[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
REDUCING BARRIERS TO CAPITAL
FORMATION, PART II
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JULY 10, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-38
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82-860 WASHINGTON : 2014
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama BRAD SHERMAN, California
PETER T. KING, New York RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
C O N T E N T S
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Page
Hearing held on:
July 10, 2013................................................ 1
Appendix:
July 10, 2013................................................ 41
WITNESSES
Wednesday, July 10, 2013
Leach, Raymond T., Founding Chief Executive Officer, Jumpstart,
Inc., on behalf of the National Venture Capital Association
(NVCA)......................................................... 6
Moch, Kenneth I., President and Chief Executive Officer,
Chimerix, Inc., on behalf of the Biotechnology Industry
Organization (BIO)............................................. 8
Nagy, Christopher, President and Founder, KOR Trading LLC........ 10
Souza, Wayne G., General Counsel and Executive Vice President of
Law, the Walton International Group (USA), Inc., on behalf of
the Investment Program Association (IPA)....................... 12
Thompson, Robert B., Peter P. Weidenbruch, Jr., Professor of
Business Law, Georgetown University Law Center................. 14
APPENDIX
Prepared statements:
Leach, Raymond T............................................. 42
Moch, Kenneth I.............................................. 52
Nagy, Christopher............................................ 60
Souza, Wayne G............................................... 64
Thompson, Robert B........................................... 72
Additional Material Submitted for the Record
Moore, Hon. Gwen:
Written responses to questions submitted to Kenneth Moch..... 77
REDUCING BARRIERS TO CAPITAL
FORMATION, PART II
----------
Wednesday, July 10, 2013
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Royce,
Neugebauer, Huizenga, Grimm, Fincher, Mulvaney, Hultgren, Ross,
Wagner; Maloney, Lynch, Scott, Himes, Peters, Watt, Foster,
Carney, Sewell, and Kildee.
Also present: Representatives Fitzpatrick and Duffy.
Chairman Garrett. Good morning, all, and welcome.
The Subcommittee on Capital Markets and Government
Sponsored Enterprises is hereby called to order. Today's
hearing is entitled, ``Reducing Barriers to Capital Formation,
Part II,'' which implies there was a Part I, and how many more
we will have is anybody's guess, but this is Part II.
So, I welcome the panel. We will look forward to your
testimony shortly. We will begin with opening statements, and I
will yield myself about 5 minutes, and go from there.
As I said, today's hearing will focus on reducing barriers
to capital formation for America's small businesses. Following
the most recent financial crisis, there can be little doubt
that America's big businesses are doing better than the small
businesses. Under the Obama Administration, small businesses
have become mired in a river of costly government red tape.
Indeed, the steady flow of overly burdensome regulations
coming out of Washington, D.C., these days is
disproportionately affecting small businesses, imposing
enormous compliance costs, and cutting off access to the
critical sources of capital these firms need to be able to
grow, and grow the economy and to create more American jobs.
So it is no wonder that the National Federation of
Independent Businesses' Small Businesses Optimism Index fell in
June, and 67 percent of small businesses indicated in a recent
survey that they do not have plans to hire in the next 6
months. That is a one-point decrease from the fourth quarter of
2012.
Despite the regulatory headwinds facing small businesses
today, there are some signs that the landscape for small
business capital formation is improving. For one thing, self-
executing provisions of the JOBS Act are already helping small
businesses gain access to the U.S. equity market.
For example, IPO activity surged in the second quarter of
2013 with emerging growth companies (EGCs) under the JOBS Act
accounting for 77 percent of all IPOs as a price during this
period, and a 79 percent of the EGCs IPOs during the second
quarter made use of the JOBS Act confidential filing
provisions.
In addition, while the SEC has historically only paid some
lip service to small business capital formation, as I speak, an
open meeting is currently under way at SEC headquarters to
finally vote on amendments to eliminate the band on general
solicitation and general advertising in certain private sector
securities offerings, which was mandated by the JOBS Act more
than a year ago.
I expect that the outcome of the Commission's meeting today
will provide a significant new avenue for small business
capital formation while protecting investors by providing those
who are accredited with additional investment options.
American companies and investors also caught a much-needed
break from overly burdensome SEC regulations last week when a
Federal judge vacated an SEC ruling issued under the Dodd-Frank
Act requiring disclosure of payments to government entities by
companies engaged in resource extraction.
As I mentioned before, whatever commendable goals this rule
might have had, it has absolutely nothing to do with the causes
of the most recent financial crisis; it was always outside of
the SEC's core area of expertise.
Given the validity of a similar SEC ruling requiring
companies to disclose their use of conflict minerals, which is
still before the courts, I would like to take this opportunity
to urge Chairman White not to revisit any rulemaking on
resource extraction.
Moreover, I urge her to instead focus on the SEC's core
mission by first completing more relevant congressional
mandates including Regulation A, the overcrowding provisions of
the JOBS Act, and removal of references to credit rating
agencies in the Federal securities laws pursuant to Section
939(a) of the Dodd-Frank Act.
With the economy growing now at an anemic 1.8 percent
during the first quarter of this year, it is imperative that
Congress and the regulators continue to build off the momentum
created by the JOBS Act and explore new ways to provide our
startups and small businesses with the capital they need to
grow their operations, create jobs, and breathe more life into
the U.S. economy.
At our hearing on this topic last month, and in the
prepared testimonies submitted by our panel today, we have
received a number of ideas to promote small business capital
formation.
These ideas include, among others: modernizing the
regulatory regime governing business development companies
(BDCs); expanding tick sizes to increase liquidity in the
shares of publicly traded small cap companies; establishing a
new parallel stock market for small public companies;
increasing research analyst coverage for small and mid-cap
companies; appropriately scaling Federal regulations governing
M&A brokers; exempting small SEC reporting companies from the
SEC's XBRL filing requirements; and a variety of other measures
to update our security laws and generally improve the
infrastructure of our capital markets.
With all that said, I look forward to continuing to discuss
these ideas and other ones which I didn't go through as we move
forward in drafting legislation that will hopefully further
reduce barriers to small business capital formation and create
more American jobs.
I yield back.
And I yield to the gentlelady from New York for 4 minutes
for her opening statement.
Mrs. Maloney. Thank you, Mr. Chairman. I want to thank all
of the witnesses for being here today. And thank you, Mr.
Chairman, for really focusing on the important goal of job
creation.
The United States has the deepest and most effective
capital markets in the world. The U.S. stock market is 13 times
larger than the British stock market, and 14 times larger than
the German stock market.
The sheer size of our market is attractive for its
investors because they know they will be able to sell their
investment quickly if they need to. But unfortunately, small
businesses still have trouble raising funds in this markets.
Between 1991 and 2007, the number of small companies that went
public in our securities markets declined by 92 percent.
Providing incentives for greater investment in our country's
small businesses and entrepreneurs will allow these companies
to innovate and grow our economy and create more jobs.
That is why we passed the JOBS Act, which removed several
regulatory barriers to small business investment. For example,
the JOBS Act allows small businesses to use general
advertisements to solicit investors, allows certain businesses
to phase in SEC regulations over a 5-year period, and raises
the number of shareholders that would trigger mandatory SEC
registration from 500 to 1000.
Of course, we need to monitor the implementation of the
JOBS Act and make sure that small companies get access to the
capital they need. I look forward to hearing from the witnesses
what regulatory factors make financing for small businesses
more difficult and what Congress can do to help.
Small companies should not be forced to spend the majority
of their limited resources complying with securities
regulations. They should be spending their money hiring new
workers or investing in new products.
We need to keep in mind that one of the main reasons the
U.S. capital markets are the envy of the world is the
transparency and trust that comes from our disclosure rules. I
have always said that markets really run more on trust than
they do on capital, and we have the most trusted markets in the
entire world.
Less transparency in our capital markets will open the door
to misrepresentation, which invariably targets the most
vulnerable investors such as retirees. That is why we must
ensure that we strike the proper balance between maintaining
healthy financial disclosure and reducing companies' compliance
costs.
I know that many of you have come forward with a variety of
ideas. I have read your testimony, and I look forward to your
testimony today. I do want to note that I have a conflict with
the Joint Economic Committee, on which I am the ranking member.
I must run over there for a period, but I will definitely be
back here for questions.
I deeply appreciate your testimony and your being here
today.
Thank you, and I yield back.
Chairman Garrett. The gentlelady yields back.
I recognize Mr. Fitzpatrick for 2 minutes.
Mr. Fitzpatrick. Thank you, Mr. Chairman. I appreciate the
opportunity to offer a couple of remarks at this hearing.
Today's hearing is about regulatory reform. It is about
capital formation, but ultimately it is about jobs, and I have
had the opportunity to work with BIO and pharmaceutical
businesses that create good paying jobs in my district in
Pennsylvania and they have shared with me how regulatory relief
related to capital formation would positively affect their
research and their ability to hire, to create jobs, and to hire
folks from Pennsylvania.
For every dollar they must spend on compliance, that is
money being taken away from research and development, and the
problem isn't that they are necessarily opposed to regulation;
it is that they are being unfairly treated as large companies
despite the fact that they are small and emerging growth
companies. This one-size-fits-all approach to regulation is
just the type of barrier to economic growth that we need to be
tearing down.
That is why I have introduced the Fostering Innovation Act
of 2013, and this is a bill which is identical to legislation
that was passed by this subcommittee in the 112th Congress.
The Fostering Innovation Act would help provide permanent
regulatory relief for small and emerging growth companies by
more accurately reflecting the difference in large and small
companies.
For instance, currently, a company with market
capitalization or public float of $75 million or more is
subject to Section 404(b) of Sarbanes-Oxley (SOX) and that
requires external audits of internal controls. This bill would
raise that to a more accurate number of $250 million.
Second, my bill would apply a much needed revenue test for
determining which companies must comply with regulations like
404(b). Currently, a company could have a public float
exceeding $250 million but be making very little money and
still be considered to be a large company by the SEC.
As Mr. Moch from BIO can attest, this is actually something
fairly common in the biotech industry and in fact, would apply
to the two companies I have mentioned earlier that I am working
with in my district.
So I just wanted to come, and briefly highlight the
Fostering Innovation Act.
I would like to thank all of the individuals here to
testify today for touching on this bill perhaps and I
appreciate the chairman's calling the hearing. This hearing is
extremely important for, as I said, capital formation, but
ultimately for job creation across our country.
Thank you again, Mr. Chairman, for the time.
Chairman Garrett. I thank the gentleman. The gentleman
yields back.
Mr. Scott is recognized for 2 minutes.
Mr. Scott. Thank you, Mr. Chairman, for this hearing.
This is a very important hearing as we discuss ways in
which we can reduce barriers, and what is important is that we
identify those barriers that we as policymakers can truly do
something about.
I think it is very important that small business companies
have great potential for technological motivation and job
creation, that we truly examine and find out from our
distinguished panel what precise things they feel we can do.
I think we have to go beyond--we have to look at what we
refer to as burdensome overregulation. We need to truly examine
that to see where we can make effective changes, but we also
have to look at the bigger picture. What else is out there?
We know that the Securities and Exchange Commission has a
three-part mission to protect investors, maintain fair order
and efficient markets, but also a part of their mission is to
facilitate capital formation, and they have a pilot program
going. I think we ought to examine that just a bit.
Whether it is allowing for a larger size of increments of
bids in what we call tick sizes for smaller companies, an
option that is currently under consideration by the SEC, or
some of the more controversial options, some of which I think
they have discussions like increasing the size of companies
exempted from Sarbanes-Oxley's auditor attestation requirements
or looking at ways in which maybe smaller companies might be
exempted from the shareholders advisory votes on executive pay
and compensation.
These are all somewhat controversial, but they are standing
in the way of us making sure that we have capital formation
going out to our companies.
And then finally we have to take a look at the JOBS Act,
which was signed into law a little more than a year ago, and
see what more we can fully do.
With that, I yield back, and I look forward to the
distinguished panel.
Chairman Garrett. Thank you, and the gentleman yields back.
We now turn for 2 minutes to the gentleman from Virginia.
Mr. Hurt. Thank you, Mr. Chairman. Thank you for holding
today's hearing, the second in a series on exploring ideas for
reducing barriers to capital formation.
I thank each of the witnesses for being here today.
One of the most important functions of this subcommittee is
to promote initiatives to increase access to capital for our
small businesses and startups. It is appropriate that the
Capital Markets Subcommittee will again lead the way on
initiatives to increase capital access and promote economic
growth after a champion enactment of the JOBS Act in the last
Congress.
While the JOBS Act was an important step forward, these
hearings show that more still needs to be done to ensure that
we remove costly and unnecessary regulatory impediments that
are restricting companies from accessing capital in the public
and private markets.
I especially look forward to testimony from our witnesses
about the extensible business reporting language (XBRL), which
was mandated by the SEC in 2009.
Despite the SEC's intent of lowering the cost of capital
for smaller companies and providing more efficient access to
information for investors, this requirement has become another
example of a regulation where the costs far outweigh any
potential benefits.
Companies expend tens of thousands of dollars or more
complying with the regulation, yet there is evidence that less
than 10 percent of investors actually use XBRL, further
diminishing its potential benefits.
This is another example of an unnecessary and costly
requirement that disincentivizes innovative companies from
accessing the public markets. We must look at solutions to this
issue and others to create a regulatory environment that is
more efficient and conducive for long-term economic growth.
I appreciate this committee's continued focus on ensuring
that our small businesses and startups have the ability to
access the necessary capital in order to innovate, expand, and
create the jobs that our communities need.
I look forward to the testimony of our witnesses, and I
thank you again for your appearance before the subcommittee
today.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Garrett. The gentleman yields back.
Seeing no other opening statements, we will now turn to the
panel.
And again, welcome to the entire panel. Your entire written
statements will be made a part of the record, and you will be
recognized now for 5 minutes. In front of you, of course, is
the timer: green when you start; yellow as a 1-minute warning
light; and red for when you should be done.
And the other admonition I always ask you is to make sure
that your microphone is turned on, and the microphone is pulled
closer than it is for some of you right now when you do
actually speak.
So with those introductory comments, I recognize Mr. Leach
for 5 minutes, and welcome.
STATEMENT OF RAYMOND T. LEACH, FOUNDING CHIEF EXECUTIVE
OFFICER, JUMPSTART, INC., ON BEHALF OF THE NATIONAL VENTURE
CAPITAL ASSOCIATION (NVCA)
Mr. Leach. Good morning, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee. Thank you for the
opportunity to share with you today the venture capital
perspective on the state of the capital market system.
Venture-backed companies that go public are drivers of the
U.S. economy. That is why the NVCA supported the passage of the
JOBS Act in 2012, in particular, the IPO on-ramp provision.
I want to thank you for your work on making the JOBS Act
possible and for continuing to direct your attention to market
concerns that affect companies once they have gone through an
IPO.
A successful IPO drives extremely positive economic
outcomes. First, it allows companies to raise additional
capital to invest in growing their business, to increase its
revenues, and to create new jobs. Data shows that 92 percent of
job growth from venture-backed companies occurs after going
public.
Second, IPOs enable all types of investors to participate
directly in the company's growth and provide financial benefits
to employees who have also earned equity in the company pre-
IPO.
Third, IPOs typically generate meaningful returns for
pension funds, endowments, foundations, and other limited
partners who pooled their money with VCs to invest in these
firms.
Lastly, companies that go public have the potential to
transform regional economies and communities in significant
ways.
The decline of the U.S. IPO market over the last 15 years
has been well-documented. From 1990 to 1996, 1,272 U.S.
venture-backed companies went public in the United States on
U.S. exchanges, yet from 2004 to 2010, only 324 companies did
so.
Most analyses have pointed to a complex series of changes
in the regulatory environment and related market practices that
have driven up costs and uncertainty for emerging growth
companies looking to go public to the point where most such
companies began to position themselves for acquisitions
instead.
Recognizing the dire implications for U.S. job creation and
economic growth, Congress passed the JOBS Act 2012 to revive
the U.S. IPO market in part by building the on-ramp by which
small companies reached the public markets.
Now, a little more than a year after its passage, the urge
to assess the impact of the JOBS Act by examining the state of
the IPO market today is understandable.
In doing so, however, we must look at the entire picture
and recognize the complexity of the factors at play in today's
markets. When the JOBS Act was signed in April 2012, we assumed
that any significant uptick in IPO activity would likely trail
the law's implementation by at least a year or more.
A top line review of IPO market numbers since April 2012
confirms our assumptions. Only 49 venture-backed companies went
public in 2012, which was 2 less than in 2011.
This year, only 8 such companies went public in the first
quarter, however, the second quarter saw 21 venture-backed
IPOs, bringing this year's total to 29 IPOs.
A year with 100-plus venture-backed IPOs would be
considered a very strong year, so we are hopeful that this 20-
plus IPOs per quarter momentum will continue because of the
JOBS Act.
These numbers may seem underwhelming, but they reveal only
a fraction of the impact the JOBS Act is having. It is
estimated that a record number of companies are currently in
registration for IPOs.
Since the law's passage, more than 500 companies have
registered with the SEC as emerging growth companies. That is
77 percent of all companies who filed over this time.
Of these, 63 percent have used the confidential filing
provision. In fact, it is estimated that a record number of
companies, more than 200 in fact, are currently in registration
for IPOs.
Finally, microcap IPOs, meaning firms with less than $250
million in market cap, have constituted 40 percent of IPOs so
far in 2013 up from 21 percent in 2012.
Today, thanks to the on-ramp and other provisions, many
companies are again committing to the time and resources
required to explore IPOs as a viable option.
While the JOBS Act has reopened and smoothed the road to
the public market for emerging growth companies, that market
remains a very difficult place to grow a company. Today, market
structures continue to favor the short-term, high-frequency
trading of large cap stocks by investment banks.
In this environment, small stocks struggle to achieve
visibility and liquidity. In the prior market era, small
issuers could help support their stocks by publishing analyst
research and employing market makers to spur interest among
investors.
But current market economics no longer support these
activities. This lack of information and liquidity has
diminished the appeal of small cap stocks for investors.
Unfortunately, with all of these issues that we have
discussed today, we don't believe there is a single simple
solution to alter the current dynamics. With that being said,
we are committed to working with a broad range of market
participants to develop solutions that take all perspectives
into account and that ultimately benefit all stakeholders.
Thank you for the opportunity to discuss these important
issues with you today. I look forward to answering any
questions that you may have.
[The prepared statement of Mr. Leach can be found on page
42 of the appendix.]
Chairman Garrett. And I thank you for your testimony. Thank
you for being on the panel.
Next, Mr. Moch is recognized for 5 minutes, and welcome to
the panel as well.
STATEMENT OF KENNETH I. MOCH, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CHIMERIX, INC., ON BEHALF OF THE BIOTECHNOLOGY
INDUSTRY ORGANIZATION (BIO)
Mr. Moch. Thank you very much.
Good morning, Chairman Garrett, Ranking Member Maloney,
Vice Chairman Hurt, and members of the subcommittee.
My name is Kenneth Moch, and I am the president and CEO of
Chimerix, a small, now publicly traded biotechnology company in
lovely Durham, North Carolina. I am also on the board of the
Biotechnology Industry Organization.
I want to thank you for the opportunity to speak about the
pivotal role that the public market plays in financing the
search for groundbreaking new cures and treatments.
Chimerix is a venture capital-backed company that went
public in April of this year, and our offering was greatly
enhanced by the IPO on-ramp provisions in the JOBS Act.
Leading up to the offering, we used testing-the-waters
meetings to explore and evaluate the interest of potential
investors. We were able to gather feedback on Chimerix and the
interest of the potential public market investors that was
critical to our decision to proceed with our IPO.
The testing-the-waters meetings also allowed potential
investors to do their homework on Chimerix in the time between
our initial meetings and the IPO. We were able to conduct
literally dozens of meetings with potential investors which
provided invaluable contact with the parties who later helped
make Chimerix's offering a success.
I always say that biotechnology companies are research and
development pipelines unencumbered by revenue. We conduct years
and often decades of research and development and spend
hundreds of millions and often over a billion dollars in
investment capital before hopefully reaching FDA approval and
generating product revenue.
As I am sure you already know, beyond and further
complicating the sheer magnitude of investment is the risk of
developmental failure due to the complexities of human biology.
Because of our unique business model, a successful IPO is
of vital importance. Chimerix's offering allowed us to set
aside the significant funding necessary to conduct a Phase III
trial of our lead anti-viral drug candidate, CMX001, which is
being developed to prevent life-threatening infections in
immunocompromised bone marrow stem cell transplant patients.
In addition to the considerable benefits of testing-the-
waters meetings, the 5-year SOX exemption allowed by the JOBS
Act ensured that we will not waste valuable research dollars on
unnecessary reporting.
It cost Chimerix over $10 million in legal, accounting, and
ultimately banking fees to go public, and the temporary SOX
exemption allowed us to focus those funds that we raised in our
offering rather than preparing for 404(b) compliance.
I want to thank Congressman Fitzpatrick for introducing the
Fostering Innovation Act to continue this important exemption
for smaller issuers.
Spending investment dollars on compliance can limit R&D and
delay R&D so changes like the on-ramp, Congressman
Fitzpatrick's legislation, and Congressman Hurt's audit firm
rotation bill are important for growing biotechs without
product revenue.
I would also encourage the subcommittee to consider a small
issuer exemption for XBRL reporting, which is a drain on both
financial and personnel resources for growing businesses.
Compliance expenditures are a direct transfer of R&D
dollars to auditing and accounting. For companies such as
Chimerix that write a few thousand checks a year and have small
accounting teams, this truly isn't a wise investment.
In the years since the JOBS Act was enacted, other biotech
companies like Chimerix have seen the promise of the IPO on-
ramp: 27 firms, merging biotechs, have gone public using
provisions of the law--there may be a larger number now--and
many more are on file with the SEC.
Congress now has the opportunity to ensure a positive
trading environment for these emerging innovators through
market structure reform.
Many small companies face liquidity and pricing issues that
can be detrimental to their public float and cash flow. Market
structure reform that addresses these issues could spur capital
formation and support company growth.
I urge the subcommittee to address tick size flexibility as
it considers market structure reform. A pilot program that
allows--to allow small companies to choose a larger tick size
for their stock would stimulate trading in growing businesses.
Decimalization has harmed liquidity for smaller issuers,
and reforming the current one-size-fits-all tick size regime,
which has been successful in other financial markets around the
world, would grant flexibility to growing companies and
increase the liquidity and capital availability necessary for
emerging biotechs to be successful on the public market.
A functioning public market is vital to the success of the
biotech industry and the American economy. At a time when
venture capital financing of biotechnology is at a historic low
and as an asset class truly appears endangered, the ability to
access public capital is increasingly important.
We have seen the appetite for capital formation on the
public market in the wake of the JOBS Act, and Chimerix was a
clear beneficiary of that law; however, capital formation does
not end with an IPO.
Congress has the opportunity to build on the success of the
JOBS Act by exploring market structure reform to small-company
growth in fundraising.
For growing biotech companies with voracious capital
requirements, successful market structure reform would lead to
scientific advancements, novel medicines, and life-saving
treatments for patients in need.
Thank you.
[The prepared statement of Mr. Moch can be found on page 52
of the appendix.]
Chairman Garrett. And I thank you as well.
Next up from KOR Trading, Mr. Nagy is recognized for 5
minutes.
STATEMENT OF CHRISTOPHER NAGY, PRESIDENT AND FOUNDER, KOR
TRADING LLC
Mr. Nagy. Thank you.
Chairman Garrett, Ranking Member Maloney, and members of
the Capital Markets and Government Sponsored Enterprises
Subcommittee, thank you for inviting me to testify today on
this important hearing on reducing barriers to capital
formation.
My name is Chris Nagy. I have spent the last 25 years
working within financial services on Wall Street. Coincidental
with the passage of the JOBS Act, I left Wall Street and
corporate America to found KOR Trading, a startup advocacy and
consulting firm.
Secondly, I partnered with other entrepreneurs in another
venture startup, PrairieSmarts, which will bring institutional
quality risk metrics to individual investors, traders, and
advisors.
As you know, when the JOBS Act was signed, specific
mandates were assigned to the SEC to promulgate rulemaking;
however, nearly 1 year after its passage, the SEC has not
finalized these rules.
For many startups similarly situated like ours, Title II of
the JOBS Act would open the doors to additional access to
capital by allowing general solicitation and advertising to
accredited investors.
We believe there is a much greater good by allowing more
participation in capital raising for companies that are
generating new jobs than the potential downside of an
accredited investor losing money because of failed disclosure.
I am pleased to hear that the SEC is voting on Title II as
I speak. Crowdfunding is an important source of capital for
startup companies. It is early-stage firms like ours, which do
not seek a great deal of capital, that often face the largest
barriers.
We commend the House for allowing crowdfunding of up to $1
million in 12 months. In our case, it is not quite enough, but
it is enough to get us up and running. These resources,
however, only become available if and when the SEC finalizes
the initial regulations.
We also expect to find further funding through the Small
Business Investment Company program. Start-up businesses are
hamstrung by the current profitability requirement when seeking
SBA financing assistance.
We are very excited to be a part of the SBIC investment
program in the fall of 2013, and believe it will be successful
to expand the reach of assistance to startups like ours.
Title VII of the JOBS Act also requires that the SEC will
conduct outreach programs and make information available to
startups. I can tell you from my seat that I have yet to
receive my information or outreach from the SEC on
opportunities available under the JOBS Act and I would ask
Congress to help the SEC along on provisions of the Act.
With innovation many times comes the ability to patent a
product or an idea. The patent process is designed to protect
that idea and give the initiator a competitive advantage in the
marketplace.
Patent costs bear a considerable cost burden to the
startup. Further, patent trolls lurk in the weeds waiting to
jump on an opportunity to sue or potentially sue the startup
which initiated the patent.
I ask Congress to examine this issue and seek ways to help
protect startups from unnecessarily and many times frivolous
litigation by requiring the initiator of such actions to bear
all the legal costs.
We do support the initiative to seek widening spreads for
small public companies. However, we feel that simply widening
spreads may not achieve the full desired effect of increasing
transparent liquidity provisioning.
We believe that in conjunction with a pilot, the SEC should
seek to incentivize liquidity as was recommended by the joint
CFTC-SEC Advisory Committee.
One such method would be the removal of Section 31 fees for
small capitalized securities along with greater incentives to
persons who regularly implement market maker strategies. We do
believe that the balance has tipped in favor of dark pool
operators, and we encourage the SEC to finalize its non-public
trading rule proposal.
We also note that internalized payment for order-flow
programs have increased and would encourage the SEC to consider
a trade-at pilot in small capitalized securities. Other
countries such as Canada and Australia have implemented rules
regarding trade-at with good results.
Finally, we believe that the SEC should seek to fortify
Rules 605 and 606 regarding execution quality. Greater
transparency of order execution stimulates competition, keeps
practices like payment for order-flow in check, and ensures
that any pilot to widen spreads has empirical data behind it.
I am hopeful Congress can help push the SEC on its mission
to finalize their tasks under the JOBS Act, and help
entrepreneurs like myself become successful and deliver
innovation and jobs to our capital market system.
Thank you for your time, and I am happy to answer any
questions you have.
[The prepared statement of Mr. Nagy can be found on page 60
of the appendix.]
Chairman Garrett. And, thank you very much.
Next, on behalf of the Investment Program Association, Mr.
Souza is recognized for 5 minutes.
STATEMENT OF WAYNE G. SOUZA, GENERAL COUNSEL AND EXECUTIVE VICE
PRESIDENT OF LAW, THE WALTON INTERNATIONAL GROUP (USA), INC.,
ON BEHALF OF THE INVESTMENT PROGRAM ASSOCIATION (IPA)
Mr. Souza. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee.
My name is Wayne Souza. I am general counsel and in-house
executive vice president of law for the Walton International
Group of Scottsdale, Arizona, and I am pleased to be here today
to testify on behalf of the Investment Program Association
(IPA).
The IPA was created in 1985 to serve as a national trade
association for the direct investment industry.
Direct investment refers to the pooling of capital by
individuals to make investments directly in tangible assets
without taking on the responsibility of the day-to-day managing
or operating of those assets.
Examples include non-listed real estate investment trusts,
oil and gas and equipment leasing programs, and business
development companies.
Direct investment products are designed to be medium- to
long-term holdings, and because they are held for these longer
durations they offer critically important capital in the form
of debt investments and stable equity investments.
By the end of 2012, direct investments represented more
than $1 billion in assets held in more than 1.5 million
investor accounts with an average investment of $30,000. IPA
members reported total sales of $13.3 billion for that same
period of 2012.
Direct investments are a critical source of capital for
America's small businesses. We are pleased to have this
opportunity to discuss ways to reduce barriers to the capital
formation and stimulate job creation for our fellow Americans.
We commend Congress, and of course the subcommittee, for
the enactment of the JOBS Act last year. The Act included a
number of provisions that will foster the creation of new
businesses, as we have heard today, and the growth of existing
ones.
The IPA would, however, like to suggest two clarifications
to the JOBS Act in particular that are intended to make it even
more efficient.
First, the Act makes it easier for private companies known
as emerging growth companies to raise capital through an
initial public offering.
The Act allows companies to test the waters, as we have
heard, by engaging in communications with qualified
institutional buyers and accredited investors without becoming
subject to the requirements that apply to the prospectuses
under Section 10(a) of the Securities Act.
However, in certain arenas, we have began to implement the
JOBS Act and there have been many concerns raised as to whether
these testing-of-the-waters materials are exempt from the
requirements that apply to public offerings generally.
The lack of clarity in some sectors of the market is having
a chilling effect on IPOs as companies may be reluctant to use
the Act's provisions. The scope of the exemption should be made
clear by Congress by amending Section 5(a) of the securities
act.
Secondly, the JOBS Act requires the SEC to develop rules to
ensure that securities sold by general solicitation or general
advertising are sold only to accredited investors.
And subject to your comment this morning, Mr. Chairman,
concerning the meetings currently being conducted over at the
SEC, Congress should clarify that the Act neither requires nor
permits the Securities and Exchange Commission to add
requirements not found in the Act regarding disclosure or
content standards in the very materials used for solicitation
or advertising.
Beyond clarifying the JOBS Act, the IPA has two additional
sections we believe would reduce barriers to capital formation.
Business development companies (BDCs) are one of the fastest
growing segments of the direct investment space and our
membership at the IPA. BDCs are similar in function to venture
capital and private equity firms, however, their ownership
structure allows the general public to participate in them.
Currently before your committee are H.R. 31 and H.R. 1800,
which would improve the ability of BDCs to provide capital to
small businesses across this country. The Investment Program
Association supports each of those bills.
A continuing challenge to our members is the patchwork of
existing State laws that govern the acceptance of electronic
signatures and executing security subscription documents. These
different State standards slow down and even in some instances
block the free movement of capital between regions.
We would recommend that Congress consider updating the
securities laws to allow for acceptance of electronic
signatures on security subscription documents in all
jurisdictions.
Again, on behalf of the Investment Program Association, we
appreciate this opportunity to address you. I will be happy to
answer any questions you may have.
Thank you.
[The prepared statement of Mr. Souza can be found on page
64 of the appendix.]
Chairman Garrett. And I thank you as well.
Finally, Professor Robert Thompson, professor of business
law at Georgetown, welcome. You are recognized for 5 minutes.
STATEMENT OF ROBERT B. THOMPSON, PETER P. WEIDENBRUCH, JR.,
PROFESSOR OF BUSINESS LAW, GEORGETOWN UNIVERSITY LAW CENTER
Mr. Thompson. Thank you.
My thanks to you, Chairman Garrett, and to Ranking Member
Maloney and the members of the subcommittee for the opportunity
to testify about removing barriers to capital formation.
Even as we have seen the economy grow over recent reporting
periods, the growth of capital formation, as measured for
example by the number of IPOs, has been below some
expectations.
The JOBS Act lowered a variety of barriers to capital
formation and more are still coming in the regulatory pipeline.
At the same time, innovations in the capital markets have also
lowered barriers to capital formation and shifted how capital
is raised.
My brief comments today will focus on those two topics.
JOBS added five deregulatory features to our national
securities laws: two new exemptions, Crowdfunding and
Regulation A-plus; revisions to a third exemption, 506, that
will greatly expand its use; and then two major changes to the
1934 Act regulatory burdens, the on-ramp that has already been
discussed and an increase in the threshold of Section 12(g),
which quadruples the number of record shareholders before a
company becomes subject to the 1934 Act reporting requirements.
As the three 1933 Act exemptions remain waiting rulemaking
from the SEC and as 12(g), the effect will not be felt for some
time, my focus today is on the fifth deregulatory feature, the
on-ramp, where we have seen the greatest changes in the year
since JOBS.
Most companies today, as has already been said, come within
the definition of emerging growth companies and are eligible to
use the detailed--less detailed regulatory requirements for up
to 5 years after going public.
The first year of JOBS did not produce much difference from
the period before JOBS in the number of IPOs, but we can see
evidence that those companies that have chosen to go public are
taking advantage of the reduced requirements for capital
formation, although not in a uniform fashion.
A recent study by Latham and Watkins of the first year of
JOBS shows a variety of taking advantage at different levels of
different figures.
For example, starting at the top, nearly all emerging
growth companies are using 404(b), the audit requirement
exemption for their EGC period.
About three-quarters of emerging growth companies are
taking advantage of reduced disclosure as to executive
compensation. Almost half of emerging growth companies have
provided 2 years rather than 3 years of financial statements.
One-third of emerging growth companies began filing with
confidential submissions and many more of those are in the
pipeline.
Only 20 percent of ETCs are taking advantage of the
extended phase-in of accounting rules that could be put in
place in the future, and there has been little use of the
expanded definition of research that would allow borrowers
communication with perspective buyers.
This diversity of EGC conduct in reaction to the new
requirements is useful information both in terms of the
provisions that they are adopting and also the ones that they
see the benefit of continuing to make disclosures about.
Investors and issuers understand that credible information
is essential to permit investors to accurately price their
investments. The burden of increasing disclosure obligations on
smaller public issues including the conflict mineral resources
that the chairman mentioned at the beginning suggest the value
of considering two levels of public issuers: one to whom all
public disclosure rules will apply; and the other only
applicable to larger disclosures that would cover, that go
beyond shareholder interest.
The new Section 12(g) threshold which I described as having
less of an immediate effect does impose one burden that merits
current attention.
The threshold for being public which had been 500
shareholders of record has been changed to 2,000, but it
requires that companies know who their shareholders are and not
just their number of shareholders, but the number of accredited
investors.
And they have to know that not just when they go public--
not just at the beginning before they go public but every year
until they go public.
This information 1 year into the new regime, the method by
which companies will get this data remains unclear. Companies
are very good at figuring out who their investors are when they
issue stock to them in a 506 or some other private offering.
But as the years go by, they lose track of them. This is a
burden that has not yet been solved. Congress needs to change
the anachronistic of record label to something that is more
suitable for the electronic age.
My last point relates to the fact that institutional
shareholders are our shareholder base, and if we talk about
barriers to raising capital, we need to focus on how
institutional shareholders are different than individuals and
some needs that they bring to the table.
Thank you very much, Mr. Chairman.
[The prepared statement of Professor Thompson can be found
on page 72 of the appendix.]
Chairman Garrett. And thank you, Professor.
And I thank the entire panel.
We will now go to questions, and I will first recognize
myself for 5 minutes.
So, where should I start? Right in the middle.
Mr. Nagy, you mentioned one item that was of interest;
unfortunately, it is outside of our jurisdiction, but still of
interest to us is the patent trolls and frivolous litigation.
So I will just make note that is something of interest to us,
but I guess I will have to be put on another committee or
something like that in order to deal with those issues.
But maybe you could go into an area you touched on that we
do have jurisdiction on. From your experience and what you are
looking at, the exchange is--so you laid out some of the
problems, you laid out some of the things that Congress can be
doing, can you lay out in the markets today, in the exchanges
today, what are the participants on their own doing to
ameliorate some of the problems that this panel has been
looking at outside of Congress to improve in the area that we
are looking at obviously trading in small cap companies?
Mr. Nagy. In terms of small cap companies, that is the
problem.
Chairman Garrett. Right.
Mr. Nagy. The volume just isn't there, so I would say, what
are people doing? There has not been a lot done to really
encourage robust liquidity in those names.
Chairman Garrett. Okay.
Mr. Nagy. You have low trading costs and you have
everything priced exactly how you have big securities priced,
but what happens is particularly if you are a retail client or
want to go in and buy the security you might see 100 shares
offered--right--you want to buy 1,000 shares.
The next price point is going to be maybe $0.05, $0.10 up
so there isn't enough liquidity to encourage somebody to even
want to place an order to buy in a lot of those.
And I would say that is where the problem begins.
Chairman Garrett. Right.
Let me swing over to the gentleman to your right, Mr. Moch.
You laid out some numbers here which are interesting, the $10
million cost to go public in some of the problem areas which
was 404(b).
Do you want to just comment on what the professor was
talking about--from your view--as he put it, the diversity of
the benefits by companies that they selected of the JOBS Act.
You heard what he said. He just ran down how they were using it
differently.
Mr. Moch. Which particular aspect? I'm sorry.
Chairman Garrett. So in other words, the professor was--and
professor, you can chime in here--running through that we
passed the legislation, it provided benefits, but apparently
that the companies are looking at it from their own
perspective, which is good, to pick out which ones best work
for them, and you highlighted I guess in the one area, 404(b)
as far as one of the benefits of being able to avoid that.
Mr. Moch. Right. We spent about $1.8 million in fees before
going public or as part of the process and then the bankers
fees were another eight when we finally went public, and we
were able to not--in the going public process, one of the
things that was important for our investors was not to spend
too much money before we found out if we could go public.
That is when the key things--by not having to be prepared
for 404(b) compliance before the public offering, we can avoid
that preparation, which is about tens of thousands of dollars.
And if you look at it from--even hundreds of thousands of
dollars--the venture capitalist perspective, you are putting
more capital at risk for an event that might not happen.
So in a general sense, what we are trying to do is before
we find out if we can even go public, not spend a lot of money
getting ready for it. To be 404(b) compliant, for example,
before a public offering requires you to be ready--get ready
months if not years in advance and you can't make the decision
of when the window is going to be available. So all of that
spending money, basically transferring it from research and
development to accounting.
Chairman Garrett. Okay.
Mr. Souza, can you just elaborate a little bit on the
disclosure requirements that you were talking about and the
fact of whether or not to say--and I think I know the answer,
but I will throw it out to you--as far as the SEC adding to or
detracting from the disclosure requirements and the authority
that they have in that area that you are talking about in your
testimony?
Mr. Souza. Are you talking in connection with testing-the-
waters?
Chairman Garrett. Yes.
Mr. Souza. Yes. The best thing in our judgment as the
association to remedy that situation is to borrow a piece out
of Rule 408 in connection with free writing prospectuses.
In the area of free writing prospectuses, everything that
is in the free writing prospectus need not necessarily go into
the registration statement; absent which you would have
material misrepresentation and the same thing we believe would
be appropriate in terms of testing-the-waters.
That is, just because you may have some information in the
materials one uses to test the waters and it is not in the
registration statement, does not necessarily make it a material
admission and remedying that would take care of that issue.
Chairman Garrett. Okay, I think I got that.
Thank you. I appreciate it.
Mr. Scott, you are recognized for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
Professor Thompson--incidentally I think all of you gave
very, very good information, very good testimony--I just want
to focus on three basic areas to get an ascertainment on and
some of you may want to jump in, but Professor Thompson, do you
have any significant evidence about the impact of the JOBS Act?
It has been a relatively short period of time, and in that
time, have we given enough time for us here in Congress where
we can get an impact on it before we even begin to think of
what else we may want to do?
Mr. Thompson. As to the name, the hardest impact to measure
is jobs. It is very difficult to have any metric to say we have
produced jobs. As to--secondly, as to capital formation, which
does lead to jobs, we can measure how much capital has been
raised in the last year and there has been testimony from the
panel about that already and it is going up. The second quarter
has been very good, but still not so great.
As to the specifics, what I mention and the chairman
referred to, it hasn't been one-size-fits-all. Companies that
think about going public are looking at the JOBS Act and seeing
what fits for them.
Section 404(b) is there for almost everybody, so you know
that is making a difference. Some of the other things are not
being used as much and that is worth taking into account, and
then there are things like testing-the-waters that are by
definition testing-the-waters goes on behind closed doors.
It is pretty hard for us on the outside to see what is
going on, and the SEC is going to adapt as it goes along, so
there hasn't been enough time yet to see exactly how that is
working.
Plus, there is still more stuff coming online; 506 perhaps
today, crowdfunding down the road, there will be other things
going on, so we will know more than we know today and the
question is, when do you know enough that you want to go ahead
with something else?
Mr. Moch. Would it be helpful to personalize that to
Chimerix's effects--useful?
Mr. Scott. Yes.
Mr. Moch. We absolutely use parts of the JOBS Act in our
decision-making process to go public. We really started the
process of going public a year ago; we went public in April, so
the early part of last year.
We needed to raise money for a very expensive clinical
trial, the drug I mentioned, CMX001, so we had to start talking
to investors to see if they were interested and a year ago,
there was no real public market. So today, yes, it is very
nice. A year ago, it wasn't there.
So testing-the-waters was very important, and not having to
spend money on something like 404(b) to get ready for a market
which might not exist was critical to this decision-making
process. Again, had there not been a public market, we would
have been wasting money and time.
Mr. Scott. So the answer to the question would be that
Congress might need more time to fully implement and evaluate
the effects of the JOBS Act before pushing for any additional
experimental, small business capital formation proposal. Is
that pretty much the consensus of the group?
Mr. Moch. Yes, but there are things you can already see to
be helpful.
Mr. Scott. Okay, now I spoke earlier about are there any
identifiable undue regulatory burdens that we need to look at
that are standing in the way of capital formation?
Mr. Moch?
Mr. Moch. I can certainly clarify--one of the comments was
made about clarification of things like testing-the-waters
meetings. This may be a minor part of it all, but I can tell
you in talking to many other biotechnology CEOs, it is not
clear how many people you can talk to, what you can or cannot
leave behind, the depth of testing-the-waters meetings. So,
every law firm gives a different piece of advice because there
is no clarity.
Mr. Scott. Okay, I have 40 seconds left. What about the SEC
program, the tick size, the efforts to make other moves? Each
of these points that have been brought up with what the SEC is
doing? What kind of grade do you give that? Are there
alterations that need to be made in that?
Mr. Leach?
Mr. Leach. I think the ideas that have been discussed today
and in previous conversations about piloting whether it is on
tick size or other issues are things that the committee should
look strongly at and shouldn't wait because in many of these
issues in terms of long-term economic impact are going to take
years, not quarters to get the full understanding. So I think
additional areas to consider should be looked at and tested and
further discussed.
Mr. Scott. Thank you, Mr. Chairman. I yield back.
Chairman Garrett. Thank you.
The gentleman from Virginia, Mr. Hurt, is now recognized.
Mr. Hurt. Thank you, Mr. Chairman.
And again, I thank each of the witnesses for being here.
I wanted to direct a couple of questions to Mr. Moch and
your experience with Chimerix as it relates to XBRL. You noted
in your testimony that the costs about $50,000 to comply with
that. Could you talk a little bit more about that in terms of
the ongoing--is that an ongoing cost?
And can you talk about the time that you are required--does
that estimate include the time required by staff? Does that
include the opportunity costs? That is, what could those
resources be used for as it relates to other parts of your
operation in how you invest those dollars?
Mr. Moch. There are two sides to that. One, the number--you
described it accurately--the $50,000 would include external
costs to the printer if you will, plus the internal legal--
internal costs of our staff plus legal oversight and review. So
we estimate that at about $50,000 a year, which is, if you
think about it, a person. So we are trading XBRL for a person.
Mr. Hurt. Do you--and by the way, if I may interrupt, do
you actually have one person who deals with that--
Mr. Moch. No.
Mr. Hurt. --or is that something that everybody has to--a
number of people have to contribute to?
Mr. Moch. We have a very small accounting staff who does--
we have been audited by one of the major accounting firms
through our life, but we have a small focused accounting staff.
The other side of it is the fact that most of the people
who would look at biotechnology companies don't look at us
quite bluntly for our financials; they look at us for the
progress of our science.
And so the relevance of this rule to a company like
Chimerix is one that I would question because it is not--they
are not going to put our spreadsheet up and compare it to other
biotechs. Let's put it that way.
Mr. Hurt. Okay, that leads me to my second question. What
does this do for investors? The investors who are looking to
invest in your company, do you hear from them saying, what we
see on this XBRL format is very, very helpful to us and this
makes us want to invest in your company?
Is it helpful to them? And is there a risk of having it be
actually not accurate or not helpful?
Mr. Moch. I can't answer the second part. I can tell you I
have never heard anybody ask about XBRL. I was also the CEO of
one of the smallest accelerated filers in the country after the
implementation of Sarbanes-Oxley in 2003, and never once
despite the fact that we were fundamentally tortured by the
compliance process, did an investor asked me about the status
of our financials. It is all about the status of the science.
Mr. Hurt. Very interesting.
Mr. Leach, I wanted to ask you about sort of the big
picture in terms of the disincentives for companies to go
public, and that obviously is something on which this committee
is focused. How do we encourage more companies to do that?
That was the purpose of the JOBS Act. One of the things
that you note in your testimony is that as a consequence, a lot
of these startup companies are really positioning themselves to
be acquired as opposed to going public.
Are there any negative consequences just to that dynamic in
and of itself that a company is proficient need to go--to be
acquired as opposed to going on its own and getting bigger?
What are the sort of long-term applications for that, and are
there negative consequences?
Mr. Leach. There are very, very significant negative
impacts on job growth. Obviously, when you are--in our case, a
technology-oriented firm that is being acquired typically by a
much larger company that has internal capacities that now are
duplicative, those young companies coming to the larger firm
and jobs are lost, not gained.
So this limitation and prevention of companies being able
to access public markets has a very significant, negative
impact on job growth and particularly--I am from Cleveland, so
a place in the Midwest where there are lots of young startup
tech companies.
A lot of the acquirers of these companies would be from
outside the Midwest. So not only is it a negative national job
impact, but the jobs could be polled to other markets, whereas
in our community, we are really looking for young technology
companies to be drivers of job growth. So this is a major
impediment to the long-term trajectory of jobs in the United
States.
Mr. Hurt. Do you think that the XBRL issue that you all
have touched on is--do you think that is in and of itself a
disincentive or is it an example of the sort of a regulatory
climate that is in fact of the disincentive to companies going
public?
Mr. Leach. I would say it is, but it is one of many. That
certainly isn't the issue. I would also emphasize just because
it has come up that the potential impact of crowdfunding, which
is obviously for younger companies, earlier companies, than it
is for firms that are preparing to go public, I think is also
going to have an incredibly positive impact on job growth.
I know this committee certainly isn't losing sight of that,
but it is a complex system. There are multiple levers to be
pulled. All of them should be continued to be looked at and
evaluated and tested for improvement.
Unfortunately, there is no silver bullet here, and that
certainly is one of the challenges that this committee--
Mr. Hurt. Thank you, Mr. Leach. My time has expired.
Chairman Garrett. The gentleman yields back.
The gentleman from Connecticut is recognized.
Mr. Himes. Thank you, Mr. Chairman.
I would like to thank the panel for a really informative
discussion today on some fairly technical issues. I have two
questions. One is, a number of the panelists made the point
that one of the barriers to capital formation in the IPO market
is the post-IPO trading environment, and absence of research
coverage, and absence of market makers. There have been
suggestions that there could be what feel to me perhaps heavy-
handed mechanisms whereby we could address that. Of course,
changing, mandating broader tick sizes is one of the proposals
out there.
My question is, why does the market not take care of this
problem? In other words, if you have illiquid lightly traded
shares, why don't investors do their own work, because it's an
illiquid inefficient market, they discover real value
opportunities and therefore make a lot of money.
Why is there not a natural market solution to what appears
to be an illiquidity problem in aftermarket trading?
Mr. Nagy. I can take that a little bit. Essentially,
liquidity in our country has been boiled down to the top traded
securities and furthermore, to exacerbate it, investors like
you are talking about have moved from doing the research on
individual securities more into exchange traded funds which
happen to be based on those bigger securities as well, too,
right, because they are worried about the market volatility.
When an investor takes a look at a very small capitalized
security, they do not see a lot of liquidity there. There is no
real incentive for them to want to buy it because it doesn't
have the liquidity of the larger names that are out there.
So it is really important to push liquidity in those names
and those smaller names also lack market makers and specialists
to a big degree. There are a lot of firms that--
Mr. Himes. But if I could interrupt there, isn't there
just, if you do a $100 million IPO which is not an unusual
size, there is just going to be a natural limitation on the
liquidity.
A big institutional investor can't take a $200 million
position in a $100 million IPO, right? Is there a solution to
that problem?
Mr. Nagy. So what you are talking about is if you do a
small IPO, and only have a set number of shares out there, you
are going to have a small amount of trades per day?
Mr. Himes. Yes.
Mr. Nagy. There is nothing you can do in that case, so you
are talking about what the actual float is in the marketplace.
If you have a small float, right, shares that are trading in
the public marketplace, then you are going to have much lower
volume, but the real question is not volume; the real question
is liquidity.
So if I am an investor and I want to buy shares on a very
low liquid stock, are there only 100 shares offered if I want
to buy 1,000, 2,000, et cetera, at that price. I think that is
where the real issue is and also one that drives potential
investors away.
Mr. Himes. Let me move on to my second question, because I
will run out of time.
During the whole JOBS Act debate consideration, the amount
of money we were talking about, 404(b) compliance and whatnot,
it ranged from--some companies saying it costs them $500,000 a
year and others saying $1.5 million a year. There was a big
range there.
I was always puzzled by the fact that no issuer and the
venture capital community never raised the issue of underwriter
gross spreads, which 25 years ago when I was doing IPOs were
7.5 percent, and I think today are still pretty much 7.5
percent.
Mr. Moch. Seven.
Mr. Himes. Seven, okay, it has gotten a little more
efficient there.
Doing my math, on a $200 million IPO, that gross spread is
$14 million; much larger than the $0.5 million, $1.5 million
annual we were talking about. And I understand that is an
annual cost, but here is my question.
In that industry, the inputs have gotten much more
productive; I.T., people, et cetera. Why in a purportedly
competitive industry in which we have seen productivity
improvements are issuers still paying roughly the same gross
spread that they were paying 20 or 25 years ago?
Let me ask the professor and Mr. Nagy, who said he was on
Wall Street for a while, to maybe start with answers to that
question.
Mr. Thompson. That spread goes over the whole selling
network. The core point, and it doesn't answer it entirely, is
that when you do an IPO, you don't know what the price is.
There has to be price discovery, and for price discovery you
can't go to a market and watch it. You can't watch the tape.
You have to talk to people. You have to--and you have to sense
what they are doing and a middle man, a middle person does
that.
And that process is still a--electronics hasn't helped us
on that point as much as it has a lot of other things that we
have done.
So I think there is still debate, but there is still a
question that process has to have an intermediary who has a
reputation on the line who is going to be able to come back and
be a repeat player and who is going to be held accountable over
the long haul for what they do.
And so, that is a cost of going public. It produces value
beyond it because we see companies go public. But if it
doesn't, companies will look for their money from venture
capital to private equity or some other source.
Mr. Nagy. Yes, I would tell you that if you went back to
work today it would be eerily similar in that regard, because
the markets in that aspect haven't changed a lot from the
underwriting aspect.
One of the things that has happened though over the past
decade and a half is we have seen this decoupling of the
distribution network versus the underwriting network. So back
in the day when I first got into the industry, those were
actually intertwined.
You had the distribution network coupled with the
underwriting network and now that distribution network has been
pulled out. We see that--in the form of online brokerages and
where we see the investment thinking in the big banks. So there
is a big decoupling there which doesn't allow those revenues to
flow back and forth.
Just quickly, I was thinking about the last IPO that was
done differently, Google, which did a Dutch auction out to
their investors and there was a lot of criticism over the
pricing of it. But it was fairly innovative in trying a
different method for that.
So at the end of the day, the methods that are out there
are still old. The market has changed quite a bit, and thus the
reason why things are the same in that regard.
Mr. Himes. Thank you, Mr. Chairman.
Chairman Garrett. Sure. Thank you.
Mr. Huizenga for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman.
I appreciate your time, and I know that especially for
those of you from the private sector, this is taking away from
some valuable time as you are out trying to grow businesses and
that kind of thing, and it seems to me that this is a key
element to our economic rebirth and our growth.
I come from a very entrepreneurial area over on the western
side of Michigan, in the Grand Rapids area, and we have a lot
of entrepreneurs, a lot of those small businesses, and I know
they are looking for ways to take their ideas and move them to
the next level.
I am concerned frankly that the SEC is spending more time
and resources on discretionary issues, other things for
example, the corporate political disclosure, Dodd-Frank
rulemaking, the discretionary side rather than some of those
more capital--I'm sorry, concrete measures that are going to
help small businesses access that capital. I am kind of curious
to get your temperature.
Absent of the JOBS Act, does anybody believe the SEC staff
would have proposed any rules to the Commission to enhance
capital formation, particularly small capital startups, private
companies. Do we see that sort of a visionary movement out of
the SEC or do we need to have a body like this to prompt them
along?
Mr. Nagy. I will take that question. The answer is yes, you
need a body like this to move them along. I would submit to you
that it is interesting when you look at within the SEC some of
the initiatives that they undertake.
I will give you an example. At no fault of theirs, it is
just that the process to continue to move regulation that
would. But I will talk about regulation SCI, Systems,
Compliance, and Integrity, which was just proposed on March
8th. It actually goes back to an issue with a large market
maker that happened in August of 2012, so I am drawing a
timeline here.
So in August of 2012, you had an issue, a very large
monetary issue with market maker on the street. On October 2nd,
the SEC held a fairly large roundtable, and then on March 8th,
the SEC proposed a 400-page set of rules regarding that issue.
Take that back to the JOBS Act--I said, I am a startup, I
need crowdfunding to come in, we don't have anything on the
table, it has been over a year, right. So I think it is a lot
of where the priorities really are in terms of addressing the
issues.
Mr. Huizenga. I want to say thanks for the answer, but that
confirms something that I am not real thankful of, I guess, and
that is a lot of the concern.
And I know that the SEC does the forum on small business
capital formation and advisory committee. There has been a
tremendous number of suggestions that have come out of that. I
am not seeing a lot of implementation of that. Has anybody else
seen what is coming of those things?
Professor?
Anybody else?
Mr. Souza is grabbing the microphone. Go ahead.
Mr. Souza. I happen to have the pleasure of serving as a
securities subcommittee co-chair for the American Bar
Association, and this topic came up at our very recent meeting.
These forums have been continuing for some time at the
Commission, but there appears to be a general market
frustration about the implementation of positive or any actions
in response to them.
Said another way, it is a good dialogue and it needs to
take place, but there doesn't appear to be much movement
following the meetings--
Mr. Huizenga. Not to interrupt, but are you saying actions
speak louder than words?
Mr. Souza. Often, they do. Yes, sir.
Mr. Huizenga. Okay, all right. That is good to hear, and I
know we had the pleasure of having Mary Jo White here in front
of the committee. One of those recommendations--I have to put a
plug in here for my bill, H.R. 2274, having to deal with
mergers and acquisitions.
It seems to me as you are seeing a lot of those small
businesses looking to move along they are going to have to sell
themselves or at least part of themselves and there has been a
real problem with the brokerage definitions of who that is and
we are hoping to solve that with that particular piece of
legislation. So I would love for you to take a look at that,
H.R. 2274, you can write it down.
But I am also curious, is there anything else that we
should be doing to help facilitate this, because this is so
vital as we are trying to revive our economy? I am looking for
suggestions.
Go ahead.
Mr. Nagy. I would just say that SEC funding is an important
consideration, getting people to give the SEC the proper
bandwidth that they need to be able to complete a lot of the
rules.
Just visiting the SEC quite a bit, it was obvious they were
bogged down from a lot of the implementation activities with
Dodd-Frank. So a lot of other things went on the back burner
which kind of makes it a little bit harder when they don't have
enough staffing in place.
Mr. Huizenga. I appreciate it.
I know my time is up--maybe Mr. Moch, if the chairman will
allow but it seems to me is about priorities as well, right?
Mr. Moch. Yes. And I just wanted to add that, to reinforce
the concept that one-size-doesn't-fit-all and that is really
where we as a small company and over the course of my five
companies we got hit with application of rules that are made
for a bad act done by somebody in a very large company that
then applied universally you to small companies. When we first
encountered SOX compliance, the guys said look, I have to treat
you just like IBM because that is what the law says.
Mr. Huizenga. Maybe we are here from the government, and
maybe we can help, so we will try.
Mr. Moch. It would be nice.
Mr. Huizenga. All right. Thank you.
And with that, I yield back. Thank you, Mr. Chairman.
Chairman Garrett. The gentleman is recognized moving right
down the aisle--
Mr. Peters. Thank you, Mr. Chairman.
Chairman Garrett. --for 5 minutes.
Mr. Peters. I appreciate all of you being here, and your
testimony, and I have a question really for the entire panel if
anybody wants to jump in on this.
One suggestion of the SEC's advisory committee on small and
emerging companies was the creation of a separate U.S. equity
market specifically designed for very small and emerging
companies.
Now as I understand it, several European exchanges created
these types of so-called junior stock markets which were
intended to promote equity finance by enabling small companies
to go public and then to grow at that point.
However, in many of these new companies that initially went
public, investor participation in trading volume shortly
thereafter fell quite significantly, and by the mid-1990s, the
European exchanges decided to abolish these junior stock
markets.
So given that this is a recommendation from the advisory
panel, could any of you comment on the European experience and
how you think it might be different here in this country and
make some sense for us?
Mr. Thompson. Not just Europe, but London and Brazil and
other places have tried it. As the ranking member noted in her
opening remarks, we have the deepest stock market in the world,
and so that gives us more liquidity even in that segment, as
well.
So there--in various--the experience might be different,
but I think what the experience from the 1990s and 2000s shows
is that the markets are creative.
The markets are adapting to changes in technology and
changes in who is owning shares and the question is, who ought
to be the lead for that question? Should it be the government
or should be the markets? And on that question, I think there
is something to be said for letting the markets take the lead.
Mr. Nagy. Yes, I would actually add to that, and I saw that
recommendation of the advisory committee on small and emerging
companies. The real question is if you do it, do you just have
one, because I would like to put in the bid to be the one to
run it, if that were the case.
So competition is always a good thing. There actually are
facilities out there today. I do think once some of the
provisions of the JOBS Act are completed, we will see markets
begin to emerge naturally on their own that will begin to bring
some transparency into the pricing of securities that are not
yet IPOd.
Mr. Souza. I would observe for you that I think many
companies are looking at the Toronto Stock Exchange to
essentially do that in some form. They incubate there, they get
a following and then they migrate to the larger exchanges in
the United States and I have seen that occur a number of times.
I am not suggesting that is the ultimate solution, but I have
observed that.
Mr. Peters. Okay, very good.
Thank you, and then a final question here to Mr. Leach.
I know you have had some success in nurturing startup
companies in the Cleveland area, and Cleveland is a city that
shares some of the challenges of a city that I represent, the
City of Detroit, and I would like you to discuss some of the
factors that you believe could help create a startup ecosystem
in cities like Cleveland and how that might be transferable to
Detroit.
Detroit, of course, has incredible intellectual capital. In
fact, when the first patent office opened just a few years ago
outside of Washington, D.C., for the first time in history it
wasn't opened in Silicon Valley, it was opened in the City of
Detroit because of the incredible intellectual capital there,
and yet we don't have the venture capital community in the City
and in Michigan like some other areas.
Do you have some suggestions as to things that we should be
doing that you would recommend?
Mr. Leach. Absolutely. My organization is actually a
nonprofit that partners with public, private, philanthropic,
and institutional organizations that have a common vision to
accelerate capital formation in the acceleration of young tech
companies.
So the secret for us in Ohio, and we have actually worked
now in 15 other regions of the country, is how do you bring
together the leaders, the stakeholders who already have a
vested interest in economic growth and particularly the
acceleration of tech companies and help those leaders in that
community figure out a strategy, a collective strategy that
will leverage off and benefit each other?
We call it a collective impact strategy. There have been
significant partnerships with Federal agencies as well as State
and local governments, but more substantially, the private
sector.
As a good example, my organization has invested $30 million
of State and philanthropic monies in startups, in Cleveland--
Northeast Ohio--and those startups have now raised about $400
million of private capital.
And along with that system, of those 70 companies that we
have helped, we have also helped attract another $1.2 billion
of private capital.
So for the places that aren't the usual suspects for this
type of innovation, it really takes an all-in collective
strategy, but most importantly tactics that institutions of
research, the private sector, the corporate leadership, and the
public sector can partner and of course the private sector can
carry most of this weight if it gets some catalyst activity or
momentum from the public sector in the philanthropic community.
Mr. Thompson. And don't forget the university segment in
funding basic research that feeds into that same pipeline.
Mr. Leach. Absolutely, absolutely.
Mr. Peters. Thank you. Mr. Chairman, I yield back.
Chairman Garrett. The gentleman yields back.
Mr. Royce?
Mr. Royce. Thank you, Mr. Chairman.
I was going to ask a question to the panel and this goes to
the founder of the SUBWAY Restaurants chain, who I saw make a
comment to the effect that if he tried to start his company
today, there would be no SUBWAY because of, in his words,
``more and more regulations.''
And I saw that the National Federation of Independent
Businesses had this study which purported that on a daily
basis, there are 10 new regulations a day. Now ignorance of the
law is no excuse, but clearly for small businesses, you have to
stay abreast of all of these new regulations. You have to stay
current. It has an amazing impact in terms of litigation costs
and everything else as you are trying to deal with all of this
in compliance.
I thought I would ask the panel what, if anything, could be
done because if we start counting up the new regulations out of
Dodd-Frank, all of the new regulations that impact litigation,
all of the regulatory superstructure that is being erected and
all of the ways in which small enterprises try to stay up with
this, given their economies of scale, what might we be able to
do to streamline some of this? Maybe get rid of some of the red
tape, create a safe harbor in order to do startups, because
this is where most of the new job creation is, isn't it, with
starting the next little company and watching that grow and
that is where the employment is created?
But, Mr. Leach, do you want to--
Mr. Leach. Yes. It is a great question. The ideas of safe
harbor's ideas and opportunities like that I think to be looked
at. I think the reality for most small companies, certainly
firms that are about ready to go public, absolutely, they have
a good sense of the regulatory environment today are working
in, but the reality is most small companies really don't,
particularly in the earliest stages.
So to really have for small companies, small firms to have
a better sense as well as Congress, the committee, and the
citizenry of what are all of the regulations that are relevant
to these businesses.
I think it is no one on the small business side. I think
very few business owners have a full sense of--they are daunted
by it, they are concerned by it, but we don't have a full sense
of the balance of the things of that are in the short-term and
intermediate best interest of small business owners that are on
the positive and on the negative side.
I think it is just overwhelming for small companies today
as they contemplate all of the different issues they are
facing. So I think it is something that we need to get a much
greater clarity on not only what is in place, but what could
change to improve the situation for small companies.
Mr. Royce. I think a cost-benefit analysis on some of this
would certainly be warranted if you consider how few people
work. And of course once you have that small business that
begins to take off, then you are in a situation as Mr. Moch,
the company that went public under Title I of the JOBS Act,
your firm, and I was going to ask you, Mr. Moch, because once
you get some momentum in an enterprise, you have an idea that
is really clicked, and as a consequence now you need access to
capital to expand that company, I was going to ask you, was
some of what we did in terms of the JOBS Act, is that what led
you to choose this avenue for any merging growth company for
your firm?
Mr. Moch. To start off, our new company is actually already
10 or 11 years old and that is biotech drug development, and
now only now going into Phase III.
Without the JOBS Act, it is an interesting question, and we
were debating as a company what the course would be for us if
the public markets were not open and we needed to raise $85
million to $100 million to run our Phase III trial, we would
have had to do a private venture capital round.
The way venture capital works these days, because it is
such a complex industry, is the new rounds coming in crush the
old rounds, so the people who have been investors for 5 and 10
years would have had their returns crushed.
When they went out to raise their next round of venture
capital because their returns were bad, the pension funds and
others who look at the asset class of venture capital would
have passed on it.
So there is a whole cascade of bad things that happen when
public markets and financing markets don't exist and the
existence of the JOBS Act and the ability to find out that yes,
we could go public and we spent a lot of time talking to
investors and bankers was critical because the alternative was
a very difficult washout financing that probably would have
crushed the prior investors and made this company,
survivability would have been a question.
Mr. Royce. So after growing for 10 years to get to this
point, the existence of the JOBS Act was then a critical factor
in making you decide to access the public market and enter
those public markets?
Mr. Moch. Yes, and for other companies. I talked to a lot
of other CEOs as well, and many companies are looking at, do
they sell or do they try and do a venture round or do they try
to go public?
If you sell a company, you cap the value and as was just
mentioned by Mr. Leach, your company moves generally so their
jobs are lost wherever you are.
If you have to do a venture round, you are crushed, and if
there is a public market and we happen to--we spend a lot of
time with the bankers and investors trying to figure that out.
People look at Chimerix and think that we helped open up
this particular market, and I think that timing-wise we did,
but without the ability to talk to everybody and make it
happen, it would have been a very different outcome.
Mr. Royce. Thank you, Mr. Moch.
I thank the panel.
And thank you, Mr. Chairman.
Chairman Garrett. Thank you.
The gentleman from Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman.
I want to thank the witnesses for helping the committee
with our work.
Mr. Nagy, I was very encouraged by your statement regarding
adequate funding for the SEC. I appreciate that. I am however
concerned that the subcommittee's recommendation underfunds the
SEC, underfunds the present request by $300 million, and I
think that the added responsibilities that we have placed upon
the SEC and Dodd-Frank and on the regulatory infrastructure
cannot be met with the existing funding.
Professor Thompson, roughly 35 percent of all equities
trading this year is taking place in dark pools or brokerage
dealer internal pools of orders and other alternative training
systems where prices are not publicly available in advance of
the trade. They are only listed after trade.
Can you talk about the consequences of that? We are talking
about capital formation and we see more and more trading coming
off of the transparent exchanges and more energy, more
resources, and greater risk being directed toward these dark
pools.
What does it say if that trend continues with respect to
the overall goal of enhancing capital formation, especially for
some of the smaller companies that we are talking about coming
into business at this time?
Mr. Thompson. Technology has really sped up the price of
discovery process for any trader to the point that if you are a
trader you are worried about entering into the market because
the information is going to be--you are competing with someone
who is having a different strategy and so you would rather be
in a dark pool because you like the odds better of making money
on your information.
And so, we have to deal with the technology part that is a
reality that just speeds it up so much, and so, it is pretty
complex. I don't have an easy answer for you, but there has
been movement toward pushback on getting 2 second, millisecond
advantages information before it is public, how to deal--
because that is the kind of thing that drives you to a dark
pool because you don't want to deal--you don't want to trade
with someone who has an advantage over you and so it requires
knowing technology and how that interacts with traders.
And that requires an expertise that doesn't usually exist
in regulatory agencies or in the Congress and so it is a
question of keeping up with technology and it continues to be a
real challenge that the SEC is working on and we need to
support them with having the guns to match what is going on in
the private sector.
Mr. Lynch. Thank you. Just a follow-up question: I know
that we received some testimony at a previous hearing from
Chairman Schapiro regarding the attitudes of investors with
respect to companies that are required to comply with Section
404(b) versus the confidence level in companies that are not
required to comply.
And I know that you have dealt with some survey information
with respect to 404(b) compliance. Is there anything you can
tell the committee with respect to investor confidence in terms
of that compliance?
Mr. Thompson. There is a general correlation between
information and investor confidence and there is a trade-off
between cost and investor confidence.
I think the main point about JOBS is that emerging growth
companies get 5 years of grace for 404(b), which is a large
space to work out this cost point and to that extent, we can
see how that works. Because we always have to balance the
availability of information which usually helps consumers
versus the cost of information to providers, but JOBS gives
most companies, because remember most IPOs are emerging growth
companies, it gets them 5 years of grace to get that sorted
out.
Mr. Lynch. Okay, thank you.
Mr. Moch. May I--
Mr. Lynch. Mr. Chairman--
Mr. Moch. Can I just add to that--
Mr. Lynch. Sure.
Mr. Moch. --for the biotech industry, again, to be very
specific where the lifecycle is so long and the probability of
hitting revenue is often the future, even after 5 years, the
applicability of the financial control that we are talking
about in 404(b) isn't necessarily relevant because again, it is
just a wealth transfer from R&D to accounting.
My first company, which I founded in 1982, didn't have
product revenue for 15 years, but it was public in 1986. You
have these long lifecycles before you have a dime of revenue.
So the general one size you have to have it after 5 years may
not work and probably doesn't in certain industries.
Mr. Lynch. No, that is a great point. That is a great
point. That is something we should be able to address.
I thank you, Mr. Chairman. My time has expired.
Chairman Garrett. Thank you. The gentleman from South
Carolina, Mr. Mulvaney, is now recognized for 5 minutes.
Mr. Mulvaney. I thank the chairman.
Gentlemen, I have a couple of different questions on a
couple of different topics, so I will move through it as
quickly as I can. I will open the first one up to just
everybody which is: Several of you have mentioned in your
testimony, both written and verbal today, that the SEC still
has rules outstanding. If you had to pick one rule from the
JOBS Act that the SEC had not yet enacted that you would like
to see take a priority, what would it be?
Mr. Nagy, you mentioned, I think more specifically, so I
will start with you, and then Mr. Leach, and I think Professor
Thompson mentioned it as well.
Mr. Nagy. Without wasting your time, Title III.
Mr. Mulvaney. Title III?
Mr. Nagy. Yes.
Mr. Mulvaney. Mr. Leach?
Mr. Leach. Crowdfunding; I think it will have a very
significant impact, a positive impact.
Mr. Thompson. I would say 506, because crowdfunding, as it
passed the Congress, put very serious limitations on how to
draft a system that works. I still remain very skeptical about
how they have been given a task to make crowdfunding work
within the constraints of the bill is going to be a challenge.
506 can maybe make this happen already. It can happen, it
will change capital raising immediately when that happens.
Mr. Mulvaney. Mr. Souza, do you agree?
Mr. Souza. Absolutely, 506, but perhaps we will have some
greater clarity today.
Mr. Moch. And from BIO's perspective, it is really Reg A.
Mr. Mulvaney. Okay.
Thank you, gentlemen.
Mr. Nagy, a question for you. In your written testimony,
there is a line--and I will read it, it is only one sentence.
It says, ``Congress may want to consider permitting these
firms,'' which you are talking about SBICs, ``to become more
involved in providing capital to financial service firms.''
That is currently the case. I have a bill that would allow BDCs
to do exactly that. Could you tell us why you think that is
important?
Mr. Nagy. Maybe it is a little self-interested, but we are
what will be considered the financial services firm and there
are quite a few out there. The SBIC program--
Mr. Mulvaney. But other than its benefit to your firm, how
would it help access to capital?
Mr. Nagy. It would help to access capital simply because
that program goes from--as it is today, you have to have net
revenues, positive net revenues in order to receive money from
that SBIC program.
The new program changes that in terms of you do not have to
have net revenue; you don't need to be net revenue positive in
that case, and I think that is really big. When you look at a
startup coming in, the first thing they have are costs. Right?
You have patent costs, you have hiring costs, you have
developing costs. You are not bringing in any revenue because
you haven't launched your product. Then, you have marketing
costs on top of that, so you may not be profitable, as in our
case, for 2 to 3 years.
Right? So, being precluded from that entire section of the
market is very difficult. You have to go through different
avenues to get funding in that regard which makes it harder.
Mr. Mulvaney. Mr. Moch, do you want to check in on that
one?
Mr. Moch. No, I was just enjoying being profitable for 2 to
3 years. Remember the unencumbered by revenue. My experience is
15 years on average is not before revenue, not profit.
Mr. Mulvaney. I have started companies and if we couldn't
get net revenue positive in 6 months, we wouldn't have existed.
Mr. Moch. My current company is about 200 and something
million dollars of accumulated retained earnings negative. My
last company that unfortunately didn't work because of how much
money was lost was about $225 million before we started the
drug wasn't going to work.
That is what this business, the biopharmaceutical
business--
Mr. Mulvaney. That is a different world.
Professor Thompson, you mentioned in your testimony
regarding an anachronism, that the concept of the on-record
shareholdings is an anachronism. Any suggestions on what we
could replace it with?
Mr. Thompson. Beneficial shareholders. Record shareholder
refers to who is on the company's record and it is always a
depository company. This was designed to solve the back office
crisis of a generation ago.
When you go public, all shares are owned by a depository
company or a broker-dealer. It measures nothing. If you do
beneficial ownership, and computers let us do that, we get much
more of a sense of who ought to be covered and who ought not to
be covered. We ought to use beneficial owners only.
Mr. Mulvaney. That is the second or third time we have
heard that as a constant theme in this committee, that this
concept needs to go away and companies need to be able to know
who owns them, and it is possible to do today where it wasn't
in the past.
I was going to talk a little bit about the tick bill, but I
understand Mr. Duffy is here, and he and my friend, Mr.
Schweikert both have separate bills, so I am going to leave
that to him and then close with you, Mr. Moch.
You mentioned that it cost you about $10 million to go
public. Did you all have a feel for what that would have cost
but for the JOBS Act?
Mr. Moch. You could probably add a couple million more in
terms of prep costs, so be spent again, $1.8 million of legal
fees and accounting fees--I am sorry, $650,000 in D&O insurance
which is required when you are public, but you could argue a
million-plus more at risk for 404(b) preparation and other
aspects of getting public in the old environment and that risk
capital to venture capitalist is probably where we weren't
willing to put it up.
Mr. Mulvaney. In the few seconds I have left, you also
mentioned something that was very interesting to me, which is
the percentage that you had to incur before you actually made
the go, no go decision. Was that beneficially impacted by the
JOBS Act as well?
Mr. Moch. Yes, because we could feel the market. Early on,
we could see the market interest. And I might add that by the
way, other biotech companies--which we have looked at this
number--we are low on the extent scale because I am a tightwad,
but other companies going public have spent $3 million and $4
million to be--those are the costs of going public. So my $1.8
million is just low.
We are the third lowest out of 21 recent IPOs, to those $3
and $4 million and we certainly by knowing that there was
interest in the market, we talked to investors, they would get
feedback to the bankers, the bankers would tell us. We knew we
had a path.
And the market was not open at the time we did this. So it
is absolutely important for our decision-making process.
Mr. Mulvaney. Thank you, gentlemen.
Thank you, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
Mr. Foster, you are recognized for 5 minutes.
Mr. Foster. Mr. Leach, I guess, could you say a little bit
more about the net job creation in an IPO versus an acquisition
scenario? Because it seems to me that in an ideal market where
everyone knows, everyone has complete information, the value of
a startup might be higher in an acquisition scenario simply
because redundant jobs can be eliminated and the merged entity
would be a more efficient economic object. And that a lot of
the increased value from--in the IPO scenario--has to do with
the lack of complete information that you are introducing a
much larger pool of less informed investors. And a lot of the
increased economic value that is seen at the BC end and the
startup end is due to the large pool of less informed
investors. And where this is a fundamental trade-off and--
anyway, how do you see that whole--
Mr. Leach. So today, approximately 20 percent of the U.S.
economy is being driven by venture backed companies and as we
discussed earlier, 92 percent of job growth is coming post-
public markets. I think many of these firms have been industry
creators. So as we look forward, what venture capital does is
it invests in firms that create new industries as opposed to
perhaps we are in more of a--we haven't had a dramatic new
innovation in a--whether it is the Internet or biotech industry
in previous decades that have been huge job creators and wealth
creators going forward. I think that is an interim period where
yes, M&A might have some greater efficiencies to the points
that you raised, but looking forward, where the large--where I
believe the large growth is going to happen is going to be from
firms that are creating new innovations, whether that is out of
things in the biotech sector, in genetics or other areas, those
are going to be firms that if we are going to maximize the
economic impact and potential of these new innovative firms, a
more optimum approach would be to be able to access the public
markets.
Today, the public markets are decreased or depressed mainly
because there isn't confidence and access to it in the general
downturn of the economy. So I understand your point, and I
think there are some inefficiencies there, but looking forward,
increasing access to the public markets is really what is going
to enable these new innovative firms to create more jobs as
opposed to more of an efficiency play which would occur more in
the M&A space.
Mr. Foster. I come from the point of view of someone who
started a startup with $500 from his parents that is now $150
million a year and it has been a very successful ongoing
concern--when we had to grow, we simply brought in additional
well-informed partners as investors and never were attracted by
the public markets.
And it seems to me that there is some merit to having well-
informed investors be the primary elements in this and avoiding
the potential, the large number of the things you worry about
on things like crowdsourcing when you are bringing in large
numbers of less-informed investors.
And so I think we have to just be very careful that this is
real economic value that we are optimizing for and not just
transfer of wealth from a large number of less informed
investors.
And a related thing, it seems to me that the issue of
liquidity for small cap IPOs is a fundamental problem that I
think Representative Himes touched on that the cost of
obtaining information on a small cap object is relatively high.
You are never going to get--technical traders will not be
interested in that because there are not a large number of
competing, well-informed investors on these things because it
is not worth their time. And so you are--I think you are never
going to get larger volumes of technical trading and--or even a
large number of well-informed investors.
And so I was just wondering if any of you can describe any
scenario where we really have high true liquidity for small cap
IPOs and then whether fixed size is really going to affect that
fundamental problem?
Mr. Nagy. I can take that. When you talk about high and
true liquidity for small cap security, when you look at many
small cap securities today, they trade with large spreads. They
are not trading at penny spreads, although we have a one-size-
fits-all approach in the market. So they are bound by the exact
same rules that the S&P 100 stocks trade by.
Now the disadvantage there is that when you look at that
stock, you don't see a lot of size amount security. And I spoke
about this before where you might see the offer side maybe 100
shares, the next level up might be a nickel or a dime up. When
you look at an S&P 100 security, you are looking at a penny
spread in that stock, hundreds of thousands of shares on each
side.
If you widen the spreads, what you do is you encourage the
liquidity provider to essentially commit more capital because
they have carry costs, trading costs, everything else that goes
in association with that, you encourage them to commit more
capital for their implicit and explicit trading costs.
Thus, you go from 100 shares being offered at the inside to
maybe 1,000, 2,000 shares being offered at the inside. That
then incentivizes somebody who is looking at the stock to say,
``Well, there is enough liquidity in it for my trade.''
Mr. Foster. Who is the best entity to choose the tick size?
Should that be the company or should it be rules-based? What is
the best scenario for that?
Mr. Nagy. That is a really good question. The SEC held a
roundtable, a decimalization roundtable late last year, and
that was up for debate, should it be a nickel, should it be a
dime? The JOBS Act amendments call for a dime.
Really what needs to happen and what is lacking in the
market today is just empirical evidence. Do a pilot, figure out
what the exact right amount is, and then perhaps apply that to
different securities, different tiered securities. Other
countries such as Canada and Australia, although they are far
less liquid than the United States, all have tier sizes with
their trades.
So if your stock price is X, then you trade at a different
price, or if capitalization is X, you trade at a different
price. That is really what has to happen. Any pilot needs to be
followed up with empirical evidence to see whether or not it
really made a difference.
Mr. Foster. Thank you.
I see I am out of time. I will yield back.
Chairman Garrett. The gentleman yields back.
The gentleman from California has joined us.
You are recognized.
Mr. Sherman. It is always good to be as close as possible
to the gentleman from Georgia.
The SEC advisory committee has urged that we not take into
consideration policy objectives or humanitarian or social
objectives. I would point out that they don't have the
expertise to see what the effects are on the ground,
particularly in Africa, and to weigh those with whatever
inconvenience there is for the public sector companies.
I sit on the Foreign Affairs Committee and to think that we
would diminish our efforts to deal with conflict minerals and
that decision would be made on the basis of input from those
who have not studied the conditions on the ground there does
concern me.
A lot of the small companies were trying to get financing
or spend money on R&D and under FASBR #2, Financial Accounting
Standard Boards Release Number 2, they have to write it off. So
if you build a laboratory, a building, and you capitalize that,
it doesn't reduce your bottom line at all, but if you spend
money inside that building, even if the research is successful,
you have to list that as an expense.
Now if you are a real high tech high flyer company,
investors recognize that, but we want research to be done by
companies that don't have the word ``research'' in their name.
To what extent are companies that aren't known for their
research, that are companies where you buy on the basis of
earnings-per-share, being discouraged from investing in
research because it is an expense that hits the bottom line
rather than a capitalized asset?
Does anyone have a comment on that?
Mr. Nagy. I will take a stab at it. In our country, we do a
one-size-fits-all approach in the markets. So if you are a
public company or a trading company, you pay the exact same
price if you are a small company versus being a large company.
Now if you look at just personal taxation, that is dependent
upon the income that you--
Mr. Sherman. Mr. Nagy, I am not sure you understand my
question. My question was about our accounting principles,
which I think everybody agrees should be the same for large and
small companies. I wasn't raising a question about taxation.
Mr. Nagy. Oh, sorry. Sorry, Congressman.
Mr. Sherman. Okay.
Does anyone else have a comment?
Next, one of the things--the really small companies, people
who are seeing me every day in my district aren't looking to go
public or even to talk to a venture capitalist. Their goal is
to get a $1 million loan and they come to me, and they have
talked to this bank and that bank and the other bank. To what
extent would it help if we allowed credit unions to make
business loans? Does anybody have a comment?
Mr. Leach. My organization gets involved in a whole range
of small business activities. Of course, the entities that we
spend the majority of our time with are things that are
ultimately venture-backed but there are real challenges in
terms of access to capital in the traditional small business
space as well and this is something that we see by the dozens
every day and that is all of the options to accelerate the
growth and the economic impact of small business Congress needs
to evaluate and look at.
So specifically, to the credit union issue, I am not privy
to the details of the regulatory issues there, but we still
have real challenges on access to capital across all small
business.
Mr. Sherman. Mr. Souza, you have members who are business
development corporations. How would they be helped if we
allowed them to issue preferred stock and that stock would
count as capital in calculating their equity ratio?
Mr. Souza. I believe that would help tremendously, along
with a number of other measures that are proposed in H.R. 31
and H.R. 800.
Mr. Sherman. I yield back.
Chairman Garrett. Mr. Carney?
Mr. Carney. Thank you, Mr. Chairman. Thank you for having
this panel today and thank you to each of the panelists. I have
found your testimony today fascinating, very interesting. The
JOBS Act, which I worked on with Members from the other side of
the aisle--many of us did. This was the most productive work, I
think, that we did in the last Congress, certainly in this
committee.
We did it with Democrats and Republicans working together.
I worked on the on-ramp part of the JOBS Act with Mr. Fincher
so it is great to hear the testimony of Mr. Leach and Mr. Moch,
in particular your willingness to come here and share your
personal experiences is very, very helpful.
One of the things you said really, really hit me. You said
you want to try to avoid all costs--I like the fact that you
are a tightwad too, I try to be one; I am one of nine kids, so
I think that is the source of it--you avoid costs before going
public, an event that may not happen, and the preparation cost
for the 404(b) audit you mentioned in particular was one.
You seemed to suggest a moment ago that maybe a 5-year on-
ramp is not long enough, maybe for certain companies. Would you
like to elaborate on that at all?
Mr. Moch. Sure. The fact is that we have no idea when we
will have revenue. It could be a couple of years or it could be
another 5 or 10 years, and I have lived through that.
My last company--two companies ago called Alteon was 20
years old, never had a dime of revenue, but that is the
lifecycle of biotech. Sometimes the drugs go quickly and
sometimes they don't. Sometimes they fail in Phase III and you
have another one.
So to apply a rule that says after a certain period of
time, you have to comply with a rule which isn't really
relevant to what people are interested in, just doesn't make
sense to me.
Mr. Carney. So there are tradeoffs, as Professor Thompson
mentioned.
Do you have a view of that, Professor Thompson, with
respect to this particular sector and to the trade-off between
investor confidence and information and cost?
Mr. Thompson. As to this sector--
Mr. Carney. Yes.
Mr. Thompson. --I think there is reason for a difference
and so revenue may not be the right standard. And so you have
to come up with a targeted language that would--because
investors look at the science because there is no--why? Because
there is no revenue to look at. So you look at the science and
try to get your information from there.
But to me, it would be better--it would make more sense to
try to develop targeted language as opposed to blanketly change
the 5-year period.
Mr. Carney. So in other words, that would be directed
toward this particular sector. That would probably be difficult
to do, but maybe it is something we ought to take a look at.
Mr. Thompson. I think language could be developed that said
if you get so much of X amount of your business is a drug
development--I shouldn't be drafting for the industry.
Mr. Carney. So are there other costs that we should look
at?
Mr. Leach, maybe you can answer this question. It is my
understanding that most of the ideas for the IPO on-ramp
evolved out of a meeting that started with Treasury and then an
ad hoc group of industry participants and a series of ideas.
Are there things that are still out there that weren't in
the original bill that we might take a look at?
Mr. Leach. I can't speak to the specific gaps but there has
been conversation both in the association and with venture
firms. There are many ideas that I think can be brought to the
table and discussed and evaluated to be able to reduce costs in
this IPO on-ramp objective.
Mr. Carney. So you would be willing to share those with us?
Mr. Leach. Absolutely.
Mr. Carney. That would be great.
Mr. Moch, is there anything in particular from the real-
life that you would like to share with us and that should be a
target for it?
Mr. Moch. I don't have any specifics right now, although I
know that BIO is working on a number, and I guess I will look
to them to maybe provide some further insights.
I think that we did a pretty tough job of tightening down a
lot of things and that was good, but there is still a lot of
cost and there is still this huge uncertainty, so I am going to
look to the BIO folks and we will--
Mr. Carney. So last question--I am running out of time--on
tax reform and tax policy. Are those considerations anything
that you look at, Mr. Moch or Mr. Leach, in the companies that
you deal with?
Mr. Moch. I really want to pay taxes someday.
Mr. Carney. Say that--
[laughter]
Good point.
Mr. Leach?
Mr. Leach. Clearly, the importance of capital gains to the
investment in early-stage companies. You are hearing the time
horizons and that these investors are making 5-, 10-, 15-, 20-
year time horizons, so to benefit investors who are willing to
wait that length of time, capital gains are very important.
Mr. Moch. Can an I speak for NDCA for a second?
Mr. Carney. Please.
Mr. Moch. And I am not an NDCA person. I am critically
concerned about the potential death of biotechnology venture
capital investing. This is a tough, long-term asset class, and
the changes in capital gains rates, and the complexities of
investing in this business are such that the number of VCs
focused on biotech is dramatically declining.
It is almost--it is in a crisis--from I think 150 or so
even just a couple of years ago down to the 60s if I have that
number correct now. So the feed stock of new drug development
is drying up, and I don't know how you all face that and how
you address it and what you do, but if you don't, the
development of new drugs will ultimately decline even further.
Mr. Carney. Thank you.
Mr. Moch. It is just that hard a business.
Mr. Carney. Thank you, all, very much.
I yield back.
Chairman Garrett. I thank the gentleman.
And for the final word, Mr. Duffy is recognized.
Mr. Duffy. Thank you, Mr. Chairman.
I want to join the committee in thanking the panel for
taking time out of your days and providing such great testimony
here today. I think it has been incredibly beneficial.
I think everyone on the panel and the committee understands
that the largest creators of jobs in America are small
businesses, and it has been those small businesses that are
experiencing liquidity issues that are due to a number of
things including changes in our market structure.
Since decimalization, all stocks operate under a one-size-
fits-all trading regime. I think that has been beneficial to
our larger, better known companies, but it has been detrimental
to our smaller, less visible companies.
And to that extent, we have been talking about this, Mr.
Carney and I have, introducing legislation that would offer
tick-sized flexibility that would hopefully breed liquidity
for, or help breed liquidity for our small cap companies.
There is a wide range of topics that we are discussing, but
we are looking at tick sizes anywhere from--or increasing tick
sizes from $.05 to $.10 allowing companies to choose that size
which works best for them.
But with better liquidity, we think that we can see a
growing economy, better job growth, and more opportunities for
our American families. We think this is an important step in
the right direction to address the problems that have been
discussed here today.
And I guess, to this end, does the panel agree that one
tick size doesn't fit all? Is there a consensus on that point?
Mr. Leach. There seems to be.
Mr. Nagy. Absolutely.
Mr. Moch. Yes.
Mr. Souza. Yes.
Mr. Thompson. Yes.
Mr. Duffy. Okay, and that is a good starting point. I think
it is actually pretty interesting that we have Democrats and
Republicans, small businesses, and the SEC all agreeing that we
need to have movement on this tick size issue.
Mr. Moch and Mr. Leach, how many analysts cover your stock,
if any?
Mr. Moch. We went public. Four companies currently cover
the stock and this actually made me think of something that
might be relevant.
In order to avoid some bad acts by a certain limited number
of people multiple years ago, one of the rules that was
promulgated by, I don't know if it was Congress or the SEC, was
that analysts and bankers can't talk to each other ever because
they will be shot if they do. And I think that from a
standpoint of an IPO process, to go back to questions that have
been asked, how can you make things better, I have to do double
meetings with everybody. If I am talking to 20 banks, that is
40 meetings to try and get people up to speed, to have the
bankers and the analysts make decisions independently because
they can never talk to each other.
So if you want to find a moment in time where you might
change something and allow the system to be a little more
fluid, that is a moment in time. Yes, people did bad things
years ago, but the whole industry and the IPO market is jammed
up because of that.
So from the standpoint of analyst coverage, it is an
incredibly difficult process because the bankers--the reason
you want analyst coverage is so that people will follow your
stock and the bankers don't want to cover a company where
analysts don't like it, but they can't talk to each other.
So it is really made for a much more complex market that
was done because one particular analyst did a stupid thing and
made silly memos and I understand why you want to penalize that
person, but it has penalized everybody.
So we have four right now. We will try and get more, but it
takes a long time to work with the financial analysts. And that
is the answer.
Mr. Duffy. Mr. Leach?
Mr. Leach. I have nothing significant to add to that. It is
incredibly challenging.
Mr. Duffy. How many companies?
Mr. Leach. I am a venture capitalist, so I invest in small
tech companies. No one follows us. In terms of our companies,
they are all pre-public. So it is really not a relevant
question.
Mr. Duffy. Okay.
And I guess, Mr. Moch, would it be helpful if you had more
analyst coverage? Would that be a benefit?
Mr. Moch. Oh, yes. Absolutely.
Mr. Duffy. If we get this tick size bill right, if we do
this correctly, do you think that will foster more research in
companies like yours, Mr. Moch?
And I don't know, Mr. Nagy, if you want to jump in on this
too?
Mr. Moch. I don't know a lot about the compensation
mechanism for analysts, but certainly things that create
greater liquidity--and if they choose a stock and say this is a
good stock and people start buying that stock, I presume there
is a mechanism by which the analyst get compensated.
I don't know that specifically. That is only good for
increasing liquidity. It is self-fulfilling, right. People
follow the stock, more people will follow the stock, people
will get compensated, they will follow the stock. It is just a
nice cascade up. We block that right now.
Mr. Duffy. Yes.
Mr. Nagy. Yes, trading cost is absolutely a very important
part of why a specialist or a market maker will engage in the
stocks. So you can--if you can incentivize them and provide
further incentives downstream, I think that is really
important.
There are some proposals out there as well to allow
companies to compensate, market makers to potentially
compensate the analysts for coverage. I do think that is a
workable idea and something that should be explored further.
Mr. Duffy. And maybe on that point, if we get the tick size
bill right, will that also encourage brokerage dealers to start
making markets in smaller cap companies? Will that be a net
benefit?
Mr. Nagy. Absolutely.
Mr. Duffy. Okay.
Mr. Nagy. Yes, absolutely.
Mr. Duffy. And just--I know my time is up--if I could ask
just one quick question.
If no one is trading in companies like Mr. Moch's stock, or
if there are stale quotes, who benefits?
Anybody? Do the investors benefit? Does the company
benefit? Does society benefit? Does anybody benefit when no one
trades?
Mr. Moch. There is no liquidity and no trading? No, because
the next time I try and raise money, I can't. Remember, an IPO
is just the first step. It is not a destination. It is a
milestone along a long pathway, a milepost along a long
pathway. Our IPO is not the last time we are going to raise
money.
If nobody trades in the stock, and some small stocks trade
by appointment, then you can't raise the next round of money
and then you are really trapped. So everything we can do to
make sure the markets function fluidly will be important.
Mr. Nagy. It is also about proper evaluation. So the market
finds the proper valuation many times of what that company
should be trading and if you are very limited with coverage,
liquidity coverage on that, that can affect your valuation.
Mr. Duffy. And I guess as I am going to yield back in one
moment--if any of you have any comments for Mr. Carney or
myself in regard to what you would like to see in a tick size
bill or not in a tick size bill, we welcome that input if you
want to share it with our offices.
Again, thank you for your testimony, and with that, I yield
back.
Chairman Garrett. Did you have--I will just yield to Mr.
Carney. Do you have any other comments with regard to that
since you are working together on that?
Mr. Carney. No, I just want to thank Mr. Duffy for working
with us--for giving me the opportunity to work with him, I
should say, and any advice that you can provide for us, we want
to try to get it right. The idea is to do a pilot. You all
mentioned that and see what might happen.
Thank you.
Chairman Garrett. Thank you, Mr. Carney.
Again, thank you to the entire panel for being with us
today. It was, as a number of people have said, very helpful
and illuminating.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
With that, this hearing is adjourned.
[Whereupon, at 12:02 p.m., the hearing was adjourned.]
A P P E N D I X
July 10, 2013
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