Congressional Record, Volume 158 Issue 48 (Thursday, March 22, 2012)

[Congressional Record Volume 158, Number 48 (Thursday, March 22, 2012)]
[Senate]
[Pages S1963-S1977]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

JUMPSTART OUR BUSINESS STARTUPS ACT

The PRESIDING OFFICER. Under the previous order, the Senate will
resume consideration of H.R. 3606, which the clerk will report.
The legislative clerk read as follows:

A bill (H.R. 3606) to increase American job creation and
economic growth by improving access to the public capital
markets for emerging growth companies.

Pending:

Reid (for Merkley) Amendment No. 1884, to amend the
securities laws to provide for registration exemptions for
certain crowdfunded securities.
Reid (for Reed) Amendment No. 1931 (to Amendment No. 1884),
to improve the bill.

The PRESIDING OFFICER. Under the previous order, the time until 12:30
p.m. will be equally divided between the two leaders or their
designees.
The Senator from Michigan.
Mr. LEVIN. Mr. President, I ask unanimous consent that I be yielded
10 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. LEVIN. Mr. President, in a few hours, after votes on two
amendments that I hope we will pass, we are going to vote on final
passage of the House of Representatives-passed bill, the so-called JOBS
bill. I am going to vote against passage of this bill because it would
remain far too deeply flawed even if the two amendments were passed to
justify passage by the Senate. I am going to vote no on this bill
because it will significantly weaken existing protections for investors
against fraud and abuse.
The supporters of this bill claim it will help to create jobs. They
have even titled it the JOBS Act, but there is no evidence it will help
create new jobs. There is not one study that its proponents have shown
us how repealing provisions that protects us from conflicts of interest
in the research coverage of companies with up to $1 billion in revenue
will create jobs; nor is there evidence that removing transparency and
disclosure requirements for very large companies will create jobs; nor
is there evidence that allowing unregulated stock sales to those unable
to assess or withstand high-risk investments will create jobs; nor is
there much else in this bill that will, even arguably, help create
jobs. It will, however, take the cop off the beat relative to the
activities of some huge banks, and it will threaten damage to the
honesty and integrity of our financial markets.
That is a mistake in its own right. We should value honesty and
integrity in markets, as in all things. And legislation that creates
new opportunities for fraud and abuse should be amended or rejected.
But the damage done by this bill to the integrity of our markets will
also work against the purported goal of this bill--the encouragement of
investment to create jobs.
By making our financial markets less transparent, less honest, and
less accountable, this legislation threatens to discourage investors
from participating in capital markets. That damage would make it
harder--not easier--for companies to attract the capital that they need
and to hire new workers.
Our capital markets are the envy of the world, and that is in part
because

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we recognize that efficient markets that help businesses raise capital
and aim to match up investors in companies need transparency and they
need financial integrity. But this bill will allow companies to make
fewer disclosures and will remove important investor safeguards. This
bill will increase many types of risks to investors, including the risk
of outright fraud. I want to focus on a few of the many serious flaws
in this bill.
First, it harms investors by allowing a wide range of companies to
avoid basic requirements for disclosure and transparency. It does that
by changing the threshold at which companies are considered large
enough and their stock is widely enough held to trigger those
disclosure requirements. Today, companies are generally required to
register with the SEC and meet basic requirements for financial
transparency and accountability if they have 500 or more shareholders.
The bill before us would raise that exemption to 2,000 or even more
shareholders. It would even raise the level at which banks can
deregister from 300 to 1,200 or more shareholders regardless of the
bank's size in terms of assets. These changes will allow even very
large companies with several thousand shareholders to avoid telling
regulators, shareholders, and potential shareholders even the most
basic information about their finances, and to avoid important
accounting standards.
Second, this bill harms investors by allowing companies to make
largely unregulated private stock offerings to members of the public.
Today, such inherently risky, unregulated offerings cannot be
advertised to the public and are generally limited to shareholders who
are financially able to absorb the risks involved. But the House bill
allows advertisement of these unregulated offerings to the general
public. It will allow TV ads for get-rich-quick schemes with almost no
oversight. Advertisers could pitch these risky investments in cold
calls to senior citizen centers. That is why groups such as AARP are
deeply concerned about what these changes will do to senior citizens
who are often the targets of financial fraud and abuse.
Third, this bill abandons a lesson that we learned all too painfully
during the dot-com crisis of the 1990s. At that time, investment banks
seeking to underwrite initial public offerings--which is a lucrative
line of business--engaged in brazen conflicts of interest. They sought
this business by promising companies about to go public that their
research analysts--whom investors depend on for honest and impartial
advice--would give favorable coverage to their stocks in exchange for
the underwriting business.
In company after company, investors were misled about the strength of
new stocks by investment banks engaging in this conflict of interest.
This abuse helped to feed a stock bubble that, when it burst, wiped out
investors, evaporated companies, and it devastated the economy. The
Nasdaq index still, to this day, has not recovered from that bubble. As
a result, regulators put up barriers designed to end these conflicts,
but the House bill before us knocks down those barriers. It is
astonishing that we would forget these lessons and allow the return of
such blatant conflicts of interest.
Fourth, this bill will allow very large companies, companies with up
to $1 billion in annual revenue, to make initial public offerings
without complying with basic disclosure and accountability standards.
These companies would be able to avoid compliance with accounting and
disclosure rules to help give investors accurate information on the
company's finances. They would not have to obey standard accounting
rules or have auditors certify that they have adequate internal
controls. Many of these rules were adopted in response to high-profile
accounting frauds, such as Enron and WorldCom. Some were recently
enacted in the Dodd-Frank Act in the wake of the financial crisis.
Yet while our economy is still recovering from the damage of the most
recent crisis that arose, in large part, as a result of deregulation,
we are about to consider undoing safeguards we created in its wake. The
$1 billion limit of the House bill will allow nearly 90 percent of the
IPOs to avoid even the most basic disclosure standards. With these
provisions, we will essentially ask America's investors to place their
capital at risk almost blindly, with little if any reliable information
about the companies seeking their investment. It defies common sense to
argue that investors will be more likely to put their money at risk and
therefore help to create jobs in that kind of environment.
This is a bad bill. Because debate was closed off and amendments
severely limited, we will not be able to fix nearly enough of it. But
we will hopefully remedy a few of its flaws in amendments we are going
to be voting on. Change to the crowdfunding provisions of the House
bill is welcome, and I commend Senators Merkley, Bennet, and others who
crafted that provision which Senators Reed, Landrieu, and I also
incorporated in our substitute bill, which was defeated yesterday. This
amendment will give investors somewhat greater confidence in a new and
potentially useful method in establishing capital and in support of
Senator Reed's amendment to close important loopholes in the current
law--one the House bill fails to address. With this amendment, it will
be harder to evade registration and disclosure requirements by using
shareholders of record who exist only on paper but who hold shares for
large numbers of actual beneficial owners. This, too, is part of our
substitute, and its inclusion in the bill would represent an
improvement.
But we should not fool ourselves. These improvements, if adopted,
though welcome, are far from sufficient. We are about to embark upon
the most sweeping deregulatory effort and assault on investor
protection in decades. The Council of Institutional Investors warns us
that ``this legislation will likely create more risks to investors than
jobs.''
If we pass this bill, it will allow new opportunities for fraud and
abuse in capital markets. Rather than growing our economy, we are
courting the next accounting scandal, the next stock bubble, the next
financial crisis. If this bill passes, we will look back at our votes
today with deep regret.
We should not adopt this bill today. We should return it to
committee. We should have hearings. We should have opportunities to
amend this bill. Adopting this bill will put us in a position of the
most massive and mistaken deregulation of our capital markets in
decades.
I yield the floor.
The PRESIDING OFFICER (Mr. Brown of Ohio). The senior Senator from
Iowa is recognized.

Stock Act

Mr. GRASSLEY. Mr. President, soon, around the 12:30 hour or on one of
the seven votes this afternoon, we are going to be voting on cloture on
the STOCK Act. I have 45 minutes allotted to me to speak about the
disappointment I have with the way this has been handled and why I
think the parliamentary procedure is wrong and why the whole process
irritates me.
Bipartisanship happens to be alive and well in Washington, DC, where
most of our constituents believe it is never working. Earlier this
week, we had the Republican majority leader of the House and the
Democratic majority leader of the Senate--that is bipartisanship--work
together to thwart the will of 60 Senators and 286 Members of Congress.
The end result is, as well-meaning as the people behind this maneuver
might be--the end result is that 60 Members of the Senate are going to
be denied an opportunity to pursue what they had previously voted for
and 286 Members of the House of Representatives, cosponsoring the
language of my amendment, are not going to have a chance to do what 286
Members of the House want to do. As I said, this is bipartisanship, but
it is not the kind of bipartisan cooperation, intended or not, this
Nation deserves.
I will not ascribe motives to anyone in this body, but I know that
today's action only serves the desires of obscure and powerful Wall
Street interests, and it undercuts the will of the overwhelming
majority of Congress I just described. Once again, it is an example of
Wall Street being heard in Washington and maybe the common persons
throughout the United States not having their will expressed.
With this process, they took a commonsense provision, supported by a
majority of both Houses of Congress, and they simply erased it. In
other words, we have to remember, when we

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have a 60-vote requirement in the Senate, we know what that 60-vote
requirement is meant to do; that no amendment under a 60-vote
requirement is ever going to be adopted. That was surely the motive
behind the 60-vote threshold on the amendment I got adopted when this
bill was first up, because the Democratic leader voted against it, the
Republican leader voted against it, the Democratic manager spoke
against it, and the Republican manager was against it. Common sense
tells us, if we study the Senate, an amendment such as that is never
supposed to get adopted. But we got the 60 votes to get it adopted.
Frankly, I was surprised we got the 60 votes to get it adopted. But
that is taken out of the bill we are going to be voting on this
afternoon.
My amendment simply says that if someone seeks information from
Congress or the executive branch to trade stocks, Congress, the
executive branch, and the American people ought to know who they are.
Nobody is saying they cannot do it, but we ought to know who they are.
We do that through the process where everybody ought to know who
lobbyists are--not that lobbying is illegal or wrong, but it ought to
be transparent. With transparency comes accountability. The same way
this amendment asks these people who are involved in seeking
information to register so we know who they are. The amendment makes
nothing illegal. But we ought to know who these people are who seek
political and economic espionage. We ought to bring all that out of the
shadow, into the public's information.

But the leadership of both parties--the majority in the House and the
majority in the Senate--went behind closed doors and made that
provision magically disappear. What they did was truly amazing because
a handful of Senators and Congressmen overrode the will of 60 Senators
and 280-plus backers of my amendment in the other body. First, the
majority leader in the House said the definition of political
intelligence was so vague he could not possibly figure out how to
define it. That is the excuse given for stripping any regulation of
political intelligence, my words, or political and economic espionage
from the STOCK Act when it was taken up in the House of
Representatives.
Let me tell you why that excuse is truly amazing to me and quite a
surprise. It is because the House of Representatives put in a diluted
provision that uses the very same definition I had in my bill of what
political intelligence gathering is. Then, by taking out my language
and putting in theirs, they got it done because it was an excuse, that
the language I had in my amendment was so vague. But you know what.
They took that very same language and put it in their amendment,
calling for a study of political and economic espionage and political
intelligence and used it.
Let me go back to section 7, part b, and quote:

Definition--for purposes of this section, the term
``political intelligence'' shall mean information that is
derived by a person from direct communications with an
executive branch employee, a Member of Congress, or an
employee of Congress; and provided in exchange for financial
compensation to a client who intends, and who is known to
intend, to use this information to inform investment
decisions.

That is the definition that they thought we don't know what political
intelligence is, so we should not be passing this amendment, even
though 286 Members of the House of Representatives have sponsored a
bill to do it and take that very same definition that they say is so
vague and put it in a bill for the purposes of studying something. That
seems pretty straightforward, doesn't it? That definition seems pretty
straightforward. Of course, now that definition will only by applied to
a study, not to legislation with real teeth--because the powerful
interests of Wall Street are winning out.
If you think that is bad, this is what happened to the STOCK Act in
the Senate. By now, I think just about everybody in this body knows how
strongly I feel about this amendment that was adopted by this body 60
to 40, under a rule requiring 60 votes because that kills any
amendment--but it did not kill this one because we were right. I have
spoken many times about the dangers of unregulated political and
economic espionage. I have reached out to the leadership to express my
concern and written a letter with Senator Leahy, the chairman of the
Judiciary Committee, on the importance of our STOCK Act provisions. I
said that I was willing, if necessary, to negotiate on the language of
my amendment, and that would be on the question of what is political
intelligence. But it seems to me one doesn't need to negotiate that if
we pass something with that definition in it. The House already has 286
cosponsors with that definition in it, but they take that same
definition and put it in the amendment in the other body for a study,
not an amendment with any real teeth.

So when I said I was willing to negotiate, what was the response?
Nothing. I was not even given the courtesy of being notified before
cloture was filed. So it was kind of like an ambush, plain and simple.
Just like those people who traffic in political and economic espionage,
this process has been cloaked in a great deal of secrecy.
Now the claim is made that the Senate was forced to take up the House
bill because an unnamed Republican was threatening to object to a
conference. However, no Republican--or any Senator, for that matter--
has publicly owned up to trying to stop this bill from going to
conference. But even if we accept this fact, there are still more
questions. Supposedly we are taking up the House bill because the
Senate does not have time to take two or more cloture votes. Throughout
this Congress, we have spent weeks in nothing but quorum calls, but
suddenly we have run out of time.
Of course, in less than 10 days we will be leaving Washington, DC,
for a 2-week recess. I intend to go home and have town meetings, but we
are not going to be doing business here in Washington, DC. So I have an
idea for people to consider. With congressional approval ratings in the
near single digits, why can't we spend part of that time getting the
STOCK Act right? And by getting it right, I see nothing wrong with the
basic underlying piece of legislation, but when there is a chance to
bring transparency and accountability through the registering of people
who are involved in political and economic espionage, I think we ought
to do it, and that is what I mean by getting the STOCK Act right.
The Washington Post said that my amendment, combined with Senator
Leahy's political corruption amendment, ``transformed the [STOCK Act]
into the most sweeping ethics legislation Congress had considered since
2007.'' Maybe you don't agree with the Washington Post all the time,
and I don't agree with them all the time, but they are looking at
things on a wider scale, and they are saying that a Congress that
doesn't have a very good approval rating has a chance, for the first
time in 5 years, to do sweeping ethics legislation that we need in
order to improve the Congress's reputation by the public.
So isn't it worth taking just a couple of extra votes to get it done
right and to make Congress look better? I think so, but apparently a
small handful of people in the House and the Senate who make the
decisions on how we are going to do business around here--not taking
into consideration the votes of 60 Senators supporting this--have other
ideas.
Well, at the end of the day, here is what will happen if we don't
proceed. There are about 2,000 people working in the completely
unregulated world of political intelligence or political and economic
espionage. Right now, these people have to be celebrating because they
are in the shadows. They want to stay in the shadows. They are
celebrating because they know it is business as usual. They can
continue to pass along tips that they get from Members of Congress,
Senators, and staff, and no one will be the wiser. They pass along
these tips to hedge funds, private equity firms, and other investors
who pay them top dollar. The lobbyists get rich, Wall Street traders
get rich, but the American people lose.
At one time, these folks who set up these meetings for Members of
Congress or even in the executive branch--and I have examples to show
that--used to charge $10,000 for just setting up a meeting. They don't
charge $10,000 anymore because that information got out and it was too
embarrassing to

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them. So now there is kind of a relationship built up here between the
people who know their way around Congress and people who want this
information that if there is investment in stock as a result of this
and there is an increase in the value of the stock, that one will do
their trading through the company. That is a tragic result of this
decision by the leadership to leave out the amendment that was adopted
by 60 Members of this Congress and would do nothing more--not make
anything illegal--than let us know who these people are.
Through my oversight investigations, I have learned that political
intelligence gathering for Wall Street is a growing field ripe for
abuse. Here are two examples of the type of activity that will continue
to be kept in the dark.
In the course of my investigations of a whistleblower's claim, I
learned that the Center for Medicare and Medicaid Services has closed-
door meetings with Wall Street firms where CMS policies are discussed.
No record is kept of the meetings, and employees are essentially on the
honor system to make sure they are not giving investors inside
information. As an example, the whistleblower who came to us claimed
that over a dozen CMS employees spent nearly 2 hours briefing Wall
Street analysts and investigators on the taxpayers' dime. A member of
the public could not walk in and get that kind of access to that
information. CMS is supposed to be working for us. Instead, we found
out that they are working for Wall Street. If my amendment fails, we
won't know how many of these meetings occur throughout the government
and who profits from these meetings.
Another example is an investigation I conducted into the Obama
administration's Department of Education. The Department of Education
was getting set up to issue regulations on gainful employment that
would affect not-for-profit colleges. Several hedge funds had bet big
that those new regulations would make it harder for for-profit colleges
to do business. Then news began to leak that those regulators were not
going to be as tough as was expected. Suddenly, for-profit stocks began
to rise, and these hedge fund investors reached out to their friends in
the Department of Education.
This is from an actual e-mail my investigators uncovered. It was sent
from Steve Eisman, a hedge fund investor, to David Bergeron. He was
part of a team in charge of writing these regulations. The e-mail
reads:

I know you cannot respond, but FYI education stocks are
running because people are hearing DOE is backing down on
gainful employment.

To translate that Wall Street jargon, the term ``running'' means that
a stock is going up.
Within minutes this e-mail was marked ``high importance'' and
forwarded to senior-level political appointees. These appointees
included James Kvaal, the Deputy Under Secretary, and another policy
expert at the Department and Phil Martin, the Secretary of Education's
confidential assistant. To this day we do not know why the Department's
higher education policy experts needed to know that a hedge fund
investor was losing money. What we do know is that for-profit stock
dropped significantly, and if you bet big that these stocks would drop,
you likely made a lot of money.

When the Department of Education answered my questions, they admitted
to my staff that this e-mail was not a proper contact.
In addition, the Department of Education inspector general is
investigating the gainful employment rulemaking process.
These are just two examples in government agencies where reports such
as these are just the tip of the iceberg. The more power Washington, DC
has, the more it affects financial markets, and the more it affects
financial markets, the more people on Wall Street want to pay for
information about what is going to happen here on this island
surrounded by reality that we call Washington, DC.
Usually, the only way any sort of ethics reform gets done around here
is if someone gets caught. With political intelligence, we have the
opportunity to create transparency before the next scandal occurs. As
government grows, this industry is going to grow, with the potential
for corruption. The question is, What are we going to do about it?
Transparency is the simplest and least intrusive solution, and if
transparency doesn't do the job, then you can legislate. But I have
found out through so many of my investigations over the last 20 years
that if you bring transparency to something and get it out in the open,
it tends to correct itself--maybe not completely but to a great degree.
Originally, in starting investigations, you think you are going to
have to have a massive amount of legislation, but when you get
transparency involved and the accountability that goes along with it,
you find that you don't have to pass a lot of laws, that a lot of
people know that if somebody is looking over their shoulder, they are
going to do what is right.
Now, we can commission another study, as the House of Representatives
wants to do and we are going to be voting on when we vote on cloture
here, but that is kicking the can down the road for another year. We
can act today by defeating cloture and getting to some of these
amendments that have such widespread support in the Congress of the
United States. With 60 votes in the Senate and 286 cosponsors in the
House of Representatives, this is our last chance to make sure the
Senate speaks with a unified voice against secrecy for political and
economic espionage people and for transparency in government. We must
not allow the special interests to operate in the dark. Just bring them
out of the shadows--not that what they are doing is illegal, but we
ought to know what it is.
For these reasons, and to support transparency, to support open
government, and to support good government, I will oppose cloture on
the bill, and I hope a lot of my colleagues--in fact, I hope all 60 of
my colleagues who voted for the amendment in the first place--will
oppose cloture.
If cloture is invoked, which is likely, I intend to vote for this
bill anyway because the underlying bill is a very necessary piece of
legislation, but it is not much of a victory for the American people.
As the Washington Post said, if it included the Leahy amendment, if it
included the Grassley amendment, it would be the most sweeping ethics
reform in the last 5 years.
I yield the floor and reserve the remainder of my time. I suggest the
absence of a quorum.
The assistant legislative clerk called the roll.
The PRESIDING OFFICER. The Senator from Rhode Island.
Mr. REED. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. REED. Mr. President, this is a critical moment. The Senate is on
the verge of adopting legislation that could cost the American people
dearly in the future. The House bill with respect to capital formation,
which is labeled a jobs bill, but goes more to fundamentally changing
security laws, is, in effect, another regulatory race to the bottom.
There has not been a normal committee process in terms of weighing this
legislation. This is a complicated bill involving the interaction of
many different securities laws, interactions which have not been sorted
out or analyzed. As a result, we are rushing to justice--or rushing to
conclusions.
Hasty deregulation has repeatedly been the source of financial
crises--including the savings and loans crisis, the Enron-era crisis,
the great recession of 2008, and the list goes on. Those who are
impacted by those crises--those who lost their savings or dealt with
cleaning them up, experts in this field, and many more--have come out
in strong opposition to the House proposal: from the Chairman of the
Securities and Exchange Commission, Mary Schapiro, the North American
Securities Administrators Association, the State officials charged with
enforcing securities laws, auditors, financial analysts, pension fund
managers, and organizations like AARP, all who have spoken out against
this legislation and supported my efforts to protect investors.
This capital formation bill is fundamentally flawed, and it should
not become law in its present form. It undercuts and dilutes investor
protections and has no real requirements to

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protect American jobs in order to use these new capital raising
procedures. That is what is so ironic. We have a jobs bill, but
actually I see nothing in this bill that requires creating American
jobs in order to earn the benefits of this bill. I think it is, again,
misnomered as a jobs bill.
In addition to the substitute amendment I offered with Senators
Landrieu, Levin, and others that received a majority vote earlier this
week, I offered an amendment that we will be voting on later today to
clarify the shareholder trigger for Exchange Act reporting so that all
companies count their actual shareholders so they cannot avoid periodic
reporting requirements.
Adoption of this amendment would achieve one of the stated goals of
the legislation, which is ostensibly to have more companies into a
transparent marketplace, disclosing and/or listing on stock exchanges.
That was the whole essence of this IPO onramp idea: encourage more
people to go public so they can disclose information to shareholders,
so the market can follow them, and so investment advisers can advise
investors about purchasing the stocks on the market.
This proposed amendment would close one glaring loophole, but,
frankly, too many others remain, and I have grave concerns about the
impact this underlying bill will have on the middle class. Backers say
it is needed because initial public offerings are down since the 1990s.
They blame regulation, ignoring evidence that the dot-com bubble
bursting--which shook the confidence of many investors through lots of
new IPOs coming on the market quickly with huge multiples in their
prices and then quickly disappearing and leaving the scene altogether--
and the biggest financial collapse since the Great Depression,
beginning in 2008 and lingering with us today, have shaken the
confidence and, frankly, shaken the business calculation of many small
businesses.
These small businesses are looking to expand when they see the demand
out there for their products. If the demand is there, they will, even
in this environment, go forward with initial public offerings. They
also repeatedly blame the lack of IPOs on accounting costs and all
other compliance costs brought on by Sarbanes-Oxley and other laws.
They conveniently ignore that the single largest cost, by a large
multiple, is not the Sarbanes-Oxley audit costs or the attorney costs;
they are the investment bankers' fees, and there is nothing in this
legislation that will affect those fees whatsoever.
In the case of Groupon, for example, the investment bankers were paid
28 times what the auditors were paid. If we ask the shareholders of a
company's stock whether they would prefer solid auditing practices
going forward to ensure their investment is being wisely used, I think
they would say they prefer that to paying large fees to investment
bankers. In the case of LinkedIn, the underwriters were paid 18 times
what the auditors were. Groupon paid their accountants and auditors
$1.5 million, and their investment bankers received $42 million. So the
notion that these Sarbanes-Oxley auditing costs and accounting
procedures are what is stopping a business person from deciding to go
ahead ignores the fact that compared to the investment banking fees
which they will still have to pay, these costs are somewhat
insignificant in comparison.
Theoretically, this bill is supposed to promote the flow of capital
to emerging businesses. But in practice it will likely promote and
continue to promote the flow of big fees to investment bankers and
others to bring these companies public. There is nothing wrong with
that, but there is nothing in this underlying legislation that is going
to require discounts in the cost of an IPO because of the reductions in
accounting costs. There is nothing in this legislation that will change
that dynamic. However, this legislation could give insiders more ways
to manipulate the market while average investors are left out in the
cold.
There is a difference between cutting redtape and allowing insiders
to cut corners--undoing the commonsense safeguards that protect people
who play by the rules. The House bill lowers standards for taking
companies public and lowers standards for protecting the public from
investment fraud.
This so-called IPO onramp desperately needs an offramp, through more
careful consideration by the Senate and the House in conference so that
we can improve some provisions which have great merit but need
improvement. This bill would allow very large companies with up to $1
billion in revenues per year to avoid financial transparency and
auditing disclosure designed to ensure they are not manipulating their
books while enjoying lighter regulation for up to 5 years after the
IPO.
If this unbalanced bill becomes, law without these needed
improvements, it could weaken oversight of Wall Street--oversight that
in the past has provided investors protections that are extremely
important. Again, there is merit to the idea of giving small startup
companies more financing options, but the devil is in the details, and
the way this bill is written and packaged could have the opposite
effect and ultimately make it harder to raise capital.
It opens the spigot to general solicitation and mass marketing of
what have traditionally been private securities offerings, and we could
fully expect to have senior citizens and others--through nightly cable
advertisements, through billboards, cold calls by brokers, or other
individuals telling them about the special opportunities for investing
their cash, fall for some of these tactics.
Retail investors can be solicited through this bill's reg A process
to raise up to $50 million capital for small businesses. They will hear
the pitches to make their investment now and get rich.
Again, there is potential for expanding the use of regulation A--it
is on the books already at the Securities and Exchange Commission--but
not without safeguards. For example, as the bill is currently drafted,
these solicitations can be made without audited financial statements. I
think as a point of departure, if someone is trying to sell a security,
they should at least have to provide ordered financials from the
company they are soliciting on behalf of.
Now, the crowdfunding amendment, I hope, will be improved
dramatically by the work of Senator Merkley and Senator Bennet and
Senator Brown. We will be voting on that later today too. It is a
substantial improvement, but I think even they themselves will admit
this is an experiment and perhaps could be improved even further. But I
commend them and salute them for what they have done, and I hope our
colleagues will accept the amendment and move forward.
Over the last few days we have spent a great deal of time talking
about the shortcomings in this legislation. With the exception of the
proposals before us, many of these shortcomings still exist, and I
think they will lead potentially to difficulties and harm to investors.
People understand investing is risky. They try to make an informed
choice, and they win some and lose some. But most Americans would agree
that U.S. financial markets work best when investors have access to
timely, comprehensive, and accurate public information that allows
people to make solid investment decisions. In fact, one of the
principles of the competitive market, if we refer to an economics 101
textbook, is perfect information.
That is the assumption for competitive markets: perfect information.
Well, there is never perfect information. But there has to be
adequate information. Otherwise it is not a market, it is a casino.
This legislation undermines some of the decades-long protections we
have had in place to provide at least adequate information to
investors.
By stripping away auditing standards and giving the investing public
less information in almost every setting, sophisticated players and
investment banks will have all the advantages. The average investor
will be operating in much more challenged circumstances.
Middle-class America will be particularly affected. As USA Today
noted:

Banks that manage IPOs will be able to use inside access to
past financial results to dominate research on new companies,
with incentives to promote their firm's banking clients.

The American people want big banks and large companies to play fair
and comply with the basic rules and responsibilities that go with being
a public company. That is not too much to ask.

[[Page S1968]]

I believe history will judge this misnamed bill quite harshly.
Instead of rushing to pass this bill, we should be working together to
protect the interests and economic well-being of the American public.
We should be focused on creating jobs and helping working families. In
my estimate, this bill does not do that and, indeed, ironically, it
could harm our constituents by shattering their faith--and it has been
tested quite recently by the financial crisis and other crises--in the
market, rather than reinforcing their confidence that they will be
protected against fraud and manipulation.
I believe we are capable of writing better legislation without
sacrificing important investor protections. I hope we can go forward. I
am disappointed the substitute amendment, authored by myself and
Senator Landrieu and Senator Levin, was not accepted. As such, I would
urge, when we get to final passage, people think very seriously about
the consequences of the bill. Despite the efforts of Senator Merkley
and Senator Bennet, Senator Brown of Massachusetts and others, despite
my efforts, I am afraid the final version of this legislation will not
protect investors as it should and, therefore, should be rejected.
Mr. President, I ask unanimous consent that any time remaining in
quorum calls be equally divided between my Republican colleagues and my
Democratic colleagues.
The PRESIDING OFFICER. Is there objection?
Without objection, it is so ordered.
The Senator from Pennsylvania is recognized.
Mr. TOOMEY. Mr. President, I would like to yield myself 5 minutes to
discuss the JOBS Act.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. TOOMEY. Mr. President, I think we are on the verge of doing
something very constructive in this body, something very constructive
for our economy, for the American people, for economic growth, and for
job creation. After being in a Congress that has thus far been a little
frustrating for the lack of progress we have made on this front, today
is a very big day.
We have a chance to pass a bill that has passed the House
overwhelmingly with a huge bipartisan majority--a bill that the
President of the United States has said he will sign into law. We have
a chance to pass this, to have it signed into law, and to, thereby,
enable small and growing businesses across America greater access to
the capital they need to grow, to hire new workers, to help expand this
economy, to really make some progress at a time when we need it badly.
The bill I am talking about, of course, is the JOBS Act. It has
passed the House 390 to 23--an overwhelming majority. It consists of a
series of component measures I will talk about in a little bit in some
detail--each of which has either passed the full House almost
unanimously or at least in committee by overwhelming majorities. This
is very broad bipartisan support.
It is important, however, that to get to this point we need to defeat
the amendment offered by my friend and colleague, whom I respect a
great deal, the Senator from Rhode Island, who is offering an amendment
that would have devastating unintended consequences--an amendment that
does not merely weaken the progress we are going to make with this bill
but would actually take us backwards from where we are today.
The way in which it would do that--and I doubt this is the intent,
but I am sure this is the consequence of this amendment--if it were
enacted, this amendment would cause companies that are organized as
private companies, for good and sufficient reasons--many for many
years; they choose to be private companies because it is what is best
for their business, their employees, and their customers--it would
force many of them to become public companies against their will.
Because a change in the rules, in the regulations by which we count
the number of shareholders--as the amendment from the Senator from
Rhode Island would do--would trigger this change in the status of these
companies, having an enormously detrimental impact on many companies,
raising their costs of compliance dramatically, making them less
profitable.
I am very concerned, for instance, among the many ways this could
happen--one could be through ESOPs, the employee stock ownership plans.
I know the Senator from Rhode Island believes they would not trigger
this. I think it is very likely they would. Not only would this force
private companies to go public against their will, but it would
discourage the creation of employee ownership in companies. I think the
last thing we want to do is discourage a very constructive way of
compensating employees.
So if we can defeat the Reed amendment, then we can move on to--I
think we will have another amendment that will deal with crowdfunding.
I do not know whether that passes. But either way we will be able to
expand the opportunity of small companies to raise capital through
crowdfunding mechanisms. Then we will have a final passage vote on what
I think might be the most progrowth measure this body will consider
perhaps this whole year.

Let me walk through a couple of specific items.
This is a chart I have in the Chamber that shows just a sampling of
the organizations and institutions that support this bill. It is a wide
range of businesses and business associations, folks who are in the
business of launching new companies, of growing small companies. It is
a long list. This is an incomplete subset of that list.
As shown on this next chart, this is an important point I want to
make; that is, there is a very vast range of investor protections that
are completely unaddressed, completely unaffected by this legislation.
The legislation is actually modest in the regulations it changes, and
the categories it leaves in place to protect investors who are choosing
to invest in companies--be they public or private--are quite extensive.
A whole range of antifraud provisions that remain in full force are
unaffected.
A full range of SEC disclosure and reporting obligations remain
entirely still in full force. There are governance rules that are
unaffected by any of this legislation--proxy statements, reporting
obligations. We have a very extensive body of law and regulation that
very precisely controls all kinds of reporting and disclosure
requirements designed to protect investors. It all stays in place.
Investors remain very well protected if this legislation is enacted.
I want to touch on the three aspects I think I am most excited about,
and I will acknowledge my bias. These are three bills I introduced with
Democratic cosponsors in the Senate, each of which has been rolled up
into this package, in addition to the crowdfunding piece I alluded to
earlier and a bill introduced by Senator Thune and others that is also
part of this package.
One of the pieces in this jobs package that is very constructive is a
bill I introduced with Senator Tester. This is a bill that takes the
existing regulation A in the securities law, the body of law--
regulation A allows companies to issue a security in a streamlined
regulatory fashion. It streamlines the process. It reduces costs
somewhat. The problem is, the current limit is only $5 million, making
it not very practical for the vast majority of companies. Our bill
would take that limit to $50 million and make this an option to raise
capital and grow a business that would be available to far more
companies.
A second piece that I introduced with Senator Carper, and I am very
grateful to Senator Carper for his work, is to lift the permissible
number of shareholders that a small privately held business can have
without triggering the full, very expensive, and onerous SEC compliance
regime. Our bill would take that from a current level of 500 up to
2,000. There are many companies throughout Pennsylvania, across the
country, that are successful. They are thriving, they are growing, but
they have a number of shareholders that is bumping up against their
limit. They are close to 500. They need to raise capital. They do not
want to go public, and they have plenty of people who would like to
invest in their successful business so they can grow. But they cannot
do it because they are so close to the threshold. We would lift that
threshold to 2,000 so they can raise more money in the private markets
which is available to them.

[[Page S1969]]

Then, finally, what is in some ways the centerpiece of this
legislation in my mind is a bill I introduced with Senator Schumer, and
I thank him for his work. This is a bill that facilitates going public.
When a company reaches that point in its growth where--in order to grow
further, in order to hire more workers, in order to expand--it needs to
become a publicly traded company, we make it more affordable for more
companies to do that, so they can do it sooner, they can grow sooner,
they can hire the additional workers sooner.
We do it with what we call an onramp. It is a process by which a
company--if it has less than $1 billion in sales, less than $750
million in market flow--such a company would be able to do a public
offering without being subject to all of the most expensive parts of
the SEC regulatory regime. They would be required to comply with a big
majority of all of the existing reporting requirements, but there would
be some pieces--especially section 404(b) of the Sarbanes-Oxley Act,
which is extremely complex and expensive to comply with--they would not
have to fully comply with that for 5 years or until they reached $1
billion in sales or $750 million in market flow, whichever came first.
So what we are doing with this part of the JOBS Act is we are giving
small and growing companies an opportunity to grow into the ability to
afford the most expensive regulation to which they would be subject.
Nobody is exempted permanently. Everybody who goes public would be
subject to the full panoply of regulations within 5 years or sooner if
they grow faster, and it is only available to companies that have
sales, as I said, of less than $1 billion. But that describes a great
number of companies.
I can tell you from personal experience, when a company is
approaching that threshold of asking themselves: Should we go public--
we could grow, we could use the capital, we could deploy it to hire
more workers, we could make constructive use of it--they also have to
weigh the cost. The cost of compliance right now is huge, and we have
seen a huge dropoff in the number of IPOs. We have seen a huge
extension in the period of time between the successful launch of a
company and the moment they do an IPO. We have seen that lengthen
dramatically since we passed Sarbanes-Oxley. It is, in part, because it
is so expensive to comply.
So what we will be doing, if we pass this legislation today--which I
certainly hope we will--is making it a little bit more affordable for
companies to make that decision sooner, which means hiring workers
sooner, which means growing sooner, which means more growth for our
economy, more opportunities for all of the people we represent.
So I am very optimistic. I am very pleased that we have been able to
pull together such broad bipartisan support--this overwhelming vote in
the House, the endorsement of the President of the United States, the
support and cooperation with individual Democratic Senators who have
cosponsored key pieces of this legislation.
I do think it is equally important we defeat the Reed amendment so we
do not actually go backwards in this process and have the unintended
consequence of forcing currently private companies to become public
against their will, forcing them to incur all kinds of costs that are
actually counterproductive. If we can do that today, then I think we
can pass this legislation. We know the President of the United States
will sign it. We should do it as soon as we can. I wish to thank all my
colleagues who played a role in advancing us to the point we are at
today.

I yield the floor and I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. DURBIN. Madam President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER (Mrs. Hagan). Without objection, it is so
ordered.
Mr. DURBIN. Madam President, how much time is remaining in the debate
on this measure?
The PRESIDING OFFICER. There is 23 minutes total; 18 minutes on the
majority side.
Mr. DURBIN. Madam President, I see the floor is vacant. I assume the
time is being taken from both sides at this moment.
The PRESIDING OFFICER. In the quorum call, the time is being charged
equally. Right now, it is being charged to the majority.
Mr. DURBIN. Thank you. I will try to fill that time with something
interesting. The United States has the best markets in the world.
Because of strong regulation and oversight by the Securities and
Exchange Commission and other agencies, our markets are transparent and
investors get accurate detailed information. One hundred million
Americans depend on the strong regulated markets when they are making
their savings for retirement or college. This is a creation that began
back after the Great Depression, when Franklin Roosevelt said we needed
to establish the appropriate regulatory agencies to set the economy on
the right track and keep it there.
Strong oversight has helped pension fund managers who count on safety
and transparency so they can provide pension benefits to millions of
American retirees, and investors from around the world bring their
money here because of our investor protections. Yet the Senate is
considering a House-passed capital formation bill that rolls back the
very protections that make our markets the best in the world.
Supporters of this bill claim investors will jump at the opportunity
to invest in a company as soon as we reduce disclosure, auditing, and
accounting standards. They say this is a perfect way to create jobs.
But why should investors choose to invest in companies under conditions
that do less to protect their money? Why should investors who were
burned during the dot-com crash put more capital in companies that are
exempt from the same rules we put in place to ensure it would never
happen again? Why would investors who were left with nothing after the
financial crisis because of risky behavior by executives with golden
parachutes find companies exempt from compensation standards more
attractive?
The answer is they will not. The ones who do will be more exposed to
deceit and fraud. The result will not be more jobs, it will be less
transparency, less accountability. Professor John Coats of Harvard Law
School agrees. Here is what he said: ``[T]he proposals could not only
generate front-page scandals, but reduce the very thing they are being
promoted to increase: job growth.''
Listen to what SEC Chief Accountant Lynn Turner said:

The proposed legislation is a dangerous and risky
experiment with US capital markets. . . . I do not believe it
will add jobs but may certainly result in investor losses.

The House-passed bill, as written, will not create jobs, but let me
tell you what it will do. It will exempt firms with more than $1
billion in revenue--that is 90 percent of the newly public companies--
more than $1 billion of annual revenue exempted from the standards that
help ensure audits based on facts, not on who is managing the auditor's
contract. These are the same internal controls we just adopted after
Enron, after we were burned there, after investors lost their money,
after pension funds lost their investment, after people lost their
jobs. We set up standards and said: Let it never happen again.
In this euphoria, we are going to repeal the Enron standards for
these companies. This bill would allow companies to use billboards and
cold calls to lure unsophisticated investors with the promise of making
a quick buck investing in new companies.
According to the New York Times, it will allow anyone with an idea to
post that idea online and raise $1 million without ever providing
financial statements. This is a scam. How many times have we picked up
our cell phones to see there is a Nigerian opportunity out there? Be
prepared after this bill passes. They will not be from Nigeria; they
may be from next door. We are giving them the opportunity to ask people
all across America for their hard-earned savings on investments that
are not backed with financial statements.
Last Friday, SEC Commissioner Aguilar joined the Chairman of the SEC
Mary Schapiro in raising concerns about this House-passed bill. Is that

[[Page S1970]]

not fair warning that we ought to least have a hearing on this bill
before it passes?
I ask unanimous consent to have Commissioner Aguilar's statement
printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From the U.S. Securities and Exchange Commission, Mar. 16, 2012]

Investor Protection Is Needed for True Capital Formation

(By Commissioner Luis A. Aguilar)

Last week, the House of Representatives passed H.R. 3606,
the ``Jumpstart Our Business Startups Act.'' It is clear to
me that H.R. 3606 in its current form weakens or eliminates
many regulations designed to safeguard investors. I must
voice my concerns because as an SEC Commissioner, I cannot
sit idly by when I see potential legislation that could harm
investors. This bill seems to impose tremendous costs and
potential harm on investors with little to no corresponding
benefit.
H.R. 3606 concerns me for two important reasons. First, the
bill would seriously hurt investors by reducing transparency
and investor protection and, in turn, make securities law
enforcement more difficult. That is bad for ordinary
Americans and bad for the American economy. Investors are the
source of capital needed to create jobs and expand
businesses. True capital formation and economic growth
require investors to have both confidence in the capital
markets and access to the information needed to make good
investment decisions.
Second, I share the concerns expressed by many others that
the bill rests on faulty premises. Supporters claim that the
bill would improve capital formation in the United States by
reducing the regulatory burden on capital raising. However,
there is significant research to support the conclusion that
disclosure requirements and other capital markets regulations
enhance, rather than impede, capital formation, and that
regulatory compliance costs are not a principal cause of the
decline in IPO activity over the past decade. Moreover,
nothing in the bill requires or even incentivizes issuers to
use any capital that may be raised to expand their businesses
or create jobs in the U.S.
Professor John Coates of Harvard Law School has testified
that proposals of the type incorporated into H.R. 3606 could
actually hurt job growth:
``While [the proposals] have been characterized as
promoting jobs and economic growth by reducing regulatory
burdens and costs, it is better to understand them as
changing . . . the balance that existing securities laws and
regulations have struck between the transaction costs of
raising capital, on the one hand, and the combined costs of
fraud risk and asymmetric and unverifiable information, on
the other hand. Importantly, fraud and asymmetric information
not only have effects on fraud victims, but also on the cost
of capital itself. Investors rationally increase the price
they charge for capital if they anticipate fraud risk or do
not have or cannot verify relevant information. Anti-fraud
laws and disclosure and compliance obligations coupled with
enforcement mechanisms reduce the cost of capital.
``. . . Whether the proposals will in fact increase job
growth depends on how intensively they will lower offer
costs, how extensively new offerings will take advantage of
the new means of raising capital, how much more often fraud
can be expected to occur as a result of the changes, how
serious the fraud will be, and how much the reduction in
information verifiability will be as a result of the changes.
``Thus, the proposals could not only generate front-page
scandals, but reduce the very thing they are being promoted
to increase: job growth.''
Similarly, Professor Jay Ritter of the University of
Florida has testified before the Senate banking committee
that such proposals could in fact reduce capital formation:
``In thinking about the bills, one should keep in mind that
the law of unintended consequences will never be repealed. It
is possible that, by making it easier to raise money
privately, creating some liquidity without being public,
restricting the information that stockholders have access to,
restricting the ability of public market shareholders to
constrain managers after investors contribute capital, and
driving out independent research, the net effects of these
bills might be to reduce capital formation and/or the number
of small [emerging growth company] IPOs.''
As drafted, H.R. 3606 would have significant detrimental
impacts on the U.S. securities regulatory regime, including
the following:
First, the bill will reduce publicly available information
by exempting ``emerging growth companies'' from certain
disclosure and other requirements currently required under
the Federal securities laws. The bill's definition of
``emerging growth company'' would include every issuer with
less than $1 billion in annual revenues (other than large
accelerated filers and companies that have issued over $1
billion in debt over a three year period) for five years
after the company's first registered public offering. It is
estimated that this threshold would pick up 98% of IPOs and a
large majority of U.S. public companies for that five year
period.
An emerging growth company would only have to provide two
years (rather than three years) of audited financial
statements, and would not have to provide selected financial
data for any period prior to the earliest audited period
presented in connection with its initial public offering. It
would also be exempt from the requirements for ``Say-on-Pay''
voting and certain compensation-related disclosure. Such
reduced financial disclosure may make it harder for investors
to evaluate companies in this category by obscuring the
issuer's track record and material trends.
``Emerging growth companies'' would also be exempt from
complying with any new or revised financial accounting
standards (other than accounting standards that apply equally
to private companies), and from some new standards that may
be adopted by the PCAOB. Such wholesale exemptions may result
in inconsistent accounting rules that could damage financial
transparency, making it difficult for investors to compare
emerging companies with other companies in their industry.
This could harm investors and, arguably, impede access to
capital for emerging companies, as capital providers may not
be confident that they have access to all the information
they need to make good investment decisions about such
companies.
Second, the bill would greatly increase the number of
record holders a company may have, before it is required to
publish annual and quarterly reports. Currently, companies
with more than 500 shareholders of record are required to
register with the SEC pursuant to Section 12(g) of the
Securities Exchange Act and provide investors with regular
financial reports. H.R. 3606 would expand that threshold to
2000 record holders (provided that, in the case of any issuer
other than a community bank, the threshold would also be
triggered by 500 non-accredited investors). Moreover, the
bill would exclude from such counts any shareholders that
acquire securities through crowdfunding initiatives and those
that acquire securities as eligible employee compensation.
Thus, a company could have a virtually unlimited number of
record stockholders, without being subject to the disclosure
rules applicable to public companies. This effect is
magnified by the fact that the reporting threshold only
counts records holders, excluding the potentially unlimited
number of beneficial owners who hold their shares in ``street
name'' with banks and brokerage companies, and thus are not
considered record holders.
This provision of the bill raises concerns because it could
significantly reduce the number of companies required to file
financial and other information. Such information is critical
to investors in determining how to value securities in our
markets. Regular financial reporting enhances the allocation
of capital to productive companies in our economy.
Third, the bill would exempt ``emerging growth companies''
from Section 404(b) of the Sarbanes-Oxley Act, which requires
the independent audit of a company's internal financial
controls. Section 404(b) currently applies only to companies
with a market capitalization above $75 million; companies
below that threshold have never been subject to the internal
controls audit requirement and were exempted from such
requirement in the Dodd-Frank Act. The internal controls
audit was established following the accounting scandals at
Enron, WorldCom and other companies, and is intended to make
financial reporting more reliable. Indeed, a report last year
by Audit Analytics noted that the larger public companies,
known as accelerated filers, that are subject to Section
404(b), experienced a 5.1% decline in financial statement
restatements from 2009 to 2010; while non-accelerated filers,
that are not subject to Section 404(b), experienced a 13.8%
increase in such restatements. A study by the SEC's Office of
the Chief Accountant recommended that existing investor
protections within Section 404(b) be retained for issuers
with a market capitalization above $75 million. With the
passage of H.R. 3606, an important mechanism for enhancing
the reliability of financial statements would be lost for
most public companies, during the first five years of public
trading.
Fourth, the bill would benefit Wall Street, at the expense
of Main Street, by overriding protections that currently
require a separation between research analysts and investment
bankers who work in the same firm and impose a quiet period
on analyst reports by the underwriters of an IPO. These rules
are designed to protect investors from potential conflicts of
interests. The research scandals of the dot-com era and the
collapse of the dot-com bubble buried the IPO market for
years. Investors won't return to the IPO market, if they
don't believe they can trust it.
Fifth, H.R. 3606 would fundamentally change U.S. securities
law, by permitting unlimited offers and sales of securities
under Rule 506 of Regulation D (which exempts certain non-
public offerings from registration under the Securities Act),
provided only that all purchasers are ``accredited
investors''. The bill would specifically permit general
solicitation and general advertising in connection with such
offerings, obliterating the distinction between public and
private offerings.
This provision may be unnecessary. A recent report by the
SEC's Division of Risk, Strategy and Financial Innovation
confirms that Regulation D has been effective in

[[Page S1971]]

meeting the capital formation needs of small businesses, with
a median offering size of $1,000,000 and at least 37,000
unique offerings since 2009. Regulation D offerings surpassed
$900 billion in 2010. The data does not indicate that users
of Regulation D have been seriously hampered by the
prohibition on general solicitation and advertising.
I share the concerns expressed by many that this provision
of H.R. 3606 would be a boon to boiler room operators, Ponzi
schemers, bucket shops, and garden variety fraudsters, by
enabling them to cast a wider net, and making securities law
enforcement much more difficult. Currently, the SEC and other
regulators may be put on notice of potential frauds by
advertisements and Internet sites promoting ``investment
opportunities.'' H.R. 3606 would put an end to that tool.
Moreover, since it is easier to establish a violation of the
registration and prospectus requirements of the Securities
Act than it is to prove fraud, such scams can often be shut
down relatively quickly. H.R. 3606 would make it almost
impossible to do so before the damage has been done and the
money lost.
In addition others have noted that the current definition
of ``accredited investor'' may not be adequate and that the
requirement that purchasers be accredited investors would
provide limited protection. For example, an ``accredited
investor'' retiree with $1 million in savings, who depends on
that money for income in retirement, may easily fall prey for
a ``hot'' offering that is continually hyped via the internet
or late night commercials.
These are just a few observations regarding H.R. 3606. It
also includes other provisions that require substantial
further analysis and review, including among other things the
so-called crowdfunding provisions.
The removal of investor protections in this bill are among
the factors that have prompted serious concerns from the
Council of Institutional Investors, AARP, the North American
Securities Administrators Association, the Consumer
Federation of America, and Americans for Financial Reform,
among others.

Questions Re: H.R. 3606

As H.R. 3606 is considered, the following is a non-
exhaustive list of questions that should be addressed:
1. The bill would define ``emerging growth company'' as any
company, within 5 years of its IPO, with less than $1 billion
in annual revenue, other than a large accelerated filer or a
company that has issued $1 billion in debt over a three-year
period.
What is the basis for the $1 billion revenue trigger?
Why is revenue the right test? Why is $1 billion the right
level?
It has been estimated that this definition would include
98% of all IPOs, and a large majority of all public companies
within the 5-year window. Was such a broad scope intended?
2. As provided in the bill, financial accounting standards,
auditing and reporting standards, disclosure requirements,
and the period for which historical financial statements is
required, could all differ as between ``emerging growth
companies'' and all other public companies--including all
companies that went public before December 8, 2011.
How will these differences affect the comparability of
financial reporting for these two classes of issuers?
Will reduced transparency, or lack of comparability, affect
the liquidity of emerging growth companies?
Will reduced transparency or reduced liquidity affect the
cost of capital for emerging growth companies? Will investors
demand a ``discounted price'' to offset any perceived higher
risk resulting from reduced disclosures and protections?
Will emerging growth companies be required to include risk
factors or other disclosure in their registration statements
and other filings, regarding transparency, comparability and
any potential effects thereof?
3. The bill would expand the threshold for the number of
shareholders an issuer may have, before it is required to
file annual and other reports under Section 12(g) of the
Exchange Act, from 500 to 2000 (of which no more than 500 may
be non-accredited investors, for issuers other than community
banks), and would exclude from such counts shareholders that
acquire securities through crowdfunding initiatives and those
that acquire securities as eligible employee compensation.
How was the new threshold of 2000 holders determined?
Is that the right threshold for determining whether the
public interest in such securities justifies regulatory
oversight?
How many companies would be exempted from registration and
reporting by the bill?
When shares are held in ``street name'' the number of
beneficial owners may greatly exceed the number of record
holders. How will the new threshold of 2000 record holders be
applied in such cases?
How would the exclusion of employees and crowdfunding
purchasers be applied, if such holders transfer their shares
to other investors? How would this be tracked?
4. To the extent the bill results in reduced transparency
and/or reduced liquidity for emerging growth companies, or
for companies exempted from Exchange Act reporting by the new
thresholds under Section 12(g), such results may impact
investment decisions by institutional investors.
How would mutual fund managers, pension fund
administrators, and other investors with fiduciary duties
address such reduced transparency or lack of liquidity in
making investment decisions?
Could reduced transparency or reduced liquidity impact the
ability of fund managers to meet applicable diversification
requirements?
Could such effects cause managers to increase concentration
into fewer US reporting companies? How would such
concentration affect market risk? Would the bill result in
investor funds being redirected to companies overseas?
5. The bill is being promoted as a jobs measure, on the
grounds that reducing regulation will improve access to
capital for small and emerging businesses, allowing them to
grow and add employees.
What is the evidence that regulatory oversight unduly
impedes access to capital?
What is the evidence that companies that are otherwise
prepared to grow (that is, they have the appropriate business
model, management team, and aspirations) are prevented from
growing by an inherent lack of access to potential sources of
capital?
I understand that the costs of complying with regulatory
requirements are a factor underpinning H.R. 3606. How do such
costs compare to other costs of raising capital, such as
investment banking fees? How do such costs compare to other
administrative costs? If reduced transparency, lack of
comparability, and other consequences of the bill result in a
higher cost of capital for emerging growth companies, will
the money saved on compliance be worth it?
6. Evidence shows that the public companies that are
currently exempt from internal controls audit requirements
have a higher incidence of financial reporting restatements,
and that companies that have restated their financial results
produce substantially lower returns for investors.
How do any perceived benefits from H.R. 3606's exemption of
emerging growth companies from the audit of internal controls
compare to the likelihood of increased restatements? Would an
increase in restatements hamper capital formation?
Will the lack of an internal controls audit result in
greater financial and accounting fraud?
7. The bill requires the Commission to revise its rules to
provide that the prohibition against general solicitation or
general advertising contained in Regulation D shall not apply
to offers and sales of securities pursuant to Rule 506,
provided that all purchasers are accredited investors.
Given the success of Regulation D as a capital raising
mechanism, including its successful use by small and emerging
companies, is there any evidence that general solicitation
and general advertising are necessary for capital formation?
Given the current definition of ``accredited investor'', is
that the right test for determining who issuers may target,
in offers made by general solicitation or advertising?

Conclusion

H.R. 3606 would have a significant impact on the capital
markets and raises many questions that have yet to be
satisfactorily resolved. I have yet to see credible evidence
that justifies the extensive costs and potential harm to
investors this bill may impose.
I urge Congress to undertake the review necessary to
resolve these questions, and to ensure that investors, as the
providers of the capital that companies need to grow and
create jobs, have the protections they need and deserve.

Mr. DURBIN. Commissioner Aguilar said he shares concerns expressed by
many that provisions of this bill would be a boon to boiler room
operators, Ponzi schemers, bucket shops, and garden variety fraudsters
by enabling them to cast a wider net and make securities law
enforcement that much more difficult.
Others have raised concerns. The North American Securities
Administrators Association, the Consumer Federation of America, the
Americans for Financial Reform, the Council of Institutional Investors,
securities experts such as Professor John Coffee and former SEC Chief
Accountant Lynn Turner, the AARP, concerned that seniors will be bilked
out of their savings with these phony solicitations for companies that
may not even exist.
I share the concerns. I believe there is a path forward to protect
investors and make it easier for small firms to come up with capital.
Several of my colleagues had a substitute amendment--Senator Jack Reed,
Senator Carl Levin, Senator Mary Landrieu--which would have done just
that, made it easier to raise capital but kept the safeguards in place.
It was defeated virtually on a party-line vote. It was defeated. It
would have preserved the Dodd-Frank say-on-pay provisions to allow
investors to weigh in if executives are getting exorbitant compensation
and golden parachutes. The amendment would have prohibited companies
from advertising and selling stock to the unsophisticated, unsuspecting
investors. It would have included minimum requirements for
crowdfounding Web sites so investors are not blindly giving money to

[[Page S1972]]

someone with a good-looking Web site that promises a good return that
will never ever happen.
In short, the amendment would have responded to investors' concerns--
the very same investors some of my colleagues claim the underlying bill
will encourage to invest.
That is not all we have done. The amendment also included a
reauthorization of the Export-Import Bank, which makes loans to major
companies and smaller companies too who want to export American-made
products made by American workers.
The reauthorization increased the bank's lending cap to $140 billion.
This is the same Export-Import Bank that received bipartisan support in
the Banking Committee and was reported out on a voice vote. A similar
reauthorization was introduced by a Republican the last time around in
2006. It passed the Senate without even the requirement of a record
vote.
However, yesterday, both the Landrieu-Reed-Levin amendment, which was
the substitute that included the Export-Import Bank reauthorization,
and the Cantwell amendment failed to obtain enough votes to invoke
cloture, mostly on a party-line vote. Two Republicans voted to extend
the Export-Import Bank authorization--two. This is a bank which gives
our companies in America a fighting chance around the world to compete
with those companies in other countries that are subsidized by their
government. We have the Export-Import Bank to help our companies,
companies in my State such as Boeing and Caterpillar. Good-paying jobs
right here in America, sustained by exports, helped by the Export-
Import Bank, defeated on the floor of the Senate. Only two Republican
Senators would step up and vote for that bank, and it used to be
noncontroversial. We did it because we knew it was so good for our
economy. It turned out to be a partisan issue.
Too many things turn out to be partisan issues on the Senate floor
lately. That is the latest casualty. It is clear that politics and
theoretical jobs created by a bill that significantly reduces investor
protections are more important to some of my colleagues than the real
jobs that would have been created by the Export-Import Bank.
The Export-Import Bank is responsible for supporting 288,000 American
jobs at more than 2,700 U.S. companies. One would think it would have
won more than two Republican votes. Madam President, 113 of these
companies are located in my State of Illinois and 80 are small
businesses.
One of those companies, Holland LP, in Crete, IL, employs 250 people
and completed a major export transaction with assistance from the
Export-Import Bank. Holland was able to sell two complete in-track
welding systems to a company in Brazil.
The CEO of Holland said: ``Without [the Export-Import Bank], this
transaction would not have come to life.''
That is how the Ex-IM Bank can help companies in my State and
companies around the United States.
I have to say, there will be an amendment offered soon, this
afternoon, within the hour, the Merkley-Bennet-Scott Brown amendment,
which is bipartisan. It would allow small businesses to raise up to $1
million through crowdfunding Web sites but will put in protections for
investors from those posing as a business and selling a lot more hope
than substance.
The amendment would require all crowdfunding Web sites to register
with the SEC. That is a step in the right direction. It is one of the
most important elements that needs to be changed in this bill out of
about eight elements, and it is the only one we are likely to address
this afternoon.
I urge my colleagues to support the amendment of Jack Reed of Rhode
Island requiring the SEC to revise the definition of ``holder of
record.'' The financial industry has been working overtime to beat this
amendment. They have been on the phones calling everybody saying,
``Stop the Reed amendment.''
According to John Coffee, a professor at Columbia Law School, the
shareholder of record concept is archaic and can be gamed.
State securities regulators also share that same concern. The
American Securities Administrators Association said in a recent letter
that it makes little sense to exclude any investor from the count of
beneficial holders.
The Reed amendment would require the SEC to update the definition of
``holder of record'' to revise an outdated definition that may hide the
true number of shareholders a company might have.
While I believe the bipartisan Merkley-Bennet and the Reed amendments
will significantly improve parts of this bill, it doesn't make this a
good bill. That is why I am prepared to vote no on final passage.
This bill, as much as any bill we have ever considered on the Senate
floor, should have at least had a hearing. We should have at least
brought in some expert witnesses. I will tell you, we will rue the day
we ran this thing through the House and Senate without the appropriate
oversight. I can already predict, having seen this happen time and
again, there will come a time, after we pass this bill, when we start
hearing from Americans who are being lured into phony investments,
losing their life savings and their retirement in the process, and we
will step back and say: My goodness. How did that happen? Remember, on
March 22, 2012, we had a chance to make a difference to slow down and
stop this bill until there was an adequate hearing, until we could put
safeguards into place, which Americans deserve.
I am not against investment. I know there is risk associated with it.
We have said since the 1930s--1932--under the creation of the SEC, that
we owe to Americans, when they make a decision about an investment, two
basic elements: Make sure the salesman is telling the truth and make
sure what he said can be backed up with audited financial statements.
We can all remember stories about the people who used to blow in, sit
down and sell penny stocks and $5 stocks and unsuspecting investors
losing their savings as these folks caught the next train out of town.
We don't need to return to that in the name of job creation. If we are
creating the jobs of new charlatans who are offering these investments,
these are not the kinds of jobs America should encourage.
I believe the House-passed bill should be defeated today. We should
take the time to get it right and listen to the Chairman of the SEC and
put the protections in the law so we can move forward with a bill that
all of us can be proud of.
I yield the floor.
The PRESIDING OFFICER. The Senator from Oregon is recognized.
Mr. MERKLEY. Madam President, I rise to address the amendment on
crowdfunding that we will be considering shortly on the floor of the
Senate. Specifically, the goal is to create a solid foundation for
success of enabling Americans to invest in startup companies, invest in
small companies through the Internet, and to do so in a fashion that
does not result in predatory scams but results in capital formation
that helps small business thrive across our Nation.
The House bill, as it came over to us, has crowdfunding provisions
that are simply a pathway to predatory scams, a paved highway to
predatory scams. What do I mean by that? They say basically that a
company seeking to raise investment capital doesn't have to give any
financial information of any kind about their company. If they do
provide information, they don't have to have accountability for the
accuracy of that information. By the way, they can hire people to pump
their stock, and that is OK under the law. In other words, everything
we associate with the worst boiler rooms, the worst pump-and-dump
schemes, is made legal by the House legislation. That is why we need to
fix this on the floor of the Senate.
We lay out a provision that says, if you raise less than $100,000,
you as the CEO assert the accuracy of the information you are putting
out--simple financial statements. If you raise a larger amount of
funds, you proceed to have an accountant-reviewed statement that you
can vouch for. If you raise yet more funds, at a higher level, then you
have an audited financial statement. So it is adjusted in degrees and
it streamlines it to the appropriate levels, based on the amount of
investment you are asking.
This amendment says directors and officers should take responsibility
for the accuracy of that information. That

[[Page S1973]]

will give investors a great deal more confidence that what they are
reading is actually and truly the case. That is a foundation for
successful investment.
There are many folks across the country who have looked at these
crowdfunding positions, different measures. I thought I would read from
Motaavi, a crowdfunding intermediary based out of North Carolina. On
the House bill, they say:

The crowdfunding language in the [House bill] lacks
critical investor protection features. It does not require
offerings to be conducted through an intermediary, which
opens the door to fraudulent activity. . . . It also does not
require appropriate disclosures or inspections. The bill does
not require the issuer to inform investors of dilution risk
or capital structure.
Crowdfunding is premised on openness. Without disclosure,
investors cannot protect themselves or accurately price the
securities they are buying. If issuers are not willing to
provide information over and above what is required, the
[House] language does not provide investors with other
alternatives short of giving up on crowdfunding altogether.

They then comment on the bipartisan amendment we are presenting on
the floor of the Senate, and they note:

It strikes the right balance between disclosure and
flexibility. The language is tightly integrated with existing
securities laws to provide investor protection. It places
easily met obligations on the issuer and the intermediary to
ensure that investors have the information they need to make
sound decisions. The bill has many provisions for appropriate
rulemaking, and is written in a way that reflects how
crowdfunding actually works.

Remember, this is a crowdfunding intermediary based in North
Carolina--one working to occupy this Internet space and wants a
platform, a structure, that works and makes crowdfunding a legitimate
strategy for capital formation.
The letter continues:

We think crowdfunding can be a valuable and integral part
of the capital formation process. The Crowd Funding Act is
the right bill [the amendment we are considering today] to
make this happen.

Launcht is a crowdfunding portal provider. They say:

For the first time, we have a Senate bill with bipartisan
sponsorship, a balance of state oversight and Federal
uniformity, industry standard investor protections, and
workable funding caps.

Let's turn to the startup exemption--three entrepreneurs who have led
the charge in our Capitol for flexible provisions for crowdfunding:

We write to suggest that if you consider the House version
of the bill, you consider adding the following crucial
components:
1. Crowdfunding investing intermediaries that are SEC-
regulated to provide appropriate oversight.
2. All or nothing financing so that an entrepreneur must
hit 100 percent of his funding target, or no funds will be
exchanged.
3. State notification, rather than state registration, so
the states are aware of who is crowdfunding in their states.
This ensures they retain their enforcement ability while
creating an efficient marketplace.

These provisions are in the amendment we are considering and the
amendment they have endorsed.
Finally, we have SoMoLend, a peer-to-peer lending site. Here is their
commentary, where they say this amendment is:

. . . robust enough to provide guidance to a new industry,
but will also benefit the crowdfunding industry in the long-
term, as compared to a possible race to the bottom with a
``no regulatory'' approach. The disclosure and regulatory
requirements will provide adequate information to investors,
advising of risk but also deterring fraud.

It continues:

Again, this has long-term benefits to the industry as a
whole.

This hits at the heart of why these investor protections are so
important. Not only do they deter scams and fraud, not only do they
protect vulnerable investors, such as seniors and others, who have
little experience in the investing market, but they build a strong
capital formation market, a successful platform for capital formation,
a market that puts capital where citizens would like to put it--the
wisdom of the crowd, if you will--a market that allows good ideas to
rise to the top, a market that will create jobs now and in the future.
I urge my colleagues to support amendment No. 1884 to provide the
right balance of streamlining and investor protection.
I yield the floor and suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. REED. Madam President, I ask unanimous consent that the order for
the quorum call be rescind.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. REED. Madam President, I ask unanimous consent to speak up to 1
minute.
The PRESIDING OFFICER. Without objection, it is so ordered.

Amendment No. 1931

Mr. REED. Madam President, shortly, we will be voting on my
amendment, which will maintain the House's increase in the number of
shareholders at 2,000 in order to remain private. But what I do is
actually ensure that the shareholders are the real shareholders; that
there is not an intermediary holding the stock in the name of perhaps
literally hundreds of shareholders, but they are the real shareholders.
There has been some criticism about the affect it will have on ESOPs,
private funds, mutual funds, and others. We have been assured by legal
experts it doesn't affect any of these funds or entities.
In addition, the SEC has assured us that it, through rulemaking, can
clarify that ESOPs, mutual funds, private funds, and other entities
similar to these will not be affected. I believe if a company has 2,000
real shareholders, those shareholders should have access to routine
information on a regular basis, and that is the thrust of this
amendment.

Shareholder Threshold

Mrs. HUTCHISON. Madam President, one of the six components of the
House-passed JOBS Act is a measure I sponsored here in the Senate to
foster capital formation in the community banking industry. I
appreciate the support of Senator Toomey and twelve additional
cosponsors, including Senators Pryor, McCaskill and Bill Nelson. Our
bill would update the threshold before a bank must register its
securities with the Securities and Exchange Commission from 500
shareholders to 2,000. It is Title 6 in the JOBS Act before us today.
My colleague Senator Toomey has a bill contained in the JOBS Act as
well that would raise the shareholder threshold for all companies.
Senator Toomey's legislation is contained in Title 5 of the JOBS Act.
On this point, my understanding is that Sections 501 and 601 of the
JOBS Act address two distinct classes of issuers. One is a general
provision for all issuers other than banks and bank holding companies--
and the other one applies to banks and bank holding companies. I ask
the Senator, is this correct?
Mr. TOOMEY. Yes, that is my understanding. I thank Senator Hutchison
for all of her hard work on the bank shareholder bill, and for
clarifying this point.
Mrs. FEINSTEN. Madam President, I rise today in strong opposition to
the JOBS Act. Supporters of this bill insist it will help small
businesses looking to raise capital, but instead its primary effect
would be to strip away critical investor protections.
The House-passed bill applies to more than just small businesses. It
also exempts large corporations--those with annual revenues up to $1
billion--from important financial reporting requirements.
There are many good reasons why public companies are required to
undergo periodic examinations and disclose financial information, and
this bill undercuts those protections.
I remember the massive fraud and financial chicanery that led Enron
to intentionally shut down powerplants in California in order to pump
up profits. And all of us remember the lasting damage from the collapse
of the dot-com bubble.
Let me go over some of the problems with the House bill.
It would eliminate the requirement that many companies audit their
internal controls, a requirement put in place specifically in response
to the Enron debacle.
Companies with virtually no operating history could sell stock
directly to the public over the Internet without going through any
registered intermediary.
The bill has no meaningful protections to prevent investors' savings
from being wiped out on risky investments. Investors could bet 10
percent of their annual income on any one company, with no limit to how
much income or savings they could invest in

[[Page S1974]]

multiple companies' stock sold over the Internet with little financial
disclosure.
The JOBS Act would reduce the number of years of audited financial
statements that companies must publicly disclose.
It would abolish shareholder advisory votes on executive compensation
and golden parachutes.
And it would eliminate the disclosure requirement of CEO-to-median-
worker salary ratio required under the Dodd-Frank Wall Street Reform
Act.
It remains unclear why the supporters of the JOBS Act believe
disclosing executive compensation is an obstacle to companies going
public.
Under the JOBS Act, a fraudster could raise up to $1 million in small
increments from mom-and-pop investors without having to disclose any
significant financial or legal disclosures. Candidly, this could lead
to the greatest proliferation of get-rich-quick schemes in history.
It is a shame this process has unfolded in this manner and at this
breakneck speed. There are some merits to the underlying goal of the
bill.
Reducing compliance costs on actual small businesses seeking to go
public is a laudable goal. But instead of debating the issues, we are
rushing through this bill.
It is important to note that, even under the Sarbanes-Oxley law,
financial game-playing by big public companies has not gone away. This
bill would invite even more of that harmful activity, under the guise
of being good for the public marketplace.
Congress's recent track record on financial deregulation isn't very
good. In the past decade or so Congress has eliminated the Glass-
Steagall firewall between commercial and investment banking and
deregulated the over-the-counter derivatives market. We are still
paying for those mistakes.
I had hoped the Senate would be humbled by that experience. Instead,
we are rushing through changes to decades-old securities laws that
could have significant negative effects on investor protections.
I voted against the JOBS Act so we can take the time to truly
understand the ramifications of this bill for the marketplace, small
businesses, and investors.
Mrs. BOXER. Madam President, I wish to explain my opposition to H.R.
3606, a bill that would undermine regulation of our financial markets
and leave investors vulnerable to fraud.
The underlying spirit of this legislation is one that I support:
improving the ability of smaller companies, especially startups, to
raise capital. Small companies are essential to our economy, and it is
critical that they be able to raise capital efficiently. Our financial
regulations should be up-to-date and pragmatic, realistically
reflecting the size of new public companies in modern times, and new
methods of reaching out to potential investors.
However, I am deeply concerned that the bill goes too far in rolling
back investor protections. These rules were created for a reason, often
after hard lessons learned from scandals like Enron and WorldCom. They
protect ordinary people from losing their retirement savings to
corporate fraud and mismanagement, and help our markets function
efficiently, ensuring that investors of all types have meaningful and
accurate information. All companies benefit when investors have
confidence in the safety and fairness of the marketplace.
SEC Chair Mary Schapiro and SEC Commissioner Luis Aguilar have raised
concerns that this bill will hinder securities law enforcement and
reduce investor protection. Bloomberg News editorialized that it
``would be dangerous for investors and could harm already fragile
financial markets.'' The New York Times Editorial Board said this
legislation ``would undo essential investor protections, reduce market
transparency and distort the efficient allocation of capital.'' CalPERS
and CalSTRS have expressed concerns, as have Americans for Financial
Reform, AARP, AFL CIO, AFCSME, Consumer Federation of America, the Main
Street Alliance, the Sustainable Business Council, and many other well-
respected organizations.
It is a mistake to rush this important piece of legislation when the
possibility of a genuinely bipartisan compromise exists. The Reed-
Landrieu-Levin amendment, which was blocked by Senate Republicans
despite bipartisan support from 54 Senators, would have greatly
improved the bill. It would have allowed smaller companies to raise
capital more easily, without going as far as the underlying bill in
providing exemptions for companies with annual gross revenue of up to
$1 billion. I thank my colleagues for their efforts in drafting that
carefully balanced proposal.
I am pleased that the bipartisan Merkley-Bennet-Brown amendment
became part of the bill. It will allow companies to reach investors
through social media, but with sensible rules to reduce fraud and
provide meaningful regulatory oversight. Nevertheless, significant
investor protection problems remain in the other sections of the bill,
and I cannot support its passage.
I was also disappointed that reauthorization of the Export-Import
Bank, which was offered as an amendment by a group of bipartisan
cosponsors, was blocked by Senate Republicans.
The Ex-Im Bank keeps American businesses competitive worldwide,
especially in countries with challenging economic and political
conditions, and sustains American jobs in the process. The Bank's
investments helped to support 290,000 export-related American jobs last
year, including 21,025 in California. As the economic recovery
continues, now is not the time to take away this support and put our
companies at a disadvantage.
This bill clearly was rushed; this bill is risky for investors, and
that is why I voted no.
Mr. JOHNSON of South Dakota. Madam President, I rise today to express
my views on the bill that is before us--H.R. 3606--the Jumpstart Our
Business Startups Act. This bill is a package of measures intended to
increase capital formation a goal which I believe Democrats and
Republicans share. Banking Committee members on both sides of the
aisle, including Senators Schumer, Crapo, Tester, Vitter, Merkley,
Toomey, Bennet and Johanns, teamed up to introduce a number of
bipartisan legislation on this issue, and I commend them for their hard
work.
Small businesses are the engine of the American economy. Start-ups
and small businesses create a majority of new jobs, and they deserve
every opportunity to take an idea and turn it into an exciting, new
venture that could lead to the next great American company.
Investments are often necessary resources that allow start-ups and
small businesses to grow. Unfortunately, the recent trend is that fewer
emerging growth companies are entering the U.S. capital markets though
IPOs. According to the IPO Task Force, 92 percent of job growth
occurred after a company's IPO, so it makes sense to consider ways to
facilitate more IPOs in a manner that protects investors. There are
also novel ideas to help start-ups raise money over the Internet,
reaching out to their friends through social media and inviting them to
invest small amounts to help them grow their business.
So in considering these new ideas to spur job creation in a balanced
and thoughtful way, the Banking Committee held four hearings since last
summer. We heard a wide range of views on how best to modernize our
securities laws to allow new and growing companies to raise capital,
but in a way that does not undermine investor protections so that
people will still be willing to invest.
At our hearings and through our efforts to explore this subject,
members of the Banking Committee heard concerns about provisions in the
House bill before us from a number of experts, including the Chairman
of the Securities and Exchange Commission. One piece of the legislation
attempts to encourage more companies to pursue an IPO by creating a so-
called ``on-ramp.'' The House bill determines that companies under $1
billion in annual revenue should be exempt from disclosures for up to 5
years. Witnesses at the Banking Committee's hearings raised concerns
about whether this threshold is appropriate and accurately reflects
those companies that need relief most. The House bill contains a
provision to restrict the independence of accounting standard-setting
by the Financial Accounting Standards Board. For many years Congress
has debated whether we

[[Page S1975]]

should legislate accounting standards or leave it to the experts. I
remain unconvinced that interfering with the independence of FASB would
be an appropriate action for Congress to take or would inspire more
people to invest in IPOs.
It is also unclear that eliminating safeguards to reduce conflicts of
interest between stock research analysts and firms selling stock, as
the House bill does, will on the whole be beneficial. The absence of
such safeguards a decade ago led analysts to write conflicted stock
recommendations which too many Americans believed and relied upon to
invest, and ultimately lose, their money. Those misleading and
fraudulent stock recommendations caused many Americans to pull out of
the market and lose confidence in the integrity of the financial
system. We must closely monitor this area going forward.
Crowdfunding is a concept with potential, but I do not think that the
House bill provides appropriate oversight of the online funding
platforms to ensure that unsuspecting investors are not ripped off by
an online scam. Operators of online funding platforms are not required
to register with the SEC. While there is some information these
operators are required to share with regulators, it remains unclear if
this modest sharing of information will be sufficient for regulators to
monitor these new equity-raising platforms in the same way investments
on the stock market are monitored. The House bill needlessly limits the
involvement of State securities regulators to help the SEC oversee new
crowdfunding operations.
In response to these concerns on crowdfunding, I was pleased to
assist Senators Merkley, Bennet and others in crafting an alternative
approach that strikes a better balance between capital formation and
investor protection. The Merkley-Bennet amendment requires crowdfunding
companies to provide basic disclosures, including a business plan and
financial information to potential investors. It also requires
companies offering stock online to either register as a broker-dealer
with the SEC, or pursue a ``funding portal'' registration. This will
provide greater oversight than the House bill. Among other key
improvements, the Merkley-Bennet amendment provides for stronger
Federal-State oversight coordination, and it allows for properly scaled
investment limits as well as an aggregate investment cap across all
crowdfunded companies, further protecting investors. For these reasons
and more, I urge my colleagues to correct the weak House crowdfunding
title and join me in supporting the Merkley-Bennet amendment.
Another provision in the underlying House bill modernizes the
Regulation A threshold by raising the cap on how much money can be
raised in the capital markets without registering with the SEC. The
House bill transfers authority away from Congress by requiring the SEC
to review and potentially raise the threshold every 2 years. This has
the potential to preclude a rigorous public debate about when and why
the Regulation A threshold should be raised again.
The House bill would also expand the ability of companies to
advertise private offerings to accredited investors, referred to as
Regulation D. Some have raised concerns that there are not enough
protections for our seniors, who could be misled into investing in a
company without a full appreciation of the level of risk they are
taking on. This will also warrant close attention moving forward to
ensure seniors are not taken advantage of.
Finally, while I believe the current 500 Shareholder Rule should be
updated, it is unclear if the House approach to dramatically raise the
threshold to 2,000 shareholders of record is a balanced approach. A
more modest increase seems more appropriate to balance investor
protection and transparency with capital formation.
Throughout this process I have sought to help address needed investor
protections in a thoughtful manner while helping to support
entrepreneurs, grow small businesses, and put Americans back to work.
But I did not write the underlying House bill before us today, and I
was pleased to help support my colleagues in drafting the Senate
substitute amendment. I believe the Senate substitute addresses each of
the concerns I raised. I am disappointed more of my colleagues did not
support this alternative that would have increased protections for
investors.
That said, no piece of legislation is perfect, and this bill contains
innovative new solutions that have the potential to boost the economy.
Small businesses and startups deserve the opportunity to test these new
ideas, but Congress has chosen to act quickly.
The House bill received 390 votes in the House, including most House
Democrats, and the President and the Majority Leader support it. So
despite my misgivings over a number of these provisions, I will support
my Leader and the President and vote for this legislation.
That said, we must all keep an eye on the effects of these changes as
we plow this new ground. As lawmakers, we seek out the appropriate
balance in writing laws, doing our best to promote a strong economic
recovery while protecting the public from abuse and fraud which would
undermine the confidence in our financial system.
While I will support this underlying package today, I believe we all
have a shared responsibility to ensure that going forward the new
changes that we pass today will truly benefit, and not undermine, both
start-ups and investors alike.
Mr. BAUCUS. Madam President, in Taming of the Shrew, William
Shakespeare wrote:

There is small choice in rotten apples.

I am here to talk about the choice we have this afternoon, on voting
for final passage of H.R. 3606.
Over the past week, the Senate has been debating a bill the House has
called the JOBS Act. But as former Securities and Exchange Commission
chief accountant Lynn E. Turner said recently:

It won't create jobs, but it will simplify fraud.

I fully support finding ways to help the private sector create good-
paying jobs.
Last year, I worked with my colleagues on both sides of the aisle to
pass the Vets Jobs bill, cutting taxes for small businesses while
helping veterans get back to work. This Chamber also passed three free
trade agreements, setting the stage to increase American exports to
Korea, Colombia, and Panama by an estimated $13 billion a year,
resulting in tens of thousands of new jobs. And just last week, the
Senate passed overwhelmingly the highway bill, which will create and
sustain more than 14,000 American jobs per year.
But our choice today leaves much to be desired. While this bill
includes some very positive changes to enhance and encourage small
business investment, it includes several rotten apples that roll back
important investor protections and put the integrity of our markets
into question.
So quickly we forget the past. Just over a decade ago, a company
called Enron revealed one of the largest corporate and accounting
scandals of our time. We all remember the stories of documents
shredded, shell companies, exaggerated profits, and lax accounting
rules.
Within 1 month, shareholders lost nearly $11 billion as Enron stock
plummeted. Families and employees lost their entire savings in a matter
of days. Investor confidence in the entire system evaporated.
Just a few years earlier, the dot-com boom hit a fever pitch. Wall
Street firms worked frantically to put together initial public
offerings for fledgling Internet companies. At the same time, these
firms would agree to release upbeat research reports supporting the
upcoming IPO in exchange for the company's underwriting business.
Unassuming investors relied on this public research touting the IPOs,
while firms failed to fully disclose the inherent conflicts of
interest.
Congress and the Securities and Exchange Commission responded to
these scandals by putting investor protections in place to restore
confidence in the markets and ensure companies provide comprehensive
and honest information to the public. Thanks to these protections,
investors no longer have to wonder whether the accounting and auditing
disclosures are, in fact, independent and accurate. We can't afford to
go backward.
Still, these rules are not perfect. Congress should be looking at
ways to

[[Page S1976]]

ensure small businesses are given a level playing field.
I hear from Montana small businesses that rules under the Sarbanes-
Oxley Act can be costly and time-consuming for small companies which
simply lack capacity to handle the extra regulation. I agree we must
also look at what these rules may be doing to hamper growth of U.S.
small businesses. But we should not forget the past. We should not
exempt big business carte blanche without fully discerning the
implications.
There are several pieces of this legislation with which I agree. I
commend my colleague and friend from the State of Montana, Senator
Tester, for his tireless effort to address legitimate concerns with the
current cap on small business public offerings.
Senator Tester introduced his bipartisan measure after meeting and
talking to growing companies in Montana and elsewhere that could
benefit greatly from raising the cap on regulation A small public
offerings. Rob Bargatze, founder and CEO of Ligocyte, in Bozeman, MT,
and chairman of the Montana Bioscience Alliance, testified in the
Banking Committee last year on ideas to improve access to capital for
the emerging bio industry.
Rob rightly points out that the current $5 million cap ``does not
allow for a large enough capital influx for companies to justify the
time and expense necessary to satisfy even the relaxed offering and
disclosure requirements.'' Senator Tester has done extraordinary work
to shepherd this bill forward. It received considerable support in the
House, and was included in the Senate substitute amendment that I
supported on Tuesday.
However, this straightforward update to regulation A has been folded
into a broader House package. This package includes enough rotten
apples to spoil the whole bunch. The House fails to take heed of past
history. This bill goes too far in relaxing investor protections
critical to preserving the integrity and transparency our markets
depend on to function.
For example, this bill includes a new IPO process to exempt companies
from many SEC rules for a period of 5 years. The idea is to give small
emerging companies time to comply with new auditing and reporting
requirements. However, the House bill applies to all offerings by
companies with sales less than $1 billion. At this level, even the very
large, well-established companies will have a free pass for 5 years
before complying with the very rules put in place to protect investors
and the markets from another Enron-type scandal.
Furthermore, the House creates a gaping hole in the rules set up
after the dot-com bubble to prevent an underwriting bank from
publishing research reports in support of the upcoming IPO. The House
bill would now allow underwriting banks to issue such research to
unsuspecting investors. And it limits the company's responsibility to
make sure such research is accurate and comprehensive.
We have seen too many examples lately of what can happen when we
don't protect the little guys from Wall Street greed--just look at how
MF Global took advantage of Montana ranchers, and that is when there
were rules in place. We can't afford to go back to the days when Enron
was able to swindle thousands of Americans out of their life savings.
I appreciate the work of my colleagues on this matter, but we owe it
to American workers and families to see to it that this bill preserves
investor confidence and integrity in our markets.
I simply cannot support the House package containing so many bad
apples.
The PRESIDING OFFICER. Under the previous order, all postcloture time
has expired.
The question is on agreeing to the Reed amendment No. 1931.
The amendment (No. 1931) was rejected.
The PRESIDING OFFICER. Under the previous order, the motion to
reconsider is considered made and laid upon the table.

Amendment No. 1884

Under the previous order, there will now be 2 minutes of debate
equally divided prior to a vote in relation to the Merkley amendment
No. 1884.
Who yields time?
The Senator from Oregon.
Mr. MERKLEY. Madam President, I have 1 minute?
The PRESIDING OFFICER. The Senator is correct.
Mr. MERKLEY. Colleagues, I want to encourage you to adopt amendment
No. 1884. The House bill, as it came to us, on crowdfunding is a
pathway to predatory scams. It requires no information to be provided
by a company; and if the company provides information, it requires no
responsibility or accountability for the accuracy of that information.
It allows companies to hire people to pump the stocks, which is exactly
what we all know, from pump-and-dump schemes, is very devastating to
any sort of solid financial foundation for capital aggregation, capital
formation.
I want to applaud my colleagues Senator Bennet, Senator Landrieu, and
Senator Brown of Massachusetts, who have worked together to bring this
bipartisan amendment forward. It provides the right amount of
streamlining for the companies, the right amount of streamlining for
portals on the Internet, and the right set of investor protections,
information, and accountability necessary to make crowdfunding fulfill
the exciting potential it has.
I thank the Chair.
The PRESIDING OFFICER. The Senator's time has expired.
Who yields time in opposition?
Mr. KYL. I yield back.
The PRESIDING OFFICER. All time is yielded back.
The question is on agreeing to amendment No. 1884.
The yeas and nays have been ordered.
The clerk will call the roll.
The legislative clerk called the roll.
Mr. KYL. The following Senator is necessarily absent: the Senator
from Illinois (Mr. Kirk).
The PRESIDING OFFICER. Are there any other Senators in the Chamber
desiring to vote?
The result was announced--yeas 64, nays 35, as follows:

[Rollcall Vote No. 54 Leg.]

YEAS--64

Akaka
Baucus
Begich
Bennet
Bingaman
Blumenthal
Blunt
Boxer
Brown (MA)
Brown (OH)
Cantwell
Cardin
Carper
Casey
Coats
Cochran
Collins
Conrad
Coons
Cornyn
Durbin
Feinstein
Franken
Gillibrand
Grassley
Hagan
Harkin
Hutchison
Inouye
Johnson (SD)
Kerry
Klobuchar
Kohl
Landrieu
Lautenberg
Leahy
Levin
Lieberman
Manchin
McCaskill
Menendez
Merkley
Mikulski
Moran
Murkowski
Murray
Nelson (NE)
Nelson (FL)
Pryor
Reed
Reid
Rockefeller
Sanders
Schumer
Shaheen
Snowe
Stabenow
Tester
Udall (CO)
Udall (NM)
Warner
Whitehouse
Wicker
Wyden

NAYS--35

Alexander
Ayotte
Barrasso
Boozman
Burr
Chambliss
Coburn
Corker
Crapo
DeMint
Enzi
Graham
Hatch
Heller
Hoeven
Inhofe
Isakson
Johanns
Johnson (WI)
Kyl
Lee
Lugar
McCain
McConnell
Paul
Portman
Risch
Roberts
Rubio
Sessions
Shelby
Thune
Toomey
Vitter
Webb

NOT VOTING--1

Kirk

The amendment (No. 1884) was agreed to.
The PRESIDING OFFICER. Under the previous order, the motion to
reconsider is considered made and laid upon the table.
The question is on the engrossment of the amendment and third reading
of the bill.
The amendment was ordered to be engrossed and the bill to be read a
third time.
The bill was read the third time.
The PRESIDING OFFICER. Under the previous order, there will now be 2
minutes of debate, equally divided, prior to a vote on passage of H.R.
3606, as amended.
The Senator from Rhode Island.
Mr. REED. Madam President, the House bill has some very promising
concepts about providing access to capital. What it fails to do is
adequately protect investors.
We have tried, through our alternative, to protect investors. That
alternative has been rejected on a cloture vote by the Senate. We have
made some improvements with the Merkley proposal, but we are not quite
to the point yet where I think we can be confident that investors will
be protected.

[[Page S1977]]

As such, I think we should vote against this legislation, and that we
should in fact try again and get it right. That is why the head of the
Securities Exchange Commission opposes this, and the state securities
regulators, and former heads of the Securities Exchange Commission, and
the Council of Institutional Investors, and many others.
We are opening up vast loopholes in our securities laws without
adequate disclosure for investors. I think we will regret this vote.
The PRESIDING OFFICER. The Senator from Pennsylvania.
Mr. TOOMEY. Madam President, I claim the time in support of the
legislation.
I suggest that we are on the verge of doing something very
constructive for our economy, for small businesses, and for job growth,
and it might be one of the most constructive things we are going to do
this year in that area.
This legislation makes it easier and more affordable for young and
growing companies to go public, to raise the capital they need to grow,
to hire more workers. It also actually makes it easier for those who
want to remain private and to attract more investors, and to do so
without triggering the very onerous and expensive regulations attendant
to being a public company.
This is going to create more jobs and more growth in the economy.
That is why it passed the House with a vote of 390 to 23. That is why
the President of the United States has endorsed this bill and said he
will sign it into law. That is why there are dozens and dozens of
organizations and groups and companies and trade associations that
support this legislation, so that we can do something right here, right
now, today, that the President will sign into law, which will help
small and growing companies raise the capital they need to grow.
I urge my colleagues to vote yes.
The PRESIDING OFFICER. The question is, Shall the bill, as amended,
pass?
Mr. INHOFE. I ask for the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second?
There appears to be a sufficient second.
The clerk will call the roll.
The assistant bill clerk called the roll.
Mr. KYL. The following Senator is necessarily absent: the Senator
from Illinois (Mr. Kirk).
The PRESIDING OFFICER (Mrs. McCaskill). Are there any other Senators
in the Chamber desiring to vote?
The result was announced--yeas 73, nays 26, as follows:

[Rollcall Vote No. 55 Leg.]

YEAS--73

Alexander
Ayotte
Barrasso
Bennet
Bingaman
Blunt
Boozman
Brown (MA)
Burr
Cantwell
Carper
Casey
Chambliss
Coats
Coburn
Cochran
Collins
Coons
Corker
Cornyn
Crapo
DeMint
Enzi
Graham
Grassley
Hagan
Hatch
Heller
Hoeven
Hutchison
Inhofe
Inouye
Isakson
Johanns
Johnson (SD)
Johnson (WI)
Kerry
Klobuchar
Kohl
Kyl
Lee
Lieberman
Lugar
Manchin
McCain
McCaskill
McConnell
Menendez
Moran
Murkowski
Nelson (NE)
Nelson (FL)
Paul
Portman
Pryor
Reid
Risch
Roberts
Rubio
Schumer
Sessions
Shaheen
Shelby
Snowe
Stabenow
Tester
Thune
Toomey
Udall (CO)
Vitter
Warner
Wicker
Wyden

NAYS--26

Akaka
Baucus
Begich
Blumenthal
Boxer
Brown (OH)
Cardin
Conrad
Durbin
Feinstein
Franken
Gillibrand
Harkin
Landrieu
Lautenberg
Leahy
Levin
Merkley
Mikulski
Murray
Reed
Rockefeller
Sanders
Udall (NM)
Webb
Whitehouse

NOT VOTING--1

Kirk

The bill (H.R. 3606), as amended, was passed.

____________________