longer necessary? Technology has broken down many of the
barriers that makes geography such a strong barrier between
people. You can hop on a plane to San Francisco and be there
within a day. You can communicate with people all across the
country and world easily through messaging and video
applications.
This question is really for all witnesses. I would like to
hear from all of you. I would be curious to hear from you
regarding your thoughts on this topic. Is there a point where
these entrepreneurial ecosystems would no longer be necessary
at all or they would not necessarily need to be located in one
geographic place? We will start with you, Mr. Case.
Mr. Case. I think we certainly want to build out dozens and
dozens of ecosystems, and there is still something even in a
world where there is more virtual, more remote, to having
clustering of talent. It is just unfortunate that the
clustering is only happening in places like San Francisco and
New York. There is progress in places like Lincoln and Omaha,
and even an effort around creating more of a regional hub, so a
couple of mid-sized cities can work together to create a
broader entrepreneurial zone. I think that is a step in the
right direction.
Mr. Flood. I would add that Lincoln, Nebraska, which is the
largest city in my district, has seen some success here, but
building upon that success is really a question.
Mr. Newell. The thing that I learned in the pandemic was
that it was difficult to get the richness of ideas by remote
linking to people. There is something valuable about being able
to meet a friend at a coffee shop and talk about an idea with
them that you cannot replace with a Zoom meeting. Now, Zoom
meetings can be necessary supplements to it, but I do think the
success of Silicon Valley, Boston, San Diego, other communities
has to do with the proximity of people, and that is an
important thing that we need to remember. We lost it in the
pandemic, and thank God, it is coming back.
Ms. Matthews Brackeen. The critical mass is necessary. I
would say that 10 years ago when I got into the tech community,
Steve brought the bus through Cincinnati, At that point our
network really exploded, and we understood what the playbook
looked like. I think it is necessary as we build out innovation
hubs, as you are saying, in Nebraska. We are doing that in Ohio
with innovation hubs in our 3C cities, and the critical mass
and us being next to each other is important.
Mr. Flood. Thank you.
Mr. Trotter. I agree with all these comments. You are never
going to replace face-to-face interactions, but I also think
that technology changes things and makes it more efficient.
Ms. Senn. Yes. I am excited. We have Innovate Alabama much
like Invest Nebraska, and our State has innovation hubs across
the State and we reach all geographic regions of our State. I
think it is critically important we have economic incentives
and non-economic incentives, and having people collaborate is a
key to prospering our Alabamians. Our community wants to invest
in Alabama. We have attractive geographic incentives, the
beaches, the coast, so we highlight that, and we are excited
about bringing entrepreneurs into the State. I think you guys
are in a unique position to be able to go back to your States
and help prosper them through those economic hubs. They are a
big success in Alabama.
Mr. Flood. I would be remiss if I did not also recognize
Little Rock. Thanks to our chairman and his efforts at
innovation and growing jobs and entrepreneurial activity. With
that, I yield back.
Chairman Hill. The gentleman yields back. The chair
recognizes from New York, Mr. Lawler, the vice chair for
communications of the committee and also the author of the
Helping Angels Lead Our Startups, HALOS, Act. Mr. Lawler, you
are recognized for 5 minutes.
Mr. Lawler. Thank you, Mr. Chairman. Small businesses are
now facing these turbulent economic times, having to contend
with many regulations that the previous administration put into
place, which could stifle economic growth, prevent
entrepreneurs from retrieving their full potential, and
frankly, prevent folks from living out their American dream.
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
of entrepreneurship. That is why I introduced the Helping
Angels Lead Our Startups Act or the HALOS Act, last Congress,
and reintroduced it again.
The HALOS Act will promote access to investment capital for
small companies and ensure that startups can continue to
generate interest and connect with investors. It will do this
by ensuring 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. In doing so, companies will be able to engage with
a wider audience of investors and spread word of the products
and services that they can offer to help develop a thriving and
diverse economy. In addition to driving economic force, angel
investors provide by supporting tens of thousands of small
companies per year, long-term impact can be seen as companies,
such as Amazon, Costco, Facebook, Google, and Starbucks, were
all initially funded by angel investors.
We have seen many successes since the passing of the
bipartisan JOBS Act over a decade ago, which helped reduce
barriers to investment. By alleviating burdens on businesses,
cutting red tape, and making capital raising in our public
markets easier and less costly for emerging companies, not only
will we be clearing the way for businesses to expand and
develop, but we will also be helping to build a more diverse
and inclusive universe of entrepreneurs and founders by
expanding opportunities to underrepresented entrepreneurs and
communities facing capital formation challenges. The HALOS Act
will simply allow folks to get eyes on their businesses and
potentially find the vital investor they need to succeed. Think
``Shark Tank.'' I look forward to reintroducing the HALOS Act,
which passed out of this committee last year and to seeing it
signed into law.
Mr. Case, in 2020, the SEC adopted amendments to Reg D to
allow for certain demo day communications to be exempt from
being considered general solicitation or general advertising.
The amendment also defined ``angel investor group'' for the
purpose of Federal securities laws. These changes were made to
support startups discussing their products and business plans
demo day events without it being considered an initial
investment offering. How critical are the changes made in 2020
to capital formation, and should Congress solidify these
changes by codifying them into law?
Mr. Case. I support the principles you mentioned. We need
to figure out more ways for entrepreneurs who have ideas to
talk about those ideas, including demo days and other
gatherings of startups, educating people about the potential of
a particular market, and modifying some of the rules or perhaps
the legislation you are proposing, the bill you are proposing,
that would make it easier for angel investors, make it easier
for entrepreneurs, would be a step in the right direction.
Mr. Lawler. In your experience, startups generally hesitate
to participate in demo days, in large measure due to fears of
violating securities laws. Do you see that codifying these
exemptions would help give entrepreneurs some more confidence
in going out and seeking the funding that they need to grow
their business?
Mr. Case. Yes, I believe it would.
Mr. Lawler. Okay. Would anybody else care to comment?
Ms. Senn. The States certainly support--I am sorry. Go
ahead.
Mr. Newell. Go ahead.
Ms. Senn. Those demo days and pitches, we do it all the
time in Alabama, but State securities regulators, since we are
seeing these operations going on across our State, we just want
to be sure that we do not have, and we see it all the time. You
all, I mean, prosecute these cases where you have a startup
that is not very business savvy, they are misusing the funds
and they are not doing what they are saying. They are making
misrepresentations. Knowing that they are out there, it is
important to sort of help prevent some of that and keep these
businesses. Like I said, build a good foundation, but the
pitches and the demo days are very successful in Alabama.
Mr. Newell. I think it is important that you spread the
message of what you are doing, why it is important, and why it
is going to be a valuable investment. The more that you can
allow that to happen, the better it will be for the country.
Mr. Lawler. Thank you, Mr. Chairman, I yield back.
Chairman Hill. The gentleman yields back. The gentleman
from Tennessee, Mr. Ogles, is recognized for 5 minutes.
Mr. Ogles. Thank you, Mr. Chairman. Mr. Trotter, I want to
revisit Mr. Garbarino's conversation about the closed-end funds
and give you a little more opportunity there, but millions of
Americans, including many in Middle Tennessee, depend on
closed-end funds (CEFs) as a critical source of retirement
savings and investment opportunities. We are talking about
expanding access to capital. CEFs can be a significant force
multiplier in helping our fellow citizens achieve the American
dream, as you mentioned, Mr. Case. In 2023, total closed-end
funds, CEF assets were $544 billion. Traditional CEFs had total
assets of roughly $250 billion. Unlisted CEFs, including
interval funds, tender offer funds, and business development
companies, had total assets of $77 billion, $60 billion and
$159 billion, respectively.
Unfortunately, the SEC maintains that a closed-end fund
should hold no more than 15 percent of its asset and private
funds, and that if a closed-end fund exceeds this amount, the
CEF should offer its share to accredited investors, which, as
many of my colleagues have noted, is in desperate need of
definition upgrade. In the case of CEFs, candidly, there are
few investment vehicles that have more robust investor
protections, including investment advisors, directors,
extensive disclosures, reporting requirements, et cetera. Mr.
Trotter, in your view, given these protections, is it a
worthwhile tradeoff to maintain the SEC staff position,
limiting private fund investments to 15 percent of a CEF's
assets? Why or why not?
Mr. Trotter. I think 15 percent is a little arbitrary. It
is a staff position. I think it makes sense to broaden that.
Mr. Ogles. Well, and I think there is the opportunity when
you have a fund, they can analyze their own risk protocols and
tolerance, quite frankly. It does make sense to allow CEFs to
invest what they think is basically how they should invest in
private securities, creating arbitrary anti-free market
limitation, crowds out the market, needlessly precludes retail
investors from critical opportunities.
I am grateful to the gentlewoman from Missouri, the
Chairwoman of the Capital Markets Subcommittee for her
legislation, the Increasing Investor Opportunities Act, and
look forward to working with her on that one. The current
definition of ``accredited investor'' limits private market
investments to those deemed sophisticated. Mr. Stutzman's bill,
the Investment Opportunity Expansion Act, would expand the
accredited investor definition to include individuals who
invest 10 percent or less of either their net assets or annual
income, whichever is greater, in a private offering.
Mr. Case, can you flesh out a little bit for me if the
opportunities that an investor would have had in the early days
when you were launching AOL versus the regulatory regime that
kind of has stymied those opportunities and limits the access
to that American Dream? The returns that you saw under your
tenure were phenomenal, of course, right, and not every
investment is going to have that, but again, let the free
market decide, if you will.
Mr. Case. Yes. As I mentioned earlier, in the 80s and 90s,
when an asset class was less developed, there was less of it.
It was harder to get, and also, once you got to a certain
stage, you had to go public in order to access additional
capital. Because of the growth of capital markets and venture
capital and later-stage growth, companies can stay private
longer, and many choose to, and that is totally fine. As I said
earlier, it has an unintended consequence of depriving
individual investors, retail investors, of the ability to
invest in some of these companies when they are up and running,
whether it be AOL or Uber or Amazon or other companies. You
might have been a customer of one of those companies, believed
in that company, but you did not have the ability to invest
until much, much later when they go public, when they are worth
$10 billion or $20 billion or more.
Figuring out ways to allow people to invest in those
companies by modifying the accredited investor rules would open
up that market to other investors who could then participate in
some of the upside of some of these companies. You note there
are obviously risks associated with that so you need to figure
out how to strike the right balance, but it does feel like it
is time to take a fresh look.
Mr. Ogles. Yes, sir. Well, and then, Mr. Newell, would an
expanded definition of ``accredited investor'' have been able
to help you as you started your Sutro Biopharma company?
Mr. Newell. Absolutely. When the company was first started
in 2003, it was really friends and family. Venture capital did
not come in for a couple of years, so it was really important
to have those angel investors around the table, and the more
you have, the more successful you are likely to be with your
business.
Mr. Ogles. Yes, sir. Thank you, and, Mr. Chairman, I think
the note here is that obviously we proceed responsibly and with
caution, but there are missed opportunities for the retail
investor in this sector to win and achieve that American Dream.
With that, Mr. Chairman, I thank you and yield back.
Chairman Hill. The gentleman yields back. The gentlewoman
from Michigan, the Chair of the Republican Conference, Mrs.
McClain, is recognized for 5 minutes.
Mrs. McClain. I will try and be quick since we have votes,
Mr. Chairman. Thank you. I am going to piggyback off what
Congressman Ogles was talking about. Ms. Matthews Brackeen,
what variables other than wealth and income do you think we
should consider when expanding the accredited investor
definition and look at it from both the investor end and the
entrepreneurial end?
Ms. Matthews Brackeen. I would say there are probably two
areas that you could look at. Experience would be one of them.
Mrs. McClain. Experience in investing. Have you had 5 years
of experience, is that what you are saying?
Ms. Matthews Brackeen. Not necessarily in investing, but
really in different markets. There could be someone who studied
chemistry or biology in college and deeply understands biotech.
They have experience in that space, so experience and education
could be another way to expand that.
Mrs. McClain. I do not want to put words in your mouth, but
I want to make sure I understand, experience maybe in the
sector.
Ms. Matthews Brackeen. In the sector. Thank you.
Mrs. McClain. Anything else?
Ms. Matthews Brackeen. I would not want to limit it any
more than it already is. I think that the point of this is to
expand it so that capital is not constricted as much as it is
right now.
Mrs. McClain. I agree. Mr. Case, I would like to hear your
opinion on that as well.
Mr. Case. I agree that sector expertise helps, also having
some investor expertise, understanding the complexities of
these securities and what happens with follow-on rounds, I
think, is important. A number of the proposals that require
some level of education, maybe passing some kind of test would
be a step in that right direction.
Mrs. McClain. I am sorry. Passing some kind of test, did
you say?
Mr. Case. Some way to make sure that people making these
investments understand not just the opportunity, but how the
structures work and what some of the risks are.
Mrs. McClain. Yes.
Mr. Case. Many different ways to do that, but having that
as part of it would, I think, be important.
Mrs. McClain. Very helpful. Thank you. Mr. Trotter, we have
heard from numerous small business owners in Michigan, my
State, who found working with the SEC, me being one of them,
over the past years to be extremely frustrating, expensive,
complicated, especially the past 4 years. What I am trying to
figure out is, I had my own financial services company at one
point. We had more people in the compliance department than we
had in the processing department, than we had in the client
service department, right? We were so worried about making a
mistake that we spent a lot of resources doing that to make
sure that we were compliant. What I am trying to figure out is,
can you discuss ways to actually reduce friction, roadblock in
the registration process or from the SEC? I mean, I think it
was started with good motive, but just like everything, I think
we are a long way from home.
Mr. Trotter. We have talked about a lot of those ideas. You
have sponsored a bill that would be very helpful in that
regard. It does not necessarily affect every single company
going public, but many companies going public will run into a
problem with their auditor independence. There are private
company auditor independence rules that apply to pre-IPO
companies, and then the PCAOB and SEC rules are much more
rigorous and demanding, and your bill would be very helpful for
companies like that.
Mrs. McClain. I just want to make sure I get you on record.
You would be in support of that. You think that is a good idea.
Mr. Trotter. Yes, it is a great idea.
Mrs. McClain. Thank you. No, I mean, it is important, and I
think we all have good intentions when we put these regulatory
bodies together, right? We want to provide guardrails, but at
some point they just grow so big and they get so overwhelming
that they actually begin to do the opposite, and they have the
opposite effect for both the companies and the investors that
we have talked about. With that, Mr. Chairman, we have votes. I
am going to yield back. Thank you all for your time.
Chairman Hill. The gentlewoman yields back. Pursuant to the
previous order, the chair declares the committee in recess,
subject to the call of the chair. We will reconvene immediately
following the last vote in the series of floor votes, so the
committee stands in recess.
[Recess.]
Mr. Downing [presiding]. The committee will reconvene and
come to order following our recess.
The gentlewoman from Texas, Ms. De La Cruz, is now
recognized for 5 minutes.
Ms. De La Cruz. Thank you so much, Chairman, and thank you
to all the witnesses for being here. I do appreciate it.
Texas is home to over 3.3 million small businesses and is a
destination for businesses of all sizes. My district is all the
way down in deep South Texas, a very rural area, hard to raise
capital, but very entrepreneurial. In fact, I myself am a small
business owner and have been blessed to open several different
types of small businesses. I understand how challenging it can
be, especially in a minority community, like mine is, being a
female and then opening small businesses with all the
challenges. My question is directed to Ms. Matthews Brackeen.
What are some of the issues startups face when they are located
in more rural districts, like mine?
Ms. Matthews Brackeen. Good afternoon, and thank you,
Congresswoman. I would say it depends on kind of the small
rural region. Is it covered in the county? Does that county or
city support economic development work? Is there educational
programming available? I think there are a lot of different
things that people need beyond just capital. If your region
does not have kind of economic development work happening
within it, you sometimes do not know how to access those
things, so what is that center point within your community that
can help you to grow and thrive as a business? Is that the SBA?
Is that a Service Corps of Retired Executives (SCORE) mentor?
Is that just someone who has set up a local innovation hub? All
of those things are necessary to help a company to grow.
Ms. De La Cruz. Thank you so much, and you are ``Mrs.'' I
am sorry.
Ms. Matthews Brackeen. That is Okay. We are all moving
fast.
Ms. De La Cruz. We are moving fast here. Thank you so much.
I appreciate it, and you are absolutely right. As I said, I
have been blessed to be a part of many different types of
businesses, opening them by myself, and sometimes you just do
not know where to start. If you are not in a community that has
a small business association or a university that has an SBA
area that can help you, then you can feel quite lost and
overwhelmed, right? As a small business owner myself, like I
said, sometimes with those challenges, especially the capital
challenge, they often close. What is the statistic? Do you know
something like 50 percent of small business openings close
within the first 3 years?
Ms. Matthews Brackeen. I am not certain of the small
business number, but I know for tech companies, it is 8 fail
out of 10 generally, right? That number is really high at the
early kind of pre-seed seed stage. It is later where they start
to grow, but I do not know that small business number.
Ms. De La Cruz. Eight out of 10 is very high. What do you
think some of the steps for Congress or that Congress could
take in order to assist?
Ms. Matthews Brackeen. I would say more support around
technical assistance for companies. I would say there is not
really a nationwide push behind helping with technical
assistance for technology companies. The Small Business
Administration is still supporting, in general, main street
businesses. That could be through other organizations, like
ours, where we support through kind of economic development
work. We are in seven cities in the State of Ohio and nine
cities elsewhere in the country, so that is one area. Another
is just making it easier for capital to flow throughout all of
the States. SSBCI has been brought up several times today. I
would say continuing that program is incredibly important. It
has helped to capitalize lots of companies that were started in
garages and labs across the country.
Ms. De La Cruz. Thank you. Mr. Trotter, how can we make
public markets more attractive?
Mr. Trotter. Well, continue with the success of the JOBS
Act. In particular, make it easier to go public, and then once
you are public, make it easier to be a new public company and
entice companies that are considering an IPO by lowering the
cost of being a new public company for a meaningful period of
time after the IPO. Those would all be helpful steps, and you
can do all of those by expanding the definition of emerging
growth company.
Ms. De La Cruz. Thank you. I yield back.
Mr. Downing. The gentlewoman yields. The gentleman from
Iowa, Mr. Nunn, is now recognized for 5 minutes.
Mr. Nunn. Thank you, Chairman Downing. It is always good to
have an Air Force guy as your wingman up in the seat there. We
appreciate it, certainly, as a combat veteran ourselves.
Let me begin by iterating the U.S. capital markets remain
the envy of the entire world. We have a lot of good opportunity
here. Our markets provide unrivaled liquidity. They have
transparency, competition, rule of law, which help millions of
Americans, including millions right in my home State of Iowa.
The challenge, however, is despite our Nation's financial
strength, access to capital remains overly concentrated,
particularly in the East and West. I see my colleague from
Alabama nodding her head. This is the reality. Last year alone,
33,000 new small businesses launched in Iowa, but our markets
still fail to reflect its growth. Imagine the economic power if
we were able to bring more of this capital to the heart of the
heartland.
Now, Ms. Matthews Brackeen, you are an Ohio gal. You
recognize this firsthand. I think that you know that we
struggle with our traditional financial centers when it comes
to raising that initial funding. Limited availability of
initial capital outside of major investment hubs reinforces a
pattern, matching a tendency for fund startups to resemble what
we have seen in the past, which makes it even more difficult
for a Central America opportunity to get outside of Boston, New
York, Miami, or Silicon Valley, all great places, but we have
an opportunity right here. You have helped lead some real
successful examples of what securing capital in the Midwest
might look at, some of the key factors that we should focus on
to increase and lower barriers for small companies. Tell me how
Ohio and Iowa could better fit into this model.
Ms. Matthews Brackeen. I think we need to look a little bit
at the model that you see on the coast, but we also need to fit
it to ourselves, right? I would say in the Midwest, we are more
thoughtful about the way that we spend money. First and
foremost, we make certain that companies are generating
revenue, that they can see growth, and we can really build our
own models. Earlier today, I talked about Ohio Third Frontier
and JobsOhio. Those are the ways that we are capitalizing our
businesses and putting Ohio companies first. I think Iowa could
definitely do the same thing and you are seeing that across the
country, and those things work quite well.
Mr. Nunn. I could not agree with you more, and I think you
are right. There is a model we can use on both sides of this.
As we look at the lack of small businesses in our public
markets now, they are deprived of the investing opportunities
to invest in high-growth companies, primarily because they do
not have the same opportunity. Have you seen opportunities for
businesses in Ohio or other places to be able to capitalize on
those high return yields?
Ms. Matthews Brackeen. That is a question that I do not
think I could answer, but, Joel, do you want to take that one?
Mr. Nunn. All right. Mr. Trotter, she just teed it up for
you, brother.
Mr. Trotter. I do not have an easy answer to that question.
I mean, my emphasis, again, is on improving capital formation
by principally expanding the category of emerging growth
company and expanding the well-known seasoned issuer
definition. I think all of the proposals before you are steps
in the right direction. They all help facilitate capital
formation and take down some of the barriers that are
unnaturally inhibiting steps to grow capital and raise capital
and help businesses grow.
Mr. Nunn. Mr. Trotter, on that example, I will take you one
step further. The JOBS Act created the EGC designation, which
is an example that grants certain smaller companies relief from
specific disclosure compliance requirements for a limited
period and helps ease their transition effectively into the
public market. I have a bill that would allow EGCs to present 2
years of audit financial statement, rather than what is
currently out there right now, 3 in both the IPO and spinoff
transaction. Is this an example of something that could help us
get into the public market space, and if so, how?
Mr. Trotter. Yes, that is definitely a great example. EGCs,
when they go public, they can go public with 2 years, but there
are these aberrational circumstances that your bill would
address where experience has shown that despite having gone
public with 2 years, for whatever weird reason, they are
required to present a third year. It makes no sense, and there
is no easy path for relief for those companies. Addressing that
scenario in a spinoff scenario, as well as a case where maybe a
newly public, emerging growth company has acquired another
company and they have to come up with a third year of target
financial statements, that makes no sense in those situations.
You are fixing parts of the rules where there is an extra
burden that really should not be there.
Mr. Nunn. Hopefully that is a good onramp. Mr. Chairman,
thank you very much. I yield the remainder of my time.
Mr. Downing. The gentleman yields. I now recognize myself
for 5 minutes for questions.
First, without objection, I enter into the record a comment
letter from the Institute for Portfolio Alternatives.
So ordered.
[The information referred to can be found in the appendix.]
Mr. Downing. Montana is a very rural State, and according
to the SBA, more than 99 percent of Montana businesses are
considered or classified as small businesses, and they employ a
super majority of the State, 67 percent of Montanans. I have a
lot of experience dealing with the challenges of a startup,
especially in a rural State, and this is mostly a comment. I
really appreciate some of the comments that we have had on the
unique challenges that rural startups face, but I am going to
start on something a little bit different.
One of the issues that I have had in my career before
politics is, like, the definition of ``accredited investors.''
It is something that has bugged me because it seemed like it
disqualified a lot of Americans from being able to participate
in alternatives, and it was a big problem for that. Mr.
Trotter, the current accredited investor standard limits
investments in the private markets to individuals with an
annual income of at least $200,000 and net worth over a million
dollars. The median income in Montana is about $71,000 with
only 8 percent of households making $200,000 or more, and over
99 percent of U.S. companies are not publicly traded. My
question is, does this deny retail investors growth and
diversity in their retirement accounts when they can
essentially only invest in less than 1 percent of U.S.
companies?
Mr. Trotter. Yes, it does, and I have been to a number of
these hearings where a lot of emphasis is placed on this
definition. It does seem like there is room for commonsense
expansion of the definition and to take a more pervasive
approach.
Mr. Downing. Right. I have always struggled with the fact
that you could have no experience and a lot of money and you
are qualified, or you can have a lot of experience and not
enough money and you are not qualified, and so thank you for
your answer there.
I am going to go to Ms. Matthews Brackeen. Most VC
funding--venture capital funding--is concentrated in
California, Massachusetts, and New York. Again, I struggled
with this, trying to start a startup company outside of
California, and we have discussed a lot today on how new
challenges are needed to expand venture capital access to other
states, like Montana. The 2012 JOBS Act contains several
provisions to make raising capital in private markets easier.
After the passage of the JOBS Act, did you see some venture
capital funding going to other areas that would demonstrate the
need for Congress to do more now?
Ms. Matthews Brackeen. Yes. I will say that I have been in
the tech industry specifically for the last 10 years, so some
of that was before my time. However, I will State that SSBCI
funding did get put into the State of Ohio, and it helped
launch three major funds in our State: Cincy Tech, REV1, and
Jumpstart. We have seen incredible economic development in our
State because of that, and I think that States like yours in
Montana could see the same if we continue those programs.
Mr. Downing. Thank you. Shifting on to Mr. Newell, the U.S.
has recorded several of its worst years on record for initial
public offerings as costs associated with going public have
doubled since the 1990s. Costs are crazy. Gary Gensler, the
former chair of the SEC, never proposed a single rulemaking to
make raising capital easier. In fact, he pushed policies to
make private markets less attractive, like adding costly
regulatory requirements and disclosures on private funds. Can
you explain why it is a bad idea to try to force companies to
go public when they are not ready?
Mr. Newell. The regulatory burden of becoming a public
company is not insubstantial. The accounting costs that are
required can run into the millions of dollars, and, you know,
that is money that is not going to advancing your business.
That is not money going to hire new employees. That is money
going to satisfy accounting requirements that, frankly, are not
rightsized for the business at that point in time, so it acts
as a great deterrent. I would say that you have to think
carefully about going public. It is one of these be careful
what you wish for because you might get it. There are a lot of
things that if you are not well advised, you are going to
discover that you now need to triple the size of your
accounting force, your finance team, just to meet compliance
requirements when, really, that is not necessary for investor
protection. There are other investor protections we have as
well, and we have talked about a lot of them here today.
Mr. Downing. Yes. Thank you, and I thank all the witnesses
for your time today. This has been very useful and informative.
I yield my time, and I would like to thank you all for your
testimony.
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 witness for his
response or her response. Witnesses, please respond no later
than April 29, 2025.
[The information referred to can be found in the appendix.]
Mr. Downing. With that, this hearing is adjourned.
[Whereupon, at 2:35 p.m., the committee was adjourned.]
APPENDIX
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