[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE JOBS ACT: IMPORTANCE OF PROMPT IMPLEMENTATION FOR ENTREPRENEURS,
CAPITAL FORMATION, AND JOB CREATION

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

JOINT HEARING

before the

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND
BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

of the

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

and the

SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES

of the

COMMITTEE ON FINANCIAL SERVICES
U.S HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

SEPT 13, 2012

__________

Printed for the use of the Committees on Oversight and Government
Reform and Financial Services

Committee on Oversight and Government Reform
Serial No. 112-182
Committee on Financial Services
Serial No. 112-156

Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform

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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana ELIJAH E. CUMMINGS, Maryland,
JOHN L. MICA, Florida Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee PETER WELCH, Vermont
JOE WALSH, Illinois JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida JACKIE SPEIER, California
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania
VACANCY

Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Robert Borden, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director

Subcommittee on TARP, Financial Services and Bailouts of Public and
Private Programs

PATRICK T. McHENRY, North Carolina, Chairman
FRANK C. GUINTA, New Hampshire, MIKE QUIGLEY, Illinois, Ranking
Vice Chairman Minority Member
ANN MARIE BUERKLE, New York CAROLYN B. MALONEY, New York
JUSTIN AMASH, Michigan PETER WELCH, Vermont
PATRICK MEEHAN, Pennsylvania JOHN A. YARMUTH, Kentucky
JOE WALSH, Illinois JACKIE SPEIER, California
TREY GOWDY, South Carolina JIM COOPER, Tennessee
DENNIS A. ROSS, Florida
HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice MICHAEL G. FITZPATRICK,
Chairman Pennsylvania
PETER T. KING, New York LYNN A. WESTMORELAND, Georgia
EDWARD R. ROYCE, California BLAINE LUETKEMEYER, Missouri
FRANK D. LUCAS, Oklahoma BILL HUIZENGA, Michigan
RON PAUL, Texas SEAN P. DUFFY, Wisconsin
DONALD A. MANZULLO, Illinois NAN A. S. HAYWORTH, New York
WALTER B. JONES, North Carolina JAMES B. RENACCI, Ohio
JUDY BIGGERT, Illinois ROBERT HURT, Virginia
GARY G. MILLER, California ROBERT J. DOLD, Illinois
SHELLEY MOORE CAPITO, West Virginia DAVID SCHWEIKERT, Arizona
SCOTT GARRETT, New Jersey MICHAEL G. GRIMM, New York
RANDY NEUGEBAUER, Texas FRANCISCO ``QUICO'' CANSECO, Texas
PATRICK T. McHENRY, North Carolina STEVE STIVERS, Ohio
JOHN CAMPBELL, California STEPHEN LEE FINCHER, Tennessee
MICHELE BACHMANN, Minnesota FRANK C. GUINTA, New Hampshire
KEVIN McCARTHY, California
STEVAN PEARCE, New Mexico
BILL POSEY, Florida

Subcommittee on Capital Markets and Government Sponsored Enterprises

SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
Chairman Member
PETER T. KING, New York GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
JOHN CAMPBELL, California ED PERLMUTTER, Colorado
KEVIN McCARTHY, California JOE DONNELLY, Indiana
STEVAN PEARCE, New Mexico ANDRE CARSON, Indiana
BILL POSEY, Florida JAMES A. HIMES, Connecticut
MICHAEL G. FITZPATRICK, GARY C. PETERS, Michigan
Pennsylvania AL GREEN, Texas
NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois
FRANCISCO ``QUICO'' CANSECO, Texas

C O N T E N T S

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Page
Hearing held on September 13, 2012............................... 1

WITNESSES

Mr. Rory Eakin, Co-Founder and Chief Operating Officer, Circle Up
Oral Statement............................................... 9
Written Statement............................................ 12
Ms. Alison Bailey Vercruysse, Founder and Chief Executive
Officer, 18 Rabbits
Oral Statement............................................... 16
Written Statement............................................ 18
Mr. Jeffrey Van Winkle, Treasurer, National Small Business
Administration
Oral Statement............................................... 20
Written Statement............................................ 22
Mr. Robert B. Thompson, Peter P. Weidenbruch Jr. Professor of
Business Law, Georgetown University Law Center
Oral Statement............................................... 38
Written Statement............................................ 40
Mr. Naval Ravikant, Co-Founder, AngelList
Oral Statement............................................... 51
Written Statement............................................ 53

APPENDIX

Independent Community Bankers of America, Key Jobs Act Provision
Must Be Addressed to Benefit Thrifts........................... 76
Letter to Elizabeth M. Murphy commenting on the Commission's
pending rulemaking under Section 201(a)(1)..................... 78

JOINT HEARING ON THE JOBS ACT: IMPORTANCE OF PROMPT IMPLEMENTATION FOR
ENTREPRENEURS, CAPITAL FORMATION, AND JOB CREATION

----------

Thursday, September 13, 2012,

House of Representatives,
Committee on Oversight and Government Reform's
Subcommittee on TARP, Financial Services and
Bailouts of Public and Private Programs joint with
the
Committee on Financial Services' Subcommittee on Capital
Markets and Government Sponsored Enterprises
Washington, D.C.
The subcommittees met, pursuant to call, at 10:00 a.m. in
room 2154 Rayburn House Office Building, Hon. Patrick McHenry
[chairman of the Subcommittee] presiding.
Present: Representatives McHenry, Issa, Bachus, Garrett,
Schweikert, Neugebauer, Pearce, Posey, Hayworth, Hurt, Stivers,
Dold, Canseco, Fincher, Waters, Lynch, Maloney, Himes, Green,
Eakin, Quigley, Ravikant, and Thompson.
Staff Present: Will L. Boyington, Staff Assistant; Molly
Boyl, Parliamentarian; Lawrence J. Brady, Staff Director; John
Cuaderes, Deputy Staff Director; Brian Daner, Counsel; Linda
Good, Chief Clerk; Peter Haller, Senior Counsel; Ryan M.
Hambleton, Professional Staff member; Christopher Hixon, Deputy
Chief Counsel, Oversight; Laura L. Rush, Deputy Chief Clerk;
Rebecca Watkins, Press Secretary; Ashley Etienne, Minority
Director of Communications; Carla Hultberg, Minority Chief
Clerk; Adam Koshkin, Minority Staff Assistant; Lucinda Lessley,
Minority Policy Director; Brian Quinn, Minority Counsel; Safiya
Simmons, Minority Press Secretary; and Davida Walsh, Minority
Counsel.
Mr. McHenry. The Committee will come to order.
This is a joint Subcommittee hearing of both the
Subcommittee on Oversight and Government Reform for TARP,
Financial Services, and Bailouts of Public and Private Programs
and the Subcommittee on Financial Services on Capital Markets
and Government Sponsored Enterprises.
This hearing is entitled: The JOBS Act, importance of
prompt implementation for entrepreneurs, capital formation, and
job creation.
We have a tradition on the Oversight and Government Reform
Committee to read our mission statement, our Committee's
mission statement: we exist to secure two fundamental
principles. First, Americans have a right to know that the
money Washington takes from them is well spent. Second,
Americans deserve an efficient, effective Government that works
for them.
Our duty on the Oversight and Government Reforms Committee
is to protect these rights. Our solemn responsibility is to
hold Government accountable to taxpayers, because taxpayers
have a right to know what they get from their Government. We
will work tirelessly in partnership with citizen watchdogs to
deliver the facts to the American people and bring genuine
reform to bureaucracy. This is the mission statement of the
Oversight and Government Reform Committee.
Because this is a joint Subcommittee, we are happy to be
with my colleagues Scott and Mike and Maxine for this hearing
today.
I will now recognize myself for five minutes for the
purposes of an opening statement.
Current economic and jobs numbers remind us that the U.S.
labor market continues to face unprecedented challenges. The
unemployment rate has remained over 5 percent for 43
consecutive months, and nearly 24 million Americans are
unemployed or under-employed. To effectively address our
sluggish economic recovery, the House Oversight and Government
Reform Committee and the Financial Services Committee have
identified outdated securities regulations that limit job
growth and access to capital, which is the lifeblood of our
economy.
Our efforts come together in an overwhelmingly bipartisan
bill known as the JOBS Act, which the President signed into law
this April. Today's joint Subcommittee hearing represents
continuing efforts by both Subcommittees to examine obstacles
faced by entrepreneurs and small businesses and allow the JOBS
Act to advance capital formation and facilitate public
offerings.
Supported by every member of both Subcommittees, which is
let's just say rare in this Congress, the JOBS Act has clear-
cut intentions, and that is to revitalize the creation and
growth of American small businesses.
So while Congresses intentions made and clearly stated in
the legislation, several sections provide the SEC authority to
promulgate rules and regulations in a timely fashion.
Unfortunately, the SEC chairman has already abandoned her
commitment to finish the Act's first deadline and most
straightforward provision, which is lifting the ban on general
solicitation to accredited investors, which is title two of the
bill.
And although the SEC chairman has compared the recent
regulatory delays of the JOBS Act to the regulatory delays of
Dodd-Frank, the truth is that they are dramatically different.
They are worlds apart. Dodd-Frank mandates 95 rulemakings, many
of which concerned issues that are foreign to the Securities
and Exchange Commission. In particular, extracted industries
and conflict minerals.
In comparison, the JOBS Act simply looks at reforms that
lie at the core of the Commission's expertise. So while the
Dodd-Frank rules require careful and deliberate speed, the JOBS
Act should be seen as a walk in the park for the SEC.
Having authored the original crowdfunding title of the JOBS
Act, I'm concerned the SEC's habitual 11th hour decision defies
the bipartisan foundation of the entire legislation and may
even stymie capital formation for small businesses altogether.
This would be a tragedy for a bill whose only motive is to
promote capital formation and unlock opportunities and
information for investors and job creators.
Currently, there is a real chance that our entrepreneurs
and innovators could lose their competitive advantage simply
due to outdated securities laws. However, after recognizing
efforts of Chairman Garrett, Ranking Member Quigley and Waters
to modernize our Nation's securities laws, I am confident that
our Committee can continue to promote policies that ensure the
United States never becomes complacent about its environment
for startups and innovation, and I believe that the JOBS Act is
a first step in the right direction, but only if it is
implemented correctly.
I thank our witnesses for attending today's hearing. Each
of them is respected in the field of capital formation and
securities laws or particularly in the creation of granola. So
we are grateful for the witnesses today.
With that, I would like to yield the balance of my time to
the full Committee Chair of the Oversight and Government Reform
Committee, Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman. My goal in a short
opening statement is, first of all, to thank you for your
leadership on this. This is a joint committee hearing, a joint
committee hearing for the reason that is pretty clear:
Financial Services and Oversight have both worked tirelessly to
try to be an active part of job creation. Our Committee and the
Financial Services Committee both were involved in Dodd-Frank
and both were involved in the JOBS Act.
Your earlier statement is exactly right: Dodd-Frank has
been put in front of the JOBS Act. The SEC Chairwoman, in
fairness, got Dodd-Frank first, but, in fact, since Congress
got Dodd-Frank wrong she is having a difficult time
implementing it. It is our opinion, and I believe today's
hearings will show, that the creation of private sector jobs
should come before the creation of new bureaucratic
organizations, no matter how well meaning, in Washington.
More importantly, it is clear that many of the aspects of
the JOBS Act are long overdue, and, if implemented, would have
given a signal to the private sector that business was now
again a priority. I commend the President for his quick signing
of it, his ceremony, his statement, but, unfortunately, rose
garden ceremonies do not take the place of actual
implementation or allowing the private sector to create jobs.
In closing, Mr. Chairman, I believe we understand that if
Government grows it may create private sector jobs by spending
taxpayers' dollars, but only through private sector job growth
will tax revenue close the deficit we already have.
With that, I thank the Chairman and yield back.
Mr. McHenry. Thank you, Mr. Chairman.
With that, I will yield to the Ranking Member, the
gentleman from Illinois, Mr. Quigley, for five minutes.
Mr. Quigley. Thank you, Mr. Chairman. I thank you Chairman
McHenry and Chairman Garrett for holding today's hearing on
implementation of the JOBS Act. I'm also pleased to be joined
by my colleagues on the Financial Services Committee Capital
Markets Subcommittee, including Congressman Waters, the Ranking
Member. This is the Subcommittee's third hearing on the
implementation of the JOBS Act.
As you know, the JOBS Act was passed with bipartisan
support and signed into law by President Obama on April 5,
2012. The act amends Federal securities laws and regulations to
make it easier for small business and startups to raise
capital. Under title three of the JOBS Act, for example,
startups will be able to raise capital through crowdfunding.
This is a big step forward toward innovation and job creation
in this country, and I commend the President and Chairman
McHenry for working together on this issue.
I am just as eager as my colleagues at the SEC to meet the
aggressive rulemaking deadline set in the JOBS Act. I am also
eager for the SEC to finish its rulemaking under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, which was
passed by Congress back in 2010. The Dodd-Frank Act, once fully
implemented, will roll back the perverse incentives that cause
financial firms to become too big to fail. It establishes the
stronger provincial regulation, closing many of the loopholes
that allow Wall Street to engage in excessive risk-taking.
Especially pertinent to the SEC, Dodd-Frank takes steps to
eliminate serious conflicts of interest at credit rating
agencies. Their inflated ratings of poorly underwritten
mortgage-backed securities directly contributed to the
financial crisis. I believe it is important that the SEC
implement the provisions of both the JOBS Act and the Dodd-
Frank Act in a timely manner. However, it is also important
that implementation is not rushed and that the SEC gives
appropriate consideration to the impact on investor protection.
Rushed implementation of the JOBS Act could result in
greater risk of fraud and harm to investors and that would
ultimately defeat the act's intended purpose of increasing
access to capital for business. In the long term, investors
must have confidence in the integrity of U.S. capital markets,
and that requires SEC rules and enforcement to prevent fraud
from corrupting the new methods of raising capital.
In June the Oversight Committee held a two-part hearing on
implementation of the JOBS Act. As I said at that hearing, just
as clean water standards keep our water safe to drink,
financial regulations protect us against unsafe financial
products.
The SEC has a dual mission to facilitate capital formation
and protect investors, and I believe that those must be equal
priorities going forward.
There is also no reason that the JOBS Act should be
prioritized in front of the pending Dodd-Frank rulemaking. The
same standards should apply equally to all of SEC's rulemakings
that are required by law. Rushed, haphazard implementation of
either act is unacceptable. And so, while I urge the SEC to
move forward expeditiously, I also urge the Commission to
ensure both of its important missions are met.
Thank you, Mr. Chairman. I yield back.
Mr. McHenry. I thank the Ranking Member.
I will now yield five minutes to the Subcommittee Chairman
on Capital Markets, Mr. Garrett, my good friend and wise
friend.
Mr. Garrett. Thank you, Mr. Chairman. I appreciate you and
your staff for your collaboration with the Capital Markets
Subcommittee on this very important hearing today.
Having this hearing as a joint subcommittee between two
authorizing committees should show both the SEC and the
American public the importance and the priority of this issue.
Now, I, likewise, recently learned that the SEC, after missing
its initial 60-day requirement for implementation of the
general solicitation part of this bill, had again delayed
implementation. This was even after the staff had proposed
moving forward with the interim final rule.
You know, this type of delay on what is really a pretty
simple, straightforward requirement from Congress is
unacceptable. The rulemaking process is not setting up a
regulatory framework for a multi-trillion dollar derivatives
market; it is, however, on a topic that has been around for a
long time, and is well known by the SEC and by market
participants. This is both extremely disturbing, and I expect
and hope that the SEC will move forward to finalizing this rule
in the near future.
Now, earlier this year Congress passed the JOBS Act. This
legislation would ensure that overburdensome regulation does
not strangle innovation and job creation. Specifically, the
JOBS Act would ease the burden on capital formation on
entrepreneurs and growth companies. In addition, the
legislation would provide a larger pool of investors with
access to information and investment options.
So with venture capital fundraising stagnant now in this
Country and initial public offerings, IPOs, market basically
closed off, innovative startup companies who cannot access the
capital markets they need to grow have been forced to delay
research on medical technologies, scientific technological
breakthroughs. That has hurt everyone--the economy, our global
competitiveness. You know, developing medical cures to help
people live longer, healthier lives requires capital.
Developing technology to improve the speed of communication
requires capital. Developing alternative energy technologies to
reduce our dependence on fossil fuels requires capital.
So the implementation of the JOBS Act will provide these
startup companies with a cost-effective means to acquire
startup capital and keep the Country at the forefront of
medical, scientific and technological breakthroughs.
So with our Nation still struggling with persistent high
unemployment, it is essential, Mr. Chairman, that the
bipartisan JOBS Act implementation becomes a high priority for
the SEC to be done in the near future.
With that, I yield now to the gentleman from Alabama, the
chairman of the full Financial Services Committee.
Mr. Bachus. I thank Chairman Garrett and Chairman McHenry
for holding this joint subcommittee hearing to review the
implementation of the JOBS Act.
The JOBS Act was a victory for job creation and for job
creation in small businesses. Let's not tarnish this victory
with regulatory red tape that stifles the innovation, economic
growth, and job creation that is intended by this bill.
As Chairman of the Financial Services Committee, I am proud
of this legislation, comprised of six pieces of legislation
that originated in our Committee and passed our Committee with
overwhelming bipartisan support. The JOBS Act is proof that
when we put our minds together, Republicans and Democrats can
work together, find common ground, and help small businesses,
which are the growth engine of our economy.
In previous economic recoveries, nearly 65 percent of new
jobs were created by small businesses. That is not the case
today, however. What we are seeing now is that almost all job
growth, such as it is, comes from small corporations. Small
businesses are not growing for two reasons. Owners and
entrepreneurs tell us that the first reason is excessive
regulation, almost all of it coming from Washington. A second
reason is lack of capital. When these regulations consume too
much of our time, energy, and finances, capital is even more
critical.
In the JOBS Act we removed some of the unnecessary and
outdated Depression Era job barriers to capital formation so
entrepreneurs have more freedom to access capital, hire
workers, and grow their businesses.
Unfortunately, the SEC has already missed three JOBS Act
deadlines, and we are here today to discuss how important
prompt implementation of the JOBS Act is to our economic
recovery. The JOBS Act was a positive step taken by Congress
and the Administration to promote capital formation. It should
be implemented by the SEC without further delay.
With each job report, it becomes more urgent. American
innovation and job creation must not be stifled by slow-moving
government bureaucracy.
At this time, Subcommittee Chairmen McHenry and Garrett, I
would like to introduce some of the younger Members to a former
colleague of ours, Congressman Chip Pickering, who is seated in
the first row. Chip was a senior staffer and served in this
Body with distinction for several years.
I am just sorry that some of the younger Members didn't
have an opportunity to serve with you, Chip. We welcome you
back to Congress where you are so well thought of.
Thank you, Chairmen McHenry and Garrett.
Mr. McHenry. Thank you, Mr. Chairman.
We will now recognize the Ranking Member of the Capital
Markets Subcommittee, Ms. Waters of California.
Ms. Waters. Thank you very much.
Normally we start out testimony by thanking the Chair for
holding the hearing. I won't be doing that this morning because
I basically believe that this hearing is not necessary.
I think that what we wouldn't see is what gets in the way
of bipartisan efforts. As a matter of fact, each of our members
this morning have talked about how we cooperated to get the
JOBS bill passed, and we did. I reluctantly supported the act
with the hope that it would help facilitate capital formation
and create jobs, but I think this kind of attack on the SEC and
the kind of accusations that are being made does not help us to
foster bipartisan support for other efforts.
I expressed some concerns about particular provisions in
the act, including the elimination of the walls between
investor banking and research, the expansive definition of
emerging growth companies, and increasing sanctions for
provisions punitively by Sarbanes-Oxley and Dodd-Frank.
I understand that today we are going to focus on some
aspects of the JOBS Act that requires SEC rulemaking before
they can become effective. Some of my colleagues on the other
side of the aisle will criticize the Commission for not just
rushing through the process and putting a finalized rule into
place before any public comment. Apparently, being upset that
the SEC missed a deadline. There are rules that were supposed
to come out in July 2012.
I guess I would have more sympathy or concern if I didn't
also see a push to delay other rulemaking by the SEC, because,
while there are complaints about slow rulemaking on a provision
that would relax industry regulation, what I also find is there
have been attempts to delay by passing legislation to delay any
of the rulemaking for two years, asking regulators to re-
propose the bulk of the rules which were also due in July and
trying to buy the SEC down by an additional cost-benefit
requirement, while not supporting an increase in the budget.
Now, again, I voted for the JOBS Act and I want to see it
get implemented, but complaints about the slow pace of
rulemaking under the act are simply unreasonable given these
facts that I have highlighted. I am pleased that the SEC is
taking public comment of the proposed rule eliminating the ban
on general solicitation and advertising under title two of the
JOBS Act. I had an amendment to that title which required that
issuance of securities using reasonable steps to verify that
the purchasers of the securities were, in fact, accredited
investors or individuals or entities that are supposedly
sophisticated and not in need of protection. Given that the
general solicitation ads have been around for decades, and
given that many stockholders had questions on how to implement
my amendment, it is appropriate occurred that the public had
the opportunity to comment on this provision.
After considering the SEC proposal, I am disappointed that
it didn't require more robust verification procedures on behalf
of issuers, and the Commission also should have considered the
many suggestions offered by investor advocates and other
stakeholders for additional measures that would decrease fraud
in these expanded offerings.
I would make sure that as the SEC implements these
provisions they are putting equal focus on all facts of their
mission, including not just facilitating capital formation, but
also protecting investors and maintaining market integrity.
I look to explore that with our witnesses here today, and I
will yield time to the gentleman from Connecticut.
Mr. Himes. I thank the Ranking Member and I just want to
add my observation. I will tell you in a moment of a hall of
mirrors, and this is truly a hall of mirrors.
I have been listening since the Dodd-Frank passage to
Republicans complaining constantly daily, weekly, monthly that
we should delay the implementation of the regulations that are
there to keep Americans--delay, we should reverse it. Now here
we are saying that the SEC, in language, frankly, which is not
promotive of the kind of comity we would have on Capital Hill,
saying that the SEC should do it faster. I heard the Chairman
of this Committee say that this should be a walk in the park.
At the core of what we are talking about is protecting American
investors from risky securities.
I supported the JOBS Act. I worked very hard on the JOBS
Act. But we are talking about protecting not just those
investors, but the integrity of our critical capital markets.
The Chairman of the Government Reform Committee said we should
put the creation of new jobs ahead of creating new regulations.
That is actually a novel idea.
The military, when something goes wrong they do something
called a stand-down, where they figure out what went wrong and
how to proceed with prudence and deliberation. The private
sector, whether it is new Coke or Gibson Greetings, when they
make a mistake, they stand back and they ask, how can we avoid
that happening again? We should do this, but we should do it
with care and deliberation and not worshipping at the alter of
deregulation.
Mr. Issa. Would the gentleman yield?
Mr. Himes. I am out of time.
Mr. McHenry. Well, comity is a little different than
comedy, so at this point I will just say that Members will have
seven days to submit opening statements for the record.
We will now recognize our first panel. I had a request from
the Chair of the Financial Services Committee to recognize and
introduce Naval Ravikant. With that, I will recognize Mr.
Bachus to so.
Mr. Bachus. Thank you, Chairman McHenry, for allowing me to
introduce my friend.
I first met Naval before the House considered H.R. 2440,
which became Title II of the JOBS Act. It was refreshing to
hear from someone who had so much passion for helping companies
access capital they need to grow and create jobs--in fact, he
has been the catalyst for several Internet companies which are
now household words. He was a strong supporter of H.R. 2940 and
H.R. 2930, your crowdfunding bill, Subcommittee Chair, in the
House, and was instrumental in getting the Senate to act on the
JOBS Act, which, as we know, was not an easy thing to do.
Using technologies such as Twitter, Naval and AngelList put
together a letter of support for the House bill that contained
signatures from over 5,000 investors, entrepreneurs, and small
businesses. Without Naval's support, we probably wouldn't be
here discussing the implementation of the JOBS Act.
Also, a fascinating thing for me to do, I visited one of
the sites which was responsible for new Internet companies in
San Francisco, and saw a building full of young entrepreneurs.
They had video games, they had basketball courts, they were
watching sports, and they were also creating new companies.
Several of them had been with Google, eBay, and other
companies, and were part of the formation of other companies.
I didn't see any ties. I had a tie on when I first got
there and I took it off fairly quickly. But those are the job
creators, and, as we all know, our identity is really not in
homeownership, it is in our occupation or our job, and without
a job, it really denies us a part of who we are and our
identity.
So I thank you, Naval, and I thank Congressman Pickering
for your help as a former staffer for the Commerce Committee,
senior staff. Thank you.
Mr. McHenry. Thank you, Mr. Chairman. In the interest of
time, I will introduce the rest of the panel. Mr. Robert
Thompson is the Peter P. Weidenbruch Jr. Professor of Business
Law at Georgetown University Law Center. Mr. Jeffrey Van Winkle
is the Treasurer of the National Small Business Association and
a partner at Clark Hill. Ms. Alison Bailey Vercruysse is the
founder of 18 Rabbits, a small business that makes granola and
granola bars, and from what I hear they are delicious. And Mr.
Rory Eakin is the Founder and Chief Operating Officer of
CircleUp, which is a form of crowdfunding, a wonderful website.
Both with AngelList and with CircleUp, it has been
fascinating to see what you all are doing to link up innovators
and capital.
And with that it is the policy of Oversight and Government
Reform Committee that all witnesses be sworn before they
testify, so please rise and raise your right hands. Do you
solemnly swear or affirm that the testimony you are about to
give will be the truth, the whole truth, and nothing but the
truth?
[Affirmative answers by all.]
Mr. McHenry. Let the record reflect that the witnesses
answered in the affirmative and they are now seated.
In order to allow for time for discussion, if you could
summarize your opening statement, keep it to five minutes. We
have a light system. Green means go, obviously. Yellow means
hurry up and finish. And red means stop.
With that, we now begin with Mr. Eakin for five minutes.

WITNESS STATEMENTS
STATEMENT OF RORY EAKIN

Mr. Eakin. Mr. Chairman, Ranking Members, distinguished
members of the Committee, thank you for the honor of appearing
before the Joint Committee today with an opportunity to speak
on the issue of critical importance to the American economy.
I am the founder of CircleUp, a small business which
supports other small businesses seeking growth capital from
accredited investors through the Reg D 506 exemptions.
CircleUp is a private investment platform that focuses on
businesses outside the technology sector providing growth
capital for consumer brands and products and companies through
a network of accredited investors. My partner and I were
inspired to found CircleUp because we saw a gap in the market,
namely, established, high-grade businesses struggling to find
affordable capital, and a network of investors eager to fuel
their growth. They needed a simpler, more accessible way to
come together. CircleUp provides a platform to do just that.
America is a Country full of ideas and entrepreneurs
pursuing their dreams. Over the last two decades, small and new
businesses have been responsible for creating two out of every
three new jobs, and today the Country's 28 million small firms
employ 60 million workers, fully half the private sector
workforce.
Investment capital is the oxygen on which young businesses
survive, and today investment capital market remains on a slow
path to recovery. Bank lending, venture capital, and individual
investing all remain below their pre-2008 levels, 13 percent
below in the case of angel investments.
Beyond these broad statistics are the Americans, small
businesses, and investors currently limited by the ban on
general solicitation. We see these companies every day at
CircleUp. Kim Walls, the Founder and CEO of Episencial, a skin
care company in Los Angeles. Kim founded her company in 2009 to
bring baby-safe, all natural skin care products to market.
After extensive product development process and strong early
traction from hospitals and consumer buyers, she needed to
raise expansion capital. Her company had a passionate following
of customers, parents, supporters interested in helping their
business grow. Yet, because of current regulations Kim could
not even make a passing motion of the opportunity to invest in
Episencial to her 20,000 fans on Facebook.
Or consider Zak Normandin, a father of three who lives in
Brooklyn, New York. Three years ago, dissatisfied with
unhealthy snack food options available for his children, Zak
created a new company to create organic, healthy snack options
for all children. Today, Little Duck Organics is a rapidly
growing small business. They are expected to increase seven
fold this year. Little Duck has hundreds of thousands of
consumers across the Country. They are passionate about the
company, but Zak is not permitted to inform them about a
capital raise. These consumers, many of whom are investors,
would surely want at least the opportunity to learn more about
Zak's company and his vision for a suite of products delivering
healthy, organic food to children of all ages. Yet, under
current regulations, Zak's fundraising process is limited to
closed door conversations with existing angel investors, many
of whom were not yet familiar with the brand.
Mr. Chairman, our current system is one that rewards
entrenched investors, an insular network of institutions and
individuals that favor private investor access more than the
creation and growth of new businesses. But, with modern
technology and this Act, this is going to change.
Lifting the ban on general solicitation will spur
entrepreneurship and unlock small business growth opportunity
to every corner of America, including some of the towns that
today investors might consider unlikely or uncommon. But, like
Little Duck Organics, and Episencial, we know they are not
uncommon at all. Today, thousands of small businesses just like
them are waiting to connect with investors who want to
participate directly in our national recovery, by backing a
young company and receiving a stake in the business in return.
We just need to open the doors and make it happen.
Of course, investor protection is also essential. I believe
the best protection is transparency and accountability. As an
industry participant, I strongly support the SEC in oversight
and regulations that protect investors while providing a more
efficient flow of capital. If fraudulent investment schemes are
permitted to prey upon unsophisticated investors, we will all
lose.
The SEC has put forth a workable set of rules to increase
the capital available for small businesses by lifting the ban
on general solicitations. When adopted, the rules will increase
the amount of information available to prospective
investors.The time is now to implement these rules, fulfilling
the mandate enacted with broad, bipartisan support in Congress
and the President's approval without further delay.
Mr. Chairman, Ranking Members, members of the Committee, I
thank you again for the honor of this opportunity and will be
pleased to respond to any questions.
[Prepared statement of Mr. Eakin follows:]

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Mr. McHenry. Thank you, Mr. Eakin.
Now with that we will recognize Ms. Vercruysse.

STATEMENT OF ALISON BAILEY VERCRUYSSE

Ms. Vercruysse. Thank you, Mr. Chairman and other
distinguished Members. I am the Founder and CEO of 18 Rabbits.
I started my business in San Francisco, and we create, like Mr.
Chairman said, organic granola and granola bars.
I started this in my kitchen with literally a toaster oven,
and now today we make millions of bars a year that we sell. So
I am in favor of lifting this ban because we make a very easily
understood and approachable product. So here it is.
Our customers include people like the Fresh Market, Peet's
Coffee and Teas, Duane Reade, Google, Virgin America. That is
where we currently sell. And we also sell them in hotels, spas,
yoga studios.
All of our production takes place in the United States, in
California right now, and 85 percent of our ingredients come
from U.S. farms, and most of them small farmers that I have a
direct relationship with.
Our competitors are large companies like Quaker Oats and
Kashi and Nature Valley, and in order to compete against these
mega companies we need the capital in order to raise brand
awareness about who we are and what we are about and who we are
selling to and why choose us.
So to grow our company what we did is we raised money from
our friends and families. I sat in my father's living room and
asked him for $10,000, so that is how we started the company.
And then we recently closed a $500,000 round from CircleUp.
Thank you, Rory.
So in between all of that, over the course of the three
years, I applied and spoke in front of about five or six angel
networks, and then I also met with ten private equity and
venture capital firms in our State. Time and time again I was
told, okay, come back when you are X amount of revenue, and
then only to be told when I came back when we did reach that
milestone, Oh, we need double that now. So that was really
frustrating, and it also takes a lot of time. It takes time
from me being innovative and getting my ideas out there to
market, and also that is not providing value to the customer
who is actually purchasing our product. What is providing value
is for me to get in there and to continue to create and change
the world with what I am making.
So the other thing that we did is we went and talked to
banks and we asked them for funding. And so then we were told,
Well, do you have positive cash flow? Do you have profit? well
no. If I want to grow my business, I need to plug all the cash
I am making in revenue back into the business.
So then what happened is luckily in 2009 there was the
American Recovery and Reinvestment Act where we got a micro
loan from the city of San Francisco for $25,000. That really
helped us. We were actually able to hire a couple of more
people on our team. Right now we are at about eight people.
And then the next thing that we got was a line of credit
from a bank. So last year we actually did have a profitable
last quarter. And this year we are growing even more rapidly
and we are seeing some profit, and next year we will be
profitable every quarter.
But what we need in order to continue to expand is access
to more capital, and being able to go to our loyal customers
and ask them for their money.
So a specific example about where the lack of capital held
us back was at the launch of our bunny bars. This is a package
that you will see hopefully very soon in Costco, in October.
These little bars are geared towards kids, and they are healthy
and organic and there is nothing like them on the marketplace
because of the kinds of ingredients that we use.
So because we didn't have the access to the necessary
capital, we had to delay the launch of the product, and then we
haven't been able to penetrate the market deep or wide enough,
where all of our competitors have a lot of money to do
advertising and get it all out there, we don't have that right
now, so it keeps us from our mission of putting healthier food
in kids' bodies.
So we also could be providing more bars through our
community service, through our 1 percent for kids program,
whereby we actually give one bar out of every hundred bars made
to kids in urban schools so we can start telling them or
sharing with them that we have healthy snacks, that you don't
have to reach for a bag of chips.
So starting a small business in America should not feel
like starting a fundraising business. With lifting the ban on
general solicitation, entrepreneurs like me and some of you can
focus on running and building the business instead of using
that valuable time to raise money.
Thank you.
[Prepared statement of Ms. Vercruysse follows:]

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Mr. McHenry. Thank you. I know when you held up the bars I
think there were questions here on the dias whether or not you
have enough for everyone.
Ms. Vercruysse. Hopefully.
Mr. McHenry. And I thank my friend Scott for suggesting
that.
With that, Mr. Van Winkle.

STATEMENT OF JEFFREY VAN WINKLE

Mr. Van Winkle. Thank you. My name is Jeff Van Winkle. I
appreciate the opportunity to be here to present the views of
the National Small Business Association. I am the volunteer
treasurer of the NSBA and a former chairman of the Small
Business Association of Michigan. I am also a member of the law
firm of Clark Hill
The focus of my practice is assisting small-and medium-
sized businesses, particularly in connection with raising
capital.
The NSBA was founded in 1937 to advocate for the interests
of small businesses. It is the oldest small business
organization in the U.S., representing more than 65,000 small
businesses throughout the country in virtually all industries
and of all varying sizes.
The JOBS Act has the potential to dramatically and
positively transform the ability of small firms to access the
capital they need to grow, to innovate and to create jobs.
Counsel for issuers have long sought increased flexibility to
connect issuers with investors. The high-cost large broker
dealer model has become a substantial barrier to getting
capital to small-and medium-sized businesses that are seeking
to grow.
The passage of the JOBS Act demonstrates the broad
bipartisan understanding that existing securities laws pose an
unreasonable burden on the ability of small firms to access the
capital markets. The JOBS Act does this while continuing strong
investor protections by retaining all existing State and
Federal anti-fraud laws.
The SEC and FINRA are under significant pressure from State
regulators and others who oppose the JOBS Act to use the
regulatory process to accomplish what they could not accomplish
in Congress. We are deeply concerned that either the SEC or
FINRA or both will impose such a high regulatory burden on
issuers and crowdfunding portals that important aspects of the
JOBS Act may become a dead letter. This would frustrate the
act, the intent of Congress and the President, and have a
severely adverse impact on the ability of small firms to raise
capital.
Both the SEC and FINRA must guard against complex
regulations that will undermine the purpose of the act, and
instead the regulatory framework should be straightforward and
streamlined, imposing no more necessary costs and regulatory
risks in small firms seeking to raise capital.
The Act required the SEC to issue a rule by early July to
implement general solicitation provisions contained in title
two of the Act. On August 29 the Commission issued a proposed
rule that mostly restated the applicable statutory language in
the JOBS Act.
No matter how the SEC ultimately proceeds, the reasonable
belief standard regarding accredited investor status should be
retained and the rule needs to be written so that Rule 506
offerings not involving general solicitation are not in a worse
position than they were prior to the passage of the JOBS Act.
In our judgment, the traditional and almost universal
practice of using investor suitability questionnaires combined
with investor self-certification to establish accredited
investor status should continue to be allowed and be deemed to
constitute taking reasonable steps to verify that purchasers of
securities are accredited investors, as is required by the JOBS
Act.
On balance, after careful consideration of the likely
outcome of the current situation, NSBA has decided to support
the proposed rule in its current form. It is better to let
practitioners, experience, and courts work out the contours of
the verification requirement over time. Perhaps the issue can
be revisited after some period of experience with the proposed
rule.
Now Title III of the act creates a crowdfunding exception
to registration requirements, this provision has the potential
to be of major importance to small firms seeking capital.
However, the success or failure of crowdfunding will depend
upon the regulatory scheme applied to the portals and
crowdfunding issuers. We are deeply concerned that the SEC and
FINRA will both regulate crowdfunding, but only broker dealers
will become portals and crowdfunding will become also a dead-
letter-like regulation as it is today.
We are concerned that the SEC and FINRA will miss the year-
end deadline for adopting rules.
Further, regulation must be substantially different from
broker dealer; otherwise, the process will be too expensive for
a million dollar offering or less. The Commission also needs to
resist the temptation to make issuer disclosure and reporting
requirements for crowdfunding issuers a close cousin of the
requirements imposed on public companies. If they do,
crowdfunding will not be viable.
We would like to see Congress also address a number of
small business capital access issues that the JOBS Act does not
address. To address the issues of finders to match capital with
issuers, we would like Congress to look at permanently and
substantially reducing the regulatory burden.
We appreciate the opportunity to make these remarks. Thank
you.
[Prepared statement of Mr. Van Winkle follows:]

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Mr. McHenry. Thank you, Mr. Van Winkle.
Mr. Thompson?

STATEMENT OF ROBERT B. THOMPSON

Mr. Thompson. Chairman McHenry, Chairman Garrett, Ranking
Member Quigley, Ranking Member Waters, members of both
Committees, thanks for the opportunity to talk about JOBS, its
affect on the economy, the obstacles faced by entrepreneurs in
raising capital.
JOBS produced far-reaching legislative reforms in this
area. It added two new exemptions, which was, frankly, unheard
of over the 80-year history of the Securities Act, plus it
substantially expanded a third exemption, so there is a whole
new area that we haven't had before, big space. It also
increased the deregulatory space of the 1934 act, and the on
ramp creates lessened burdens for emerging growth companies.
In implementing and passing this legislation, Congress
followed an established template for securities regulations
which basically, as I told my students this morning before this
hearing, involves four essential pillars: disclosure, SEC
review, increased regulations when there is intense selling
efforts versus others, and liability to cultivate due
diligence.
The JOBS Act followed this template. The crowdfunding bill
includes disclosure, includes focus on intermediaries, and it
includes a 12(a)(2)-like liability. A-plus follows this
template, with a focus on 12(a)(2) liability, intermediaries,
and disclosure. Implementation should follow the same template.
To talk about a couple of specifics, crowdfunding in bills
introduced by Chairman McHenry and passed by one of these
Committees, reflects an innovative path of raising securities.
The challenge in this area though is that if you are trying to
raise $1 million or less, any regulatory cost will quickly eat
into what you are going to raise, and any issuer is going to
look at the relative cost and benefits of different exemptions.
I mentioned the several that are being applied.
We heard from two members of our panel already who use 506
and probably they would keep using 506 to reach accredited
investors after the crowdfunding regulation occurs. That
remains a dilemma for implementing that section of the Act.
I think the focus on portals may be the way to go to try to
get some innovative approach there.
Similarly, A-plus has a problem in terms of relative use.
Regulation A, which is the base for the smaller amount, has
fallen into almost never being used. Now, once we increase it
by ten-fold, from five to fifty, it may be used more, but it is
going to be the same comparative dilemma. 506 is going to be
more attractive to many people who might use A-plus.
So that takes us to 506, which I think will be the most
far-reaching affect of the JOBS Act. Empirical data from the
SEC for the period 2010 and early 2011 shows that more money
was raised in private offerings, particularly in 506, than in
IPOs. It is already the biggest form of public raising, and
once the general solicitation ban is removed, which will be not
too far in the future, it will grow even more.
I think that that will be the focus in the near-term for
accessing capital.
Now, the problem I have with 506 is that the focus is on
accredited investors, which was an innovative addition back in
1982 when the SEC promulgated it. A lot has changed since then
in the sense that an accredited investor is carrying a lot more
of the weight than it did in 1982. Why? Business in 1982 the
amount hasn't changed--$200,000 in income, $1 million in net
worth, same as it was three decades ago. You all know what
inflation has occurred in those three decades. I actually
looked up Congressional salaries, but I won't talk about that.
The number that got my attention is that the number of
investors who qualify as accredited, in 1982 it was .17 or .18
of all individual taxpayers. Today that number, the cohort that
qualifies to be an accredited investor is 20 times bigger. The
focus should be on that more than anything else.
I will refer you to my testimony for my other points.
Thank you very much, Mr. Chairman.
[Prepared statement of Mr. Thompson follows:]

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Mr. McHenry. Thank you, Mr. Thompson.
Mr. Ravikant.

STATEMENT OF NAVAL RAVIKANT

Mr. Ravikant. Thank you, Chairman McHenry and Garrett,
Ranking Members Quigley and Waters, and the rest of the
Committee members, I appreciate your having me here to speak.
I am the Founder and CEO of AngelList. We are the world's
largest service for connecting technology startups and
sophisticated investors. In less than two-and-a-half years we
have helped 1,500 companies to meet VCs and angels for
successful funding rounds, and our alumni have gone on to raise
over $1.1 billion on and off AngelList.
If you look at the map up there, there's 80,000 companies
on AngelList today spread out over the entire United States,
and we have connected companies in Colorado, here in D.C.,
Texas, Seattle, everywhere, to investors in Silicon Valley and
New York.
There was some discussion here about the timing of the
general solicitation and crowdfunding provisions, but I want
you to know that the JOBS Act has already had a huge impact on
us in our ecosystem.
If you go to the next slide, you will see that we recently
launched AngelList Docs, which is regulatory compliance and
financing closings online. This process puts $20,000 into the
pocket of every startup, and it reduces the burden of closing
from a month to three days, and major law firms have signed up
to do these closings for free. I mean, when is the last time
your lawyer did anything for free?
Thanks to the JOBS Act, we had 250 companies sign up for
this in two weeks, and that represents a net savings of $5
million if they all use this product. That is in two weeks.
So obviously there is a discussion about general
solicitation and crowdfunding coming up. Given our learnings,
helping thousands of companies, we have just a little bit of
advice on what people should keep in mind as we think about
implementation.
On general solicitation, we think it is important that the
verification of accredited investors be doable by third
parties, whether it's people like ourselves or broker dealers
or lawyers, so that an investor only has to go through the
process once, and then the third party clearinghouse can help
with the verification in the future and keep the cost low for
issuers.
Crowdfunding is obviously a very complicated issue. On the
one hand there has to be sufficient investor protection to
prevent fraud, and, like I said, we have helped 1,500 companies
raise money. To date we have had no reports of fraud.
On the other hand, if you make the burdens too high or the
regulatory compliance too high, then the good companies will
opt out of crowdfunding and they will raise money under 506 or
other exemptions, and at that point you end up with a huge
adverse selection problem. At least in our part of the world, a
very small number of companies account for all the returns for
investors. If those companies were to not use crowdfunding,
crowdfunding would be dead on arrival.
So we think it is important that the SEC and the regulators
help make crowdfunding more viable. Ways to do that are to
allow the crowdfunding platforms to explicitly curate what
deals they show. Kickstarter, for example, which is a
celebrated poster child for crowdfunding, curates heavily. The
SEC should provide clarity on liability issues and what
qualifies as errors and omissions that may generate liability
for the issuers. Otherwise, again, the good companies will
avoid crowdfunding.
Finally, it is very important to keep this exemption, the
crowdfunding exemption, compatible with raising from accredited
investors. One of the best ways to protect the crowd in a
crowdfunding situation is to also have sophisticated individual
investors or VCs investing alongside on the same terms. So
someone has done the due diligence.
Finally, I want to thank you for the JOBS Act. It is a very
rare kind of accomplishment because the constituents that you
are really helping with the JOBS Act are companies that don't
yet exist, which is pretty rare. Normally there is a strong
constituency already asking for whatever you work on; but in
this case most of the constituents are yet to be created. I
hope they will also create jobs that don't yet exist and pay
taxes that don't yet exist.
We take a long view on this because we think that today's
startups are tomorrow's Fortune 500 companies, and I think you
have enabled a lot more of those given due time.
Thank you very much.
[Prepared statement of Mr. Ravikant follows:]

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Mr. McHenry. Thank you so much for your testimony. It is
very exciting to hear what the panel is doing. And I would say
before I begin my questions is that, you know, we are focused
on both capital formation and ensuring investor protection.
Investor protection is not forgotten in either the JOBS Act nor
SEC regulation nor crowdfunding portals as they currently exist
or angel investing networks. Capital formation is inhibited
when you have fraud. It is bad for market participants, bad for
startups, and obviously bad for those that are victims of this.
So robust investor protection is highly important, and I
obviously care deeply about that.
With that I would recognize myself for five minutes for
purposes of questions.
Mr. Ravikant and Mr. Eakin, if I could ask you, do you
believe that non-accredited investors are harmed by seeing
advertisements that are directed towards accredited investors?
Mr. Ravikant. Well, that is a fair question. I don't think
there is any harm in actually seeing it, as long as they don't
make those investments.
Mr. Eakin. Agreed.
Mr. McHenry. Okay. Well, we will start there with some
commonality here.
Ms. Vercruysse, you outlined you spent a significant amount
of your time trying to raise capital. Do these regulatory
restrictions on your ability to raise capital, did that inhibit
your ability to grow your business and create jobs?
Ms. Vercruysse. Yes. I feel that it does because not only
you have to find those people that are willing, it is a lot
harder to find people that are willing to invest in your
company, and that is why it takes so much time. Whereas if I
could just go to my loyal customer base that already believe in
what I am doing, because we were actually told even on Facebook
a customer said, I love your bars. How can I invest in your
company? Well, I said right now you can go out and buy a bar
and that is how you are investing in our company, because the
current law forbid me from engaging him.
Mr. McHenry. And to that point, lifting the ban on general
solicitation, the SEC just a few weeks ago, instead of making a
final rule or interim final rule, they basically put forward a
proposal on lifting the ban on general solicitation. Mr. Eakin,
what affect does that have on linking up capital and creating
jobs?
Mr. Eakin. Lifting the ban will have a tremendous positive
affect on helping more businesses reach out to more investors.
We believe that the platforms like CircleUp provide an
efficient way to start the conversation. Investors maintain the
ability to conduct their diligence, to thoughtfully review
investment opportunities, but it allows a spark to start
conversation.
Mr. McHenry. So not putting forward a rule that can be used
now inhibits job growth and the flow of capital? Is that what
you are saying?
Mr. Eakin. We are looking forward to the implementation of
title two of the JOBS Act.
Mr. McHenry. Okay. All right. So Mr. Thompson, you outlined
a couple of things dealing with crowdfunding that are of
particular interest to me. I have an idea, as something I have
put forward to the Commission, that they have enormous latitude
for how they implement and write the rules dealing with
crowdfunding. What I put forward is this idea that we can start
just by having as much freedom as possible to raise capital up
to $100,000 as sort of a first step for raising up to a million
dollars. Would you think that that is workable, that the
Commission open up first a lower space, see how that forms, and
learn some best principles, best practices out of that, then
keep raising it?
Mr. Thompson. I think scaled enforcement has been a core
part of securities regulation for decades, and that means lower
burdens for lower amounts, and what benefits can be achieved,
and so I think focusing at a smaller amount, $100,000 as a good
try, and see what works there, and if we can figure out
something that works there with some prerequisites, it might
well work.
Mr. McHenry. Okay. And Mr. Van Winkle and Mr. Ravikant, you
both outlined that you are concerned about crowdfunding as how
it is implemented and whether or not you can actually have a
robust marketplace in core participation, and, lacking that, it
will be, I would say to Mr. Van Winkle's comment, it was dead
on the vine, I think is how you termed it.
Mr. Van Winkle. A dead letter.
Mr. McHenry. Dead letter?
Mr. Van Winkle. Yes.
Mr. McHenry. Thank you.
Mr. Van Winkle. If issuers need to go through too much of a
process, a disclosure process, as Mr. Thompson indicated, they
are going to look at other exemptions for the amount that is
available through a crowdfunding portal. If you took too much
of your money in trying that you might raise in compliance, it
is not a good exemption.
Mr. McHenry. Mr. Ravikant?
Mr. Ravikant. Yes. I would add that we don't want to create
a situation where only the desperate companies use
crowdfunding. It should be used by top tier companies and that
means that the regulations have to be streamlined and
comprehensible.
Mr. McHenry. To that, Mr. Ravikant, you outlined what
AngelList is currently doing. How is AngelList using the JOBS
Act right now to link up capital and help small businesses?
Mr. Ravikant. Right now we only connect accredited
investors and obviously don't engage in general solicitation,
so it is somewhat limited in its nature, and it will be opened
up more after the full implementation of the JOBS Act.
Mr. McHenry. Okay. So a lot more to come after full
implementation?
Mr. Ravikant. We always like to lead with a product as soon
as the law allows it.
Mr. McHenry. All right. Excellent.
Thank you so much for your testimony. Thank you for being
here. And thank you for what you are doing to help create jobs.
With that, Mr. Quigley is recognized for five minutes.
Mr. Quigley. Thank you, Mr. Chairman.
I supported both these measures very strongly, and I know
the Administration did, and I don't see any reason why I or the
Administration want to win the race. I am not pulling for one
of these acts over the other to cross the finish line, but they
are both complicated.
Mr. Thompson, you talked about what seems to me the real
challenge and the real intense dichotomy of trying to address
this issue of crowdfunding is the smaller amounts. Any kind of
regulation eats up what you are actually trying to collect,
but, on the other hand, when you are dealing with small amounts
in the manner in which we are talking, we are talking about
less-sophisticated investors.
If you could give a few specific ways to try to address
that if you were advising the SEC.
Mr. Thompson. I think one way is to try to bring in a third
party to carry some of the load. And if the portals, as Mr.
Ravikant suggested in one of his slides, can carry some of the
load of verification or regularization, then the costs go down,
and so I think the SEC might well want to look at focusing on a
subset of portals who have the capacity and the affinity to
want to support capital raising and are willing to commit some
of their resources toward developing the platform that will
reduce the amount of fraud, as opposed to making it all on the
sellers who have sometimes overly addressed an incentive to
sell and get the balance wrong.
So I think the portal focus has potential in dealing with
this small amount.
Mr. Quigley. Mr. Ravikant, you talked in your testimony, I
think it is along the same lines: the sophisticated investors
alongside the unsophisticated. Is that the manner in which you
described what Mr. Thompson is saying?
Mr. Ravikant. Yes. I would say it is a couple of things. As
Mr. Thompson said, the portals can help in the prevention of
fraud, but the SEC has to enable that. The examples I would
give are, number one, we can help curate the deals. We have
lots and lots and lots of data on these deals, as well as
competitive companies and so forth, so by curation we can help
the investors get some data.
We can build in tools for transparency. We don't want the
reputation of being a hotbed for fraud, obviously, or the
investors won't come, and since we deal with a lot of
sophisticated investors we would put in a lot of protections.
One other protection which I talked about which you just
referred to is having the sophisticated investors invest
alongside the crowd on the same terms, but that may be uniquely
possible for us for tech startups. It may not be possible for
other local businesses or consumer goods startups where you
don't have a large native base of sophisticated investors.
Mr. Quigley. And Mr. Van Winkle, you understand--and I know
you agree--that this is an extraordinary opportunity for
investment for small businesses, but we want to get it right,
as to the point that you don't want this to be viewed in a few
years as a reservoir for people who are out to milk
unsophisticated investors.
Mr. Van Winkle. I would agree with that.
Mr. Quigley. What is your thought on how to balance this?
Mr. Van Winkle. I think the elimination of the public
advertising and solicitation ban has been talked about by
practitioners for a long time, that as the markets have
matured, investors are selective, whether a small investor or a
larger. We heard described by a panel, they had to go out and
seek many people who turned them down at times because they
would have to keep going. I expect that will continue on, that
we are not going to see a sea change of the investing public
because the laws change. What this will do is it will create
many more opportunities to connect folks, and the existing
anti-fraud protections will continue to protect those
investors.
I think it will enhance the opportunity to raise capital
without injuring investors.
Mr. Quigley. Ms. Vercruysse, your personal experience in
that vein, you would also agree that these are sometimes very
small investors for the first time, and the reputation of this
type of investments is just as important as your ability to get
them, is key to it?
Ms. Vercruysse. I agree. Was there a question there?
Mr. Quigley. No, I just wanted to see your personal
experience, particularly with smaller investors, their concerns
about something along the lines. They are typically used to
investing in Quaker, as you said. You are a little different.
So the reputation of a pool like this is as important as
anything you do.
Ms. Vercruysse. I think this speaks to what you are talking
about, but what I like to do is be really transparent about
where we are as a company, and it is actually a lot easier for
them to embrace a company of our size. The financials are very
simple, you know, and our expenses are very easy. We have
marketing costs and payroll and a little bit of research and
development, but it is very easily understood by a non-savvy
investor by just having a couple of conversations with them.
And then by seeing the financials they can see where their
money is going, and then also by seeing us out in the community
actually selling products they can see that we are actually
selling a viable product.
Mr. Quigley. Great. Thank you.
Mr. Garrett [presiding]. Thank you. The gentleman yields
back, and I will recognize myself for five minutes.
Again I thank the panel, and I also thank the panel
specifically for their entrepreneurial spirit, which is what
makes America great.
This morning, before I came here, the professor was
teaching classes, and I was on C-Span doing a TV interview. The
questions that were coming to us, Why isn't there more
bipartisanship in Congress and why doesn't both sides of the
aisle just put controversies aside and work together? And I
could actually point to this piece of legislation, and I
mentioned actually Ms. Waters name on there, and actually there
is legislation that we have worked together on, and we have
worked together to be able to pass it through our subcommittee,
full committee, and right on through the process. I said, don't
always believe everything you read in the newspaper as far as
all the antagonism.
The JOBS Act is an example of true bipartisanship, but that
is what happened here in Congress, and then it gets out to what
we always like to call the bureaucrats. In this case, the
bureaucrats fall into the category of the regulators or the SEC
who put--what I am hearing from the panel, effectively an
impediment to the will of Congress.
I know the gentleman from Connecticut was here earlier--I
guess he is not here right now--and he talked about how in the
military there is a process called a stand-down, when they see
that something is going wrong first they stand down and see
what is wrong and then go forward from that. If that had
occurred in the situation in the last session of Congress when
we had the financial meltdown of 2008, and then there was a
stand-down into a thoughtful analysis of actually what the
problems were that led up to that, and we then passed a piece
of legislation that resolved that problem, that would be an
appropriate stand-down in resolve and reform, but we didn't
have that. We had a 2,000 page Dodd-Frank that came from it
addressing all sorts of areas that were not the cause of the
problem, and then not addressing areas such as this one that
could actually help us get out of the morass that we are in.
So with that, I throw this to the panel, and maybe Mr.
Eakin or any other members might want to talk about this. We
have already heard somewhat of the effect of the SEC's standing
in the way of the will of Congress and what the impediment will
be to the cost of industry.
If we look at Commissioner Agilar's statement, it appears
he wants to create a whole new set of regulations to impede
capital formation, and, as I said, that runs directly counter
to the initial intent of the JOBS Act. And his dissent is
entitled, actually, ``Increasing the Vulnerability of
Investors.''
So starting with you, Mr. Eakin, I don't know whether you
read that dissent or not, but the caption, ``Increasing the
Vulnerability of Investors,'' is that what Congress was doing
when we passed the JOBS Act? Was that our intention? Were we
increasing the vulnerability of investors who might want to
invest in this granola bar company next to you?
Mr. Eakin. That would be the interpretation of Commissioner
Agilar's words to himself on that one.
Mr. Garrett. Okay.
Mr. Eakin. We support the full implementation of the JOBS
Act as written and believe increased transparency and
accountability in the marketplace is in the funding portals
under the oversight of a strong SRO, and the SEC will improve
the capital formation in the Country.
Mr. Garrett. Anyone else on that? Mr. Van Winkle?
Mr. Van Winkle. I would simply say that there are people
standing on the sidelines waiting to see how, for example,
crowdfunding regulations are going to look and what is going to
be required. They are prepared to move froward, put their
offering of their business out there and connect that capital
with the business. We think that will be very beneficial. I
believe that is what Congress and the President wanted with the
passage of this act.
Mr. Garrett. Can you also just explain, since you are
speaking, in your testimony you talk about how existing
security laws pose an unreasonable burden on the ability of
small firms to access the capital markets, harming economic
growth and job creation? Those are some of your words?
Mr. Van Winkle. That is correct. So the framework before--
--
Mr. Garrett. Yes.
Mr. Van Winkle.--the JOBS Act was such that it is very
difficult for the small issuer that is out there that is
looking for capital to connect. Those networks aren't there.
they need to be able to have more opportunities to be able to
connect.
The ban on solicitation, the removal of that will be very
helpful in connecting those folks. These investors often will
still pass on the ideal. They may not understand it. Maybe it
is not as simple or straightforward at they thought, so they
will walk away. But there will be transparency, as Mr. Eakin
indicated, and we think that will be very helpful.
Mr. Garrett. I think Mr. Quigley raises a good point. Mr.
Thompson and Mr. Ravikant, can you address it a little more
fully? If I'm the investor going forward with the JOBS Act as
Congress wanted it to be implemented, why should I feel assured
that I, as an investor, maybe not a sophisticated investor,
would have adequate protection under congressional intent with
the JOBS Act?
Mr. Thompson. The act, itself, it is not just a blank
sheet. It contains a large number of guidelines for
implementation. It says SEC do it, and here is what you should
do: disclosure, intermediaries, liability. All of that is in
there.
Mr. Garrett. Mr. Ravikant?
Mr. Ravikant. Yes, I would say the portals, like ourselves
and Mr. Eakin's portal, will bend over backwards to try and
prevent fraud. There is no such thing as a completely fool-
proof system, but our reputations and businesses are on the
line.
Mr. Garrett. Gotcha. And with that, I see that I am over
time, so I thank you very much for the panel.
The gentlelady from California.
Ms. Waters. Thank you very much. Mr. Chairman, I would like
to thank all of our participants in our panels here today, but
I am especially pleased about Ms. Vercruysse for your
appearance here today.
When I talk about business, small business and
entrepreneurs, I really like to talk to people who do it, who
have their hands on, who have to meet that payroll, who
understand what it really means to have to go out and find
investors and money. Consultants and lawyers and all that are
fine, but I really appreciate your being here today and the way
that you have described the development of your business.
I also know that oftentimes you must seek capital from
various sources, and I am very pleased to see that you were
able to get that micro loan of $25,000. That was part of the
American Recovery and Investment Act, so that makes me feel
good that what we did is real, and that is certainly had a
positive impact on businesses such as yours.
So again I appreciate your being here. As a matter of fact,
I worry a little bit about the time that you are spending on
this, because I know you must spend that time in your business,
a small business like that where you are hands on. You don't
need to be sitting up here in Congress for hours talking about
whether or not they are moving fast enough.
The JOBS Act is real and it is going to happen, and I want
to tell you, even with Dodd-Frank, what we have been doing, and
oftentimes in a bipartisan way. We are looking at the soft
spots, the gray areas, and we have had remarkable cooperation
from both sides of the aisle on straightening out some of these
things in Dodd-Frank, and I think that the JOBS Act, between
SEC and all of us who care about this, we will do that, so I am
very confident.
I would like to, if I may, Mr. Chairman, I would like
unanimous consent to insert into the record a letter that was
written to us by many of those consumers and organizations that
are paying attention to this particular legislation.
This letter was sent to the Securities and Exchange
Commission related to the rulemaking on general solicitation
and advertising under JOBS Act by a group of consumer and
investor advocates, including Americans for Financial Reform,
Public Citizen and Consumer Federation of America, among
others.
First, this comment letter from the group says that they
would have opposed the SEC going straight to an interim final
rule on general solicitation and advertising because they
believe there were a number of issues that were in their public
comment period.
I would like to know, Mr. Thompson, do you think that it is
reasonable that the SEC propose a rule on this issue rather
than going straight to an interim final rule, given that the
ban on general solicitation and advertising that the JOBS Act
lists has been in place for decades? Should the implementation
of its repeal be open to a robust dialogue?
Mr. Thompson. The SEC rulemaking is never the end of the
story, and certainly in recent years what happens after
rulemaking is litigation, with a focus on cost/benefit
analysis. That has been a grave concern of members of this
Committee. So the SEC has to worry about will its rulemaking
stand up to challenge that is likely to come, and that suggests
paying attention to notice and comment, having a period of
notice of comment, reflecting on what is commented, and then
making the final rule.
So by not doing that, I think the SEC was increasing the
risk of litigation and increasing the risk of the rule not
being implemented as quickly as it might otherwise.
Ms. Waters. Thank you very much.
Just quickly to Mr. Ravikant, I want you to know that some
of the comments of members of this panel about our small
businesses not having to spend their limited capital trying to
be in compliance is something that I certainly am concerned
about and I support, and the idea of a portal or portals that
could help with that I think is extremely attractive. But,
having said that, as someone who works in the world of rules,
do you think it is fair to say that the SEC should move slowly
and deliberately with the way it lifts the general solicitation
ban?
Mr. Ravikant. Yes. It honestly impacts us less because of
the nature of the companies that we work with already have
access to sophisticated investors. That said, the strange part
is that a lot of companies accidentally or not knowingly
violate the general solicitation ban on a regular basis, so in
that sense it does need to be modernized quickly.
To give you an example, this morning my fiance forwarded me
a video on You Tube pitching me to invest in a startup, me
personally, so this company had gone and made a rap video
singing about me and hoping I would invest in their company.
Now clearly that is a violation of the general solicitation
ban. I don't think they will be harmed by it because it was
addressed to me, but it shouldn't be sitting on You Tube. So
things do need to be modernized.
Ms. Waters. Thank you. Mr. Chairman, I yield back the
balance of time I don't have.
Mr. Schweikert. [Presiding].Thank you, though I am still
trying to get my head around rap solicitation.
Dr. Hayworth?
Ms. Watson. Sounds good to me.
Ms. Hayworth. Thank you, Mr. Chairman.
Mr. Ravikant, you rap star fan base aside--that is really
big, actually--but I was interested in your comments about the
cost of regulation and, of course, the entire panel has alluded
to them, as well, but I think the big theme that we face in
this Congress and in this Committee, of course, is that we are
trying to balance consumer protections, investor protections,
with the cost of, as Ms. Vercruysse has described so
eloquently, with the cost of trying to navigate that system.
We can keep layering on requirement after requirement, sort
of suspenders, duct tape, you name it. But, as you have pointed
out, eventually it stifles growth, in fact, relatively quickly.
Could you comment a bit further in particular about the
liability issues that are also incurred, because I think one of
the subtexts of the regulatory burdens is not only the cost of
compliance per se but also the anticipated cost potentially of
liability. Could you talk a bit more about that?
Mr. Ravikant. Yes. I am really not an expert in this area,
but my understanding is that, as part of the JOBS Act
crowdfunding provision, that the directors and officers of the
companies are directly liability for any material errors and
omissions, so what we are basically asking there for is some
kind of a checklist for the SEC as to what disclosures a
company should go through, and then know that it is not subject
to potential liability in ex post facto manner, and that will
help issuers have some comfort on using crowdfunding.
Part of the problem is those liability provisions do not
exist on the 506 exemption side, so a company going into
crowdfunding is going to have that additional burden, so the
more streamlined that process can be, the more transparent, a
checklist or a set of guidelines would definitely help a lot.
Dr. Hayworth. Thank you, Mr. Ravikant.
Mr. Thompson, can you speak to that issue, as well?
Mr. Thompson. Sure. As Mr. Ravikant said, 506 doesn't have
liability because of the Gutherson v. Alloy case from 15 years
ago, but crowdfunding does. And it is 12(a)(2) like, which I'm
not sure what that means, but someone who drafted it must know
what it means, but there is some liability there. And so that
is why I think many investors will be using 506 instead of
crowdfunding.
Is there a way to give some safe harbor? I think the
rulemaking for that hasn't come yet. It is not due yet. I think
you will see some attention paid to that.
It is hard to do, so I can't predict it, but I don't know
exactly how it is going to look.
Dr. Hayworth. Would any of our other panelists care to
comment? Ms. Vercruysse, does that play on your mind when you
think about how you interact with potential investors?
Ms. Vercruysse. The part about the liability?
Dr. Hayworth. About being held liable.
Ms. Vercruysse. Well, I just have to speak to my own
personal experience, and that is that I was just asked by one
of my business partners, actually, and he is a major investor
in my company, whether I had D and O insurance to protect
against that. That is how we would do it.
But I, as an entrepreneur, didn't know before about the
existence of D and O insurance, than that leaves my husband and
I completely liable if we don't have that.
Dr. Hayworth. Right. Mr. Eakin, is that----
Mr. Eakin. I very much agree with Mr. Ravikant's sentiments
in having a healthy, attractive ecosystem of companies wanting
to use this provision, and one way to do that is providing
clear guidance to those issuers of how they can protect
themselves from the liability perspective.
Dr. Hayworth. Right. Thank you very much.
I yield back, Mr. Chairman.
Mr. Schweikert. Thank you.
Ms. Maloney?
Ms. Maloney. Thank you, Mr. Chairman. Thank you for holding
this hearing. I welcome all of you.
First, I would like to say that I supported the JOBS Act
and I worked with my colleague, Mr. McHenry, on the
crowdfunding provision of the bill because I believe that we
should be able to have all kinds of tools, investors and
companies, at their disposal to grow and create jobs.
I appreciate Mr. McHenry accepting one of my amendments to
make SEC oversight of these sites more robust and to combat
against bad actors.
The JOBS Act just became law in April, and we have had 90
days, and said it should be done in 90 days, and no question we
are past that time, but I don't think any of us feel that we
don't need to get it right, especially since the SEC's job is
to protect investors and guard against the bad actors.
I would like to ask Mr. Thompson, despite the well-
established need for financial regulation reform--we are still
recovering from this great recession--the majority has made
considerable efforts to delay implementation of the Dodd-Frank
financial reform bill, while supporting, in contrast, an
expedited implementation of the JOBS Act. I, for one, think we
should finish the rules on Dodd-Frank first. But I am concerned
that the majority's attempt to rush the JOBS Act could severely
weaken investors' protections and the integrity of American
capital markets.
In your written testimony, Mr. Thompson, you stated--and I
would like to quote your words back to you--the largest impact
of raising capital from the JOBS Act is likely to be in the
expanded use of offerings under Rule 506.'' That is offerings
issued after the removal of the ban on general solicitation; is
that correct? And if that is correct, the implementation of
Section 201 is no small matter; would you agree?
Mr. Thompson. It will be the biggest impact because it is
already the largest source of capital raising, and once general
solicitation is removed it will be get even bigger. And so it
is appropriate that it is first on the list. But the SEC has
got a lot of balls in the air. They have to do them all. There
were 90 sections of Dodd-Frank that required them to do
something. I mentioned there were two new exemptions under
JOBS. They are doing them all.
I think 506 needs to be a focus. They have still got a 506
regulation from Dodd-Frank to remove the bad boy, to add a bad
boy exemption to 506. That was proposed a year ago. I think,
given the use of 506, that rule needs to keep moving.
Ms. Maloney. I agree.
Mr. Thompson. So I think all these 506 rules ought to be on
the table first.
Ms. Maloney. I agree. And Chairwoman Shapiro stated that
she is giving serious consideration to all of these rulemaking
approaches, and she says--and I will quote from her letter--
``Due to the high level investor interest and strong desire for
a comment period expressed by a number of commentators in the
public; however, upon further reflection and analysis I now
believe that the more appropriate approach in this matter is to
proceed per our normal notice and comment process.'' This was
in response to Mr. McHenry's letter that she should bypass the
normal notice and comment process.
I think something that is so serious, to protect investors,
and the fact that the public has notified the SEC that they
want to comment on it, I just want to know, if you agree that
the approach the Commission has decided to use for 201 to allow
for the comment period is important. Do you agree, Mr.
Thompson?
Mr. Thompson. I agree, and I think it also assists looking
ahead toward litigation because the shorter the interim final
has the potential to increase the challenge to the rules that
are implemented.
Ms. Maloney. And Mr. McHenry goes on in his letter to
request internal documents and communications related to
``potential Commission action to implement section 201 of the
JOBS Act.'' And this Committee has a legitimate role to conduct
oversight, but in this case the agency is simply following the
normal rulemaking process, and I would argue that their demands
and documentations is just adding to the time when she is
following the normal rulemaking process which allows a comment
period.
I would say that their actions are somewhat disingenuous,
particularly when they have voted to underfund the SEC. They
wanted a cost/benefit analysis, and tried to pass that. Believe
me, if you pass the cost/benefit analysis, we never would have
gotten to any rules. And their real action to sort of stonewall
and stop the implementation of Dodd-Frank.
And I would like to respond to Mr. Van Winkle that you are
saying the money is on the sidelines because we have to come
forward with the rules, but if you look at all the analyses
that are coming out from the economists, whether it is Zandy or
with McCain's economists or Krugman from the Times or any of
them, they are all saying that money is on the sidelines
waiting for the election, that is the real reason. I have read
about five different reports on that, not the fact that the
rule isn't in place. And I would say that the JOBS Act went
into effect, and I think it is very important that the SEC get
it right when it comes to protecting investors.
My time has expired and I yield back and I thank the
Chairman.
Mr. Schweikert. You caught me not paying close enough
attention.
Mr. Canseco?
Mr. Canseco. Thank you, Mr. Chairman.
One of the biggest concerns I have with the SEC's proposed
rule is the verification of accredited investors. It seems the
proposed rule would disincentivize the issuance of new
securities for fear of legal retribution.
Mr. Van Winkle, you allude in your testimony to issuers
currently being able to rely on written statements from
investors that they are accredited. Could you explain why the
new standards set by the SEC in its proposed rule is a problem
and how it could minimize the positive effect of the JOBS Act?
Mr. Van Winkle. The proposed rule, I don't think it
minimizes that. Under its current structure, what I described,
it is 40 years of tradition of inquiring of an investor, Are
you accredited, Do you meet these standards, and telling the
issuer. The issuer typically has some basis of knowing that or
has had some connection with that person. The proposed rule
gives room for the issuer to continue to sort out what makes
sense, and will be able to verify that.
So if the proposed rule is implemented as it is currently
written, I think it will create the right playing field for the
JOBS Act implementation to move forward.
Mr. Canseco. Do you think that the proposed rules are a
little too subjective?
Mr. Van Winkle. I don't think, based on what I know now,
that they are too subjective. We may know more two years from
now, but there's plenty of protection in place to keep issuers
honest. Quite honestly, what we heard today is that issuers
want to tell about what is going on in their companies. That
has been my experience in my practice, that issuers want to
disclose that information. That is what is going to keep the
honesty going in the system.
Mr. Canseco. As I understand it, if the SEC rule were to
become final there would be a double standard for investor
accreditation. Issuers using new solicitation exemption would
be held to a different standard than other issuers. Now, Mr.
Van Winkle, do you believe that could create a problem?
Mr. Van Winkle. I am certain someone could find a problem,
but I think we are concerned that we want to make sure that the
existing exemption, if you are clearly not using general
solicitation, that you can continue to follow that pattern;
whereas the issuers who are seeking to find a broader expanse
of investors may have a slightly different standard to apply
and they will sort through that.
Mr. Canseco. So if an investor were to put in writing and
under a contract that they need certain net worth or income
requirements to purchase private issued security, do you think
that is sufficient information for an issuer to rely on?
Mr. Van Winkle. Yes.
Mr. Canseco. Even under the current proposed rules?
Mr. Van Winkle. Under circumstances, that may be very
correct, but as you allude to, the subjective nature of it, the
flexibility means that the issuer will look at, Is this the
appropriate investigation for this level? And we do that all
today in practice. We make sure that there is a relationship
that is established and there has been appropriate
verification.
Mr. Canseco. So in your opinion did the SEC go far beyond
what Congress asked it to do with its proposed rule on
solicitation?
Mr. Van Winkle. The proposed rule seems to be aligned with
what I understand Congress' intent was with the JOBS Act.
Mr. Canseco. Okay. So one other question, Mr. Van Winkle.
The JOBS Act received a fair amount of criticism from certain
groups who argued it could lead to increased fraud or that it
somehow relaxed standards and increased risk to investors.
You mentioned in your testimony, but could you explain why
fraud protections are not weakened by the JOBS Act, and do you
believe that the SEC erred on the side of over-caution, thus
damaging the intent of the JOBS Act?
Mr. Van Winkle. The JOBS Act, title two of it, greatly
expands the opportunity in the potential investor pool. That
may or may not lead to higher probability of fraud. I don't
know. What I do know is that the concern is that there are more
issuers that would be causing fraud by not disclosing, so the
disclosure regime is still going to remain for issuers under
rule 506. They still need to disclose what they are supposed to
disclose.
I can't predict whether or not we have more potential
investors, whether there will be more fraud. I think the fear
is that there will be people just coming out of the woodwork
who are advertising fake businesses. I mean, that is what I--my
experience has been that issuers are very concerned about
making sure that they have a reliable and viable business
before they bring in investors.
Mr. Canseco. Thank you, Mr. Van Winkle. I see that my time
has expired.
Mr. Schweikert. Yes. This time I was paying attention to
the time. Thanks, Mr. Canseco.
Mr. Lynch?
Mr. Lynch. Thank you, Mr. Chairman.
Let's stay right on that point about the fear of investor
fraud. Many observers believe that the most significant
provision of the JOBS Act is, in fact, at least from an
investor fraud standpoint, the elimination of the ban on
general solicitation and advertising for section 506 offerings.
Indeed, I recall a statement by Chairman Shapiro. Actually, I
will quote her. This is right before the JOBS Act passed. She
said, ``We must balance our responsibility to facilitate
capital formation with our obligation to protect investors in
our markets.'' And she goes on to say, ``I am concerned that we
lack a clear understanding of the impact that this legislation
and its exemptions would have on investor protection.''
And sort of echoing what you just said, Mr. Van Winkle, the
New York Times editorial board, which I don't normally quote--
this is a first--said, this is two days after the SEC issued
its proposed rule, said ``Soon retirees and other investors
will be barraged with advertisements for private stock
offerings. Such advertising that used to be banned under
Federal securities law will make it easier for hucksters and
ripoff artists to lure people into unsuitable investment and
outright frauds because private offerings are not subject to
the disclosure requirements and other investor protections that
apply to publicly held companies.''
What do you think about the concerns raised there? I mean,
given the fact that a lot of people, even before this
relaxation, had trouble really discerning the disclosures to
begin with, and those were more sophisticated investors. Now we
are going to have general solicitations. Do you think that
presents a danger to the market and to average investors?
Mr. Van Winkle. There are a number of pieces to that
question. I can just observe these comments in response. Maybe
it is helpful. It is assumed that there are going to be many
more issuers that are going to be promoting businesses that are
fraudulent. I guess that is----
Mr. Lynch. Well, there is more opportunity for fraud.
Mr. Van Winkle. Because we have more investors potentially?
Mr. Lynch. No, no, but because we have less protections
against fraud.
Mr. Van Winkle. The sole protection against fraud is really
on the issuers. It is the obligation of the issuers to be
honest, to disclose what they need to disclose, and what they
communicate to those potential investors to be truthful. I
mean, I am distilling that down. The fact that----
Mr. Lynch. No. Also you have a general population that is
more vulnerable. Therein lies the opportunity for fraud. You
have a general population that now can be solicited openly, and
without--and they don't have the protections, the ability to
protect themselves. That is what creates the opportunity. I am
not as concerned about companies that are out there now and
operating under the previous rules; I am worrying about
opportunities that will present themselves where investors
won't have that protection. That is the danger.
Mr. Van Winkle. So we have to have an issuer that is
fraudulent that is now going out into the marketplace and
advertising and seeking to bring in those investors that aren't
going to ask those questions. We certainly don't know what that
looks like. I mean, that is one of the concerns people have.
That is why there is this concern about the change.
I will simply say my experience has been from the very
small investors--and I have worked with very small companies
that have raised small investments--that almost every single
potential investor looks at issues and asks questions. I have
seen that from what I consider to be very unsophisticated
financially but smart business people, or the smart retiree who
is very concerned. That retiree has to actually have cash to
put into the business in order to be an investor. So that, as a
practical level, is going to be an element of protection.
Mr. Lynch. Let me attack this from a different direction
then. Even though lifting the ban was required under the Act,
the SEC still had an ability in the rulemaking process, I
think, to provide some level of protection still for the
investor. Did the SEC miss that opportunity, in your opinion?
Mr. Van Winkle. I don't believe the SEC has missed it. If,
based upon experience, two years from now they observe that
they missed the mark a little bit, they may move that. But just
based on what we know now, based on what the SEC knows now in
its best judgment I think it issued the proposed rule which
said the issuer is going to have to make those determinations.
As was previously said, there is a subjectivity to that.
Mr. Lynch. Okay. Fair enough. Thank you.
I yield back.
Mr. Schweikert. Thank you, Mr. Lynch.
Mr. Pearce?
Mr. Pearce. Thank you, Mr. Chairman. Fascinating
discussion. I appreciate the testimony of every single one of
you here, those of you sitting out there, not those of us
sitting up here, that give me hope for the future. I really
appreciate the depth.
Mr. Ravikant, I really appreciated your presentation, the
sophistication of a small business owner. I could have used
help like yours way back when.
Ms. Vercruysse, again your struggle starting with one or
two people are things that are very familiar to me, so I
appreciate that.
I found it a fascinating discussion because there is a
definite split in opinions from this side of the table that
somehow we are going to protect the general public. We don't
seek to protect the general public from people who want to read
your palms. You can advertise that. Walking down here in
Arlington I can find palm readers that are going to hook me up
with a different generation that passed away several decades
ago, and I don't get protected from that. I go out to Las
Vegas, I slap my money on the roulette wheel where I know the
odds are far less than investing with any single one of you
all, and there's no protection for that.
And yet somehow we want to protect the general public with
the same people who watched M.F. Global from inside. We have
100-something protectors, protectors of the general public,
protectors of the investors sitting in the room watching what
was going on. Sometimes the very highest level protectors, and
somehow they didn't catch that we are about to defraud the
investors, some guy named J.P. Morgan, Lehman Brothers, when
that guy up there named Madoff, $50 billion they believe, and
they are watching very closely, and yet we are going to tell
Ms. Vercruysse that she can't advertise on Facebook. If you
want to stick $100 in my company you might not get it back, but
I think you will. We are going to stop that.
I just can't imagine where we are coming from in this
Country right now. We want to unleash the power and innovation.
People are responsible. If they stick $100 in Ms. Vercruysse's
18 Rabbits, maybe they only get 16 rabbits back. I don't know.
And then we hear that the economists all are in absolute
declaration that investors are sitting on the sidelines waiting
for the election. Now, the President himself said a couple of
years ago that people are hoarding their money and corporations
are hoarding their money. They shouldn't be doing it. They are
hoarding their money because they are uncertain. The money is
on the sidelines because of uncertainty, not some election.
Mr. Ravikant, I agreed with almost everything you said, but
I do want to dig a little bit deeper on one thing. I think you
said in your testimony or in your answer to a question that you
don't want crowdfunding for the smaller companies, that you
would want to reserve it for the larger ones? If I
misunderstood, that is the reason I am asking, because I am
thinking directly of the 18 Rabbits. I can see where, if she
could just advertise on Facebook page, she probably would have
enough to expand. So give me some clarification.
Mr. Ravikant. Okay. That was a misinterpretation.
Mr. Pearce. Okay.
Mr. Ravikant. Yes. Actually, I think it would work better
for smaller companies.
Mr. Pearce. Okay. All right.
Mr. Ravikant. Absolutely. Less at risk, smaller amounts,
smaller denominations.
Mr. Pearce. Okay.
Mr. Ravikant. Obviously, depends on the regulatory cost.
Mr. Pearce. I was afraid that I had misunderstood.
Mr. Thompson, one of the things that you had talked about
several times is sophisticated investors, people who are
knowledgeable. Again, keeping the backdrop of the gentlelady
sitting straight down the table from me there with a small
investment could grow significantly with a few people pitching
in a little bit of money, $500 apiece. Tell me a little bit
about the sophisticated investor. I heard you use the term and
I am not diminishing the requirement, but also I am thinking
about her situation.
Mr. Thompson. Accredited investors includes $1 million in
assets, which includes your pension, your retirement. Whatever
you save for retirement counts for that million dollars or
$200,000 in income. That is a large group that has disposable
investment income.
Mr. Pearce. If I could interrupt, because I am running out
of time, just apply it to her request. Why can't we make it
available to her to advertise on Facebook for people who maybe
don't even make $20,000 a year to stick $100 in it?
Mr. Thompson. I think after the ban is lifted you will be
able to do that, for accredited investors.
Mr. Pearce. But you don't think there is some great risk
there.
Mr. Thompson. There's a risk, because I think we dip too
deep into the pool, but it will expand who she can advertise
too. But that is different than what is on the other
exemptions.
Mr. Pearce. Okay. And I see my time is lapsed. If we go to
a second round I have got a couple more points.
Thank you, Mr. Chairman.
Mr. Schweikert. Thank you, Mr. Pearce.
Mr. Hurt?
Mr. Hurt. Thank you, Mr. Chairman.
I want to thank each of you all for appearing today. I come
from Virginia and we have a rural south side District where we
have unemployment that is much higher than the national average
in many places. We have some places in Virginia's Fifth
District that have unemployment as high as 16 percent. So the
jobs issue is very, very important, and very, very real to us
in terms of sustaining families, sustaining businesses, and
sustaining farms.
So this is all very good to hear that this JOBS Act that
was adopted with bipartisan leadership seems to be making some
headway. A lot of the conversation today has been focused on
the SEC, and a lot of the financial regulation, which I think
we all would agree, despite the fact that there is polarizing,
it seems, and one side accuses the other or each other of
various offenses, I think we all agree, certainly on our side,
that there are regulations that are very, very important to
making sure that we have an efficient market and a market that
protects consumers.
I don't think there is anyone on our side who doesn't
believe that, but I think that what we see is that regulations
have costs, they have impacts, and we need to be sensitive to
that because the consequences are very real. It means no jobs,
or fewer jobs at a time when, again, I have places in my
District with 16 percent unemployment, and I have to answer to
those people, and I should answer to those people.
I guess my questions are much more general in nature and I
would ask you to back out of the SEC, the granular look at that
level, but my question is really for Mr. Eakin and Ms.
Vercruysse, and then Mr. Ravikant. If I could just have you all
talk, generally speaking, about the regulatory burdens or
regulatory issues that you see that are a part, necessarily,
from the financial regulation and from the JOBS Act.
Could you talk about the atmosphere for job creation in
terms of regulations, whether it is an oppressive tax code,
whether it is environmental regulations, perhaps all well
intentioned, but environmental regulations that affect
business? And then finally labor issues. These are all things
that we have control of here in Washington. I should say we
don't have control, we have responsibility to those very
important issues. How do they affect job creation?
If we could just go down the line, 30 seconds, 45 seconds
apiece. How is that?
Mr. Eakin. Congressman, I appreciate the opportunity. I
think it is a little bit beyond my expertise, focusing on
marrying credit investors to startups through CircleUp has been
our primary focus in the JOBS Act, so I think I will pass to
another.
Ms. Vercruysse. The regulations as far as the jobs,
providing more jobs?
Mr. Hurt. Yes. I would just love to hear your input in
terms of access to capital, in terms of a regulatory climate
that encourages job growth as to one that suppresses it. If you
have any general comments?
Ms. Vercruysse. Well, I think that general comment would be
that I do like how there are some micro lending organizations
out there right now that very much are into job creation. I sit
on the board of Working Solutions, and we provide micro loans
to small businesses in San Francisco and the Bay Area. They all
have to come to the table with proposal about how many jobs
that they are going to create and what sectors they are going
to affect and how their jobs are going to help their businesses
grow and thrive. So I think that is something that is
definitely working.
The regulations don't really, at my stage of business they
don't really burden me at all. This was a new thing going from
a LLC to a corporation. I had some things to learn, but luckily
CircleUp helps with that.
Mr. Hurt. Right. Do you have anything to add, Mr. Ravikant?
Mr. Ravikant. Yes. it is a great question. I think that all
of us here probably have a smart phone in our pocket right now,
and so because of that what is happening is a lot of technology
companies that before would have stayed just in the technology
space are entering other adjacent spaces, and they are running
into regulations.
An example would be Uber Cab, with its various disputes
with the taxi companies and taxi commissions, B&B, with the
hotels and so on. So the marketization of local services has
been running into a lot of regulatory issues. That would be an
interesting area to keep an eye on.
To give you an idea of some of the craziness going on, San
Francisco Bay area now has two services that have peer-to-peer
taxis where he can roll up in his car and pick me up and I have
to give him a donation based on distance travel. So these kinds
of things are very innovative on the regulatory side.
Mr. Hurt. Thank you. That is very helpful.
I yield back the balance of my time.
Mr. Schweikert. Thank you, Mr. Hurt.
Mr. Fincher?
Mr. Fincher. Thank you. I thank you, Mr. Chairman.
I am going to pick up just for a second where Mr. Pearce
left off about how so many times I am not--I am a freshman
Member. I haven't been up here as long as some of my
colleagues, so I am not an expert politician. I am just a
businessperson, a farmer from Tennessee.
But are we really here to protect? Usually Congress, in my
opinion, when I go home and talk to people in my District when
it comes to jobs, when it comes to work, how the government is
in the way, that we are not helping, we are making things
worse. And bad characters do need to be punished when they step
out of line, but so many times the more rules, the more regs
that we impose on business owners only hurt the ability to grow
the economy, to lower unemployment, and to get the private
sector back in the driver's seat.
A few minutes ago, when one of my colleagues on the other
side of the aisle was trying to talk about the JOBS Act versus
Dodd-Frank, I mean, really it is a big difference there in
Dodd-Frank and the JOBS Act.
We somehow must get back to the place of there's personal
responsibility, and people are out there making decisions. They
can think for themselves. We are not here to make sure that the
world can go on and everything needs to travel through the
House of Representatives or the Senate or the White House, that
people can make decisions for themselves.
Your testimony today has been great.
Mr. Ravikant on the end, can you comment for me just for a
second on the JOBS Act, I was looking at a couple of questions
about how many dollars of capital, how many jobs it would
create. If this had not been put in place, do you think the SEC
would have been able to clarify or make decisions making it
easier for companies to go public without the JOBS Act?
Mr. Ravikant. I actually don't know anything about the
public side of it, unfortunately, I deal in much earlier stage.
But I will say that thanks to the JOBS Act there will be more
capital for small businesses. Some of it, in fact a lot of it,
will come from the 506 exemptions, some of it will come from
crowdfunding, and so eventually there will be more public
companies. We just have to give it time. It is a 30-year cycle.
We just have to look a little forward.
Mr. Fincher. Absolutely.
Mr. Ravikant. But, to give you an idea, Chairman McHenry's
amendment to the JOBS Act which allowed us to offer that online
documentation, we can save companies $5 million in the first
two weeks. That is $5 million that is better used hiring people
and building product.
Mr. Fincher. Absolutely. Any more comments? Mr. Eakin?
Mr. Eakin. Sir, we believe that the JOBS Act is a great
stimulus in helping small businesses raise more capital more
efficiently, and through portals like Mr. Ravikant as well as
CircleUp we are excited for full implementation.
Mr. Fincher. And let me finish up by saying this. I was
thinking last night; I couldn't sleep. I sleep about three
hours a night now in this job. This is not about any past
political arguments or things that one party or another party
has been doing to each other. I don't know what happened in the
past. This is about going forward, and we have got to get this
right if America is going to be able to get back on top, and if
we don't get the private sector growing again by allowing us to
get out of the way, then it is going to be hard to do.
So that is what we are trying to do up here, and hopefully
both sides can work together to make that happen.
Thank you for your testimony. I yield back.
Mr. Schweikert. Thank you, Mr. Fincher.
The Chair is going to yield to himself. I guess I can yield
myself all the time I want, right? I like this. No. We are not
going to do a second round of questions, but I will do sort of
a lightning round.
Two things I want to touch on. One, we were hearing in some
of the questions the comment general population. I want to make
an additional clarification. It is not general population.
These are accredited investors. That was a part of that
discussion.
And there is also sort of a philosophical split here, and I
may be an outlier in this. I have an intense concern that often
in our attempt to protect everyone we take part of our
population that hasn't made that threshold of being accredited
and take away their opportunity to find a golden egg, to invest
in something that really over their lifetime gives them that
opportunity.
My great fear is we often end up in these debates of the
have's and have-not's, but if we made the barrier so, You are
accredited. You get to play. You are a small investor. We are
going to add barrier and barrier where no one wants you to
really even knock on our door, but we never give them the
opportunity to start that process of taking risk and ultimately
accumulating wealth.
Mr. Ravikant, you are doing some things that I find
fascinating in building a portal that allows a small business
to be able to use your standardized documentation. Walk me
through that as sort of quickly as you can of how that benefits
a small upstart.
Mr. Ravikant. Today if you are a small business and you
find investors, whether through AngelList or CircleUp or
wherever, you have to then negotiate a term sheet, negotiate
the investment. Before the JOBS Act, if you wanted help on that
regard you would have to go hire a lawyer or work through a
broker dealer, both of which are very expensive.
The JOBS Act allows us to offer optional closing documents,
soup to nuts, online. We created a beautiful, visual process,
well designed, Internet based, lays out all the standard terms.
Your lawyer can even work with it, it works very quickly. It
takes the process that used to take a month of back-and-forth
negotiation and generating huge documents and redlines and all
that, and it is instant. It is basically instant. And we made
it free, not just for the company that raised money through
AngelList, but for any company.
Mr. Schweikert. And that is for the business side. How
about if I am the person that absolutely loves Ms. Vercruysse's
product and I sent her a note over Facebook and she says, I
can't talk to you over Facebook because I would go to jail, but
you could go take a look at this website.
Mr. Ravikant. Correct.
Mr. Schweikert. And if I actually ultimately would
establish, can I invest in her through you?
Mr. Ravikant. Well, we can make the introduction after we
establish the investor's accreditation and their
sophistication. We actually go one level beyond accreditation.
Mr. Schweikert. Mr. Van Winkle, you practice in this area
of helping folks. Give me the range of type of investor class
you ultimately will represent or deal with or help.
Mr. Van Winkle. The investors that we are typically working
with, and usually we come across them because we are
representing the businesses that are using their network. That
is really their only method today, and they are going on and
talking to their friends and other business acquaintances, and
they are talking to people who are their business owners.
Sometimes they are talking to family members. Many of them have
been owners of some other business, so they have some sense of
how to do that. Or they have been just a person who has paid
attention to things over the years.
It is a wide, wide range, but today it is a relatively
small group because it is based on personal connections, and so
someone who might know about an idea has no idea how to go
about investing in it. I think what we are hoping to unlock is
the ability to create a connection and then, within the
regulatory framework, enable them to make that investment
lawfully.
Mr. Schweikert. You actually just nailed where I was trying
to go here. My wife and I, on occasion we find a product we
absolutely love, and I assume other people have this experience
saying, We have a little money saved up. Do we go out and buy a
boat, or do we actually put some money some place--if you put
it in a savings account or other things today you get almost no
yield in this world.
But maybe I should take a little risk because I love
organic, I live on your type of product. You said, even though
it is going to be the kid version at Costco, I will look for
it. But how do we take that next subclass of investor and make
it more egalitarian so they can invest? Do you see as with the
approach we are trying to hopefully get the SEC to move with
the JOBS Act to provide those opportunities?
Mr. Van Winkle. I think that is what the title two is
trying to do and say that there are a lot of accredited
investors who perhaps are suitable investors and they are
unable to connect with issuers, so they will be able to do
that.
The issuers will be able to announce we are looking for
investors, and it will go about--I think there will be new ways
of communicating, and it will connect those folks.
Mr. Schweikert. But somewhere here--and this may be JOBS
Act 3.0 eventually if we ever get to that, and I know I am
heading over time, but you are involved in a micro lender, but
ultimately I would love to see a world where it is micro
equity, where I can take a few hundred dollars or a few
thousand dollars, and I know for many folks that was a vision
within the crowdfunding, and take a risk, but actually start to
be someone who gets to participate in the rewards of taking
that risk.
This is the end of this panel. Thank you for participating
with us. All of you, if you have any other ideas or suggestion
of how we can do things better, please share that with us.
We have a letter from the ICBA that will be put into the
record.
Mr. Schweikert. Without any objection, this Committee is
closed.
[Whereupon, at 12;01 p.m., the hearing was adjourned.]

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