[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]







                    LEGISLATIVE PROPOSALS TO IMPROVE
                        THE U.S. CAPITAL MARKETS

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 2, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-64



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     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
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 2, 2015.............................................     1
Appendix:
    December 2, 2015.............................................    39

                               WITNESSES
                      Wednesday, December 2, 2015

Carcello, Joseph V., EY and Business Alumni Professor, and 
  Department Chair, Department of Accounting and Information 
  Management, Haslam College of Business, University of 
  Tennessee, Knoxville...........................................    10
Grundfest, Hon. Joseph A., William A. Franke Professor of Law and 
  Business, Stanford Law School; and former Commissioner, U.S. 
  Securities and Exchange Commission.............................     6
Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on 
  behalf of the Biotechnology Industry Organization..............     8
Mathieu, Chris, Chief Financial Officer, Horizon Technology 
  Finance, on behalf of the Small Business Investor Alliance 
  (SBIA).........................................................    11
Quaadman, Tom, Senior Vice President, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................    13

                                APPENDIX

Prepared statements:
    Carcello, Joseph V...........................................    40
    Grundfest, Hon. Joseph A.....................................    49
    Hahn, Brian..................................................    58
    Mathieu, Chris...............................................    66
    Quaadman, Tom................................................    73

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Letter from Hon. Joseph A. Grundfest, dated December 8, 2015.    83
Hinojosa, Hon. Ruben:
    Written statement of Public Citizen..........................    85
    Written statement of Jennifer Taub, Professor of Law, Vermont 
      Law School.................................................    89
Quaadman, Tom:
    Letter to the Public Company Accounting Oversight Board, 
      dated October 7, 2009......................................    98

 
                    LEGISLATIVE PROPOSALS TO IMPROVE
                        THE U.S. CAPITAL MARKETS

                              ----------                              


                      Wednesday, December 2, 2015

             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 10:06 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Huizenga, 
Duffy, Stivers, Fincher, Ross, Wagner, Messer, Schweikert, 
Poliquin, Hill; Maloney, Sherman, Hinojosa, Himes, Ellison, 
Carney, Sewell, and Murphy.
    Ex officio present: Representative Hensarling.
    Also present: Representatives Green and Sinema.
    Chairman Garrett. Good morning. And we are not going to go 
by the clock on the wall, which I see is a little bit behind.
    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises is hereby called to order. And without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Also, without objection, members of the full Financial 
Services Committee who are not members of the Subcommittee on 
Capital Markets and Government Sponsored Enterprises shall be 
permitted to participate in today's hearing.
    Now, as we indicated on the website, today's hearing is 
entitled, ``Legislative Proposals to Improve the U.S. Capital 
Markets.'' With that, I welcome our witnesses to the hearing 
today. Some of them are familiar faces and there are new faces 
as well.
    I thank you all for coming and I thank you for appearing 
before us.
    Before we get to the panel, however, I will recognize 
myself for 2\1/2\ minutes for an opening statement.
    So today's hearing, as I said, will examine a generalized 
topic, and in so doing we will be looking at five legislative 
proposals. And in so doing we will be continuing our work over 
the last 5 years to modernize those securities laws and help to 
improve the U.S. capital markets.
    Now, four of these bills would build upon the success, if 
you will, of the 2012 JOBS Act by lowering barriers to capital 
formation for small and growing businesses. And I want to take 
this time to thank the sponsors on both sides of the aisle for 
their work on those issues.
    The fifth bill we will discuss today is one that I have 
introduced and that is H.R. 3798, the Due Process Restoration 
Act. This legislation would allow defendants in litigated SEC 
enforcement cases to have their cases be removed to a Federal 
district court, thereby availing themselves of the due process 
protections that currently do not exist in the SEC 
administrative proceedings.
    And you may ask, why is this necessary? Well, in recent 
years the SEC has transformed itself into a veritable judge, 
jury, and executioner as it has brought more and more 
enforcement cases before its own in-house tribunal where they 
are heard then by administrative law judges who are themselves 
actually employees of the SEC.
    Let us look at the numbers. In fact, in Fiscal Year 2014 
the SEC brought nearly half of its litigated actions through 
administrative proceedings, and that was an increase of about 
35 percent over 2012. And its win rate in these cases is, not 
surprisingly, extraordinarily high.
    So while prosecuting more cases in this manner is maybe 
more efficient and leads to lower expenditures for the SEC, we 
must realize that these efforts come with a significant cost. 
The cost is less due process protection for defendants who find 
themselves beholden to a seriously flawed system that violates 
the constitutional rights of the accused.
    And despite recent attempts by the SEC to address some of 
the concerns that have been raised, its in-house courts still 
lack many of the protections provided under the Federal Rules 
of Civil Procedure and the Federal Rules of Evidence, such as 
full discovery rights and the right to jury trial.
    So the solution envisioned under the Due Process 
Restoration Act, my bill, is a simple one: Simply allow 
defendants the option to have their cases moved to a district 
court where robust due process protection exists.
    The legislation maintains the ability of the SEC to 
commence an administrative proceeding in cases where the SEC, 
for example, may be seeking to bar someone from practicing from 
their Commission. And importantly, the bill does not mandate 
that certain cases automatically move to a district court. 
Instead, it leaves the decisions up to the defendant.
    So if the administrative proceedings are as fair and 
impartial as the SEC says they are, under the bill those 
defendants would have the ability to remain within the SEC's 
in-house tribunal.
    Hopefully, we can all agree that enforcement is an 
essential part of the SEC's mission, but we can also agree that 
the rights of the innocent must also be protected when the SEC 
takes actions that can destroy the career and reputation of an 
individual.
    So the Due Process Restoration Act would help protect the 
innocent against government overreach. And I look forward to 
hearing from our witnesses today on this important matter.
    With that, I yield to the gentlelady from New York for 3 
minutes.
    Mrs. Maloney. I thank the gentleman for calling this 
hearing and for yielding to me.
    And this hearing will address a series of legislative 
proposals, most of which address capital formation issues. They 
are intended to make it easier for companies to raise capital.
    I am proud to be a cosponsor of one of the bills, the SEC 
Small Business Advocate Act, which my colleague Mr. Carney has 
worked so hard on. This bill would create an Office of the 
Advocate for Small Business Capital Formation within the SEC 
and would also create a permanent Small Business Advisory 
Committee at the SEC.
    This is a common-sense proposal. It is actually modeled off 
of the provision in the Dodd-Frank Act which established the 
SEC's Investor Advisory Committee.
    Ms. Sinema and Mr. Fitzpatrick also have a bill that would 
provide very targeted relief on the auditor attestation 
requirement in the Sarbanes-Oxley Act. All of the Democrats on 
this committee, myself included, voted against a bill last 
Congress that would have provided a blanket exemption from this 
requirement for roughly 75 percent of all public companies.
    But I am intrigued by this compromise bill from Ms. Sinema, 
which is substantially more narrowly targeted. In effect, the 
bill would only provide limited relief and only to companies 
that can prove that they don't have enough revenue to pay for 
the auditor attestation requirement.
    So I will be very interested in hearing more from our 
witnesses about this proposed compromise.
    Finally, the Due Process Restoration Act would overhaul the 
SEC's administrative courts. I am very concerned about making 
changes that could weaken the SEC's enforcement authorities as 
well as their ability to quickly and fairly prosecute 
wrongdoers.
    It is also important to remember that the SEC has long had 
the authority to try certain cases in an administrative forum 
rather than in Federal court. And we simply expanded this 
authority in Dodd-Frank because it has been such a useful tool.
    In fact, people forget that much of our insider trading law 
was developed in an administrative case, the insider trading 
case of Katie Roberts in 1961 was an administrative opinion and 
the Supreme Court later adopted much of the Katie Roberts 
analysis as the basis for insider trading law.
    So I think the SEC's administrative forum has been a useful 
tool. And I will be interested to hear from our witnesses about 
this proposal.
    I look forward to all of your testimony and the exchange we 
will have. Thank you for being here, and I yield back.
    Thank you.
    Chairman Garrett. Thank you. The gentlelady yields back.
    I now yield to the vice chairman of the subcommittee for 
2\1/2\ minutes.
    Mr. Hurt. Thank you, Mr. Chairman--
    Chairman Garrett. For 1\1/2\ minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    And I thank the witnesses for appearing today in this 
important hearing.
    I represent a rural district in Virginia, Virginia's 5th 
District. It stretches from the northern part of Virginia in 
Fauquier County to the North Carolina border. As I travel 
across my district, I am reminded by my constituents again and 
again that the number one concern that they face is jobs and 
the economy. At a time when our economy is still struggling, 
Congress must do everything possible to help our small 
businesses achieve success.
    These entities are our Nation's most dynamic job creators 
and their success is essential to our economy and American 
working families depend upon their success.
    Every one of the measures we are considering today is 
designed to achieve that goal, whether that means establishing 
an office for small business capital formation, reducing the 
size of the administrative state or helping startups market 
their securities to a larger poll of investors, the goal is to 
help our Nation's small businesses achieve that success.
    One such measure we are considering today is the Helping 
Angels Lead Our Startups Act, or HALOS Act. If enacted, this 
legislation would help startups by allowing them to better 
market their securities and to take part in economic 
development events like demo days where these startups can 
interface with potential investors without the risk of 
violating Federal securities law.
    If adopted, the HALOS Act would alleviate the burden placed 
on startups with regard to privacy and compliance concerns 
which often require entrepreneurs and startups to take on 
burdens that are unnecessary and disproportionately expensive 
for small firms. These burdens have a significant impact on an 
entrepreneur's ability to deal with investors because of the 
risk of having their interactions with investors viewed as 
general solicitations or advertisements in violation of the 
Federal securities laws.
    The adoption of the HALOS Act would be an important step in 
continuing the success that this committee has achieved in the 
bipartisan JOBS Act.
    I look forward to the testimony of each of our 
distinguished witnesses.
    I thank the chairman and yield back the balance of my time.
    Chairman Garrett. Thank you, and the gentleman yields back.
    And now for 2 minutes, Ms. Sinema.
    Ms. Sinema. Thank you, Chairman Garrett and Ranking Member 
Maloney, for holding this legislative hearing.
    I have heard from companies throughout my district that 
burdensome and unnecessary regulations continue to stifle their 
ability to grow and succeed. My bipartisan bill, the Fostering 
Innovation Act, provides targeted regulatory relief for 
companies on the cutting edge of scientific and medical 
research.
    The bill adds an additional 5 years to the current JOBS Act 
exemption from auditing requirements under Sarbanes-Oxley for 
emerging growth companies that have an annual average revenue 
of less than $50 million and less than $700 million in public 
float.
    This common-sense exemption will help ensure that costly 
regulations don't stand in the way of success for companies 
with a research-driven business model.
    I am also a sponsor of the Helping Angels Lead Our Startups 
Act, or the HALOS Act. This bipartisan bill provides a clear 
path for startup businesses to connect with angel investors and 
venture capitalists through demo days without being subject to 
onerous verification requirements.
    Demo days are business-planned competitions, startup days, 
innovation summits, and other public forums that introduce 
entrepreneurs to potential investors. But because of confusion 
under current law, small businesses that need equity capital 
may forgo these events, losing opportunities to meet not only 
accredited investors, but also students, professors, and 
business professionals whose input and eventual investment 
could be invaluable.
    I am committed to working with my colleagues on both sides 
of the aisle to ensure that Arizona's innovative small 
businesses have every opportunity to thrive.
    So thank you to Mr. Chabot, Mr. Hurt, and Mr. Fitzpatrick 
for working with me on these common-sense, bipartisan bills.
    And thank you again to Chairman Garrett and Ranking Member 
Maloney for holding today's hearing.
    I yield back my time.
    Chairman Garrett. The gentlelady yields back.
    The gentleman from Maine is recognized for 1 minute.
    Mr. Poliquin. Thank you, Mr. Chairman.
    I want to thank Chairman Garrett and Chairman Hensarling 
for bringing forward the Small Business Capital Formation 
Enhancement Act in a draft format today that I am sponsoring.
    I also want to thank Congressman Juan Vargas from 
California who will be the lead cosponsor on this bill.
    We all know that 80 percent of the new jobs in America are 
created by small businesses. But often, small businesses can't 
get the traditional loans from banks that they need to grow and 
expand and to hire more workers, so it is so important for our 
small businesses to be able to access our capital markets, the 
most liquid in the world, to make sure they have that lifeline.
    Now, it doesn't matter if you are a boat builder in 
Ellsworth, Maine, or you are a call center in Lewiston, Maine, 
those jobs are critically important to our district and other 
employers throughout the country.
    Now, during the past 35 years, as required by law, the SEC 
holds a forum that combines government officials and the 
private sector to make sure we come up with the best ideas 
possible on how our small businesses can access capital so they 
can grow and hire more workers. And we get the best academics 
and businesspeople, industry people and attorneys and 
government folks in the same room so we can come up with the 
recommendations.
    Now, one of the problems we have, Mr. Chairman, is that 
this group every year comes up with some terrific 
recommendations that should become part of the rulemaking here 
in Congress or part of legislation that we sometimes advance 
here in this committee. But the SEC is not required to do 
anything with these recommendations.
    So all this Act does is require that the SEC access this 
information, take it very seriously, and issue a public 
statement on whether or not they are going to use these 
recommendations to further capital access in America.
    So with that, Mr. Chairman, again I want to thank you very 
much for letting me introduce this legislation in draft form.
    And I thank Congressman Juan Vargas for being a lead 
cosponsor on this bill.
    Chairman Garrett. The gentleman's time has expired. And I 
thank the gentleman for his work on the legislation and for him 
introducing the bill.
    We will now turn to our panel. And again, I welcome 
everyone here on the panel and I thank you very much for being 
with us. You have all submitted written testimony. I have 
reviewed it, and I suggest the subcommittee has reviewed it as 
well.
    You will be given at this point 5 minutes to address the 
subcommittee. For those of you who have not been here before, 
there should be in front of you indicator lights: green menas 
you have 5 minutes; yellow means you have 1 minute left; and 
red means you are out of time. And without objection, each of 
your written statements will be made a part of the record.
    So with that, we will turn to the professor, Mr. Grundfest. 
Welcome to the panel, and you are recognized for 5 minutes.

  STATEMENT OF THE HONORABLE JOSEPH A. GRUNDFEST, WILLIAM A. 
FRANKE PROFESSOR OF LAW AND BUSINESS, STANFORD LAW SCHOOL; AND 
  FORMER COMMISSIONER, U.S. SECURITIES AND EXCHANGE COMMISSION

    Mr. Grundfest. Great. Thank you, Chairman Garrett, Ranking 
Member Maloney, and distinguished members of the subcommittee. 
I would like to thank you for the opportunity to address 
matters that are important to the enforcement of our Nation's 
securities laws in general and to the issues that are raised by 
H.R. 3798, the Due Process Restoration Act of 2015 in 
particular.
    A few brief words of introduction. I am the William A. 
Franke professor of law and business at Stanford Law School. I 
am senior faculty at the Rock Center on Corporate Governance at 
Stanford University. And I served as a Commissioner of the 
United States Securities and Exchange Commission from 1985 to 
1990.
    The substance of my testimony this morning can be 
summarized in a single word: balance. There should be a 
reasonable balance between the cases that the Commission 
decides to pursue through its internal administrative 
proceedings and those it decides to pursue in Federal court. 
And as for cases brought as administrative proceedings, there 
should be a reasonable balance between the respondent's rights 
to mount an effective defense and the Commission's reasonable 
interests in the prompt and effective enforcement of our 
Nation's securities laws.
    There is, however, cause for concern that both processes 
are out of balance from many different perspectives. 
Legislative proposals of the sort that this committee is 
exploring this morning can, I believe, help restore a more 
effective equilibrium.
    The SEC's administrative procedures have been criticized 
for decades. Critics have complained of a lack of depositions, 
the imposition of a rocket docket, the admission of hearsay 
evidence, the absence of a jury, bias by administrative law 
judges, long delays in appeals to the Commission itself, and 
the incongruity of an appeal to the same body that initially 
authorized the complaint.
    These concerns have recently been compounded by SEC 
statements suggesting a plan to increase the number of 
enforcement actions filed as administrative proceedings and 
correspondingly to reduce the number of actions filed in 
Federal civil court.
    The Commission has also clearly signaled its intent to 
insist on Chevron deference to its interpretation of the 
Federal securities laws, even when a significant number of 
Federal judges disagree with the Commission. Indeed, a sitting 
Federal judge has warned of serious adverse consequences for 
the evolution of the Federal securities laws if the Commission 
succeeds in this endeavor.
    For all of these reasons, concern has mounted about the 
fairness of the SEC's internal administrative procedures and 
the frequency with which the agency resorts to administrative 
proceedings and not to Federal court.
    To the Commission's credit, it has not been deaf to these 
concerns. It has recently proposed to amend its rules governing 
administrative proceedings so that instead of prohibiting all 
depositions, respondents will now be permitted to take up to 
five. But these are minor concessions given the litany of 
concerns that have been raised about the Commission's internal 
procedures.
    Indeed, as a leading commentator in The New York Times 
recently observed, these are, ``at best, small steps in 
responding to criticisms over truncated rights.''
    The challenge for Congress is to consider a legislative 
strategy that might help restore a more effective balance in 
the Commission's internal procedural rules and in the process 
by which the Commission decides which cases to file in Federal 
court and which to bring as administrative proceedings.
    One possible approach to this challenge would be to 
consider legislation that would help assure that appropriate 
cases are heard in Federal courts and by administrative law 
judges, and the same legislation could provide incentives for 
the Commission to reform its internal procedures so that they 
are viewed as reasonable by the Federal judiciary.
    This proposal would categorize SEC enforcement proceedings 
as falling into one of three groups. The first group of cases 
would involve proceedings that Congress determines can remain 
in the administrative process and that don't, as a rule, 
require the greater safeguards available under the Federal 
Rules of Civil Procedure or the Federal Rules of Evidence. 
Examples of these cases might include late filing cases, net 
capital violations, and a host of other matters that should not 
clutter the dockets of the already overburdened Federal courts.
    The second group of cases would be composed of cases that 
raise questions that Congress considers particularly well-
suited for resolution in Federal court. Examples of these cases 
might include insider trading prosecutions, or fraud in the 
sale of securities. As to these cases, respondents would have 
an unconditional right of removal, much as they would under the 
legislation being considered today, H.R. 3798.
    The third group would be composed of cases that fall in 
neither the first nor second categories. Respondents in these 
cases could have a right to petition the Federal courts for an 
order of removal that would be granted at the discretion of the 
judge. The entire process could be modeled on Federal Rule of 
Civil Procedure 23(f) which creates a right to petition for 
interlocutory review of decisions on motions for class 
certification.
    This tripartite approach can, I believe, lead to an 
appropriate balance that does not interfere with the SEC's 
legitimate interest in the fair and efficient enforcement of 
the Nation's securities laws and protects the legitimate 
interests of respondents in these proceedings.
    Thank you very much.
    [The prepared statement of Mr. Grundfest can be found on 
page 49 of the appendix.]
    Chairman Garrett. I thank the gentleman.
    Now turning next to the representative from the biotech 
industry. Mr. Hahn, you are recognized for 5 minutes.

       STATEMENT OF BRIAN HAHN, CHIEF FINANCIAL OFFICER, 
 GLYCOMIMETICS, INC., ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY 
                          ORGANIZATION

    Mr. Hahn. Good morning, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. My name is Brian Hahn 
and I am the CFO of GlycoMimetics, a clinical stage biotech 
company with 40 employees. We are conducting clinical trials to 
treat patients suffering from sickle cell disease and acute 
myeloid leukemia.
    GlycoMimetics' story is mirrored by our colleagues cross 
bio's membership. Our product candidates were developed by 
brilliant scientists and our early research was funded by 
venture capital. When it came time to conduct expensive 
clinical trials, we turned to the public market for financing.
    Growing biotechs do not generate product revenue. We are 12 
years into our research and we are still years away from our 
first dollar in product revenue. Because of this unique 
development pathway, investment capital is vitally necessary to 
support the $2 billion search for new medicines.
    GlycoMimetics went public in January of 2014, raising $64 
million that has funded our research for the last 2 years. Our 
IPO was supported by the JOBS Act, which has stimulated more 
than 180 biotech IPOs by granting company-enhanced access to 
investors and reducing their regulatory burdens.
    Spending capital on one-size-fits-all compliance 
requirements is uniquely damaging to emerging biotechs. Every 
dollar spent on a reporting burden is a dollar diverted from 
the lab.
    The JOBS Act has been so successful because it has allowed 
emerging growth companies to focus capital on science rather 
than compliance. In particular, I am thankful that the emerging 
growth companies are given a 5-year exemption from compliance 
with Section 404(b) of the Sarbanes-Oxley (SOX) Act.
    The external attestation required by SOX does not provide 
meaningful information to biotech investors, yet is extremely 
costly for a pre-revenue company. Our investors demand 
information about our science, our patients, and our regulatory 
pathway, but they do not want us to spend up a million dollars 
on compliance requirements that don't give any insight into our 
business.
    The JOBS Act's 5-year SOX exemption has saved millions of 
dollars for growing biotechs, but most will still be pre-
revenue when the IPO on-ramp expires.
    GlycoMimetics expects our annual expenses to increase by 
upwards of $350,000 starting in year 6 on the market, capital 
that could be used to treat over a dozen patients in the clinic 
each year.
    I strongly support the Sinema-Fitzpatrick Fostering 
Innovation Act which would extend the JOBS Act 404(b) exemption 
for an additional 5 years for certain small companies.
    This bill would allow growing businesses to remain exempt 
from Section 404(b) through year 10 on the market if they 
maintain average annual revenues below $50 million and a public 
float below $700 million.
    If focusing on revenues is the key metric of a company, 
size is vital to the reform. Public float is a measure of 
investors' predictions about our future potential, but revenue 
is a true window into a company's size today and our ability to 
pay for expensive compliance requirements that are not 
meaningful.
    We are all working toward the first dollar of revenue. 
Until that point, we need to focus all of our investment 
capital on our research rather than on our compliance 
obligations. This important bill recognizes that a low-revenue 
company that has been on the market beyond the 5-year EGC 
window is still very much an emerging, growing company.
    The Fostering Innovation Act will build on the success of 
the JOBS Act by reducing compliance costs for small businesses. 
These cost savings will allow companies like mine to focus 
solely on life-changing science, so I strongly support this 
bill.
    I also support efforts to encourage the SEC to enact 
capital formation initiatives. The JOBS Act came out of 
industry proposals that the SEC could have instituted on its 
own, but Congress had to step in.
    The SEC Small Business Advocate Act and the Small Business 
Capital Formation Act would improve the SEC's policymaking 
processes by bringing small businesses into the room, hopefully 
encouraging smart policymaking that will support capital 
formation and reduce regulatory burdens.
    The JOBS Act has shown us the strong impact that a move 
away from one-size-fits-all regulatory burdens can have on 
capital formation.
    I applaud the subcommittee for considering further cost-
saving initiatives and look forward to answering any questions 
you may have.
    [The prepared statement of Mr. Hahn can be found on page 58 
of the appendix.]
    Chairman Garrett. I thank the gentleman for your testimony.
    Dr. Carcello, welcome to the panel, and you are recognized 
for 5 minutes.

    STATEMENT OF JOSEPH V. CARCELLO, EY AND BUSINESS ALUMNI 
 PROFESSOR, AND DEPARTMENT CHAIR, DEPARTMENT OF ACCOUNTING AND 
INFORMATION MANAGEMENT, HASLAM COLLEGE OF BUSINESS, UNIVERSITY 
                    OF TENNESSEE, KNOXVILLE

    Mr. Carcello. Thank you. Good morning, Chairman Garrett, 
Ranking Member Maloney, and members of the subcommittee. Thank 
you for giving me the opportunity to speak with you today about 
legislative proposals that would affect the U.S. capital 
markets.
    I can't reduce my testimony to one word, but I can reduce 
it to one sentence: Capital markets do not exist without 
investors.
    I have served as a professor at the University of Tennessee 
for over 20 years where I teach accounting, auditing, and 
corporate governance. My remarks are also informed by my 
service on the SEC's Investor Advisory Committee and the 
PCAOB's Investor Advisory Group.
    Turning first to H.R. 3784, it would establish an Advocate 
for Small Business Capital Formation and a Small Business 
Capital Formation Advisory Committee within the SEC. This bill 
appears premised on a lack of access that small business has to 
Congress and/or to the SEC.
    The facts belie the existence of a problem, given recent 
changes to small-business regulation contained in the Dodd-
Frank Act and in the JOBS Act. Even if Congress concludes that 
the interests of small businesses need better representation, 
the bill as drafted is flawed.
    The advisory committee is essentially a lobbying group for 
small businesses, a lobbying group that Congress would have 
granted a government imprimatur to.
    Finally, H.R. 3784, as well as a number of the other bills 
being discussed this morning, seem to view any shortfall of 
capital experienced by small businesses as a problem of demand. 
That is, small businesses lack capital due to onerous and high-
cost regulation.
    Leaving aside the veracity of this viewpoint, this argument 
ignores the suppliers of capital: investors. Creating a quasi-
lobbying group to seek a more favorable regulatory climate for 
small businesses may succeed in reducing the cost of 
regulation, but at the potential cost of greater information 
risk to investors. Such an outcome would actually be 
counterproductive for small businesses as capital would either 
exit the market or would only be available at a much higher 
cost.
    Turning to H.R. 3798, this bill would give defendants 
subject to SEC proceedings before an ALJ the option to have 
those proceedings terminated. If the SEC wanted to proceed, the 
Commission would have to bring the charges in U.S. district 
court.
    Before changing the SEC's enforcement process, it is 
important to remember that Congress, first in the Sabanes-Oxley 
Act and then in the Dodd-Frank Act, made it easier for the 
Commission to bring certain enforcement actions before an ALJ. 
Congress should not underestimate the collateral damage that 
may be done by changing the SEC's enforcement powers.
    Giving defendants the right to effectively choose the venue 
in which they will be tried is unlikely to be in the best 
interests of society and will almost certainly make it more 
difficult for the SEC to deter and punish securities law 
violations, including fraud.
    Finally, the Fostering Innovation Act would extend the 
waiver of auditor reporting on the effectiveness of an issuer's 
controls over financial reporting for certain emerging growth 
companies from 5 years to as long as 10 years. Further 
expanding the number of companies exempt from 404(b) is ill-
advised because auditor reporting on ICFR is valued by 
investors.
    In a recent survey by the PCAOB's Investor Advisory Group--
by the way, $13.4 trillion of capital was represented by those 
respondents, 72 percent of surveyed institutional investors 
indicated that they relied on the ICFR opinion either 
extensively or a good bit.
    Any decision to exempt smaller public companies from 
auditor internal control testing ignores the ample evidence 
that internal control problems are often most serious in 
smaller public companies. In addition, those companies charged 
with financial statement fraud by the SEC tend to be relatively 
small.
    If Congress decides to move forward with this proposal, I 
have an alternative for Congress to consider. Rather than just 
giving a blanket exemption after 5 years, assuming the $700 
million threshold is not hit and the $50 million revenue is in 
place, put it to a vote of the people who actually own the 
company: the investors.
    If my colleagues on this panel are right, they will 
overwhelmingly vote for a further delay in that requirement. 
And if they value 404(b), they won't. So let the market decide, 
let investors who own the company make the decision.
    I look forward to the committee's questions.
    [The prepared statement of Dr. Carcello can be found on 
page 40 of the appendix.]
    Chairman Garrett. Thank you.
    From Horizon Technology Finance, Mr. Mathieu, welcome to 
the panel, and you are recognized for 5 minutes.

 STATEMENT OF CHRIS MATHIEU, CHIEF FINANCIAL OFFICER, HORIZON 
 TECHNOLOGY FINANCE, ON BEHALF OF THE SMALL BUSINESS INVESTOR 
                        ALLIANCE (SBIA)

    Mr. Mathieu. Thank you. Good morning, Chairman Garrett, 
Ranking Member Maloney, and members of the subcommittee.
    I am here today representing the Small Business Investor 
Alliance, or the SBIA, which is the trade association for 
lower-middle-market private equity funds, SBICs, and business 
development companies, or BDCs, and their institutional 
investors. SBIA members provide vital capital to small and 
medium-sized businesses across the country.
    My name is Chris Mathieu, and I am the CFO and co-founder 
of Horizon Technology Finance Corporation, an externally 
managed, publicly traded BDC. I have been involved in the 
accounting, finance, and venture debt industry for more than 25 
years.
    Horizon is a specialty finance company that lends to and 
invests in development and growth stage companies in the 
technology and life science industries. Our investments take 
the form of secured loans or venture loans to companies backed 
by established venture capital and private equity firms.
    Having served as a steward of investor capital for the last 
25 years in both public and private markets and for both 
institutional and individual investors, I believe I have a wide 
and deep perspective on the importance of having an advocate 
among the decision-makers within an organization and industry 
and its underlying sectors.
    I am here to express our support for a bipartisan bill 
called the SEC Small Business Advocate Act, or H.R. 3784, 
introduced by Representatives Carney and Duffy.
    In a speech given by former SEC Commissioner Daniel 
Gallagher on September 17, 2014, the genesis of this Act was 
born. In his opinion, Mr. Gallagher argued that the SEC does 
not have adequate structure in place to consider the views of 
small businesses. He argued that the SEC consistently overlooks 
the impact of their decisions on small businesses and this 
could be a detriment to capital formation.
    We agree with Mr. Gallagher's assessment and believe 
Congress needs to put a permanent structure in place at the SEC 
to give a stronger voice to small business and capital 
formation issues. The Act is the favored approach by the 
industry to create this new structure.
    The Act strengthens the voice of small business at the SEC 
by making significant changes to the way the SEC hears from 
small-business stakeholders, and responds to stakeholder 
requests and makes recommendations to Congress and the SEC to 
improve the ability of small business to access capital.
    The advocate will have similar powers to the Dodd-Frank-
created Office of the Investor Advocate, giving small 
businesses an equal footing with investors in influence over 
the SEC actions.
    For example, the legislation charges the advocate to 
produce an independent annual report to Congress on its 
recommendations. This report will provide a summary of the most 
serious issues encountered by small business and small-business 
investors, and recommendations for change to regulations and 
other guidance that may be appropriate to resolve these 
problems.
    Congress would also benefit greatly from this office. 
Legislating good policy generally includes technical assistance 
and input from regulators. The technical assistance given to 
Congress suffers from the same bias and focus on large 
corporations. Congress would benefit from having small-
busineses' issues included in both the technical assistance it 
receives and in the way regulations are crafted when 
implementing legislation. Better information means better 
legislation.
    SBIA also supports the HALOS Act. This legislation helps 
address a problematic issue in the raising of private capital 
surrounding the definition of general solicitation in the 
matching of investors with startup investment opportunities.
    SBIA encourages the committee to pass this legislation to 
provide associations like the SBIA and other fund managers that 
are members of the association the protection they need to 
facilitate the meeting of potential limited partner investors 
and general partner investment managers.
    We also support the Small Business Capital Formation Act. 
This legislation would require the SEC to respond in a public 
statement to each of the suggestions by the Government-Business 
Forum on Small Business Capital Formation.
    The bill requires that the SEC acknowledge the receipt of 
the forum's suggestions and explains why they will or will not 
adopt the suggestions.
    I want to thank the committee again for holding this 
hearing today on these important pieces of legislation. And I 
look forward to answering any questions.
    And I also ask for your support and cosponsor of this 
legislation. Thank you.
    [The prepared statement of Mr. Mathieu can be found on page 
66 of the appendix.]
    Chairman Garrett. I thank the gentleman.
    Last, but not least, Mr. Quaadman from the U.S. Chamber of 
Commerce, you have 5 minutes.

 STATEMENT OF TOM QUAADMAN, SENIOR VICE PRESIDENT, CENTER FOR 
   CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee.
    A prosperous, growing economy needs to have a strong and 
fair securities regulator to facilitate efficient capital 
markets. I know that is a priority of Chair White as well as 
Director Ceresney, but we were looking at SEC enforcement long 
before their tenure.
    This past July, the Chamber released a report on SEC 
enforcement that included 28 recommendations for how the SEC 
can improve enforcement oversight and investigations and, what 
I would like to talk about today, due process.
    The use of administrative proceedings has changed radically 
over the last 25 years that now today administrative 
proceedings are the primary means of adjudicating violations. 
Administrative proceedings are also not an even playing field. 
The SEC has unfettered right to discovery, and can take years 
to bring a case, whereas defendants have 90 days to prepare 
their defense, lack adequate discovery, and no right to 
deposition and have no protection of evidentiary rules.
    The due process recommendations that we made this past July 
included: alternative dispute resolution, so that the SEC can 
quickly resolve very minor violations; clarifying the use of 
administrative proceedings, so that those ministerial matters 
can solely be handled through administrative proceedings; that 
those serious offenses where there is well-settled law in 
Article III courts could have a pathway to district courts; 
that the 1993 rules of practice be replaced with new rules of 
practice that include rights of discovery, ability to have 
depositions, as well as the reliability of evidence including 
hearsay evidence, as well as the right of removal to district 
court and for the defendant, not the government, to decide the 
right to a trial by jury.
    The SEC, as has been mentioned, has proposed limited 
amended rules of practice; I will call it a crawl in the right 
direction. We are going to file a comment letter at the end of 
this week, which we will be happy to provide to the committee.
    We support the Due Process Restoration Act, but would make 
a couple of recommendations for amendments. First, we believe 
that it should include the 1933 Securities Act, the Investment 
Company Act of 1940, and the Investment Advisers Act of 1940. 
This will allow for the major enforcement matters that have 
well-settled law in Article III courts to have a pathway to 
district courts.
    We also believe that there should be one burden of proof. 
We understand what the reasoning is behind the clear and 
convincing standard, but we believe that there should be one 
standard of proof so that there is balance.
    I believe that the passage of an amended version of the Due 
Process Restoration Act, as well as the other due process 
enhancements that we had recommended, would allow the SEC to be 
a strong enforcer of the law and give defendants the ability to 
defend themselves.
    We also support the SEC's Small Business Advocate Act of 
2015. However, we believe there should be a couple of 
amendments as well. First, the powers of the investor advocate 
and small-business advocate should be similar and mirror each 
other. So, for instance, the small-business advocate should 
have the right to appoint a nonvoting member to the Investor 
Advisory Committee.
    Similarly, it is a very longstanding position of the 
Chamber that advisory committees of the SEC and its subordinate 
organizations also be transparent in their processes. 
Therefore, we would recommend that the bill be amended so that 
the Small Business Capital Formation Advisory Committee as well 
as the Investor Advisory Committee be subject to the Federal 
Advisory Committee Act and the Sunshine Act.
    We also agree that the SEC has had a difficult time in 
keeping up with evolving markets. We believe that the Small 
Business Capital Formation Enhancement Act will allow the SEC 
to modernize its regulations and overcome inertia.
    We also support the HALOS Act. We believe that this will 
help unlock capital. However, we also believe there need to be 
strong investor protections in place and that information is 
going to credited investors. We believe that there should be a 
date-certain retrospective review after implementation for the 
SEC to review if the HALOS Act is both facilitating investor 
protection, promoting investor protection and facilitating 
capital formation.
    Finally, I would just like to thank Chairman Hensarling, 
this subcommittee, and the Financial Services Committee for 
including key capital formation improvements in the DRIVE Act. 
We believe that those are very important and are an important 
build upon the JOBS Act.
    I look forward to working with the committee on these bills 
and look forward to any questions you may have.
    [The prepared statement of Mr. Quaadman can be found on 
page 73 of the appendix.]
    Chairman Garrett. Thank you. The gentleman yields back, and 
I thank you for the testimony, and also amendment ideas.
    But that is what these hearings are for, to see how we can 
improve things.
    So at this point, I recognize myself for 5 minutes for 
questions.
    I guess I will go to Mr. Quaadman first. You heard Dr. 
Carcello's comments, and his last comment was on the Fostering 
Innovation Act bill. One of his comments was, well, if you did 
it, maybe what you should do is allow the markets to decide and 
allow the investors in that field to be able to opt in or opt 
out.
    You heard that comment?
    Mr. Quaadman. Yes, I did, sir.
    Chairman Garrett. That was intriguing to me. So if we were 
to go that way, maybe we shouldn't just apply that to that 
sphere, maybe we should apply that to a whole myriad of Dodd-
Frank pieces of legislation and allow investors to be able to 
opt out all of that.
    I see Dr. Carcello agreeing.
    Mr. Carcello. Yes.
    Chairman Garrett. I will give Mr. Quaadman and Dr. Carcello 
10 seconds on each one.
    Mr. Quaadman. Sure. I think that is a very interesting 
suggestion. I agree with you that if you want to go down that 
logical road, then why not have that process for a whole myriad 
of rules and regulations.
    One thing I just want to do, throw out one area of concern 
about, we do believe that internal controls are important for a 
company to grow from small to big. In fact, BIO and the Chamber 
have been working together to address some concerns with the 
SEC and the PCAOB where those costs have actually ratcheted up 
for many companies.
    I think it is something worthy of discussion, but I think 
we also need to be very concerned as well of an uneven playing 
field.
    Chairman Garrett. Yes.
    Dr. Carcello?
    Mr. Carcello. Just very briefly, I would extend it broadly. 
I would even extend it to the external audit of the financial 
statements. I think if that had to be selected by investors, 
you would find greater competition and probably greater 
responsiveness to market needs.
    Chairman Garrett. I was initially troubled by your ideas 
because I was thinking you were looking at this as a zero-sum 
game as far as our U.S. markets. But I guess if you extended 
this as far as you would go, you would actually potentially 
open up our markets by making us on a more level playing field 
as far as investor concerns across the spectrum. So, thank you 
for that.
    Let me go back to the other end of the dais here.
    Mr. Grundfest, you laid out three pots if you will, three 
silos as far as what these could fall into, three buckets, pro 
forma matters that would remain here, the clear-cut ones that 
were over here, and then other ones that are in the middle. 
Maybe you could just spend 20 seconds on the ones in the 
middle. What would be the criteria? Because if this is 
basically left to a judge to decide, the judge is going to have 
to have some sort of criteria in order to make that 
determination, right?
    Mr. Grundfest. Absolutely, Mr. Chairman. And if you take a 
look at my written testimony, the very last footnote on the 
very last page lays out six considerations in particular that a 
court might view as what would be called core factors with an 
analogy to rule 23(f). They would be first, the presence of 
complex regulatory matters that are better resolved by an 
administrative law judge than by a jury or an Article III.
    Let's face it, there are certain levels of complexity that 
belong with the SEC. You don't want to clutter the Federal 
court docket if you have that kind--
    Chairman Garrett. That is in the first category. I got 
that.
    Mr. Grundfest. Yes. I'm sorry?
    Chairman Garrett. That is in the first category, clearly, 
the ones that are clearly--
    Mr. Grundfest. Actually, even in the toss-up cases.
    Chairman Garrett. Okay.
    Mr. Grundfest. Even in the toss-up cases, sometimes you 
have complex regulatory matters. A judge can look at it and 
say, we really need the expertise of the SEC and an ALJ to 
address these types of issues.
    Then you could look at the value of fact-finding by a jury 
as opposed to an administrative law judge. Sometimes they say, 
we have questions of credibility and we would rather have a 
jury of 12 peers view these issues rather than have the 
decision being made by an administrative law judge.
    Chairman Garrett. Let me just stop you on that because I 
can go through the other six in a moment.
    Mr. Grundfest. Sure.
    Chairman Garrett. But Mr. Grundfest, on that point, if you 
ask the average person on the street, don't we have a right in 
the United States to have a decision made on guilt or 
innocence, if you will, by a jury of our peers? That doesn't 
occur here, correct? The fact finder is not a jury of our 
peers. And is that a violation of our Constitution? Is that a 
usurpation of the powers of Article III judges, of Article III 
of the Constitution?
    Mr. Grundfest. Yes. And there have been a number of cases 
that have been popping up where courts have been expressing a 
lot of concerns regarding this use of administrative 
proceedings.
    We have now the system is set up that the government 
decides whether or not there is going to be a trial by jury, 
which puts defendants at a severe constitutional disadvantage.
    Chairman Garrett. Right. And at the end of the day, what 
are we talking about as far as the penalties that could be 
imposed? Are these not life-and-death decisions actually being 
made by these inside tribunals?
    Mr. Grundfest. Yes. In fact, Russell Ryan, who is a former 
Assistant Director of Enforcement at the SEC, wrote an op-ed in 
The Wall Street Journal last year where he was citing that 
these proceedings are being used as quasi-criminal proceedings.
    So if you take someone like a Nelson Obus with Wynnefield 
Capital--
    Chairman Garrett. Okay.
    Mr. Grundfest. --he was able to get into district court 
under the old rules and was acquitted after 12 years and $13 
million. He would not have the opportunity to do that today and 
would not have had the discovery tools that allowed him to 
unearth the evidence that acquitted him.
    Chairman Garrett. Thank you very much.
    And with that, I turn to the gentlelady from New York, the 
rnaking member of the subcommittee, for 5 minutes.
    Mrs. Maloney. Thank you.
    Professor Carcello, I would like to ask you about the Due 
Process Restoration Act. This bill would permit a defendant 
rather than the SEC to choose the venue of the enforcement 
action, essentially whether it is initially tried in an 
administrative forum or the Federal district court.
    Now when the SEC is bringing enforcement action, it can 
choose the venue that best serves the interests of the 
investors and the public. A defendant in an enforcement action, 
on the other hand, would likely choose the venue that is in the 
best interest of the defendant.
    So the bill, for example, could potentially allow a well-
funded defendant to choose a district court knowing that the 
Federal district courts are overwhelmed and that may delay a 
trial, realistically, for many years.
    In your opinion, do you think allowing a defendant to have 
this choice is in the public interest?
    Mr. Carcello. No. And the reason why--the choices here are 
very clear. It is obvious to the defendant it is in his or her 
interest to have a choice of venue. It is, I think, clear that 
from a societal perspective the SEC is going to choose the 
venue that they think best serves investors and best serves 
society.
    And I think it is important for Congress and this committee 
to think carefully about the fact that the greater use of ALJ, 
as I have talked about in my testimony, was facilitated by 
actions Congress took. Congress took action in 2002 in Section 
305 of SOX to facilitate the ability of the SEC to move in this 
venue. They took action in Dodd-Frank in 929(p) to facilitate 
the ability of the SEC to move in this venue.
    Both of those Acts followed severe market disruptions, 
massive financial fraud, to the point that our markets were 
essentially paralyzed in 2001 and 2002.
    And I would point out to this committee that in the vote 
against SOX, there were fewer people who voted against SOX--
look it up--than voted against declaring war on Japan after 
Pearl Harbor was bombed. Okay? And President Bush was the 
President then, hardly a known liberal. So the markets were 
paralyzed.
    Dodd-Frank was not nearly as bipartisan, clearly, but 
followed essentially close to the complete implosion of the 
financial sector in this country. And so Congress viewed market 
failures there. They viewed it as a situation where the SEC, 
among many other things, needed greater enforcement tools.
    So I think the question the committee needs to answer--and 
it is really a very simple question--is what has changed? What 
has changed? Why did the enforcement tools that you have 
created within the last 15 years, it is not 50 years ago, this 
is in the last 15 years, why are these enforcement tools no 
longer needed?
    Mrs. Maloney. To follow up, are you concerned that this 
would hinder the SEC's ability to crack down on bad actors in 
the securities market and especially with the funding 
constraints? We were just told from the screen that the SEC is 
funded 12 percent lower than what their requests are, even 
though their responsibilities have grown.
    So I would like to ask you to follow up on that, and then 
anyone else on the panel who would like to comment on whether 
you think this would hinder the SEC's ability to crack down on 
bad actors.
    Dr. Carcello?
    Mr. Carcello. Very briefly, to give others some time, yes, 
I think it clearly would. It would make it more difficult. I 
think even in Professor Grundfest's testimony, part of his 
testimony in his written remarks indicated that it would make 
it more difficult at the margin.
    And the SEC, in many ways, is an underfunded agency. I 
think many people have viewed that for years. And so it is 
certainly going to make it more difficult for them to enforce 
the securities laws.
    To the extent that there is, in the minds of some, a lack 
of fairness to the defendant, I think that is a legitimate 
concern. But I think there are other ways that can be dealt 
with.
    Mrs. Maloney. Would anyone else care to comment?
    Mr. Quaadman. Yes, Ranking Member Maloney, if we repeal the 
Bill of Rights a lot more people would be in jail, but we 
wouldn't be a better country. The issue here is that if you had 
sufficient rules of practice and administrative proceedings and 
you had a right of removal, you would not have a stampede to 
district court, but at least you would give defendants the 
right to defend themselves.
    The reason why we have a Bill of Rights is because 
prosecutorial powers are so great, the Founding Fathers wanted 
to put some safeguards there.
    The issue here is we do not have constitutional safeguards, 
which also means there is a presumption that somebody is guilty 
until they are proven innocent.
    Mrs. Maloney. But they can appeal to Federal court, 
correct?
    Mr. Quaadman. First, they have to--
    Mrs. Maloney. Wouldn't that be a safeguard?
    Mr. Quaadman. But first, they have to appeal to the 
Commissioners themselves.
    Chairman Garrett. The gentlelady's time has expired.
    The gentleman from Virginia, the vice chairman of the 
subcommittee, is recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    Mr. Quaadman, I wanted to start with you. I was wondering 
if you could briefly talk about the importance of the angel 
capital markets and the importance of promoting policies here 
in Congress that encourage more investment by angel investors 
in startups.
    Mr. Quaadman. Angel investors are an extremely important 
investment tool for startup businesses. They are actually the 
first line of accredited investors who are going into startups, 
so they are critical for business formation.
    I think what we have clearly seen with the JOBS Act is the 
changes in general solicitation and the opening up of roadshows 
have been wildly accredited with the increase in IPOs and 
public company formation.
    I think by helping to open up these venues for angel 
investors, if done in the right way, which they can be, I think 
that will certainly help business formation. And as I have 
testified before, we have seen over the last 7 years historic 
lows in business creation in the United States. So I think this 
is a critical reform we need.
    Mr. Hurt. And do you think that is particularly important 
in light of the pressures that have been on other participants 
in providing capital, namely banks and credit unions, the 
pressures that they have suffered from over the last 8 years?
    Mr. Quaadman. Yes. Clearly we have seen with the 
implementation of the Basel III rules and other rules that are 
happening, there are disincentives now for banks to loan either 
through traditional business products or consumer financial 
products that are used for startups. So that market has 
receded, and we are now more dependent upon capital markets. So 
I think reforms like this, as with the BDC legislation and 
others, are very important in terms of moving forward.
    Mr. Hurt. Thank you.
    I wanted to talk to Mr. Hahn and Mr. Mathieu for this next 
question. I was wondering if, beginning with you, Mr. Hahn, you 
could talk a little bit about the current general solicitation 
rules and how they unnecessarily impede the ability of startups 
to access capital under Reg D Rule 506(c), if you could talk a 
little bit about that, and then talk about our HALOS proposal 
and whether or not you believe that this proposal gets to the 
heart of solving that issue or improving that issue? And then 
maybe leave some time for Mr. Mathieu.
    Mr. Hahn. Thank you. I can kind of start working backwards 
with the JOBS Act. We went public in January of 2014. And the 
test-the-waters provision of the JOBS Act was instrumental. 
That is why we had a successful IPO.
    Working backwards toward that, though, most all of our 
funding was from venture capitalists. And over the years, when 
we were still private, we were always looking for different 
ways to raise money. So any expansion for private companies to 
get in front of more investors and to find more pockets of 
capital, would be a tremendous success to help more companies 
succeed.
    Mr. Hurt. Do you think that the HALOS proposal that we are 
considering today helps remove some of those barriers and 
enhances the ability of startups to access that capital?
    Mr. Hahn. Yes, if it works, kind of similar to test the 
waters, it gives you more access with less barriers to get in 
front of more potential investors to tell the story of the 
company. In our case, our science is very complex, so it takes 
more meetings, more time to get people comfortable with our 
technology. I think that would definitely be helpful.
    Mr. Hurt. Mr. Mathieu?
    Mr. Mathieu. Yes, I would actually agree with Mr. Hahn. I 
think that solicitation is a broad subject and it really goes 
to common-sense of how you tell your story.
    At Horizon, we often look at companies like Mr. Hahn's in 
their earlier stages as well as being public, so we actually 
like the stories, we like the time spent in developing the 
relationship. So I think the solicitation, broadening that 
flexibility is really important, not just to raise equity 
capital in the private market, but also the public sector as 
well.
    Mr. Hurt. And I appreciate the testimony of both you and 
Mr. Hahn, in support of the HALOS Act. Do you think that the 
HALOS Act, if enacted, would help remove some of those 
impediments and encourage more angel investing in startup 
companies?
    Mr. Mathieu. I do, yes. And I think it is really a path to 
just improving a process that works, but can be improved.
    Mr. Hurt. Excellent, thank you.
    I yield back the balance of my time.
    Chairman Garrett. The gentleman yields back.
    Mr. Hinojosa is recognized for 5 minutes.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    I ask unanimous consent to enter two statements into the 
record regarding the legislative proposals we are considering 
today. The first one is a statement from Jennifer Taub, 
professor of law, Vermont School of Law, and the second is a 
statement by Public Citizen, a public advocacy organization 
here in Washington, D.C.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Hinojosa. Thank you.
    I would like to thank the panelists for their appearance 
and testimony here today.
    Our capital markets are the envy of the world because they 
are safe, transparent, and liquid. Emerging companies are the 
lifeblood of our economy. So ensuring that emerging companies 
have access to capital is an imperative if we are to maintain 
our global and financial leadership.
    As we consider the proposals that aim to improve our 
capital markets, we must be careful not to undermine the safety 
and the confidence in our markets.
    My first question is to John Grundfest. Professor, in your 
testimony you voiced some concerns that the SEC faces a crisis 
of confidence over the fairness of its internal administrative 
procedures. H.R. 3798, the Due Process Restoration Act, aims to 
address some of the issues raised by the critics by providing 
defendants to remove their case to a Federal district course, a 
venue of their choosing, and by increasing the SEC's standards 
from a preponderance of the evidence to a clear and convincing 
standard.
    My question to you is, do you think these measures will 
address the concerns raised regarding the SEC's administrative 
proceedings?
    Mr. Grundfest. I think the bill is one approach that can be 
taken to these issues. And I think the existence of the 
challenge is actually effectively conceded by the Securities 
and Exchange Commission itself.
    I think it is valuable for this committee to recognize that 
the Commission itself has decided that its historic approach of 
saying no depositions in any of its proceedings may actually 
not be fair, and for that reason the Commission itself has 
proposed increasing the number of depositions to up to five.
    Now, in some of the more complex matters, the number of 
five could be viewed as being extraordinarily low, arbitrary, 
and capricious, given a case that might involve hundreds of 
thousands of documents, where the Commission itself may have 
taken testimony from hundreds of witnesses. And in order to 
have a modicum of fairness, you need not go to one extreme and 
say we are going to depose absolutely everyone, but limiting 
the number of depositions to five might be viewed as arbitrary 
and also as unfair.
    Mr. Hinojosa. That is your opinion. Do you believe this 
bill will have the result of moving most, if not all, SEC 
proceedings to an already overly burdened Federal court docket?
    Mr. Grundfest. It could move a large number of important 
cases to Federal court docket. And out of concern for the loads 
that the Federal judges do face, an alternative approach might 
be to look at the three categories that I have suggested where 
you could carve out a set of cases where you don't have to have 
any right to bring it to a Federal--
    Mr. Hinojosa. The Federal courts in Brownsville all the way 
to El Paso on the Texas/Mexico border are just overloaded with 
different immigration cases and lots of other cases. And we 
just don't have enough Federal judges to take on more like you 
are suggesting.
    My next question is to Joseph Carcello. The Small Business 
Capital Formation Enhancement Act would require the SEC to 
publicly assess the findings or the recommendations of the 
annual Government-Business Forum on Small Business Capital 
Formation. My question is, do you find it necessary to require 
that the SEC to also formally respond to each recommendation?
    Mr. Carcello. Yes, that is a concern. My understanding is, 
last year the number of recommendations that came out of that 
forum was 20. My understanding also is that any participant in 
the forum can make a recommendation.
    To the extent that these bills are patterned after Sections 
911 and 915 of Dodd-Frank, and speaking as someone who, along 
with Professor Grundfest, is on the Investor Advisory 
Committee, I can tell you it is quite difficult for us to come 
to a consensus. There are 20 members in that group. Each of the 
five SEC Commissioners essentially have four picks. As you well 
know, the SEC is pretty ideologically divided, so the IAC is 
pretty ideologically divided.
    Mr. Hinojosa. They seem to resemble Congress.
    Mr. Carcello. Yes, they seem to resemble Congress.
    Mr. Hinojosa. Do you think the bill will help the SEC--
    Chairman Garrett. The gentleman's time--I will permit the 
last question. Go ahead.
    Mr. Hinojosa. I yield back.
    Chairman Garrett. Okay.
    Mr. Duffy is now recognized.
    Mr. Duffy. Thank you, Mr. Chairman.
    I am concerned about the arguments that are being made that 
we can't allow due process because our Federal courts are 
overburdened. If that were the case, maybe what we would do in 
regard to criminal cases, we want to have the attorney 
general's office set up some form of administrative law judge 
so we can have the FBI investigate, the attorney general 
prosecute, to administrative law judges who are hired by the 
U.S. attorneys office. And then that therefore would be justice 
in the American criminal system.
    But I think most Americans would scream wildly that that is 
not fair. And to think that we are going to now make the 
argument that we can't go to Federal courts because they are 
overburdened, the better outcome then would be stay at the SEC 
and be guaranteed an adjudication of guilt is a better outcome 
for defendants, is absolutely insane.
    I agree with Mr. Garrett's bill. We should give defendants 
an outlet to go to Federal courts and have their cases heard by 
an impartial group of judges and potentially juries.
    Mr. Quaadman, do you agree with that analysis? Am I wrong 
on that? I am supposed to be spending my time on my own bill 
with Mr. Carney, but this is, anyway--
    Mr. Quaadman. No, Mr. Duffy, I think you have hit the nail 
on the head. And the reason why I also mention about creating 
new rules of practice was, if you have fair due process in 
administrative proceedings, you are not going to have a 
stampede to district courts either. You might have large cases 
move over, but it is not going to be a stampede.
    The other thing I just want to mention too, because this 
also shows how Kafkaesque this is, what got us involved in this 
to begin with was that a general counsel came in and talked 
about a situation where they had an issue that both the IRS and 
the SEC were investigating. And the IRS gave this company a 
document giving all their rights and responsibilities during 
the investigation and the SEC had nothing. So they are in 
complete no-man's land from the start of the investigation 
through. And then, when you go into the AP process, you have no 
right to discovery or anything. So it is a completely tilted 
playing field.
    Mr. Duffy. I did well as a former State prosecutor, won a 
lot of cases, but I have to tell you I would have had a much-
improved record if I was able to try my cases in front of my 
own DA staff, no doubt. And I think that is why we see the 
rates of success so high at the SEC.
    I do want to transition to the bill that I worked on with 
Mr. Carney in regard to our small-business advocate advocating 
for better capital formation with regard to our small 
businesses.
    I think if you look at economic growth, we look at job 
creation, it is coming from our small, emerging growth 
companies and making sure that they have access to capital it 
is incredibly important that we get that right.
    And I appreciate Mr. Carney's hard work and the bipartisan 
effort and the support that we have had on both sides of the 
aisle for this proposal.
    We all agree that we want to protect investors. That is a 
really good thing. But we also want to make sure we have the 
right balance, I would argue.
    And maybe to Mr. Mathieu, do you think we have struck the 
right balance between investor protection and capital formation 
specifically in regard to small businesses?
    Mr. Mathieu. I think currently, we are not fairly balanced. 
I think that is what this legislation is actually trying to do.
    Mr. Duffy. I would agree.
    Mr. Mathieu. And so I think we are trying to say that the 
SBIA supports this very strongly, because right now the small-
business investor and the small-business operators don't have a 
fair say, a fair spot to express their position.
    Mr. Duffy. I would agree. And I think to have an advocate 
there who can talk about the good, the bad, and the ugly 
specifically to the Commission would benefit our small 
businesses and emerging growth companies.
    I just want to make one comment. I know that some on the 
right have made some complaints, people are concerned about the 
growth of government. We have a really big debt. None of us 
ran, at least on this side of the aisle, to grow government and 
make it bigger. And some have said, well, this bill is a growth 
of government.
    But I think that making sure that you have an advocate 
inside the SEC promoting policies that will support our small 
businesses so they can access capital, they can grow, they can 
create jobs, they are the next innovators, Mr. Hahn, of the 
next lifesaving products or the next iPad or Apple or whatever 
that technology may be.
    To think that we are going to use the growth of government 
argument against good policies that help American businesses, I 
think is shortsighted.
    Mr. Mathieu, would you agree with that?
    Or Mr. Hahn, would you agree with that?
    Does the growth of government for the small agency that is 
funded by fees, not by appropriation, is that small in 
comparison to what this does for the American small-business 
community?
    Mr. Mathieu. Yes, I think this is common-sense. It is a no-
brainer. The incremental cost, if any, far supports the 
benefits that will come. The lack of support of small business 
from day to day has to change.
    Mr. Duffy. Mr. Hahn, quickly?
    Mr. Hahn. The SEC doesn't often act on the recommendations 
of the advisory committee or the Government-Business Forum. The 
small-business advocate would bring those industry stakeholders 
further into the SEC's decision-making process.
    Mr. Duffy. Thank you, I yield back.
    Chairman Garrett. Thank you.
    There are some people on the right who are making that 
argument. I appreciate that.
    Mr. Green is now recognized for--oh, Mr. Carney is 
recognized for 5 minutes.
    Mr. Carney. Thank you very much, Mr. Chairman, and Ranking 
Member Maloney for having this panel today and for all of you 
who have come to testify.
    A few years ago, I worked with my friend on the other side 
of the aisle, Mr. Fincher, on the JOBS Act, and in particular 
the IPO on-ramp. I come from the State of Delaware; my district 
includes the whole State of Delaware. We pay very close 
attention to corporate formation and business development 
issues. Most of the 500 companies are incorporated in our 
State.
    And folks whom I know well, who do that business in the 
Division of Corporations have been reporting to us that 
companies were no longer going to IPO. And we had had a real 
problem with that, a cutback, and there are lots of different 
reasons.
    And Treasury convened a group of business leaders. And out 
of that confab came a number of ideas to try to promote 
businesses, emerging growth companies to go to an IPO, because 
the facts were that companies that sought public financing 
through an IPO were in a growth stage creating more jobs. And 
what had happened was for some of those companies that were 
emerging, they were looking at a merger and acquisition kind of 
an outlet, which actually resulted in fewer jobs.
    And so the effort that we did in a bipartisan way to put 
the IPO on-ramp together out of the work that Treasury had done 
I think has produced some pretty good results and the facts 
speak for themselves.
    We heard the argument from BIO a while ago that biotech and 
pharmaceutical-type companies, research companies take a longer 
time to develop and therefore need a longer on-ramp. And I 
think that is part of the reason for the bill that is before us 
that Ms. Sinema and others have cosponsored.
    Is there any concern? Originally when we had that testimony 
a year or so ago, I was interested in providing an extension of 
that on-ramp to bio-type companies. This would just do it to 
any company that fits the definition, an emerging growth 
company as defined by the original JOBS Act, and then had the 
limitations of size as part of the bill.
    Should we look at limiting it further to the kinds of 
companies, Mr. Hahn, like yours, or not?
    Maybe Mr. Quaadman could answer this more generally?
    Mr. Hahn. In the last 18 or last 20 years, I have been in 
early-stage startup companies. And I have been in 
manufacturing, IT, and I have been in life sciences now since 
2002. I would say, every one of those industries, every one of 
those companies, I think this is beneficial across-the-board.
    Mr. Carney. Okay, good. So the other issue that we 
struggled with when we did the initial IPO ramp bill, and Mr. 
Himes was arguing that maybe the size limitations were too big, 
does anybody have--is there any concern, I guess from Mr. 
Carcello, about the definition of emerging growth companies 
under that piece of legislation, that it ought to be more 
limited, or anybody on the panel?
    Mr. Carcello. It is certainly significantly more limited 
than the bill you considered last year. So if you are going to 
move forward, I think the way you have structured it now is 
certainly less risky to the market than the bill that was voted 
down last year.
    Mr. Carney. Okay, thank you.
    So Mr. Quaadman, I didn't catch everything that you said 
about the small-business advocate bill, but there was some 
recommendation for a change that you mentioned. Could you 
restate?
    Mr. Quaadman. Sure. I appreciate your work on the bill. And 
as I said, we support it.
    The SEC has a tripartite mission, right: investor 
protection; capital formation; and competition. And your bill 
addresses capital formation and competition.
    The two changes we recommended were: one, that the investor 
advocate and the small-business advocate be on the same plane, 
so that there should be an amendment that the small-business 
advocate would have a similar right to appoint a nonvoting 
member to the Investor Advisory Committee as the investor 
advocate has with the Small Business Capital Formation 
Committee. That is one.
    Number two, and this has been a longstanding position that 
we have advocated for, is that these types of advisory 
committees, and I would say for the Small Business Capital 
Formation Committee as well as for the Investor Advisory 
Committee, that they be subject, that they be under the 
jurisdiction of the Federal Advisory Committee Act so that 
there is transparency with the proceedings, so that neither the 
Investor Advisory Committee nor the Small Business Committee 
could be a quasi-lobbying group that Mr. Carcello says.
    Mr. Carney. I am running out of time, but I just want to 
make a comment about that. To us, those of us who are 
sponsoring the bill and supporting it, we think advocacy, for 
some, advocacy is lobbying. We think it is advocacy and it is 
appropriate in this context.
    We do this in all kinds of different ways for small 
businesses at State, local, and Federal Government. We think it 
is appropriate in this context.
    And I want to thank everybody again for being here today 
and for your comments and input.
    Chairman Garrett. Thank you. And the gentleman yields back.
    Mr. Schweikert is recognized for 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Mr. Hahn, you were kind enough in your testimony, in your 
written testimony to talk a bit about some of the successes and 
some of what was helpful in the JOBS Act.
    First off, thank you from many of us who cared a lot about 
that. But just for curiosity, what would you add? What would 
you change? And what other legislation--the legislation we are 
talking about here today, do you think it enhances both your 
success and your use of the JOBS Act?
    Mr. Hahn. Thank you. As I stated, the test-the-waters 
meeting provision of the JOBS Act was great. It takes investors 
some time to understand our technology and our science and what 
we are doing.
    I think the Fostering Innovation Act takes a targeted 
approach to build onto the JOBS Act from the 404(b) exemption. 
So for the first 5 years, we are 404(b) exempt. And the 
company, GlycoMimetics, has been around since 2003. So here we 
are in 2015 and we still don't have--we are still several years 
out from a product to market and product revenue.
    So we are going to be in year 6 and we have most of our 
expenses, our top three expenses, are our payroll, our clinical 
trials supplies, and clinical trial expenses.
    So I think in year 6, we are looking to add upwards of 
$350,000 in 404(b) attestation and we are still going to be 40 
employees, I am still going to have a staff of 3, we are still 
going to have vanilla financials.
    Mr. Schweikert. Let me ask, within your specialty, how 
common is this, particularly in biotech, research-intensive 
sort of new intellectual capital to have as long an on-ramp as 
you are having?
    Mr. Hahn. Very common, very common. It takes upwards of $2 
million and anywhere up to 10-plus years to get a product from 
concept to FDA approval.
    Mr. Schweikert. Okay. And do you think we are going far 
enough on these pieces of legislation to give you that window 
to tell your story, but also to have the capital without the, 
shall we say, auxiliary expenses?
    Mr. Hahn. I think it is a good, measured, targeted next 
step. So the first 5 years, I think, a lot of companies, we are 
in that stage now where hopefully we can get to years 6 through 
10 and see how that works out. And then possibly expand more 
and measure it.
    Mr. Schweikert. Thank you.
    Mr. Quaadman, in that same sort of realm of subject, I am 
sort of doing a broad brush of, okay, here is our--we will call 
our success from a couple of years ago the JOBS Act, here we 
are doing some very small, incremental touches and 
improvements, may be able to have some voices, some other paths 
if you hit the wall of regulatory or litigation. What else 
would you add? What are we failing to even engage in the 
conversation on?
    Mr. Quaadman. First off, I think both the Small Business 
Advocate bill as well as Mr. Poliquin's draft bill go a long--
those bills, if they are implemented, will have far-ranging 
consequences because we will actually start to have a real 
debate about capital formation and competition within the SEC.
    Mr. Schweikert. Okay. But first on the Poliquin bill, and I 
think we are still just in draft or discussion draft at this 
point?
    Mr. Poliquin. Yes.
    Mr. Schweikert. Does it actually provide the path that you 
believe is necessary?
    Mr. Quaadman. Yes, because what you are doing is you are 
creating a mechanism that the Commission actually has to 
respond to recommendations. Because remember, the JOBS Act was 
a series of recommendations that advisory committees and the 
SEC had been making for years and nothing had ever happened. So 
rather than things just going over the transom and being 
ignored, this actually starts to force mechanisms for something 
to happen.
    So I think it is also important, for it allows the SEC to 
take the self-initiative to try and keep up with the markets 
rather than having Congress having to bear down on them.
    Mr. Schweikert. Okay, sort of the second half of this, and 
I don't mean to get ethereal. With what I am seeing in much of 
the capital formation marketplace, we all see the numbers that 
today we have, what, a third, or 40 percent fewer publicly 
traded companies, but we see the movement in private equity, we 
see the movement now on versions of capital raises that are 
happening online.
    Are we being robust enough in understanding that the way we 
raise capital today, but over the next decade, is going to look 
really different than it did last decade?
    Mr. Quaadman. The capital markets are always evolving. So I 
can guarantee you that 10 years from now, it is going to be 
much different than it is today. Remember, we are seeing online 
lending start to ramp up.
    Mr. Schweikert. Yes, peer-to-peer, the Lending Club models 
are exploding.
    Mr. Quaadman. Yes.
    Mr. Schweikert. But are we being sort of future-proof in 
the designs of how we are addressing this? And are we being 
prescriptive enough to the SEC?
    And I know, Mr. Chairman, thank you for your patience.
    But for many of us, we sat here for 3 years waiting for the 
rule sets on crowdfunding we all thought was going to be pretty 
simple. So asking the SEC to promulgate rule sets has become a 
disaster. And we almost have to be prescriptive in what we do, 
which also means we have to get it right.
    Mr. Quaadman. Yes. The one other thing that I would mention 
that should occur is also, what are the policies and 
regulations that are driving public companies out of that 
space? So what is the outflow problem? And I don't think we 
have really addressed that one.
    Mr. Schweikert. Okay.
    Mr. Chairman, thank you for your patience.
    Chairman Garrett. Thank you. The gentleman's time has 
expired.
    The gentleman from California is welcome and recognized for 
5 minutes.
    Mr. Sherman. Thank you. I think it is critical that we get 
capital to small business. Outside the scope of this hearing, 
most businesses borrow most of their capital. And what I am 
seeing is that if you are borrowing money at prime-plus-3, you 
can get the money. If you want to borrow money at 33 percent 
annual, well, there is an advertisement every few minutes about 
how you get your money the next day.
    But the prime-plus-6, prime-plus-8 loan, prime-plus-5 loan 
that I was used to seeing when banks and other lenders took 
some limited risk seems to be gone. But here we are focused on 
capital and shareholders' equity rather than loans.
    Mr. Carcello, beyond the JOBS Act, what proposals can you 
come up with that will help small and medium-sized businesses 
get access to equity capital?
    And perhaps others would have a comment as well.
    Mr. Carcello. I initially thought, as I read through these 
bills, that the HALOS Act was good. And so this gives me an 
opportunity to talk about that Act. And as these panelists have 
talked about it, they have focused on angel investor groups, 
and I actually think those are quite good and quite helpful, 
and I think would be bipartisan.
    What threw me when I read that Act, though, is the 
expansion of that Act into venues such as not-for-profits and 
universities and governmental entities. And for someone who has 
worked in a university for over 25 years, I can tell you most 
people who work there are not accredited investors, most people 
who work there are not sophisticated investors. And I think 
that poses tremendous pressure.
    Mr. Sherman. You mean my professors were not as smart as 
they told me they were?
    [laughter]
    Go on.
    Mr. Carcello. Not about financial matters. Most Americans, 
as you probably know, Mr. Sherman, being a CPA, are not quite 
knowledgeable about financial matters.
    Mr. Sherman. Does anyone else have a comment? If not, I 
will move on to the next question.
    Mr. Quaadman, I am a cosponsor of the SEC Small Business 
Advocacy Act, which would create an Office of Advocate for 
Small Business Capital Formation. Do you think this new office 
would help energize the capital markets for small and medium 
size in initial public offering companies?
    Mr. Quaadman. Yes, I think it would allow for that voice 
for capital formation to be heard within the halls of the SEC 
where it hasn't been before. And as I said before, I think it 
would also force the SEC to modernize rules that would prevent 
Congress from having to go through a JOBS Act exercise again.
    Mr. Sherman. Dr. Carcello, should we be providing 
additional exemptions from Section 404, I believe it is 404(b), 
dealing with reporting on a company's internal controls? I know 
this is a cost for some companies and it seems like an 
unwarranted cost except when it discloses a problem.
    Mr. Carcello. Right. Yes, I don't think we should. I think 
if the Congress decides to move forward, as I suggested to the 
committee, I would at least give the investors, the owners of 
the company, the right to elect. So at the end of 5 years, put 
it to a vote, put it to a shareholder vote. And if it is as 
good an idea as all of the people to my left and right think it 
is, then the shareholders will overwhelmingly approve it.
    I do think that 404 has produced tremendous benefits. There 
is a lot of research, not just in the academy. The Financial 
Executives Research Foundation recently released a study where 
financial executives, approximately half of them, have said the 
benefits of the internal control attestation far exceed the 
costs.
    Again, it was put in place because of problems with 
financial reporting, restatements, fraud. And when that 
happens, confidence in the capital markets evaporates and 
capital dries up. So if we are concerned about capital 
formation, don't lose sight of that other side.
    And if you would give me the ability, I want to make a very 
small comment, if I could, about the Small Business Advocate 
Act. I think it is important--
    Mr. Sherman. I do want to. I have just a few more seconds 
and it wouldn't be a committee hearing if I didn't rail about 
the Financial Accounting Standards Board (FASB) and their 
decision to put $2 trillion on the balance sheet of businesses, 
chiefly small and medium-sized businesses.
    Mr. Quaadman and I have been trying to prevent this 
unwarranted damage to our business system. And members of the 
subcommittee should be aware that the FASB has said they are 
going to go forward with this with virtually no input from any 
part of the public that isn't already in their own Rolodex.
    And it is just illustrative of the fact that we should 
never have that much governmental power located in Norwalk, 
Connecticut.
    I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    The gentleman from Maine is recognized for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very 
much.
    When we have an opportunity to get government together with 
the business community, the folks who are on the ground, 
growing their companies and creating jobs, it is a better time 
and a better place for all Americans and all job creators.
    That is why I am excited about discussing with you your 
experience when it comes to the small business capital 
formation forums that the SEC has been having over the past 35 
years.
    Now, it is my opinion if we are going to get all this 
talent together, folks who are taking time out from running 
their businesses to try to inform government officials, in 
particular in this case the SEC, on the best way to allow small 
companies to borrow money and grow and hire more individuals 
and grow the economy, then we should listen to the results they 
come up with.
    Now, what I would like to do is start with you, Mr. Hahn. I 
believe that you were not or have not participated specifically 
in these business-government forums that the SEC has been 
holding the last 35 years, but you represent folks who do.
    And could you, to the best of your ability, inform all of 
us here on this committee and the public as to what experience 
your folks have had with respect to this forum? Have the 
recommendations been useful?
    Mr. Hahn. I think from my understanding, as I said earlier, 
a lot of--the SEC often doesn't act on the recommendations of 
the advisory committee and the Government-Business Forum. 
However, they are published. I think it was Congress that took 
parts of the JOBS Act out of those recommendations--
    Mr. Poliquin. Right.
    Mr. Hahn. --which was a tremendous success.
    Mr. Poliquin. So these specific recommendations from past 
forums ended up in legislation that was passed through this 
committee. Correct?
    Mr. Hahn. Yes.
    Mr. Poliquin. So it was pretty useful.
    Mr. Hahn. Very useful.
    Mr. Poliquin. Okay. And doesn't it therefore make sense 
that not just that one example in the JOBS Act, but on an 
ongoing basis we have the body, the SEC, that is holding these 
and organizing these forums to make sure that every 
recommendation that comes out of these forums they address, 
they comment on in a public format. And if they are going to 
adopt some of the recommendations, fine. And if not, why? 
Doesn't that make sense?
    Mr. Hahn. Total sense.
    Mr. Poliquin. And that would be helpful to those in this 
space to make sure they know what rules coming down the pike 
might affect them when it comes to raising money for their 
companies.
    Mr. Hahn. Also, it makes you wonder what else has been 
missed.
    Mr. Poliquin. Say that one more time.
    Mr. Hahn. It also makes you wonder what has been missed, 
what hasn't come out of those recommendations that could be 
helping businesses like mine.
    Mr. Poliquin. Absolutely. I was about to morph into that.
    And Mr. Mathieu, maybe you can comment on this. If you have 
35 years of forums that are coming up with all of these experts 
from their field, in government, in academia, attorneys even, 
that are coming up with these ideas, doesn't it make sense that 
if you publicly come out and you comment on each of these 
recommendations, then you don't have to start over the next 
year?
    You now have a wealth of information, a database of 
recommendations that might make sense going forward such that 
we can go forward instead of repeating what we have just done 
the last few years.
    Mr. Mathieu. That completely makes sense. First, thanks for 
introducing the legislation.
    Mr. Poliquin. You bet.
    Mr. Mathieu. It is very important. What is crazy about this 
is that, as you said, there are a lot of people who spend a lot 
of time preparing for those forums, the structure makes a lot 
of sense, it gets a lot of people, thoughtful-thinking people 
into group sessions, breakout sessions where they are really 
spending a lot of their emotion and mental efforts to come up 
with really great ideas to help small business.
    They put them in a package, they come up with the idea, and 
then it just goes nowhere.
    Mr. Poliquin. It sits on the shelf.
    Mr. Mathieu. It goes into the atmosphere, which is just 
crazy. That is like, have every small business spend a week-
and-a-half doing business development or strategic planning and 
then throw it in the trash and the shredder right after they 
have finished it. It doesn't make sense.
    Mr. Poliquin. Yes. We have a fellow named Tom Coyte from 
Atlantic Financial in Maine who runs a VC shop, who came down 
and participated in some of these forums. So, it is close to 
our heart.
    Mr. Quaadman, if I could end with you, I just have a short 
amount of time here. Doesn't it make sense to also require the 
SEC to not only participate in these forums, but make sure that 
their recommendations are not only public, but they are 
relevant to the dynamic nature of our markets?
    One of the great things about our economy and why it has 
been so strong for so long, notwithstanding the recent period 
of time we are going through, is that we have a dynamic and 
growing, evolving and creative capital markets system, the envy 
of the world.
    These regulations should evolve along with our capital 
markets, shouldn't they?
    Mr. Quaadman. Yes. And I agree with all the other comments 
that were said. The other thing I would say too, and the reason 
why it is important for the SEC to be a part of that and to 
respond to it is because it should also focus them on areas 
where they are not looking and where they should be looking. 
So, I think there is a win-win here.
    Mr. Poliquin. I thank all of you gentlemen very much for 
participating. I appreciate it very much.
    Thank you, Mr. Chairman. I yield back my time.
    Chairman Garrett. The gentleman's time has expired.
    Mr. Ellison, for 5 minutes, if he is--
    Mr. Ellison. Thank you, Mr. Chairman, and the ranking 
member. I appreciate the recognition.
    Professor Carcello, thank you for your service on the 
Securities and Exchange Commission's Investor Advisory Board. I 
do appreciate it.
    Anyone following the Presidential election knows that many 
people think that the rules are rigged in favor of powerful 
companies. H.R. 3798 seems to further rig this, in my view, by 
allowing big companies, the defendants, to pick a more 
favorable venue for investigations into their alleged 
misconduct.
    The SEC now chooses a venue for enforcement that serves the 
interests of investors and the public, yet this bill would 
allow a well-funded defendant to choose a district court venue. 
We know that district courts are often overwhelmed, so this 
type of forum shopping may delay trial for up to a decade in 
some cases.
    How is allowing a defendant to essentially forum shop in 
the public interest?
    Mr. Carcello. Yes, I am not convinced it is in the public 
interest. And here is a thought experiment for the committee. 
Imagine if 15 years ago, the SEC thought there was a problem 
with Bernie Madoff, and they brought it in Federal court 
because they were forced to as a result of this, and there was 
a long delay. And during that time, he continued to collect 
money and ruin people's lives. Does this committee really want 
that obligation on their head?
    Mr. Ellison. Dr. Carcello, I think I can say on behalf of 
all of my colleagues on both sides of the aisle, no. So I think 
we should take steps to address it.
    When you served on the Investor Advisory Committee, one of 
the areas the committee considered was the prevalence of 
contracts and bylaws that contained mandatory arbitration 
clauses. In fact, Commissioner Aguilar called to end mandatory 
arbitration.
    I wonder what your views are on the issue of, say, this 
committee bringing a bill to allow defendants to choose the 
venue of the enforcement action while not allowing investors 
the same option.
    Mr. Carcello. Not just investors, Congressman Ellison. How 
about every person in the United States? There was a powerful 
series of stories by The New York Times about a month ago that 
everyone should read, about how the United States has 
essentially become a land where every citizen in this country, 
all of your constituents are routinely every day signing away 
their rights to jury trials in employment, in consumer 
purchases, in virtually every sphere of their life. And there 
is no outrage about that, but there is outrage about due 
process for largely well-monied financial professionals.
    It is far from clear to me, and I think it would be far 
from clear to most people in the United States, why that is in 
the interests of the republic.
    Mr. Ellison. I actually have a bill called the Investor 
Choice Act, H.R. 1098, that would prohibit predispute mandatory 
arbitration clauses in investment contracts. I urge all my 
colleagues to sign it.
    But if I may just ask you a few more questions. In your 
testimony you detail a number of concerns with both small-
business bills we are considering today. One of your concerns 
is that H.R. 3784 requires redundant authority. And I will just 
quote your testimony, the Small Business Advisory Committees, 
``create a quasi-lobbying group to seek a more favorable 
regulatory climate for small businesses. This may succeed in 
reducing the costs of regulation, but at the potential cost of 
greater information risk to investors.''
    You note the advisory committee created a rigged system 
that lacks ideological balance and seems gerrymandered. If 
Congress mandated the Small Business Advisory Committee, should 
it require that investor and public interests are represented 
and have voting powers? And can you give us a few ideas to make 
it less of a quasi-lobbying group?
    Mr. Carcello. Exactly. That is exactly right. The IAC, 
which this is arguably patterned against, has--as I said 
earlier, five Commissioners have four picks. Look at this 
committee. Professor Grundfest is here representing the 
Republicans; I am here representing the Democrats. We are both 
on the IAC.
    The SEC is highly split, so the 20 members on the IAC bring 
an ideological diversity to our discussions. It forces us to 
seek consensus solutions.
    If you look at the proposed Small Business Advisory 
Committee, it is essentially officers, directors, advisers, and 
investors, which sounds good until you realize it is venture 
capital, largely, which are heavily owners in that company with 
a different stake than the kind of mom-and-pop retail investor, 
and it is not at all comparable to the IAC.
    So if you are going to move forward with that group, first 
of all, I think one thing that should be thought about, 
Congressman Ellison, there is this implicit undertone here that 
investors are one constituency and small business is another. 
Why don't we have an advisory committee for midsize business 
and large business and biotech businesses?
    Investors are every single adult in this country.
    Chairman Garrett. The gentleman's time is way over.
    Mr. Ellison. Thank you so much, sir.
    Chairman Garrett. Mr. Huizenga is recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And I will turn to you, Mr. Grundfest. Do you care to 
comment on that riff that we just heard? I would love to hear 
from you.
    Mr. Grundfest. Yes. Just one simple point, in terms of 
point of accuracy. I think many of the issues that we are 
dealing with today aren't Democratic or Republican issues. Not 
that it means anything; I am a registered Democrat, and have 
always been a registered Democrat, and I don't view myself as 
being here representing the Republican side or the Democratic 
side.
    I think there are fundamental questions of fairness about 
how the process is actually operated. I agree with Mr. Ellison 
that fairness is an issue that needs to be considered for all 
people in all forums of all proceedings.
    Fairness can be in the eye of the beholder. That is why I 
go back to that one word that I think is the focus of my 
testimony. The question is, how do we achieve an appropriate 
balance? Clearly, there are situations where investors' rights 
and the SEC's rights need to be very aggressively protected.
    But by the same token, you can't have a situation where I 
think the SEC acts as judge and jury and as summary prosecutor 
and eliminates the rights of everyone else involved in the 
process.
    It is a difficult question. Let us admit that it is a 
difficult question. But let us not try to polarize the issues 
more than they already are.
    Mr. Huizenga. I appreciate that.
    Mr. Hahn, I want to quickly turn to you. The Fostering 
Innovation Act and the high costs associated with the SOX 
404(b) compliance has been cited repeatedly by small and 
emerging companies as one of the deterrents from listing in the 
U.S. public markets. I wanted to get your comment on that.
    And then also regarding Sarbanes-Oxley, obviously, that is 
an admirable goal to protect investors. However, many argue 
that the cost of Section 404(b) far outweighs any perceived 
benefit for most small, public companies. You suggest in your 
testimony that investors in biotech companies do not list 
404(b) compliance as a top priority of their own due diligence. 
Could you describe what types of information are used by 
investors and people looking at that?
    So if you want to touch on the 404(b), and then give me a 
profile.
    Mr. Hahn. On the 404(b) side, I think it is important to 
note that just because we are 404(b) exempt currently, we do 
have a strong internal control framework in place and we do 
have an outside party that audits our controls and reports 
directly to the Audit Committee.
    I spend maybe $15,000 a year on that. As the current now in 
year 6 when I have to be 404(b) compliant, my expenses in that 
go to $350,000 and nothing is going to change from our business 
from year 5 to year 6. We are still going to have 40 employees, 
I still have a staff of three. So that is kind of the impact on 
the 404(b) side.
    As it relates--I'm sorry, what was the second part of your 
question?
    Mr. Huizenga. Yes, just, if they are not looking at 404(b), 
what type of information are investors in small biotech 
companies looking at?
    Mr. Hahn. As I stated earlier, for the test-the-waters IPO, 
we met with 90-plus investors. And since we have been public in 
January of 2014, we have met with approximately 130 more 
investors. So about 220 one-on-one investor meetings in about 
the last 2\1/2\ years. All of the questions around 
understanding our technology, our science, the indications that 
we are going after in our current clinical trials. I think the 
only financial-related questions I get are, what is your cash 
balance and what is your runway, and how long is that going to 
get you? The only questions, no other financial questions that 
way.
    Mr. Huizenga. Okay. So is that information not useful or is 
it just not relevant really to the biotech space?
    Mr. Hahn. It is not, I would say, it is not relevant, not 
primarily relevant to the investors. It is a secondary issue. 
They want to understand the science and the technology and they 
want to know that we are spending our resources and our money 
on the R&D side and not on the administrative side.
    Mr. Huizenga. All right.
    Mr. Quaadman, you said something that I don't even remember 
how many speakers ago it was or questioners ago, but the 
outflow problem on businesses, and I want to give you the last 
little bit here to talk about that problem, because I am very 
concerned about that as well.
    Mr. Quaadman. Sure. We have half as many public companies 
in the United States as we did in 1995. The number of public 
companies has gone down every year, for 19 of the last 20 
years. Clearly, something is wrong and something is broken.
    Mr. Huizenga. Isn't it just a bad economy? That is what we 
hear.
    Mr. Quaadman. No. Remember, 1995, 1996, 1997, those were 
awfully good years and that is when the decline started, right? 
So we have to really match up our policies with capital 
formation.
    Two other points I just want to quickly mention. To 
Professor Carcello's notion of, let's put this out for a 
shareholder proposal, 54 percent of institutional investors say 
our current corporate disclosures are too voluminous and don't 
provide relevant information.
    Mr. Huizenga. In other words, sometimes too much 
information really doesn't give you any information.
    Mr. Quaadman. Correct. So you know what? Let's crank up the 
shareholder proposals because that will be faster than the SEC 
with the disclosure effectiveness project.
    Secondly, what we really have to also pay attention to 
while we are looking at these issues is that Europe is trying 
to replicate what we are doing. So we should also remember that 
as well.
    Chairman Garrett. Thank you.
    Mr. Huizenga. Thank you, my time has expired.
    Chairman Garrett. The gentleman's time has expired.
    Mr. Green, you are recognized for the next-to-the-last 
word.
    Mr. Green. Thank you, Mr. Chairman.
    And I thank the witnesses for appearing today.
    I am exceedingly concerned about the conflating of criminal 
and civil law today. Whether by accident or design, this seems 
to have taken place. All of you are scholarly people and you 
know that out of the same set of circumstances, you can have a 
criminal case or you can have a civil case.
    And in a criminal case, the standard of proof is guilt 
beyond a reasonable doubt, the doubt in the mind of a 
reasonable person. If it exists, then you must say by your 
verdict, ``not guilty.''
    In a civil case, generally speaking, most of the time it is 
preponderance of the evidence, the greater weight and degree of 
credible testimony.
    If you differ with what I have just said, will you kindly 
raise your hand? Let the record show that no one differs.
    And it is also true that these hearings with the SEC 
actually go before an independent arbiter known as an 
administrative law judge? And the administrative law judge 
makes a finding of facts and issues and also conclusions of 
law?
    If you differ with what I have just said, raise your hand. 
How do you differ, sir?
    Mr. Quaadman. The administrative law judge is an employee 
of the SEC; they are not independent.
    Mr. Green. If this is the case, the judge who hears my case 
in court, who also hears my motion for a new trial, is it 
inappropriate for that to happen, to take place?
    Mr. Quaadman. No, what the point here is, and I think Mr. 
Duffy was making this point earlier, if we were to look at it 
in that way, the district attorney would also be the judge. And 
that is currently--
    Mr. Green. I am pleased that you said that because it has 
been my experience that most judges are former DAs.
    If you differ with what I have just said, raise your hand.
    The point to be made is this. If you are talking about 
preponderance of the evidence in a civil case that can be 
appealed to the Commission, correct, and then from the 
Commission to a Federal judge, why would you have clear and 
convincing evidence as a standard at the administrative hearing 
and then when you go to the Federal judge you have 
preponderance of the evidence?
    Do you agree that can occur? If no one agrees, then I will 
have to make the case again. Do you agree that can occur? If 
you have preponderance of the evidence in the Federal district 
court, and you have clear and convincing evidence before an 
administrative law judge, you now have the same set of facts, 
two arbiters, different standards of proof.
    Mr. Carcello, do you agree?
    Mr. Carcello. Yes.
    Mr. Green. Okay. Let us find someone who differs. Who 
differs? Who differs that we would have two standards of proof 
with the same set of facts?
    Mr. Quaadman. Mr. Green, as I mentioned in my opening 
statement--
    Mr. Green. Would you kindly do this? Would you start with 
yes, I agree, or no, I don't agree? Because sometimes when 
people finish, I don't know whether they have said yes or no.
    Mr. Quaadman. No. We had suggested an amendment to the bill 
that there be one standard of evidence.
    Mr. Green. So you agree with what I have said. The question 
is, do you agree with what I have just said? You agree. So if 
you agree with what I have just said, and you understand the 
difference between criminal and civil law, O.J. not guilty 
criminal case, O.J. guilty civil case, these things exist and 
they have been decided clearly by Federal courts that they are 
constitutional. There is no unconstitutionality here.
    And I would also add this. To say, to use terminology of 
finding a person guilty before an administrative law judge, 
now, you heard that said earlier. Why would a professor of law 
not correct that in the record? The administrative law judge 
doesn't find anyone guilty or any corporation guilty.
    If you differ with what I have just said, raise your hand. 
Let the record reflect that nobody differs.
    Dear friends, we have to take these issues seriously when 
we are talking about changing the laws that impact not only 
corporate America, but also the citizens of the United States 
of America. Investors are citizens. They are taxpayers. They 
deserve fairness, too.
    Bernie Madoff treated a lot of investors unfairly. And but 
for the SEC's ability to go before an administrative law judge, 
I am not sure how that would have ultimately ended.
    So I thank you for your time, Mr. Chairman, and I yield 
back.
    Chairman Garrett. The gentleman yields back.
    Mr. Hill is recognized for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman.
    And I appreciate the witnesses' forbearance today.
    I think I want to start out and continue on that theme.
    And Mr. Quaadman, if you would just, I think, for the 
committee state the difference between mandatory arbitration 
and the SEC administrative proceedings. Because having been in 
the brokerage business for many years, we have had mandatory 
arbitration and it has worked, I think, very effectively. Fifty 
percent of those cases tend to reach a conclusion before they 
even go to a hearing panel.
    But I think we ought to clarify the difference between 
these two.
    Mr. Quaadman. These are two completely different things. 
And we are talking about two completely different universes.
    Mandatory arbitration deals with two private entities 
engaged in a transaction, and they go before a neutral third 
party if there is a dispute. That actually has been a system 
which has worked very well with keeping cases out of the 
courts, which people have talked about overburdened court 
dockets.
    What we are dealing with here, with administrative 
proceedings with the SEC, is we are actually having the 
government prosecute, whether or not we want to talk about 
whether it is civil or criminal, but there are prosecutions 
that will destroy a person's career. So these are completely 
different items altogether.
    Mr. Hill. Thank you. I appreciate that clarification for 
the record today.
    I have spent a lot of my career in private placements for 
small business. And so I appreciate the effort of my colleagues 
on this subject. And I have also on and off been involved in 
small-cap public companies and I know about the cost of trying 
to manage small-cap enterprises.
    One concern I have always had is this quarterly cost to be 
public. And many years ago, I was associated with a company 
with a market cap of around $70 million and around $10 or $12 
million in EBITDA. And if my memory is right, and I am going 
from memory, I didn't prepare for this conversation, it was 
about $400,000 a quarter to do a Q and K prep and internal 
control work and that kind of thing. This is both the audit fee 
as well as the preparation-type costs. And that is substantial.
    So anything that affects costs, I think is one of the 
barriers to Mr. Quaadman's talk about why we have declining 
numbers of IPO companies, despite efforts in recent years to 
reverse that trend.
    Section 404, what is a way to, in my view, look at the 
marginal difference in 404? In other words, sure, there is some 
benefit by having a robust internal control system. But haven't 
we gone overboard in the prescriptive nature of it and perhaps 
the costs really do outweigh the benefits, particularly for 
small, simple businesses where they are really being held to a 
404(b) standard that goes a lot deeper than you would have to 
do in a simple, straightforward business?
    Mr. Hahn, do you want to start out on that? Because I know 
you are preparing essentially for this feature.
    Mr. Hahn. I have been involved in four startup companies 
and implemented the accounting systems and the process and 
procedures. And every one of those, as I have learned over the 
last 18 years, is measured controls, appropriate controls 
measured that are appropriate to the business and the business 
processes.
    If you put too many controls on, you just clamp down the 
business and people can't operate.
    I think the 404(b) should take that same approach where we 
are exempt now, but it seems that this one-size-fits-all; that 
we are held to the same standards as these large corporations, 
we have a $130 million market cap, we cut 125 checks a month, 
we have two check signers. So to hold us to the same standards 
as these large corporations, I just don't feel is appropriate.
    Mr. Hill. It is like in the bank regulatory environment 
where we are all held to a high IT standard for data security 
in commercial banks. Some banks are more simple than others, 
but the regulation is written the same for Citibank's IT 
protocol as for a small community bank.
    And I think 404(b) over the years, because the accounting 
industry wants to be conservative in their approach, they have 
to be certified, they have to be peek-a-boo licensed, and so 
they don't make a distinction perhaps enough, I think, for 
small businesses.
    Any comments on the crowdfunding proposal? In my seconds 
left, who wants to tackle the comments on the SEC's 
crowdfunding proposal? Does anybody have any thoughts on that? 
It just got published in the last couple of weeks.
    Mr. Quaadman. I think we are going to have to see how that 
is going to progress. I think that has been an innovative 
portion of the JOBS Act. We have argued for strong internal 
controls. I know Europe is trying to do some similar things.
    So I think that is something where we had also called for, 
as we did with the HALOS Act, a retrospective review after a 
couple of years to see how it is working and what needs to 
happen to make it better.
    Mr. Hill. Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. The gentleman yields back.
    This brings us to the end. But since one of the Members 
raised a point, and I will yield to you another minute if you 
want, but just to clarify a point since I think he was 
referring to me when I used the term ``guilt'' or not.
    I will just ask Mr. Quaadman for 1 minute the question, is 
this a case where there is a distinction without a difference? 
Truly, there is a difference between a criminal and a civil 
matter, but as far as the ability of the SEC to impose a fine 
or require restitution or to require that you lose your 
license, is that a distinction without a difference? Because 
you can basically devastate an individual, take all his 
livelihood away and take all of his assets away by an SEC 
enforcement action.
    Mr. Quaadman. That is correct. And not only have we seen 
APs change in the way that they are used, but the way that the 
civil tools are used, they are now quasi-criminal trials and 
cases. So I think we can quibble, but I think you are exactly 
right. We are talking about a distinction without a difference.
    Chairman Garrett. And since I went over our time, does Mr. 
Carney have anything else for another minute?
    Mr. Carney. Yes. I would just like to take a minute again 
to go back to the characterization, which I think is troubling 
to hear the small-business advocate referred to as a lobbying 
kind of thing.
    The thing that I hear most from my business constituents, 
large businesses and small businesses, is that there is no 
advocate, there is no voice for small businesses in a lot of 
administrative procedures.
    My history is more at the State and local government level. 
And many of these big bureaucracies that we deal with here in 
Washington, it is an entirely different thing. And maybe it is 
that our politics are so poisoned by that word being such a 
negative thing.
    But the essence of the bill is to bring small-business 
concerns, which are varied and different, to the SEC in their 
processes to facilitate policies and regulations that don't 
hurt small businesses and capital formation.
    I think some of the work that has been done through the 
JOBS Act, again, my effort was with Mr. Fincher on the IP on-
ramp as the attempt is to get beyond characterizations that are 
pejorative or whatever in such a way to try to move the ball so 
that we do do something that makes it more beneficial for a 
company to be a public company, for companies in particular to 
be incorporated in the great State of Delaware, and not to get 
in these political battles back and forth.
    That is not to diminish the concerns, Dr. Carcello, that 
you have. I acknowledge those, and I will look at those in 
relationship to the legislation.
    But if we are going to make progress, I think we have to 
think about the language that we use as we characterize these 
things.
    Mr. Chairman, thank you, and I yield back.
    Chairman Garrett. Thank you.
    I thank the panel, all of our witnesses here today, for 
your written testimony and also for your testimony today and 
your questions as well.
    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.
    And with that, without objection, this hearing is 
adjourned.
    [Whereupon, at 12:00 p.m., the hearing was adjourned.]

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