[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE PROPOSALS TO ENHANCE
CAPITAL FORMATION FOR SMALL AND
EMERGING GROWTH COMPANIES
=======================================================================
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
SECOND SESSION
__________
APRIL 9, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-74
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88-536 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 BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York PATRICK MURPHY, Florida
STEVE STIVERS, Ohio JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois STEVEN HORSFORD, Nevada
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 BILL FOSTER, Illinois
STEVE STIVERS, Ohio JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina DANIEL T. KILDEE, Michigan
RANDY HULTGREN, Illinois PATRICK MURPHY, Florida
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
C O N T E N T S
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Page
Hearing held on:
April 9, 2014................................................ 1
Appendix:
April 9, 2014................................................ 41
WITNESSES
Wednesday, April 9, 2014
Burton, David R., Senior Fellow in Economic Policy, The Heritage
Foundation..................................................... 9
Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia
University Law School, and Director of the Center on Corporate
Governance, Columbia University Law School..................... 11
Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on
behalf of the Biotechnology Industry Organization (BIO)........ 13
Quaadman, Tom, Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce...................... 15
APPENDIX
Prepared statements:
Burton, David R.............................................. 42
Coffee, John C., Jr.......................................... 58
Hahn, Brian.................................................. 72
Quaadman, Tom................................................ 79
Additional Material Submitted for the Record
Fitzpatrick, Hon. Michael:
Written responses to questions submitted to Brian Hahn....... 97
Luetkemeyer, Hon. Blaine:
Law360 article entitled, ``SBIC Relief Act Will Be Good For
Advisers--And Business,'' dated April 7, 2014.............. 101
Written statement of the Small Business Investor Alliance
(SBIA)..................................................... 104
Article from The Wall Street Journal entitled, ``Dodd-Frank
Interfering With Small Business Investment,'' dated April
9, 2014.................................................... 107
Wagner, Hon. Ann:
Written statement of Protea Bioscienes Group, Inc............ 109
Written statement of Richardson Patel LLP, dated April 4,
2014....................................................... 111
LEGISLATIVE PROPOSALS TO ENHANCE
CAPITAL FORMATION FOR SMALL AND
EMERGING GROWTH COMPANIES
----------
Wednesday, April 9, 2014
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 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Neugebauer,
Huizenga, Stivers, Fincher, Mulvaney, Hultgren, Wagner;
Maloney, Sherman, Lynch, Scott, Himes, Peters, Foster, and
Kildee.
Ex officio present: Representative Hensarling.
Also present: Representatives Luetkemeyer and Fitzpatrick.
Chairman Garrett. Good morning. Today's Subcommittee on
Capital Markets and Government Sponsored Enterprises hearing
entitled, ``Legislative Proposals to Enhance Capital Formation
for Small and Emerging Growth Companies,'' is hereby called to
order.
We thank the panel for being with us for this important
hearing. And, as we always do, we will start with our opening
statements, and then look to the panel, so you can sit back and
relax for a few more minutes, and listen to the words of wisdom
from up here. I now yield myself 4 minutes for an opening
statement.
Today's hearing will examine a variety of legislative
proposals to enhance capital formation for small and emerging
growth companies (EGCs). I want to thank all of our Members
today, especially those who are sponsors of the legislation
that will be coming before the subcommittee.
The United States has the most fair, most efficient, and
the deepest capital markets in the world. Now, the primary
function of this market is to what? To help facilitate the
appropriate flow of capital from investors to companies that
need funds to create jobs and to grow their businesses. Today,
America's startups and small businesses continue to encounter
difficulties accessing U.S. capital markets to finance their
operation. Moreover, the costs to these companies of going and
staying public remains unacceptably high.
In an effort to continue to help small businesses raise
much-needed capital, we have the legislative package that is
before us today. These measures seek to help companies raise
capital, and comply with regulations in three specific areas:
first, some of the bills help small businesses go public, so we
call them pre-IPO; second, some of the bills help small
businesses be more competitive after they have gone public, so
we call them post-IPO; and third, some of the bills help small
businesses attract more investment in the private market, so we
call them no-IPO.
By focusing on the pre-IPO, the post-IPO, and the no-IPO
markets, these legislative proposals span the main areas where
companies raise capital from investors. These proposals hope to
strike a delicate balance of lowering the overly burdensome
cost of capital for some companies, while retaining the
important safeguard for the investors. Specifically, this
package includes a number of other reforms to the securities
laws that will make it easier for small companies to attract
much-needed capital.
First, the post-IPO. The gentleman from Pennsylvania, Mr.
Fitzpatrick--I think he is here--has introduced H.R. 2629, the
Fostering Innovation Act. It broadens the number of companies
that can qualify under SEC rules as nonaccelerated filers,
which are subject to certain exemptions under the securities
laws and under the Sarbanes-Oxley Act (SOX).
Second, the gentleman from Illinois, Mr. Hultgren, has
circulated a discussion draft to enhance utility of SEC Rule
701, which exempts the SEC from registration of certain
securities offerings by companies to its employees as part of a
written compensation agreement.
Third, the gentleman from Missouri, Mr. Luetkemeyer--who
will be back later on--has introduced H.R. 4200, the SBIC
Advisers Relief Act, to include small business investment
companies in the class of venture capital funds and private
funds that are exempt from SEC registration.
Fourth, we have the gentleman from California--who will be
joining us later--Mr. McCarthy. He has circulated a discussion
draft to broaden the number of companies that can qualify as
well-known seasoned issuers (WKSIs). This is a class of issuers
created by the SEC, which are able to take advantage of certain
regulatory benefits.
Fifth, we have the gentlemen from South Carolina, Mr.
Mulvaney. He has circulated a discussion draft to enhance the
liquidity of restricted securities sold to the public in other
qualified institutions through SEC Rules 144 and 144A,
respectively.
Sixth, the gentlelady who is making the last bit of
introductions this morning, the gentlelady from Missouri, Mrs.
Wagner, has circulated a discussion draft of the Small Business
Freedom to Grow Act, and that would do what? It would reduce
the burdens on smaller reporting companies seeking to register
securities offerings with the SEC.
And, finally, me. I have circulated a discussion draft of
the Disclosure Modernization and Simplification Act. What would
it do? It would direct the SEC to tailor regulations, S-K
disclosures rules as they apply to emerging growth companies
and smaller issuers to eliminate other duplicative, outdated,
and/or unnecessary disclosure rules.
So, in all this it is important to remember that capital
formation and investor protection is not an either/or
proposition. When investors have additional investment options
to earn a return, and invest their money, that additional
choice is significant protection.
Again, I want to thank all the Members for their hard work
on these important pieces of legislation, and I again urge our
colleagues in the Senate, who have so far completely ignored
the important capital formation efforts that have been done in
a bipartisan manner here in the House, to quickly consider
these measures in the interest of small business, and the
interest of investors, and of hard-working Americans across the
country. And I look forward to the testimony of all of our
witnesses today.
With that, I yield back, and at this point I yield to the
ranking member of the subcommittee, the gentlelady from New
York, Mrs. Maloney, for 5 minutes.
Mrs. Maloney. I thank the chairman for holding this
hearing. The U.S. capital markets are the envy of the world.
They offer investors liquidity, transparency, and flexibility,
and they offer companies access to capital in the form of a
deep pool of investors who stand by and are willing to invest
in promising businesses. While the ecosystem of financial
regulations in the United States is complex, the central
tension underlying the entire system is simple: investors want
as much information as possible on the companies they are
investing in, as quickly and as accurately as possible.
The issuing companies, on the other hand, want to keep as
much information as possible about their business practices
confidential. Companies also want to spend as little time as
possible preparing the disclosures that their investors crave.
It is the job of public policy to strike the right balance
between these two competing desires. Whether public policy
should favor the investors or the issuers often depends on the
specific situation. Sometimes, more disclosure is appropriate.
Other times, the burden on the company of the additional
disclosure outweighs the benefits.
I am concerned, however, that we are in danger of tipping
the scales too far in favor of the issuing companies, and away
from the investors. No one disputes that preparing audited
financial statements is a time-consuming, labor-intensive
process. But that by itself does not mean that preparing
audited financial statements is overly ``burdensome.'' So, I
think it is important to remember that reducing ``burdens'' for
public companies can sometimes come at the expense of
investors, the very investors we need to keep our capital
markets strong and competitive. We would do well to remember
that it is, after all, the investors' money that is on the
line.
Of course, there are situations where the benefits of
reducing the burdens on issuing companies outweigh the costs to
investors, and in those situations I would wholeheartedly
support eliminating those burdens. But, we need to engage in a
careful, balancing test with all of the bills that we are
considering today. And I have always said that our markets run
more on trust than on capital, and really these regulations are
there to build the trust of the American people so they
continue investing, and I would say the world, in our capital
markets, which are the strongest in the world.
One of the bills, which I am pleased to co-sponsor along
with Mr. Luetkemeyer, easily passes that test, in my view. H.R.
4200, the SBIC Advisers Relief Act fixes an unintended
consequence of the Dodd-Frank Act. Under Dodd-Frank, an
investment adviser that only advises a venture capital fund is
exempt from SEC regulation. Similarly, an investment adviser
that only advises small business investment companies (SBICs)
is also exempt, but an investment adviser that advises both a
venture capital fund and an SBIC is, for some reason, not
exempt.
This makes little sense and it provides no additional
protections to investors. And it encourages sophisticated
investment advisers who have experience advising successful
venture capital funds from bringing that expertise to small
business investment companies, which restricts small businesses
access to sophisticated investment advice. Our bill fixes this
problem by clarifying that investment advisers that advise both
venture funds and SBICs are also exempt from SEC registration.
I look forward to hearing from all of our distinguished
witnesses today, and I would note that one, Professor Coffee,
is from the great City of New York. He has testified before
Congress at least 25 times. That may be close to a record. We
are very happy to see him. He also is from New Jersey, so he is
from both, and we welcome him. Columbia is one of the great
universities in the district and city that I am privileged to
represent. So welcome, Professor Coffee, and everyone else.
Chairman Garrett. Thank you, and I share the gentlelady's
comment: At the end of the day, it is the investors' money that
is on the line. I think that is a good takeaway from however we
address these points. It is a very good point.
I now yield 2 minutes to the vice chairman of the
subcommittee, Mr. Hurt.
Mr. Hurt. Thank you, Mr. Chairman. I want to thank you for
holding today's hearing on the legislative proposals to further
enhance capital formation. I thank all of the witnesses for
being here as well.
This subcommittee's work on the issue of capital access for
small and emerging growth companies has resulted in the
bipartisan passage of numerous bills in the full Financial
Services Committee and in the House. I look forward to their
enactment so we can continue to expand upon the successes of
the Jobs Act that we have witnessed over the last 2 years.
Even with those successes, I continue to hear from
companies--both public and private--in my district about the
impacts of outdated and burdensome regulations on their ability
to access capital. As our markets and the needs of participants
continue to evolve, it is necessary for our regulatory
structure to reflect those new realities.
Today, I especially look forward to testimony from our
witnesses regarding Chairman Garrett's Disclosure Modernization
and Simplification Act, and reforming our corporate disclosure
regime. I am encouraged by the comments of a majority of the
Commissioners at the SEC, including Chair Mary Jo White, about
the need for the SEC to engage in a comprehensive review of our
disclosure requirements. They have noted that disclosure
overload is having negative impacts on investors, public
companies, and the SEC itself.
Fostering capital formation in our capital markets requires
consistently reliable information on public companies, however,
too much information, for the sake of information itself, can
create inefficiencies and confusion, especially among investors
unable to make informed decisions. Streamlining our disclosure
regime to better reflect the SEC's three missions will lead to
benefits for both businesses and investors.
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 our local communities need. I look forward to
the testimony of our witnesses and thank you, again, for your
appearance before this subcommittee. Thank you, Mr. Chairman, I
yield back the balance of my time.
Chairman Garrett. Thank you. At this point, I yield 2
minutes to Mr. Peters.
Mr. Peters. Thank you, Mr. Chairman, and thank you to our
witnesses for being here today. During my time in Congress, my
top priority has been ensuring that small businesses have the
tools they need to grow, especially access to capital. I
appreciate the efforts of my colleagues who have put forward
the bills that we will be discussing today, and I hope that our
witnesses will help us balance the potential improvements in
capital formation that these proposed changes would yield
against any decrease in the quality or the availability of
information investors need to make decisions about where to
invest.
Michigan, my home State, has some of the fastest growing
venture capital communities in the Nation. Both Detroit and
Grand Rapids have become hubs of innovation with flourishing
start-up communities. I look forward to our witnesses'
discussion of how H.R. 4200, the SBIC Advisers Relief Act,
introduced by my colleague, Representative Luetkemeyer,
addresses the interactions between venture capital advisers and
small business investment company advisers.
I hope our witnesses will touch on how this legislation
could improve advice available to small businesses and fast-
growing startups, and whether any potential conflicts could
arise from these proposed changes. Thank you, and I yield back
my time.
Chairman Garrett. The gentleman yields back. Thank you very
much. Mrs. Wagner for 2 minutes.
Mrs. Wagner. Thank you, Mr. Chairman, and thank you for
this hearing. I appreciate you all being here today. Small
businesses are the primary engine of job growth in America. The
tightening of credit, as a result of the financial crisis and
Dodd-Frank reforms, has made access to capital in the public
securities all the more important. Yet, even in one of the
strongest stock markets in years, small companies struggle to
raise money because of overburdensome regulation.
Today, we will discuss a number of proposed bills,
including my bill, the Small Business Freedom to Grow Act of
2013, which is based on recommendations by the SEC Government-
Business Forum on Small Business Capital, which included
participants such as Staples, from St. Louis in my home State
of Missouri, and also another great Missouri company, CrowdIt,
LLC.
My bill would allow smaller reporting companies to access
the public securities markets more efficiently, by allowing
them to use the shorter form of registration, form S-3, thus
reducing costly compliance. The SEC said that the proposed
expansion of Form S-3 should not adversely impact investors. In
addition, my bill would allow smaller reporting firms, who have
registered using an S-1 form, to use forward incorporation to
automatically update their registration statement. According to
the SEC, this change would allow companies to avoid additional
delays in the offering process, and could reduce or even
eliminate costs associated with filing amendments to the
registration statement.
Lastly, my bill would preempt all securities issued by
smaller reporting companies, and emerging growth companies,
lessening the burden of having to comply with 50 different sets
of States' securities laws that require considerable compliance
costs. These smart reforms are an important follow-up to the
Jobs Act, and will improve the environment for small business
capital formation, consistent with other public policy goals,
including investor protection. I thank you, and I yield back.
Chairman Garrett. I thank the gentlelady. We now yield 2
minutes to Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman. I thank the ranking
member, and I thank the witnesses for offering their assistance
with the subcommittee's work. Mr. Chairman, I just wanted to
give you a heads up, well, I would ask unanimous consent within
the next 48 hours to submit a letter to the chairman, but I
would like to circulate it to the Members on both sides of the
aisle here, regarding our ability to hold a hearing on high
frequency trading, and especially how that high frequency
trading operates within dock pools.
As you know, there has been considerable concern in the
last week or so about whether or not high frequency trading has
rigged the system. So, just to let you know that letter is
coming, and I appreciate any consideration you might give to
that. I would also like to thank the witnesses here today.
Today's hearing has seven bills that are intended to reduce
barriers to capital formation for businesses. Unfortunately, I
am concerned that the bills before the committee do not fully
strike the right balance and may do serious damage to investor
protection. It is important to remember that the SEC rules that
these bills seek to roll back serve important investor
protection purposes that could be thwarted by restricting or
repealing those rules.
What we are talking about here is a zero-sum game. Reducing
regulatory requirements for businesses seeking to access the
capital markets generally means that investors will have less
information on which to base investment decisions. Less
information also increases the likelihood of securities fraud
and abuse. We have to be careful to strike the right balance
between the burden on issuers and the need to protect
investors.
I am concerned that the subcommittee is moving too quickly
to reduce so-called burdens without fully understanding the
effect of these reductions and what effect they have on the
burdens on investor protections. I am particularly troubled
that several of the bills before the subcommittee today
completely exempt securities from State registration
requirements. A blanket State law preemption is something that
this Congress has rejected over and over, and yet these
provisions continue to find their way into legislation before
this committee.
Last Congress, we passed the Jobs Act, which significantly
reduced limitations on capital formation for all companies. I
agree with the testimony of Professor Coffee that this
committee seems to be rushing from the first Jobs Act to kind
of a ``Jobs Act II,'' without fully understanding the
consequences of the first law. Reducing unnecessary burdens is
good, and where we can make the securities law simpler and
easier to comply with, I think we should. But we should not do
so regardless of the cost. I look forward to hearing from the
witnesses about whether these bills before us today strike the
right balance. I thank you for your indulgence, Mr. Chairman,
and I yield back.
Chairman Garrett. The gentleman yields back, and I thank
the gentleman for his recommendation with regard to having
hearings on this very important topic. I do wish to remind the
gentleman that actually over the last 2 years, we have had 3
hearings and events so far. The gentlelady from New York and I
had a field event, to which the gentleman was invited. We have
had two other hearings, the last of which was about a month
ago. I know the gentleman was obviously invited to all three of
these things.
Mr. Lynch. We have gotten a lot of new information in the
last couple of weeks, though.
Chairman Garrett. Right. So, the gentleman was at the last
one, which was just shy of a month ago, and we will continue to
have hearings on this topic. And, as the gentleman knows from
the hearings that we have held so far, what we have begun to
hear is the question being raised and the facts coming out as
to whether some of the problems that have come out of late are
in fact being driven by, and behavior is a response to, the
amount and content of the regulations that are in place right
now. So, that is some of the information that has been coming
out so far, but to the gentleman's request, yes, we will be
having additional hearings on this very important topic.
Mr. Lynch. I thank the chairman.
Chairman Garrett. Next, we will be looking to Mr. Mulvaney
for 1 minute.
Mr. Mulvaney. Thank you, Mr. Chairman. I will be very
brief. I know that many of us here supported the Jobs Act a
couple of years ago. I know it passed on a bipartisan basis. I
was happy that we had a chance to make SEC registrations a
little bit easier, reduce excessive filing, and encourage
crowdfunding, which I think has been a tremendous success, and
also allow some broader advertising.
I have a discussion draft of a bill today that will make
additional changes which would try and do a little bit more.
Proposed changes to Section 144 of the SEC rules, to reduce
holding periods, provide what we call shell company relief. I
am hopeful that as a result of the hearing, we will be able to
add to the list of bipartisan bills that will come out of this
committee. I don't know if Mr. Lynch had my particular
discussion draft in mind when he said it's one of the ones he
was concerned about, but I look forward to the discussion, I
look forward to the input that the witnesses have here today,
as we try and move towards another round of bipartisan changes
that would make access to capital easier.
And with that, I yield back.
Chairman Garrett. The gentleman from Connecticut is
recognized for 1 minute.
Mr. Himes. Thank you, Mr. Chairman. I just wanted a minute
to say thanks very much for holding these hearings. I wanted to
thank the panel in advance for their participation. And, in
thanking the chairman, I just want to make the observation that
like the Jobs Act, I think this is a really important exercise
in making our capital markets more efficient, and better at
allocating capital, and I encourage my colleagues here to think
of this, and perhaps to avoid the all-too-often scenario we
fall into of making this partisan, or of making this an
argument between the absolute virtues of regulation or the
absolute absence of virtue in any regulation.
What we are talking about here with most of these bills, of
course, is shifting risk between issuers and investors. Most of
these bills do that, and that is a perfectly sane exercise, but
we should remember, particularly at a moment in time when
investors are wary of the markets--most recently, thank you
Michael Lewis and high frequency trading--that we need to
preserve the confidence of investors in these markets.
So, Mr. Chairman, thank you very much for holding this
hearing. I look forward to hopefully having nice, bipartisan
support for some of these bills, and I appreciate your efforts.
I yield back the balance of my time.
Chairman Garrett. I thank the gentleman. We will go now to
Mr. Hultgren for 1 minute.
Mr. Hultgren. Thank you, Mr. Chairman. And thank you,
witnesses, for being here to discuss these proposals regarding
capital formation for small and emerging growth companies,
which are absolutely a key engine for economic growth.
The bill that I have sponsored, the Encouraging Employee
Ownership Act of 2014, amends SEC Rule 701, which mandates
various disclosures of information for privately held companies
selling more than $5 million worth of securities for employee
compensation. We raised this threshold from $5 million to $20
million, but still require all issuers to comply with antifraud
and civil liabilities requirements.
This bill is a simple update to the bipartisan Jobs Act
reforms that exempted employee compensation securities from the
requirements for when companies must register with the SEC.
Companies that used to only offer employee ownership to top
executives because of cost, or because they wanted to avoid
distributing confidential information, will now find it easier
to provide employee ownership to nonexecutive employees. This
will help them attract talented employees by giving these
employees a stake in their company, and the large upside that
may bring. I urge this committee to support this legislation. I
look forward to this hearing. I thank the chairman again, and I
yield back.
Chairman Garrett. Thank you. The gentleman yields back.
And, finally, 1 minute to the gentleman from Pennsylvania, Mr.
Fitzpatrick.
Mr. Fitzpatrick. Thank you, Chairman Garrett, for allowing
me to participate in the hearing. A subject I am interested in
is the Fostering Innovation Act, which is a bill I introduced
in the last Congress, the 112th, and again in the 113th,
responding to concerns of constituent businesses that I
represent back home in Bucks County. This is legislation that
would update the definition of what is called a nonaccelerated
filer. It is important for small companies, because it frees
these businesses from extremely burdensome regulations, and as
we know, money not spent on questionable regulation is used
then for investment and for hiring.
The Jobs Act was the result of a realization that one-size-
fits-all regulation hurts the economy. We should be working to
reduce job killing regulations across our economy, and even in
this divided government there is bipartisan support for lifting
burdens from small business and emerging companies. That is
what I believe my bill does, and I hope that we get bipartisan
support on this committee for it.
All the bills we are going to discuss today are very
important for job creation. I would like to take a moment to
applaud my colleague, Mr. Hultgren, for his bill, which will
update Rule 701, as we just heard. I have heard from
constituent businesses in my district that would like to reward
their employees by permitting them to invest or have investment
opportunities in their companies. These businesses have been
constrained from doing so by the current rules, and so I think
that the goals of the bill are very worthy, and I hope that we
get support for that bill as well. With that, I yield back.
Chairman Garrett. Thank you. The gentleman yields back, and
now we turn to our panel of esteemed witnesses.
So, for those of you who have not testified before, I will
just run through this. As always, you will be recognized for 5
minutes, and your complete written statements will be made a
part of the record.
I always remind you each time to bring your microphone as
close to you as you can, so Mr. Burton, yours looks a little
bit far away already. Please remember to turn it on when you
begin, and remember to go by the 5-minute rule. The lights are
in front of you. Green is 5 minutes, yellow is your 1-minute
warning, and red is when time is up and I will be banging the
gavel, because the person next to you desperately wants to have
their say.
So thank you, Mr. Burton for being with us today, and you
are now recognized for 5 minutes.
STATEMENT OF DAVID R. BURTON, SENIOR FELLOW IN ECONOMIC POLICY,
THE HERITAGE FOUNDATION
Mr. Burton. My name is David Burton. I am the senior fellow
at The Heritage Foundation, and I would like to express my
thanks to you, Chairman Garrett, and Ranking Member Maloney,
and members of the subcommittee for the opportunity to be here
this morning.
The 2012 Jobs Act was a bipartisan achievement of
consequence. Republican and Democratic members of the
committee, and your counterparts in the Senate, put aside
partisan differences and legislated in the public interest.
These reforms will help small business entrepreneurial capital
formation, innovation, and job creation.
I had the good fortune to attend the rose garden signing
ceremony, when President Obama signed the Jobs Act into law. It
was a reminder that important constructive change can still be
accomplished when policymakers resolve to craft genuine
solutions to the problems that face the American people.
There remains, however, much to be done. SEC implementation
of the Jobs Act is much too slow, in some cases nearly a year
and a half behind the pace required by Congress. And the rules
being proposed by the Commission are often so voluminous and
complex that they will undermine the laudable purposes of the
Jobs Act. There are also significant statutory reforms which
are still required if we are to give genuine rebirth to the
spirit of enterprise, innovation, and dynamism necessary for a
lasting and widespread prosperity, providing opportunity and
better incomes for all Americans.
I have been asked to provide my perspective on a number of
legislative proposals to enhance capital formation for small
and emerging companies. In my written testimony, I also address
the Commission's implementation of the Jobs Act, and suggest
about a dozen specific policy changes that would promote small
business capital formation and entrepreneurship.
Regulation S-K is the regulation governing nonfinancial
statement disclosures of registered companies. Along, with
Regulation S-X, it imposes the vast majority of the costs
incurred by public companies. The SEC has estimated that the
average cost of achieving initial regulatory compliance in an
IPO is $2.5 million, and following on about $1.5 million a year
in annual compliance costs. For small and medium-sized firms,
seeking to raise capital, these costs make access to the public
capital markets prohibitively expensive.
In my written testimony, I show on a table that these costs
are likely to reduce a small company's return on equity by 20
to 100 percent, depending on the firm's size and return on
equity. Another way of looking at this is to capitalize the
$1.5 million annual costs using a discount rate of 10 percent;
this is the equivalent of erasing $15 million in shareholder's
equity. Using a discount rate of 15 percent, it would be the
equivalent of erasing $10 million in shareholder's equity. This
kind of shareholder's equity erasure simply cannot be justified
by the higher price earnings ratio that a public company
commands, until the expected risks to adjusted earnings are
quite high.
Chairman Garrett has drafted very constructive legislation
designed to address this important problem, and there is reason
to believe that the Commission itself is serious about
addressing the problem. And the legislation may well launch a
process that would substantially reduce unneeded impediments to
smaller firms being able to access public capital markets.
I have three suggested improvements. The legislation should
require an SEC survey of smaller reporting companies. It should
seek to determine which aspect of Regulations S-K and S-X are
major cost drivers, and seek input about what should be
changed. In addition, the Commission should begin to collect
and publish data regarding its enforcement actions, and I have
specific recommendations about how to go about that.
Commissioners, Congress, and this committee need actual
information, not anecdotes, about what type of disclosures,
misrepresentations or omissions are the source of enforcement
actions and other problems. I will move on to some other
things.
I support the SBIC Advisers Relief Act. They are, in
effect, venture capital funds and it is appropriate to treat
them as such. I support the legislation increasing the
threshold to $20 million with respect to Rule 701 in
compensatory benefit plans. That will help them compete with
larger companies. I support, particularly, Section 4 of the
Small Business Freedom to Grow Act; it is laudatory. These
companies are already public companies making full reporting,
so it is not reasonable to require them to comply with 51
different sets of blue sky laws. I support, also, the Fostering
Innovation Act, and in particular, exempting these companies
from Sarbanes-Oxley 404(b), and that was in the bipartisan act
during the last Congress.
Thank you very much.
[The prepared statement of Mr. Burton can be found on page
42 of the appendix.]
Chairman Garrett. And I thank you, very much. Professor
Coffee, good morning, and welcome.
STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF
LAW, COLUMBIA UNIVERSITY LAW SCHOOL, AND DIRECTOR OF THE CENTER
ON CORPORATE GOVERNANCE, COLUMBIA UNIVERSITY LAW SCHOOL
Mr. Coffee. Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee, I am honored to be here. Thank you
for inviting me.
I have been specifically asked to review seven bills. These
seven bills range in my judgment from ones that are entirely
reasonable, to ones that are debatable, reasonable people could
disagree, and some that I think have unintended consequences
that are dangerously overbroad. I will focus more on the
latter. That doesn't mean that I am opposed to everything that
is before you.
Chairman Garrett. Why don't you just start with the good
stuff, maybe?
Mr. Coffee. I have to focus on--I only have 5 minutes.
Chairman Garrett. Okay, I'm sorry. I will give you an extra
15 seconds for that.
[laughter]
Mr. Coffee. Among the good ones, of course, the simplest
and the most unobjectionable one has been proposed by Chairman
Garrett, who says we should put a facing page on the Form 10-K
that would allow you to cross-reference the rest of the
documents with electronic links. I don't see how anyone could
be opposed to that, although I think you probably can do it
under existing law.
In any event, I have one other comment. These seven bills
sort of tweak very small parts of our total Federal security
system. They are not terribly coordinated, there is a certain
ad hocery here. I would suggest that if you are really
concerned about what I think seems to be the underlying theme
that you are most concerned about, the integration of our 33
act disclosure system and our 34 act disclosure system, which
are not perfectly integrated or coordinated. Then, if that is
your concern, and if your concern is also about public
offerings and private placements, you really should ask the SEC
to conduct a serious study that maps the entire terrain, rather
than sort of looking around the edges. There is a certain
quality here of the seven blind men, roaming around the
elephant, and reporting little problems. There should be a
mapping of the entire terrain, to have a fuller look at all
this.
Now, with that statement, let me talk about the specific
areas where I have problems. First of all, I have a problem
with the downsizing of the definition of the well-known
seasoned issuer, called the WKSI in the parlance. It is going
to be reduced under this bill to what I will call down to the
level of a slightly known, modestly sized issuer, what I will
call an ``SKMI.'' I am not sure that you understand all the
consequences.
Reasonable people can debate whether it is desirable to
lower this level, so you can test the waters, whether you want
to end the quiet period for a larger group of companies, but
there is another consequence that you don't seem to have
realized.
Once you say that small companies with only a $250 million
public float can be WKSIs, then they are automatically entitled
to use something called Automatic Shelf Registration. What is
that? That is a system under which the minute you file with the
SEC, you can sell to the public with no SEC prior review.
It means that the SEC is cut out of the process of
reviewing the registration statement, and also that the board
of directors, underwriters, counsel, auditors, and accountants
do not have any opportunity to conduct a meaningful due
diligence inquiry. Both of those things are disadvantageous to
the interests of investors.
It really is amazing to me that probably the largest
division at the SEC is Corporation Finance, which is full of
hundreds of people who review registration statements. They are
about to lose two-thirds of the companies they review, if you
move WKSI down this far, without changing some of the
consequences of being a WKSI. That is point one.
Let me move on to H.R. 2629, the Fostering Innovation Act.
This is another attempt to cut back on Section 404 of Sarbanes-
Oxley. I understand that Section 404 is not popular, and that
its requirement of an annual audit of internal controls is
costly. But at least when you passed the Jobs Act, there was a
rationale here, and there was a limited period of the
suspension of Section 404. Emerging growth companies were
exempted for an up to 5 year period, under the rationale that
they were going to be accommodated and put on this learning
curve, this onramp. That I can understand.
H.R. 2629 exempts not emerging growth companies, but
basically old and stale companies. Companies that have never
gotten to $100 million in revenues, even if they have been
around for 50 years, and it also exempts companies that have a
public float below $250 million. You have to meet both of those
standards. That means there will be a lot of companies out
there that will be exempted from the internal controls, and the
other companies that may need exactly that.
I can understand trying to shorten Rule 144, but I don't
think you understand that what will probably happen, because we
had this experience with Regulation S, is if it is only a 3-
month holding period, the arbs will come in. They will buy the
privately placed stock, which will be sold at a discount to the
public offering price, and they will lock in the difference
through hedging. And once they lock it in, they will then dump
the stock once the 3-month period is expired, and it is free
for the public market.
I think that will produce volatility and it had such
adverse consequences that the SEC barred hedging when there was
a 3-month period under Regulation S, which is a similar
problem. All I am saying is we had experience with this, and it
has had more adverse consequences.
I will close now, but I want to say again, what Congressman
Lynch said, ``I don't think preempting the blue sky laws
creates jobs.'' Preempting State regulation, which is focused
on local companies with local problems, I think exposes
investors to local scandals. The SEC is resource-constrained.
The SEC doesn't have the funds it needs and it tends not to
focus on the smaller companies.
Those companies that fly under the SEC's radar screen are
still subject to the blue sky regulators and these bills,
several of them, would preempt that. I have other things that I
would say, but, again, I think a number of other ideas here are
quite sensible. Thank you.
[The prepared statement of Professor Coffee can be found on
page 58 of the appendix.]
Chairman Garrett. I thank you, professor. Good morning, Mr.
Hahn. You are recognized for 5 minutes, and welcome.
STATEMENT OF BRIAN HAHN, CHIEF FINANCIAL OFFICER,
GLYCOMIMETICS, INC., ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY
ORGANIZATION (BIO)
Mr. Hahn. Good morning, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee. My name is Brian
Hahn, and I am the CFO at GlycoMinetics, a 30-employee biotech
company in Gaithersburg, Maryland. GlycoMinetics raised $64
million through an IPO in January, the first public offering in
2014, and one of many enriched by the Jobs Act.
I am here today representing BIO and the biotech industry.
Roughly 90 percent of BIO's 1,100 members are pre-revenue
emerging businesses. Product sales do not fund their research,
which can cost upwards of $1 billion. Instead, companies turn
to external investors to finance drug development. The capital
markets play an important role in biotech capital formation,
and it is vital that small public companies are given the
opportunity to succeed on the market.
In 2003, I was part of the management team that took
Advance Pharmaceutical public. We had only 40 employees and no
product revenue, but 2003 was well before the Jobs Act
instituted the IPO onramp. From day one on the market, Advance
was hit with a full-blown reporting burden. We faced the same
compliance requirements as the rest of our IPO brethren from
2003, including Colonial Bank, TempurPedic, and Orbitz.
Compliance with Sarbanes-Oxley (SOX) became my full-time job.
Because small biotechs do not have product revenue,
burdensome regulations like SOX have an outsized effect on
them. One-size-fits-all compliance requirements divert funds
from the lab and slow down the development process. The Jobs
Acts has led to a sea change in the regulatory landscape and
has shown that a commonsense reporting standard can support
capital formation. Nearly 80 biotechs have gone public in the
last 2 years, compared to just 30 in the 2 years before the
Jobs Act.
I strongly support transparency for investors. Jobs Act
testing-the-waters meetings have been universally praised by my
biotech colleagues, largely because the additional time with
investors allows for increased dialogue and greater information
flow. But the key is to share the right information that
investors want to know.
Congressman Fitzpatrick's Fostering Innovation Act will
help emerging innovators strike that balance. GlycoMimetics
will likely still be in the lab, in the clinic when the 5 year
onramp in SOX exemption expires. When the ECG clock runs out,
small biotechs will still be relying on investor capital, but
will face a full-blown compliance burden identical to that
faced by commercial leaders.
Investors would be better served by analyzing clinical
trial results, but pre-revenue biotechs will instead be forced
to issue costly reports that do not tell the true story of
their business. The Fostering Innovation Act would provide the
SEC with more accurate company classifications in order to
institute a commonsense regulatory burden outside of the EGC
onramp. The bill recognizes the pre-revenue reality of many
small businesses by incorporating a revenue test into SEC Rule
12B2, which is used to determine a public company's regulatory
burden, including SOX compliance. This bill will allow small
biotech companies to focus on delivering medicines to patients
rather than time-consuming and costly reporting.
I am encouraged that the subcommittee is considering
legislation today to further enhance the capital formation
potential of the markets, which is key to financing the search
for breakthrough treatments. Expanded WKSI and Form S-3
eligibility will increase access to capital through cost-
effective follow-on and shelf offerings. Meanwhile, reforms to
Reg S-K, Rule 701, and conflict minerals reporting will move
capital market regulation away from one-size-fits-all
standards.
Improving the secondary market liquidity for private
offerings will build on another success of the Jobs Act, the
expansion of Reg D and Reg A. Overly burdensome regulatory
standards present a unique challenge for pre-revenue biotechs.
Their investors stress the importance of resource efficiency,
because spending capital on compliance diverts funds from the
lab and could delay drug development.
The Jobs Act allowed enhanced access to investors,
increasing the capital potential of an offering. And it then
instituted relaxed regulatory burden, decreasing the amount of
capital diverted from research. This one-two punch is critical
for biotech innovators, and has increased the viability of the
public market. I am thankful that the legislation being
considered by the subcommittee today mirrors this approach.
If the smaller issuer is having increased access to
investors and is not forced to siphon off innovation capital to
spend on costly compliance burdens, they will be able to fund
their growth, and in the biotech industry, further research
that will change the lives of patients and their families.
Thank you for your time and I look forward to answering any
questions you may have.
[The prepared statement of Mr. Hahn can be found on page 72
of the appendix.]
Chairman Garrett. And I thank you.
Last, but not least, Mr. Quaadman, welcome again. You are
recognized for 5 minutes.
STATEMENT OF TOM QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL
MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE
Mr. Quaadman. Thank you, Chairman Garrett, and thank you,
Ranking Member Maloney. I would like to thank all the members
of the subcommittee for your continued leadership on issues
important to capital formation.
What this subcommittee realizes is that the opportunity to
succeed includes the opportunity of small businesses to grow
into large businesses. However, not all companies are going to
make it, but with that opportunity to succeed, along with the
right to fail, those are the important ingredients for our
economy to grow for the long term and create jobs.
With the success of the Jobs Act, we are beginning to see a
rise in IPOs, and for the first time last year since 1998, we
actually saw a rise in the number of public companies in the
United States. However, the long-term trends are not good. For
young entrepreneurs, the public company model is not the
preferred business structure for them for the long term.
Additionally, while we have concentrated on the IPO issues, we
continue to have an outflow problem, where we have mature
public companies that are restructuring themselves into
different business formations.
The bills that are before us today are important. The SEC
has not acted on the issues that are before us today, despite
numerous recommendations from the Small Business Committee,
under the leadership of both Democratic and Republican SECs, as
well as the fact that many of the issues that are before us
today could have been taken care of independently by the SEC in
terms of trying to modernize our regulatory systems.
We welcome the new emphasis on these issues by Chair White,
however we believe that the passage of this legislation will
set forth public policy directives that the SEC will have to
follow by statue. I think one example that was a positive one
was the proxy advisery firm hearing that this subcommittee held
last June, which led to a roundtable by the SEC in December,
and then, just last week, their recommendations that the SEC
staff has given to Chair White for further action.
Let me talk about some of the bills that are before us
today. The draft Disclosure Modernization and Simplification
Act by Chairman Garrett, which is also in the same vein as the
XBRL bill that Congressman Hurt has championed, would change
our 1930s disclosure model and update it and create one for the
21st Century. This will allow for easier access of information
for investors and their ability to make decisions and enter the
capital markets.
The modernization study for all businesses is an important
means of overhauling our corporate governance disclosure
process to allow American businesses to be competitive in a
global economy. The draft compensatory benefit program by
Congressman Hultgren is an important change because Rule 701
needs to be changed in order for the 12G Jobs Act changes to be
effective. This is important for employee retention that allows
small businesses to grow into larger ones.
H.R. 4200, the bipartisan SBIC Advisers Relief Act by
Congressman Luetkemeyer, is a commonsense reform that codifies
congressional intent. The draft Small Business Freedom to Grow
Act by Congresswoman Wagner, the draft bill to improve private
market offerings by Congressman Mulvaney, and the draft bill on
definitions of well-known seasoned issuers by Mr. McCarthy--I
think if you look at them together in a package, each of them
remove barriers to capital formation, because investors have
more access to information with more disclosure and
transparency, they will be able to make more informed decisions
on a quicker basis.
Businesses will have easier access to capital, as well as
scalable costs for regulatory burdens. And what is important to
note here, too, is that these businesses that can avail
themselves of these changes, the SEC has a track record, they
will have continued oversight of these businesses, and they
will have tools for investor protection. I believe that the
Wagner change in terms of preemption is an important one, as we
are talking about a small number of businesses that are
accessing the national capital markets, and I think we need to
look at this as the Garrett bill as the key that is unlocking
the door, and that these three bills are then opening that
door.
And one thing I would just like to also point out with some
of the statements that have been said here today is that we do
have an unbalanced system today. We have more inefficient
capital markets than we had 15 years ago, but we also have a
situation where retail shareholders or investors are
effectively disenfranchised from the proxy system. And they are
disenfranchised from their ability to access the capital
markets, and that runs to counter to the democratization of our
capital markets that started with President Kennedy's efforts
to do away with the financial transactions tax in the 1970s.
So, with that, Mr. Chairman, I would like to conclude my
remarks. I am happy to answer any questions you may have.
[The prepared statement of Mr. Quaadman can be found on
page 79 of the appendix.]
Chairman Garrett. Great. I thank all of the panel members
for your testimony, and I will now recognize myself for 5
minutes for questions and comments. And, thank you, Mr.
Quaadman. I think that was overstating the case that my bill is
the one that is the key to opening the door and the rest
follow. I appreciate the comment, though.
Okay. Mr. Hahn, you made a couple of comments that I noted
down from your testimony, and maybe they sort of jibe together.
One, could you elaborate a little bit on the revenue component,
and the effect on industry by the costs of this current system
and how it affects your industry? You use the expression,
``diverting from the labs,'' is the language I just picked up
now, but also the language I just picked up now is that your
task and your role, your responsibilities have now changed,
that this is now a full-time job, was what I wrote down, as far
as compliance. Do you want to jibe those two, connect those two
together maybe?
Mr. Hahn. The full-time SOX issue was with Advance back in
2003. So, we were a 40-person company. We had a finance staff
of two and a half FTE, and when we had to do a full blown SOX
implementation, we had to increase our staff to seven, and that
diverted FTEs away from the lab.
When we talk about costs, currently at GlycoMimetics, it is
still--we have to comply with 404(a), but not 404(b). Our costs
now, annual costs to be a public company have increased by $1.6
million a year, just in auditors' fees, legal fees, and other
fees by being a public company. To put that into perspective,
our current payroll, base payroll for 2014 will be $4 million.
So, that $1.6 million in additional annual costs could be 10
additional R&D folks who could be working in the lab to help
advance our programs.
Chairman Garrett. That is significant. Thank you.
Mr. Burton, can you--and you touched on this a little bit
in your testimony--provide us with a few more thoughts on the
Jobs Act that we already have in place, as implemented, are
there other things that should be done, as far as
implementation goes, to maximize job creation through it?
Mr. Burton. There are a number of issues. First, is
actually implementing the regulation so that certain aspects of
the Jobs Act like crowdfunding can take place. Second, to make
the rules appropriate in complexity for smaller firms. The Jobs
Act proposed rules, an example of that, Regulation A Rule,
while it has very positive aspects, also has some aspects that
are very troubling. And then lastly, the proposed Regulation D
Rules, as a follow on to the general solicitation and
verification regulations, are extraordinarily problematic and
are unnecessary in almost all of their respects.
Chairman Garrett. I guess this will jump around to Mr.
Quaadman. So, in Professor Coffee's testimony he sort of
indicated, and we see this in some of the economic activity in
that and capital allocation is going through the private less
to slows market than it is through the public. Can you say, is
that happening because of any bad or nefarious reasons? Or is
that happening largely because of what the other two witnesses
have stated, because of the regulatory costs or other reasons
as well?
Mr. Quaadman. In our view, it is primarily the regulatory
costs and burdens that are a part of it. If you take a look at
any one regulation or any one burden, they are not necessarily
going to cause somebody to leave the public company space. But
when you take them all together, they make the more efficient,
inefficient, and less likely for businesses to want to become
public. So, when you take a look a the public company model in
a different way, if you have an investment dollar, you have a
whole array of different places to put it, and increasingly
investors are going away from public company investments, and
that also is why businesses are also beginning to move away
from that as the preferred business structure.
Chairman Garrett. And I just saw something in the paper
this morning, I am not going to name the company, but one of
the larger institutions is saying that they may be closing some
of their dark pool type of arrangements. Would you like to
respond to that?
Mr. Quaadman. Yes, I do think we are beginning to see that
some of the financial institutions are beginning to move away
from certain forms of financing. We have seen that, we have had
a discussion here in this room about CLOs as an example of that
as well.
Chairman Garrett. Okay.
Mr. Quaadman. While we need a diverse financial structure,
some of the burdens that we have here in terms of regulation
are impeding that.
Chairman Garrett. All right. And I was going to, my time is
almost up, I was going to say press a copy. I think we are on
the same page on some of this. Your very opening comment was
regarding a--you didn't use the word, but I will use the word--
holistic or broad approach, as far as looking back to the 1933
Act, and looking at the whole thing. I will close my time with,
we agree on that, and we have asked for the SEC, this
Administration, and the last Administration to do the same
thing, so there is no question there. But I think we are on the
same page, just what we should be doing in the meantime, I
guess, is why we have some of this legislation. But, thank you
for that comment on that point.
We now yield to the gentlelady from New York, Mrs. Maloney,
for 5 minutes.
Mrs. Maloney. Thank you so much, Mr. Chairman, and I thank
all of the panelists today. I would like to start with
Professor Coffee. Some of these bills are aimed at allowing
more companies to take advantage of the so-called shelf
registration. Can you describe the benefits of shelf
registration? And are there major drawbacks for investors when
companies use shelf registration? You pointed out in your
testimony that the proposed legislation, the $700 million
standard would be reduced to $250 million, at which point the
majority of the issuers from both the New York Stock Exchange
and NASDAQ would become WKSIs, and could use an automated shelf
registration. Can you elaborate on what that means for investor
protections?
Mr. Coffee. Let me begin with the irony here. Under these
bills, many companies could be both emerging growth companies
and well-known seasoned issuers. And, it is really hard to see
how you are both young and immature and old and seasoned at the
same time. Language is being tortured a bit.
I understand that there are high costs for many companies,
particularly because of Section 404, but we keep talking about
an all or nothing choice. You are covered or you are not
covered. I believe it is possible to scale this requirement.
You could tell certain kinds of companies whether they are
emerging growth companies or slightly larger that they only had
to do a 404 audit once every 3 years. But if you don't do it at
all, sooner or later you are going to get burned, because if a
company doesn't examine its internal controls with outside
auditors, something is going to go wrong, in many cases, sooner
or later. So, I think there should be a search for scaling this
obligation.
In terms of shelf registration, when it was originally
adopted the level was $150 million because that was the level
that the SEC thought was the beginning of the efficient market.
Now, we have gone down to $75 million for shelf registration,
that is probably below the efficient market, and there are
proposals that some of the bills would say, any company that is
a reporting company can use shelf registration.
That would include some companies now traded on what are
called the pink sheets, or companies that are traded in the
over-the-counter bulletin boards. I don't think those companies
have an adequate following, even among secure--either among
securities analysts or other informed commentators that the
public knows what is going on.
And if you permit universal shelf registration to these
companies, it would also be possible for them to do secondary
offerings as well as primary offerings. That is, the insiders
could dump their stock without any prior disclosure.
When the insiders are dumping their stock under a new
exemption, that is not creating jobs; that is creating
bailouts. So I think we should be a little more focused. I am
not saying that you cannot expand the scope of Form S-3, or
that you cannot facilitate more shelf registration, but I think
the over-breadth is when you let very small companies do
secondary offerings, and when you go well below the level of
the lowest possible level of the efficient market, that is when
I think you need the more formal procedures of ordinary
registration.
Mrs. Maloney. Thank you. You also mention in your testimony
that shortening the holding period in Rule 144 from 6 months to
3 months could invite abuses. It would allow investors to
quickly resell securities that they bought in private
transactions, usually at prices that are well below the public
trading price. And, as you know, the minimum holding period in
Rule 144 used to be 2 years, and was only recently shortened to
6 months. So my question is, do you think that a 6-month
holding period is sufficient to deter investors? And what do
you feel about this shortening period?
Mr. Coffee. Maybe I didn't explain it adequately. But in my
time, if I was going from 3 years to 2 years to 1 year to 6
months for reporting companies, if we would go to 3 months,
that greatly reduces the cost of hedging. It is very expensive
to try to hedge something for 6 months or 1 year. Three months
is more possible. What I think we would see happen is that
companies would do an initial IPO, and then would do no more
public offerings, they would do all private placements, and
they would do private placements to investors in what are
called pipe transactions. Pipe transactions are private
investment and public equity. You sell to the investor in a
private transaction at a price somewhat below the public market
price.
So, if the market price were $20 a share, you might sell in
a private placement to $19 a share, because the private
placement is so much cheaper, with so much less liability, and
so much advance planning. You would do it that way. The
investor would buy at $19 and immediately hedge to lock in the
spread between $19 and $20, and at the end of the 3 months, the
arbs would dump into the market, which would produce
volatility, and I think we would be pretty much ending public
registry offering by seasoned companies. I don't think you want
to do that without mapping the total train. I think there
should be ways that we--
Mrs. Maloney. Thank you. So, it would increase pumping and
dumping. My time is up, but maybe you could get back to me in
writing. Ideally, what do you think the holding period should
be, if you would create a holding period?
Mr. Coffee. I think 6 months was probably a reasonable
compromise as it is now. If you were to go lower, what I would
say to minimum is that you forbid hedging, because hedging is,
right now--
Chairman Garrett. I think we will leave it at that answer
right there.
Mr. Coffee. Okay.
Mrs. Maloney. Thank you.
Chairman Garrett. Thank you. The vice chairman of the
subcommittee, Mr. Hurt, is now recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman. And I thank each of you
for being here. Obviously, one of the parts of the Jobs Acts
required that the SEC study Reg S-K, and how that can be
improved to reduce unnecessary costs to companies that wish to
go public, and that are public. I guess my question is for Mr.
Burton, to begin with, I am interested in the chart that you
have included in your testimony relating to the percentage
decrease in return on equity by going public. Can you talk
about that? Is that data that is reflected there, based on
information that is pre-Jobs Act?
Mr. Burton. The cost data is from the SEC and it would be
pre-Jobs Act. It was included in the economic analysis
discussion of the crowdfunding rule, I suppose. The Jobs Act
did a lot of very positive things, but it didn't dramatically
reduce the cost of being a smaller public company.
Mr. Hurt. What is the best way to describe the
disproportionate effect, assuming that there is, and I believe
that there is, a disproportionate effect that these disclosure
requirements have on emerging growth companies? Can you talk
about that?
Mr. Burton. Absolutely. And there is--some of these bills
address that question, particularly backing off the costs
related to Sarbanes-Oxley 404B, the internal control reporting
for smaller companies, I think that is genuine; it is
extraordinarily expensive. And it is also genuinely misguided
in that, in a small company, with a small C-suite, it is not
going to have a meaningful, positive impact or at least a
significant positive impact on the ability of those people to
abscond with company money if they want to. The fact is a nice
fancy internal control loose-leaf binder on the shelf isn't
going to stop them from ripping off investors. It will be other
things that stop them.
But the long and short of it is, there is a need to
fundamentally rethink the way we do disclosure, the way we
scale disclosure. Whether some disclosure is having a positive
impact on protecting investors, or it is just a waste of money,
and we have very little information to go on. And there is a
need for the SEC to review this.
I think the chairman's legislation would be a very positive
step. I think the SEC acknowledges a need to review this, but
there is also the need to collect information, and by that I
mean two things. First, what is causing the most cost? And
second, what areas are causing the most problems with respect
to enforcement, with respect to fraud? And we don't really have
that information, nor, for that matter, does the SEC. They
don't collect it, they don't collate it, they don't report it
to the Commissioners. I know for a fact that the Commissioners
are frustrated themselves that they don't have that
information. And, it is very difficult to make policy in a data
vacuum, and that is where we are right now.
Mr. Hurt. Do you think, are you able to say because the SEC
has indicated that it wants to study the issue relating to reg
S-K more, are there areas that you think they can focus on
immediately? And what would those areas be? And then, second,
what areas do you think, specifically, they can look at long-
term?
Mr. Burton. I think that right now I am not in a position
to give you much more feedback on that other than 404 is the
biggest single problem. I have put together a securities
regulation working group at The Heritage Foundation, which
includes people from all over the country, in many different
professions, and we are developing a solution and an answer to
that question. And I hope to be in a position to provide that
to the committee in 6 to 9 months.
Mr. Hurt. Professor Coffee or Mr. Quaadman, do you all have
any thoughts on that question, about what the SEC can focus on
immediately--what areas the SEC could focus on immediately in
terms of trying to reform some of these disclosure
requirements?
Mr. Coffee. One of the proposals was that they should focus
on regulation S-K. I think it was a little unrealistic to ask
them to do that in, I think, it was something like 180 days, I
think they would need a little bit more time than that. But I
think that is perfectly reasonable to ask them to focus on
scaling Regulation S-K. I think too often we are talking about
all or nothing here, and I do understand that scaling some of
these requirements can be justifiable.
Chairman Garrett. All right.
Mr. Hurt. I think my time has expired, unless, Mr.
Quaadman?
Chairman Garrett. Ten seconds.
Mr. Hurt. Ten seconds.
Mr. Quaadman. Yes, Mr. Hurt, just, I think the delivery of
information is important, because we are currently trying to
deliver information in booklets like this, whereas we actually
use something like this. So, just one example, companies have
to publish historical stock price, which was fine in its day,
but, you know what? Alcoa's stock price on July 7, 1972, was
$49.25. I found that not in an SEC filing, but by going on
Yahoo! Finance in about 30 seconds.
Chairman Garrett. Here you go. Thank you. Mr. Lynch is
recognized for 5 minutes.
Mr. Lynch. Thank you very much. And, again, I thank the
witnesses. Professor Coffee, the premise of some of these bills
seems to be that we need to assist some of these companies in
capital formation, in raising money, and that we can accomplish
that by providing less information to investors.
But I can note several examples--WorldCom, Enron, AIG,
Lehman Brothers--where in times of uncertainty, people actually
fled from those companies where it was more opaque, and there
was less information available and fled to companies where they
felt they knew about the internal controls within those
companies. And so, I don't buy that. I don't buy that we need
to help companies by providing investors with less information.
And I just want to get your sense on that.
Mr. Coffee. The first thing I would say is there is a lot
of evidence, empirical evidence that the more you reduce
informational asymmetries, the more you reduce the company's
cost of capital. If investors aren't sure, you report the share
at $10 a share, but if they are not really sure whether it was
$5 to $20 or where it was, that company is going to have a much
higher cost of capital than a company where they are fairly
certain it was $10 a share. Plus, there are costs, of course,
to disclosure but there are benefits.
And we have the capital markets that have the deepest
liquidity and the greatest efficiency in the world because we
have gone far in reducing informational efficiencies. It may
cost $1.5 million a year for the average company, as Mr.
Burton's evidence suggests, but I think there are probably
benefits that are greater than that when we look at how
distinctive our capital markets are and how uniquely well they
do in financing startups. The rest of the world cannot finance
startups. They are dependent upon bank capital. And I think
that is partly the success of our securities markets.
Mr. Lynch. Thank you. I want to talk to you about, there
are a couple of bills here that actually take State regulators
out of the business of regulating these small companies. I know
that across our country, a lot of governors are doing great
work on job creation and we are all competing. In my district
we have an innovation district, which tries to bring in biotech
companies and other high tech companies. We provide
infrastructure, and we provide, in some cases, financing bond
assistance so there is a local risk in, especially workers;
obviously, I have a lot of universities and hospitals in my
district, so the workers there are all local.
There is a tremendous local interest and a local risk that
is far beyond what the general market faces. And my problem is
that now, under Mr. Mulvaney's bill and under another bill--and
I have great respect for my colleagues--it takes the State
regulator, ironically the person who knows the company best,
out of the regulatory regime, and really puts the local
economy, and the State economy at greater risk than would
otherwise be the case. And, by the way, we have Bill Galvin in
our State, he is my Secretary of State, and he does a great job
on this. He is all over these local companies, and it has
actually enhanced our ability to attract these small start-up
companies. But I just want to hear your opinions on the effect
of boxing out the State regulator.
Mr. Coffee. I think there is some unexplained suspicion of
the State regulators, who are typically the State attorneys
general. The State attorney general does not dislike, and is
not hostile or suspicious of small businesses. The attorneys
general have the same attitudes as the governors of the States,
typically. I think that the State and the local regulators know
the most about local companies, and as long as the SEC is very
resource-constrained, those will be the companies they give the
least attention to, because they can barely handle, if they can
at all, their current assignment, their current docket. So, we
are removing the only sentry that looks at the smaller and
local company. I think that is ill-advised.
Mr. Lynch. I appreciate that. Thank you. I only have 25
seconds left, so I will yield back. Thank you.
Chairman Garrett. I thank the gentleman for yielding back.
Mr. Huizenga for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate this
opportunity to ask a few questions, and Professor Coffee, I do
have a couple of things that you have brought up, some of the
more problematic elements that you have with some of these
bills. I am curious on Mr. Mulvaney's bill, the 6 months going
to 3 months, what is so magical about the 6 months versus the 3
months?
Mr. Coffee. I don't say that there is anything magical
about it. I say two things. First, the consequence, again, will
be that we will see only private placements done by public
companies. They will not go to the SEC. They will simply do
private placements, and there will be some loss of transparency
in the system if there are very few public offerings in the
future by seasoned companies.
Second, the difference between 6 and 3 months, as I tried
to say, is that it is much more feasible to finance hedging for
3 months than for 6 months. It is quite expensive. Now, it may
well be that you can solve that problem by barring hedging for
a 3-month holding period, which is what has been done under
Regulation S, which is quite analogous.
I would suggest again, that rather than just tinker and
play with these, we should ask either the SEC or some blue
ribbon group to give us their map of what the future should
look like in terms of the relationships between public and
private offerings. It might be that you would want to tell some
company that it could not go to the private placement market
again, because it had done it for 10 straight years, until it
went to the public market one more time. I do want there to be
some continuing transparency, which going to the public market
does enhance.
Mr. Huizenga. Okay. So, having an organization like the
SEC's Government-Business Forum on Small Business Capital
Formation is beneficial?
Mr. Coffee. I have no hostility towards that body. I point
out that one body you should also talk in this process is the
securities analysts. They have views about what they want. You
should also talk to the State regulators. I don't think they
have been consulted about some of the bills, and the blue sky
preemption. All of those people have a view.
Mr. Huizenga. My concern is--and I have some personal
experience with this because I have a bill dealing with mergers
and acquisitions which passed this committee and passed the
House unanimously--in the same situation as I am looking at Mr.
Mulvaney's bill, and Mrs. Wagner's bill, these are all
recommendations from the SEC's own working group that had been
put forward multiple times, yet the SEC doesn't do anything
about it. And, it is this constant drip, drip, drip of people
saying we have to handle this, and the SEC says, yes, we will
get to it, yes, we will get to it, yes, we will get to it. And
then in my case, with my mergers and acquisitions bill, the SEC
says, we don't need to do that.
We don't need a law to do that, which was one of the
arguments I am not sure that we need do this, and codify it,
but the problem is we can't get the SEC to move on some of
these issues, and it seems to me that one of the only ways is
possibly through this legislative process. Professor Coffee,
you put forward the notion about your concerns about the WKSIs,
and a company being both an emerging company as well as a WKSI,
does anybody else have that same concern? Mr. Quaadman, you are
shaking your head, so, if you don't mind addressing that?
Mr. Quaadman. Sure, Mr. Huizenga, I think the question,
first off with the Small Business Committee, is a process the
Chamber has participated in, and it is a process investors have
participated in. So, that is just not the business community
saying that; it is a well-rounded group.
What we are looking at here, and I think this is also what
the WKSIs are looking at, as well, is that our capital markets
are different, and they are out of balance, right? So, if we
can lower some of the thresholds, we live in an age where there
is more information that is available, we need to fix those
delivery systems so that there is more information that
investors have, and that they can actually act in a decision-
useful way in their own interests. I think we are sort of
losing sight of that fact.
This is not an us-or-them proposition. This is a two-way
street. Businesses need to disseminate that information into
the marketplace to raise capital. If investors are burned
unnecessarily, it is going to be more difficult for businesses
to raise that capital. So, we need to make sure that delivery
systems are in place. This is also something where the SEC has
a track record with these businesses, and they have continuing
oversight over them, so this is just not going to be the wild,
wild west out there. Not by any stretch of the imagination.
Mr. Huizenga. Mr. Burton or anybody else? 15 seconds?
Mr. Burton. Professor Coffee's point shows the need to
integrate and rationally re-think how we do scaled disclosure.
Because he is right. You can't be, in concept, an emerging
growth company and a well-known seasoned issuer simultaneously.
So there is a need to re-think that, and I think that we all
need be part of that process.
Mr. Huizenga. I am just concerned that we are going to let
this grind on and on here. We have to address it, and I think
we need to do that legislatively. So, thank you, Mr. Chairman.
Mr. Coffee. Congressman, I understand your frustration. You
might suggest that you give the SEC a specific grant to do this
study, and put a 1-year time limit on it. They are a very
resource-constrained body, and they are overworked, but if you
gave them the funds for doing that kind of study, I don't think
they would hesitate to take it on, and meet your deadline,
because they would be embarrassed otherwise.
Chairman Garrett. I guess they would be embarrassed in a
lot of ways because we have given them deadlines by law, and
the money has been given them to under law to do things, and
they have failed to make deadlines on numerous occasions. So, I
guess they must be one embarrassed organization.
With that, I will look to the gentleman from California for
5 minutes.
Mr. Sherman. Mr. Chairman, I look forward to the SEC
finally implementing the Frank and Sherman Amendment, so that
we have the bond rating agencies selected by a system other
than the current system, which is that the issuer selects and
pays the bond rating agency. If I could have selected the
umpires for every little league game I was in, I would be in
the major leagues right now.
Mr. Chairman, these have been good hearings, but I think
they lack the excitement that we would have if we focused the
next 5 minutes on accounting issues. And so, that is the
excitement I am going to try to provide.
Mr. Coffee, there has been a proposal to increase the
exemption from Section 404 audits of internal control, in spite
of the fact that investor advocates, State regulators, State
pension plans, and the Chair of the SEC think that we shouldn't
relax those standards any further. Now, of course, there are
costs to an audit of internal control, but you also get more
assurance that the financial statements are accurate. Should we
be relaxing further? We already exempt 60 percent of the
publicly traded companies from this standard. Should we relax
it even more?
Mr. Coffee. I share your concerns. I would point out one
compromise that rather than doing it all or nothing, the
proposal here would say any company that earns less than $100
million annually would not have to do a 40(b) internal audit. I
would suggest you could scale this. You might say some smaller
companies could do such an audit once every 3 years. That means
you are at least occasionally looking at your internal
controls, and it would reduce the cost by two thirds. That is
the better than the all-or-nothing approach.
Mr. Sherman. I might disagree with you on the cost savings
there. Once you get the internal controls up to snuff, and you
get the audit done, the cost the second year should be a lot
less. But, I want to move on to another issue. Mr. Hahn, I
don't know if you have come here to talk about FASB-2, but if
you build a building, you capitalize it. If you spend money on
research, which a lot of your companies do, you have to write
it off immediately, even if the research is tremendously
successful. Are your companies hurt because they are paying to
build an asset, and instead they have to show it as an expense?
Mr. Hahn. I would like to make two comments here about the
404 compliance, also. So, thanks to the Jobs Act, we were
actually able to perform test-the-waters meetings on our IPO
process, and it gave us the ability to reach out to almost 90
investors.
Mr. Sherman. Mr. Hahn, if you could just focus on the
question I addressed to you, because I am going to try and get
one more response from Mr. Quaadman. He knows what I am going
to ask him. And if you are not prepared here to talk about
that, I will just move on.
Mr. Hahn. I'm sorry, could you repeat the question, please?
Mr. Sherman. It was about the immediate write-off of
research expenses, even if the research project was successful.
Mr. Hahn. In our business, as an emerging growth in an
early stage company, it is all about the cash burn. So the
biggest question was, what is your cash runway with this IPO
proceeds? Whether we capitalized those costs right now, or
expense--
Mr. Sherman. So, your focus is on cash burn rather than on
earnings per share. Mr. Quaadman, what would it do to the
ability to raise capital if we suddenly put $2 trillion of
liabilities on the balance sheet of American corporations as is
being proposed by the Financial Accounting Standards Board, in
their view that we should depart from hundreds of years of
accounting principles, and treat every lease as if you had
purchased an interest in the building?
Mr. Quaadman. No, Mr. Sherman, thank you for continued
focus on this very important issue. That change would have a
significant, adverse impact on American businesses, as well as
on the commercial real estate industry. We are currently in a
position where both the International Accounting Standards
Board and the Financial Accounting Standards board here in the
United States are at loggerheads and are at an impasse. We have
recently met with both boards, as well as the SEC, to try and
come up with a rational solution. If, at the end of the day,
the solution is to do nothing, and that we keep the status quo
in place, we would at least avoid the adverse consequences that
the proposals which are out there now would have.
Mr. Sherman. And the status quo, everything that could be
disclosed is disclosed, either in the financial statements or
in the footnotes? So there is no lack of transparency here? It
is simply a matter of whether you actually put $2 trillion on
the balance sheet of all the American businesses?
Mr. Quaadman. Correct. And with those proposals, it is
important to note that the investor community has specifically
said this would not give them any more information than they
currently have today.
Mr. Sherman. Thank you.
Chairman Garrett. Mr. Mulvaney is now recognized for 5
minutes.
Mr. Mulvaney. Thank you. Professor Coffee, before we
start--and this is not going to be adversarial--I really want
to talk about my bill, but I couldn't help but hear what you
said about the SEC and how dedicated they are to the work, and
if they just had enough money, they could get all their work
done and so forth. On this committee, we are very familiar with
that, and we remember intimately how, when faced with Dodd-
Frank, it seemed like for some reason conflict minerals took
priority over the Volker Rule. I am not sure how that happened
at the SEC, but I would suggest to you, sir, that maybe, maybe,
just maybe the SEC is susceptible to political pressure, just
like other institutions.
Mr. Coffee. One area on which we can totally agree is
conflict minerals, and I am surprised that provision is still
in the law today.
Mr. Mulvaney. So, thank you. That is good. Let's move on,
because you had some comments on my discussion draft, and,
again, this is one of those, I think, very productive meetings,
where we can actually ask questions, because we want to know
the answers. We are not trying to bait witnesses; we are
actually trying to get information about the bills.
You had some criticisms of, I think, one section of the
discussion draft that I offered on SEC Rule 144. You said that
by lowering the date--as Mr. Huizenga mentioned to you, by
lowering the holding period from 6 months to 3 months, it would
create this arbitrage opportunity. I think Mrs. Maloney, before
she left, said it would create a bunch of froth in the market
and so forth. Let me just ask the question this way: what is
magic about 6 months? Why doesn't that same risk, as you
perceive it, exist now, just with a 6-month holding period,
instead of with a 3-month holding period?
Mr. Coffee. It is very costly to arbitrage for 6 months. If
you are looking at a spread of a dollar, that is going to be
used up by the cost of that additional 3 months of hedging.
Mr. Mulvaney. Didn't this rule used to be a year?
Mr. Coffee. The rule still is a year--
Mr. Mulvaney. Right.
Mr. Coffee. --for nonreporting companies. It is 6 months
for reporting companies.
Mr. Mulvaney. Okay. Was it ever a year for the nonreporting
companies?
Mr. Coffee. It was, yes, it was once a year for
nonreporting. Right now, it is a year for nonreporting
companies.
Mr. Mulvaney. I guess my question is, if we have made
changes in the past, did we see the type of concerns you have
come to fruition or not?
Mr. Coffee. I can't answer that question without
investigating. I can tell you that we saw it over in the
context of Regulation S. Regulation S invites you to sell
securities abroad, and then after a period of time, bring them
back. It is the same arbitrage potential, and when it got down
to 3 months, we saw a huge arbitrage, and eventually the SEC
had to amend the rule to prevent that.
So, I am not telling you this prevents doing what you are
saying. I am saying if you do it, you should really think about
the arbitrage potential.
Mr. Mulvaney. But let's talk about the good, Mr. Quaadman,
because I think your organization had commented on that holding
period. Tell me why you think it would be helpful to do this?
Mr. Quaadman. We think it would be helpful to do, because
you are actually going to provide more opportunities for
businesses to raise capital, and you are actually going to
provide more liquidity for smaller businesses and that has been
something that this subcommittee has looked at very closely.
I understand where Professor Coffee's concerns are. If we
are concerned about market manipulation, that is something the
SEC has the tools to fight and combat now, and that is
something I think, if this bill were to pass, we can ask for
increased disclosure, we can ask for the SEC to report back on
that, and then determine if further action is needed.
But, clearly, if we provide the information to investors,
and provide them with the opportunities to invest in
businesses, they are more apt to do that. Part of the reason
why we also had longer holding periods was that it was more
difficult to deliver that information to investors than what we
currently have today. So, I think we are in this position where
the SEC is sort of looking at the elephant and deciding, well,
the elephant is just too big to eat. Whereas, we should be
taking the position of, you have to do it one chew at a time. I
think this is a good place to start.
Mr. Mulvaney. And no one has mentioned the other two or
three parts of the bill. Professor Coffee, since you seem to be
the most interested in, at least, criticizing it in a positive
kind of way, not a negative kind of way, do you have any
difficulties, sir? Or does anybody with the proposed changes to
the shell company relief that we are talking about?
Mr. Coffee. I thought that was reasonable. I would want to
hear the SEC's views, but as I say in my statement, I did not
have an objection to that.
Mr. Mulvaney. What about the changes to the exemptions from
State laws? Does anybody see any difficulties with that?
Mr. Coffee. That is the blue sky preemption; you have
already heard me say that I am doubtful about blue sky
preemption.
Mr. Mulvaney. That was your point--
Mr. Coffee. Although I did accept it with regard to, I
think, preemption of venture capital fund advisers.
Mr. Mulvaney. Got it. Thank you, gentlemen, very much. I
yield back the balance of my time.
Chairman Garrett. The gentleman yields back. Moving down
the row, I guess, Mr. Scott is recognized next.
Mr. Scott. Thank you very much, Mr. Chairman. Professor
Coffee, each of the pieces of the seven pieces of legislation
before us today seeks to ease the ability of smaller companies
to raise capital. However, Congress just recently passed the
Jumpstart Our Business Startups Act of 2012, and that piece of
legislation also sought to encourage capital formation for the
same businesses. How have the reforms of that legislation, the
Jobs Act of 2012, that we passed, changed the capital-raising
landscape for small businesses? And have we effectively
evaluated that Jobs Act?
Mr. Coffee. I can give you some anecdotal answers, but I do
think that we do need a thorough evaluation of what the impact
has been, and I don't think we have enough data. We can't just
look at the number of IPOs, because IPOs are very volatile.
What has changed is the following: almost every issuer is
now using the confidential filing provisions so they can work
things out with the SEC before they disclose it to the public.
That may be good. That may be bad. But that is clearly
happening.
With regard to the emerging growth company being able to
use only 2-years' financial rather than 3-years' financial,
about half of those companies are being advised by their
underwriters that they should still give 3 years, because the
market wants it. So, it has been partially used, but not
entirely used.
The other provisions, certainly any company that can escape
404 is escaping 404, which emerging growth companies permit.
Underwriters are actually not using the provisions to free them
up from observing the quiet period. The major underwriters have
agreed to a procedure under which they will observe a quiet
period for basically, I think it is 40 days, after the time of
the IPO.
That suggests that the underwriters decided it looked a
little dangerous to have underwriters put out their own
analysts' reports days after they did the offering. So, some of
these rules look like the market thought they made sense.
Others, we are definitely seeing some changes. I think it takes
a little bit more, and I don't want to shoot from the hip to
say what the overall impact of the Jobs Act has been.
Mr. Scott. So, with that, does it make sense for us to pass
a Jobs Act II? Point zero, which is this collection of bills we
are looking at today, before we have had substantive analysis
of the impact of the first Jobs Act that we passed last year.
Mr. Coffee. I agree with you. And I say that even more
about crowdfunding, because there is apparently going to be a
bill coming in on crowdfunding, and we have not yet had a
single crowdfunding offer, and I think it would be wise to see
how that works before we expand the crowdfunding exemption.
Mr. Scott. And then, finally, Mr. Coffee, how reasonable
and appropriate is it to expect the Securities and Exchange
Commission to effectuate all of these rule changes, given their
inadequate funding today, and the fact that they are still
finalizing rules under the Dodd-Frank Act, and the Jobs Act?
Mr. Coffee. I have to say that they are an overworked,
understaffed, resource-constrained agency, which is probably as
frustrated as is this committee. I understand that no one is
happy with this process. I think there is also some
demoralization in some portions of the SEC. So, I think that
you can't expect them to do more without giving them more
resources.
Mr. Scott. Thank you, very much. I yield back the balance
of my time, sir.
Chairman Garrett. Mrs. Wagner is recognized for 5 minutes.
Mrs. Wagner. Thank you, Mr. Chairman. Mr. Quaadman, my
proposed legislation would allow smaller reporting firms who
have registered on an S1 to use forward incorporation to
automatically update their registration statement. The SEC has
recently taken other steps to update rules, given that the
widespread accessibility of filings, as you have displayed, has
increased investor information, access, and protection. Mr.
Quaadman, how would this change help smaller reporting
companies which are seeking to raise money in the capital
markets?
Mr. Quaadman. It would have a significant impact, because
the smaller companies that have to use S1, when they use S1,
they have to go back and have the SEC approve it. So, that
affects their ability to go into the capital markets. It almost
puts them on a slow treadmill, rather than putting them on a
fast track. So, this actually would be very beneficial to
short-circuiting it, and to also make it less costly.
Mrs. Wagner. Will investors in smaller reporting companies
be just as protected as investors in large companies?
Mr. Quaadman. Yes, because, again, this is a situation
where the SEC has a track record with this company that the
information here and the company is known to the investor
community as well. So, the investor protections are all in
place as is the SEC's continued oversight.
Mrs. Wagner. Thank you. Mr. Hahn, I received a letter from
a small biotech company, Protea Biosciences Group, Inc. It is
now a world leader in molecular analysis technology. They
basically save lives. He has 48 employees, including 10 Ph.D.
scientists, and is helping to bring high-paying jobs to rural
parts of America. They have been fully reporting for 2 years,
and their SEC filings have always been on time.
The CEO of Protea wrote to me, ``If a small company is
complying with SEC reporting requirements at the same quality
as a large company, then in the spirit of fairness,'' he
believes, ``the company deserves the same options for raising
capital. Specifically, the availability of SEC Form S3.'' Mr.
Chairman, I ask unanimous consent to submit this letter for the
record?
Chairman Garrett. Without objection, it is so ordered.
Mrs. Wagner. Mr. Hahn, have you heard stories like this
before? And how do think expanding Form S3 to allow smaller
reporting companies under $75 million in market cap will help
small biotech companies across America, like Protea?
Mr. Hahn. I fully support increasing access to capital
markets for smaller reporting companies. There is actually a
company in Maryland right now, a biotech company that is in the
same exact situation, where they are having difficulty trying
to access capital, and with some of these changes, I think it
would make it much easier for those companies to raise capital
and advance their programs.
Mrs. Wagner. Thank you very much, Mr. Hahn.
Mr. Burton, in 1996 Congress preempted State regulation of
most offerings on the national securities exchange, and in
2012, Congress further preempted State regulation of public
offerings of up to $50 million under SEC Regulation A. Mr.
Burton, why is it important that we expand preemptions to
smaller reporting companies and emerging growth companies?
Mr. Burton. The primary reason is that they are already
making full reports because they are public companies. So, it
is really fundamentally unreasonable to expect them to also
have to comply with 51 different State securities laws, the
blue sky laws, particularly in the States that are merit
review. It makes the offerings extraordinarily expensive,
because you are literally increasing by a factor of 50 the
number of people with whom you have to deal. And, we see that
in other areas as well, with Regulation A; blue sky laws killed
Regulation A. That is the reason that nobody uses them. They
use Rule 506. So, there are a whole series of areas where it
has become clear.
Now, nobody is talking about eliminating the ability of
State regulators to police fraud. We are just--
Mrs. Wagner. Right.
Mr. Burton. --talking about the registration requirements
and the qualification requirements depending on the State. So,
it is an extraordinarily important issue in terms of reducing
the cost of raising capital in a national marketplace.
Mrs. Wagner. Thank you very much, Mr. Burton. I couldn't
agree more. And, Mr. Quaadman, I would like your input on this
also, why it makes more sense to allow Federal regulations to
have this patchwork of an additional 50 State laws?
Mr. Quaadman. Sure. First off, there are 28 million
businesses in the United States, and we fully support the
State-based business formation system. However, what we are
talking about here is we are talking about taking a small
number of those several thousand businesses and helping them
access either the national or international capital markets.
So, that clearly is a system where they are trying to get
in to bigger capital markets, where you need to have one set of
rules. What I think your bill does, is you leave in place the
ability of States to regulate those other 28 million
businesses, as well as the intermediaries. So I think this is a
partial preemption that makes sense and helps facilitate the
capital formation abilities of these businesses to grow from
small ones into large ones.
Mrs. Wagner. Thank you, Mr. Quaadman. I believe I have used
all of my time. Thank you, Mr. Chairman.
Chairman Garrett. Your time has expired. And the gentlelady
yields back?
Mrs. Wagner. Yes.
Chairman Garrett. Yes. Mr. Kildee is recognized for 5
minutes.
Mr. Kildee. Thank you, Mr. Chairman. In looking at the
legislation that is the subject of this hearing, it is obvious
that the principal intent here is to increase, provide more
access to capital for companies potentially engaged in
significant growth. Obviously, that is something with which we
are all very concerned. But the notion, or the premise would be
that the barrier to that would be accomplished or would be
overcome, I should say, by reducing or eliminating requirements
for information.
Just sort of thinking about the context of some of the more
recent, in the last several years, say a decade, significant
financial calamities that this country has faced, it seems to
me it that it was not based on an overabundance of information.
I would just like to, perhaps have Dr. Coffee make some
comments, but let me just premise the question by saying this:
Sort of stepping back from these proposals, from my
perspective, I would like to take a look at this from a
slightly higher elevation, because when it comes to Congress,
one of the things I have learned in the 15 months that I have
been here is that there are a couple of overriding themes. One
has to do with regulatory reform, which has evolved into a term
of art, which really, for the most part, means creating greater
exemptions for existing regulations. Reform has its own
definition here, I have learned.
And the other continuing theme is, when we deal with the
development of regulations, with the lack of a cost-benefit
analysis, to look at the effect of a regulation and its cost
and implementation versus the public value that it would
generate.
Yesterday's hearing in the full Financial Services
Committee was focused mostly on the cost-benefit question, and
today we are talking more about this notion of reform. But, in
thinking about this, in areas that are in need of capital
formation, it would seem to me that the committee would focus,
and it has somewhat, but focus more attention on areas like the
mortgage market is a good place to start, and if we are
thinking about capital for small and emerging companies we
might think more aggressively about reauthorization of the
Export Import Bank, since the notion here is that somehow the
government is crowding out the capital that could be available
through the private sector.
But, since today we are focused on the SEC, and these
various legislative initiatives, and as I stated, some which
cause some concern for State regulation, my question would be
this to Dr. Coffee, specifically: To what extent are these
regulations, these proposed new legislative initiatives
necessary? Is there a significant problem with small companies
being able to access capital? Or if it is a problem that needs
a solution, are these legislative initiatives the solution that
you would prescribe? Or would you come up with some other
initiatives that might be more helpful in dealing with that
underlying problem if it exists?
Mr. Coffee. I think there have been two very significant
reforms that greatly increased the ability of smaller issuers
to access the capital markets. First of all, there is a general
solicitation, private placement under Rule 506, which we have
only had now for about 3 or 4 months, that the rules have been
effective. That is going to be available to small issuers as
well as large issuers. Second, we have Regulation A Plus--it is
colloquially called Regulation A Plus--which has a $50 million
ceiling on it, but $50 million is real money to a smaller
issuer, and that allows you to reach even the retail investor
who doesn't qualify for a Prop 4A private placement.
So, you can go to accredited investors under 506, with a
general solicitation. You can go to retail investors under the
Regulation A Plus. Neither of those has had much experience
yet--6 months, 2 months, I think those will be developed. It
takes a while for industry to adapt to these things, but I
think both of those will significantly enhance the ability of
issuers to access the capital markets.
I understand there are some costs, there some problems
about the continuing costs of compliance, a different issue.
But I think, again, we should be searching for scaling these
requirements, and there are lots of ways you can do that and
not go into this complete exemption mode that some of these
bills do. I hope that is helpful.
Mr. Kildee. It does. And if I could just quickly ask Mr.
Quaadman a question, you mentioned that there is a lot of data
out there, and, of course, you and I both access most of our
information through these devices. In that the presence of data
is not the issue, but it is the delivery system of that data,
the question I would have for you is if that is the case, who
would determine what data is required to be out there? We are
fixing delivery systems, but how do we determine what data
would have to be provided, under what intervals, and to what
extent, if it is not through regulations that are adopted by
some entity of the government, the SEC or others?
Mr. Quaadman. Sure. The corporate secretary of Ryder
Systems was at the Chamber a month ago at an event where we
were discussing corporate governance issues, and he was
actually talking about the fact that with an over 100-page
proxy, that makes it more difficult for them, Ryder, to
communicate with their shareholders or potential investors to
get capital.
So, the question I think we are all faced with, and this is
something that I think we all know, and the SEC has actually
been looking at it for several years, and this is actually what
the genesis of XBRL was, that different investors want to look
at different data that they feel is more important to them,
right? And where I think where Mr. Garrett's bill is going is,
you can come up with that summary page, and then you could sort
that information, and determine what is best for you. But, more
importantly, I think we need to do that study in the Garrett
bill, because that is what is going to make it, it is what is
going to inform all of us, to determine what is the data that
is needed? How should it be delivered? And what is the best way
to do that? And we don't disagree that it shouldn't be done
through regulation, but the problem is we are dealing with
regulations that are rooted in 1930s legislation.
Chairman Garrett. Thanks. Yes, so, it was pointed out to
me, two points. One is, we had a study in there, and that is in
legislation because, as you probably all know, this is not
information that we haven't already sought from them in the
past, and we just don't get it. So, now we have do it through
legislation.
And, to Mr. Kildee's comment, before I yield over,
actually, we came up with a simpler solution so maybe what we
need to do is just provide a total government guarantee for the
entire securitization process there, and then there will be
complete investor confidence regardless of the information that
is provided and then we can ensure a robust securitization
market. So, let's think about that for a little while. And with
that, I will yield to Mr. Hultgren.
Mr. Hultgren. Thank you, Mr. Chairman. And thank you,
again, to all of the witnesses for being here. I want to
address my first question to Mr. Quaadman. The U.S. Chamber of
Commerce, I know, represents more than 3 million businesses of
all shapes and sizes. Do your interactions with member
businesses lead you to believe that some companies would
consider increasing employee ownership beyond their top
executives if we passed this type of legislation, which makes
it cheaper and less risky to do so?
Mr. Quaadman. Yes, and first of all, thank you for
introducing this legislation. I have heard from companies
during the Jobs Act, actually before the Jobs Act debate, that
they were very worried that 12G was inhibiting their ability to
retain employees. And these were small businesses, private
businesses that are trying to grow. What happened after the
Jobs Act passed is they said they effectively called in and
said 12G is fine, but 12G doesn't work unless Rule 701 is
lifted, and that the dollar level is raised, and it hasn't been
raised since 1976. So, this is a device that, unless we get
this Rule 701 changed, that your bill is looking to do, it will
be exceedingly difficult for these businesses to retain
important employees in order for them to succeed.
Mr. Hultgren. I would open this up to anyone. I wonder if
anyone could elaborate on the danger that confidential
information could pose to a privately held companies?
Mr. Quaadman. Mr. Hultgren, there is a reason why private
companies are private. If they wanted to enter the public
markets and disseminate that information in such a way that
they felt was beneficial to them, they would. They have made a
decision that they feel they would rather not have certain
confidential information be displayed, and that is something
they have made that value judgment on.
It is something also, when you take a look at the Facebook,
when you take a look at the Facebook capital raising issues
from several years ago, they specifically tried to evade the
American capital markets, because they didn't want to have some
information disseminated. And, that is, if that is a value
judgment they make, they are doing so in what they feel is in
the best interest of that business.
Mr. Hultgren. Let me offer this out, if anyone has any
thoughts, if anyone could elaborate on how increased employee
ownership could benefit the market performance of privately
held companies. Mr. Burton?
Mr. Burton. I think it is clear that for some medium-sized
companies, the current threshold makes it difficult for them to
compete with larger companies that can offer stock options,
ISOs, and stock that has sold at a discount into the pensions
and so on and so forth. In other words, compensatory benefit
plans.
The long and short of it is that by raising the threshold
to $20 million, a lot of companies are currently running up
against these restrictions, will be able to compete with the
Microsofts or the Apples or the Googles or what have you as
they are trying to develop new technologies, create jobs, and
provide better products to the American people, and we don't
want to set up the world so that the only people who can
provide these kind of employee benefits are the largest
corporations in America. We want there to be parity between the
small firms and the large firms, in terms of how the employee
benefit programs work, and this is by no means the only case
where that goes on.
Mr. Hahn. We are a 30-person--
Mr. Burton. It needs to be fixed.
Mr. Hahn. We are a 30-person emerging growth biotech
company. So, we compete for talent against the large
pharmaceutical companies. We can't always compete with the
salaries, so it is important for us to be able to give equity
stakes, compensation to those employees to help attract the top
talent.
Mr. Hultgren. I have visited in my district--I have a
couple of ESOP companies, and it is just a noticeable
difference when you walk in there, of a sense of ownership, a
sense of pride of every single person there feeling like this
is their business, from the top to every single level, it is
just amazing.
Do you feel like that is similar as well, of certainly
impacting and incentivizing employees to come to a business,
but also to work more diligently, and ultimately what have you
seen? What would be the benefit for some of your employees to
have access to this?
Mr. Hahn. Like you said, ultimately, they have a stake in
the company if it does well. If the company grows, their
ownership in the company grows. Their stock value goes up.
Interestingly, we have had a lot of investor meetings where
investors were actually happy that we provide stock options to
all of our employees, and some of the investors liked that
because, as you said, it gives them more of a stake in the
company. It makes the employees actually work harder and feel
more ownership to what we are doing.
Mr. Hultgren. Really quickly, I wondered, has the SEC
articulated any reason as to why they have not promulgated a
rule since 1998 to update Rule 701? Does anyone know? Okay,
thank you, Mr. Chairman. My time has expired. I yield back.
Chairman Garrett. The gentleman's time has expired. The
gentleman from Connecticut is now recognized.
Mr. Himes. Thank you, Mr. Chairman, and thank you for
holding this hearing. I am looking at a number of pieces of
this legislation, including some related to the SBICs, which I
think are a very effective mechanism for financing smaller
companies.
I have two questions, though, for the panel. Thank you for
being here. My first question relates to the nature and
intensity of the problem that we face. Mr. Burton, and Mr.
Quaadman, in particular, you speak in pretty dire terms about
the current state of the IPO market. Mr. Burton, in your
testimony you say that it is prohibitively expensive for small
and medium-sized companies to access the public markets. That
is somewhat belied by the IPO volume that was saw in 2013,
which was a record in about the last 15 years or so, so I am
trying to get at what is really going on.
Mr. Quaadman, you put this in terms of declining
competitive, saying that there is a steady decline of public
companies in the United States and new businesses are eschewing
public markets for more private forms of financing. So the
question is, and by the way this comes from, I was a supporter
of the Jobs Act, and I was just--it was hard to get at what was
really going on. I was regularly shown charts of the IPO market
in 2008 and 2009, as evidence about how tough Sarbanes-Oxley
was, this while the financial markets were, of course, in ashes
around our feet.
So, my question is this, and Mr. Quaadman, maybe you can
just give us a little bit more information. You frame this in
terms of competitiveness, saying there is both less public
market financing happening and less in the United States. When
I got into IPOs 25 years ago, there was Japan, New York, and
London, and that was it. Today, it is a very different world.
You have all sorts of markets in Asia, and all over Europe.
I have two questions for you, really. What is the optimal
distribution internationally that allows you to say that it is
too little here in the United States? Number one, can you show
us that we have deviated from what you see as internationally
appropriately distributed? And number two, your statement that
we are doing too much private and nontraditional, as opposed to
public. What is the right split between young companies going
public, seeking private sources of financing or seeking
strategic exits? It is hard to know if there is a problem if we
don't know what the optimal steady state is. So, what do you
have for us in that regard?
Mr. Quaadman. Thank you for the thoughtful question and
thank you for your continued leadership on these issues. Last
year was the first time we saw a rise--a significant rise with
the IPOs, and it was also the first time, as I said in my
opening statement, in 15 years that we actually saw a rise in
public companies in the United States. I think what we did see
in 1999 and 2000, at the same time we were going through
Sarbanes-Oxley and the Enron scandal and all of that, we
actually had for the first time since World War II,
increasingly competitive global financial markets, right? So,
our markets now have to compete in a way that they didn't have
to compete for 70 years, and from our vantage point, that is
not a bad thing, because if we have to go out and compete,
let's go and do it because the American business community does
that best.
What I think is problematic, and this is where the Chamber
has had a concern since before the financial crisis, is that
our regulatory structures haven't kept up with the course of
time, which is what I think we are seeing with some of the
bills here, is that we are actually updating things that
haven't been updated in a while. And, at the same time, our
regulatory systems are sort of holding back the ability of
these businesses to compete.
Mr. Himes. But, let me stop you. I got that.
Mr. Quaadman. Yes.
Mr. Himes. My question is, can you assert with confidence,
based on some view of what is optimal, that we are not doing
enough public financing here in the United States relative to
Asia and Europe? And can you assert with confidence that we are
doing too many private and strategic take outs, rather than
IPOs?
Mr. Quaadman. I spoke before a group of 100 top
entrepreneurs under 35. And I asked them a question, ``Who here
wants to go public, and who wants to stay private? Who wants to
be acquired?'' That split up a third, a third and a third. Had
I asked that question 10 years ago, 90 percent of the hands
would have gone public. So, what we have done, and this is why
I think you are right, I think it is difficult to see where the
trends are right now, but what we have seen is that the mindset
of our younger business people, and our business people is
changing, because one thing that is true is that the wealth
effects of a company going public and the job creation effects
of a company going public, are established, and that we are
seeing less of that happening, or have up until last year.
Mr. Himes. Thank you. I appreciate that answer, and I want
to follow up. I am almost out of time, but I really am
interested in this question of what is optimal, because, again,
it is just not obvious that--
Mr. Quaadman. Yes.
Mr. Himes. --we have a problem, unless we look at numbers.
I am almost out of time, but Mr. Burton, you talked about $1.5
million in costs. I want to talk to you afterwards about gross
spreads. The average gross spread for an IPO has been 7.5
percent for about, well, for forever. The average IPO is $200
million in size, a little bit of math tells you that is $15
million in capital that goes away for public companies, and for
some reason I hear a lot about the $1.5 million, but I don't
hear anybody talking about that $15 million in the gross
spread. I am out of time, but I would really--I am going to
approach you afterwards to kind of get a sense of why that is
happening, and what you think about it. And with that, I will
yield back the balance of my time.
Chairman Garrett. The gentleman yields back.
The gentleman from Texas.
Mr. Neugebauer. Thank you, Mr. Chairman, and thank you for
holding this hearing. Mr. Hahn, I think there is a lot of
perception out there, that, basically, the securities laws in
this country kind of assume that everybody is a big corporation
and are flush with money, and that the large, sophisticated
multinational companies, and that kind of discriminates against
smaller companies, because of the way those laws are imposed.
Would you agree with that?
Mr. Hahn. I agree completely with that. As I was stating
earlier, with the 30-person company, and with the Jobs Act, we
reached out to 90 investors during our road show, and test-the-
waters meetings, and when we talk about 404(b) and the internal
controls, I can tell you that in not one of those meetings did
anybody ask about our internal controls, our financials. They
wanted to dig into the science, and understand where were
coming from. The only financial question we ever received was,
how long is this cash going to last?
Mr. Neugebauer. Yes, I think one of the things,
particularly, and maybe it discriminates against biotech
companies and research companies a little bit more, but the
life bread for those companies is to pour as much money back, I
guess, into research and development as you possibly can
because that, ultimately, is going to create value for your
company. Is that a fair assessment?
Mr. Hahn. That is very fair. As we were saying earlier, the
cost of our IPO was $2.5 million. And then, $1.5 million a year
just to be a public company. And, with a base salary expense,
annual salary expense of $4 million, that additional $1.5
million could be put toward research and development, hiring
more scientists.
Mr. Neugebauer. Creating more jobs, right?
Mr. Hahn. Creating more jobs.
Mr. Neugebauer. And creating more value for shareholders,
and creating more jobs. I think, Mr. Burton, we heard Professor
Coffee say that the SEC is overworked and underpaid, or
underfunded. Do you agree with that?
Mr. Burton. I think that is maybe true with respect to
enforcement, but it definitely is not true on the regulatory
side. The SEC budget, and I have these numbers in a paper I put
together about 3 months ago, has grown approximately--this is
from memory--10 percent a year for nearly 30 years, which is a
pretty high rate of growth. And if you look at the regulations,
even the relatively simple regulations have, perhaps, a dozen
lawyers involved in it. So, the bottom line is I don't think
they are under resourced in the regulation area. In fact, I
think to some degree, they may have too many people involved in
each project, and that impedes your ability to get done what we
would all like to see them get done.
Mr. Neugebauer. Yes, in fact, the numbers are this: the
operating budget for 2013, I believe, is $1.26 billion. That is
20, 22 percent higher than the highest level of funding
approved by the Democratic-controlled Congress from the period
of 2007 to 2010.
Mr. Burton. I think they have a management problem, not a
financing problem. And that requires a different kind of
solution.
Mr. Neugebauer. Mr. Quaadman, I think you picked up on
something that I wanted to talk about a little bit, and this is
about when these small to medium-sized companies can access the
capital markets, can go public, it provides a lot more capital
for them to accelerate the growth of a lot of those companies,
and creates quite a few jobs. Is that a fair assessment?
Mr. Quaadman. Yes, there are numerous academic studies
which show that the job impacts and the wealth creation that
goes along with that, and that is where I was getting to,
something that I think we have lost, and I also think we are
seeing the mindset changing.
But also, to go back to your earlier question, as well, we
came out with two separate studies that have 51 recommendations
for how the SEC can better manage itself, and I think you see
that with some of, even the prioritization of rulemakings, that
the SEC has done, where they have put conflict minerals ahead
of other rulemakings that are of more consequence to investors
and businesses.
Mr. Neugebauer. Thank you, Mr. Chairman. I yield back.
Chairman Garrett. The gentleman yields back. I guess last,
but certainly not least, Mr. Luetkemeyer is recognized for 5
minutes for the last word.
Mr. Luetkemeyer. Thank you, Mr. Chairman, I will be brief.
Thank you very much, I appreciate your allowing me to
participate this morning in your subcommittee, as I don't
normally sit on your subcommittee, but I think it is an honor
to be here, and I appreciate your indulgence.
Also, this morning, I would like to ask for unanimous
consent to add to the record two op-eds: one that appeared this
morning in The Wall Street Journal regarding to my bill; and
one that appeared in Law360 regarding my bill.
Chairman Garrett. Without objection, it is so ordered.
Mr. Luetkemeyer. They are such glowing and supportive tomes
that I could not resist putting them in the record, so I
certainly appreciate your willingness to do that. Thank you,
sir.
With regards to H.R. 4200, I assume that most of the
Members here this morning are familiar with the bill, and what
it does, I can just briefly say that it allows advisers that
have jointly advised only SBICs and venture funds to exempt
from SEC registration.
Combining the two separate extensions that currently exist,
one for advisers that solely advise SBICs and one for advisers
that solely advise venture capital funds as well as exclude
SBIC S. That is from SEC registration, threshold calculation,
and exempt from State regulation advisers of SBIC funds with
less than 90-man assets under management, leading those to be
regulated by the SBA as they are they are today, which I think
is an important point. So I would just like to get some
acknowledgement of what a wonderful bill this is, Mr. Quaadman,
from the Chamber. How do you appreciate that effort by myself
and other colleagues of mine, with tremendous bipartisan
support on this bill?
Mr. Quaadman. Yes, sir, we support your bill, and we
appreciate the bipartisan manner in which it is moving forward,
and I look forward to working with you for its passage.
Mr. Luetkemeyer. Do you have any advice or do you like
everything in it? Do you think it is going to address a need, a
concern?
Mr. Quaadman. We think it actually addresses a very
significant problem in that we have seen where we don't have
the exemptions normally lining up as they should, so I think
you are correcting a problem here. I think it makes the markets
more efficient and will help business who use both SBICs and
venture capital, and we appreciate your work on this.
Mr. Luetkemeyer. Mr. Burton, do you have any comments about
the bills?
Mr. Burton. As outlined in my written statement, I think
the bill is very constructive and addresses a significant
problem, and the bottom line is that SBICs should not be
treated less favorably than other venture capital firms. And
they are a form of venture capital firms.
Mr. Luetkemeyer. I appreciate your remarks, and I also want
to give kudos to Ranking Member Maloney for her welcome
support, and again it is a bipartisan effort, and her efforts
to support the bill are greatly appreciated.
Mr. Chairman, there is an old saying that you want to quit
while you are ahead, and understanding that, I certainly
appreciate the support and all the fine words from our panel
this morning, and I yield back.
Chairman Garrett. So, now we understand why you wanted to
come to the panel here at the meeting today. Great. While
taking that under advisement for the next time that you come
into our subcommittee hearing, great. So, again, I appreciate
the testimony, information, and responses from each and every
member of the panel. It is always helpful, and as somebody here
said--I think it was Mick Mulvaney--that this type of hearing
is a good hearing because we are, honestly, each one is trying
from both sides of the aisle just to try to get to the root
issues, on the problems, and to try to elicit what we can do in
the best case on these very complicated topics. So, I do thank
you for that.
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.
This hearing is now adjourned. Thank you again.
[Whereupon, at 12:04 p.m., the hearing was adjourned.]
A P P E N D I X
April 9, 2014
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