[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]






 
                     U.S. PUBLIC MARKETS BUILT FOR


                      THE 21ST CENTURY: EXPLORING


                       REFORMS TO MAKE OUR PUBLIC


                    MARKETS ATTRACTIVE FOR SMALL AND


                   EMERGING COMPANIES RAISING CAPITAL

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 9, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 118-8
                            
                 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]    
                 
                 
                 
                 
                          ______

             U.S. GOVERNMENT PUBLISHING OFFICE 
 52-363              WASHINGTON : 2023
    
                 
                            
                            

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    Subcommittee on Capital Markets

                    ANN WAGNER, Missouri, Chairwoman

FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                DAVID SCOTT, Georgia
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania             SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice     WILEY NICKEL, North Carolina
    Chairman                         STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York                EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 9, 2023................................................     1
Appendix:
    March 9, 2023................................................    33

                               WITNESSES
                        Thursday, March 9, 2023

Bowers, Stacey L., Professor of the Practice of Law, University 
  of Denver Sturm College of Law.................................     8
Pinedo, Anna T., Partner and Co-Leader of Global Capital Markets, 
  Mayer Brown LLP................................................     7
Piwowar, Hon. Michael S., Executive Vice President, MI Finance, 
  the Milken Institute...........................................     4
Washer, Susan B., former CEO, Applied Genetic Technologies 
  Corporation (AGTC).............................................     5

                                APPENDIX

Prepared statements:
    Bowers, Stacey L.............................................    34
    Pinedo, Anna T...............................................    48
    Piwowar, Hon. Michael S......................................    57
    Washer, Susan B..............................................    69

              Additional Material Submitted for the Record

Huizenga, Hon. Bill:
    Written statement of the Investment Company Institute (ICI)..    72
    Letter from the Securities Industry and Financial Markets 
      Association (SIFMA)........................................    74
Meuser, Hon. Dan:
    Written statement of the American Securities Association 
      (ASA)......................................................    77
Sessions, Hon. Pete:
    Written statement of the National Association of 
      Manufacturers (NAM)........................................    82
    Written statement of the National Venture Capital Association 
      (NVCA).....................................................    84
    Written statement of the U.S. Chamber of Commerce............    88
Waters, Hon. Maxine:
    Written statement of the AARP................................    93
    Written statement of the Healthy Markets Association.........    95
    Written responses to questions for the record submitted to 
      Mr. Piwowar, Ms. Washer, Ms. Pinedo, and Ms. Bowers........   100


                     U.S. PUBLIC MARKETS BUILT FOR



                      THE 21ST CENTURY: EXPLORING



                       REFORMS TO MAKE OUR PUBLIC



                    MARKETS ATTRACTIVE FOR SMALL AND



                   EMERGING COMPANIES RAISING CAPITAL

                              ----------                              


                        Thursday, March 9, 2023

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Lucas, Sessions, 
Huizenga, Hill, Emmer, Mooney, Steil, Meuser, Garbarino, 
Lawler, Nunn, Houchin; Sherman, Vargas, Gottheimer, Gonzalez, 
Casten, and Nickel.
    Ex officio present: Representative Waters.
    Chairwoman Wagner. The Subcommittee on Capital Markets will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``U.S. Public Markets Built 
for the 21st Century: Exploring Reforms to Make Our Public 
Markets Attractive for Small and Emerging Companies Raising 
Capital.'' I promise you that in the future, we will have much 
shorter titles.
    I now recognize myself for 5 minutes to give an opening 
statement.
    First of all, I would like to say thank you all for joining 
us today. The subject of today's hearing couldn't be more 
important. In a challenging and increasingly-competitive global 
economy, the strength of our public markets is vital to our 
long-term national prosperity and the financial well-being of 
American families. Our public markets have long been recognized 
as the, ``envy of the world,'' and it is our responsibility as 
lawmakers on this subcommittee to ensure they continue to 
thrive. However, the cost of entering our public markets has 
doubled since the 1990s, and at the same time, the number of 
publicly-traded companies has drastically decreased.
    Today, there are fewer companies traded on the Nasdaq and 
New York Stock Exchange than there were 3 decades ago. In 
addition, fewer companies are choosing to enter the U.S. public 
markets through initial public offerings (IPOs). When fewer 
companies go public, it limits the investment opportunities 
available to everyday Americans saving for retirement or their 
children's education. According to a report by Ernst & Young on 
IPO activity in the U.S., last year was the slowest it has been 
in over a decade, with the number of IPOs falling by 78 percent 
and the amount of capital raised in IPOs falling by 94 percent 
compared with 2021.
    Equally concerning is that while U.S. IPOs declined to 
their lowest point in more than a decade, China saw more IPO 
activity last year than anywhere else in the world. In fact, 
China accounted for 39 percent of all global IPOs in 2022. The 
declining number of public companies and slow U.S. IPO activity 
limits opportunities for everyday investors to invest in the 
next generation of successful businesses. It also stifles the 
growth and progress of the U.S. economy, as public markets have 
been a crucial source of funding for high-growth companies. 
Additionally, the increasing IPO activity in China underscores 
the need for urgent action to out-compete global adversaries. 
Without smart, immediate action, the declining number of public 
companies will worsen.
    Most economists predict that high interest rates and 
inflation will lead to at least a mild recession by the end of 
the year, which will only further weaken the U.S. IPO market. 
On top of an already-uncertain economic outlook, the SEC, under 
Chair Gensler, has neglected its mandate to facilitate capital 
formation and seems unlikely to take any reasonable measures to 
strengthen our public markets.
    Instead, the SEC has proposed a deluge of new rulemakings 
that will raise costs and discourage companies from raising 
capital in our public markets. These rulemakings are a solution 
in search of a problem and fail to adequately consider the 
compliance costs and the burden to smaller public companies. 
Rather than put forward policies that will negatively impact 
our markets and harm investors, the SEC should work with 
Congress on proposals that encourage growth in our public 
markets.
    Nevertheless, I am optimistic that Congress will come 
together to solve this critical issue. I have seen us do it 
before when we passed the JOBS Act over 10 years ago under 
similar circumstances. The blueprint is here. Each of the 13 
proposals that are being considered here today have the 
potential to make a significant difference and encourage 
capital formation in our public markets. I look forward to 
working with my colleagues in this subcommittee to ensure that 
our public markets remain the most-attractive in the world.
    The Chair is now happy to recognize the ranking member of 
the subcommittee, the gentleman from California, Mr. Sherman, 
for 5 minutes for an opening statement.
    Mr. Sherman. Madam Chairwoman, thank you for holding a 
series of three hearings focused on getting small businesses 
the capital they need. There are two things we ought to be 
doing that are outside the jurisdiction of the subcommittee: 
one, allowing credit unions to make more business loans by 
raising the cap; and two, allowing banks to make some loans at 
prime plus three, or prime plus four without the bank examiners 
regarding that loan as worthless. But there is one proposal 
that is on the agenda to be considered at this hearing, and 
that is the Access to Small Business Investor Capital Act, 
which I, along with Mr. Huizenga, have put forward. We had 21 
co-sponsors last year, and this will allow BDCs to provide an 
awful lot more capital to our small businesses by making sure 
that they are included in the indexes and mutual funds without 
discrimination.
    We are told that there aren't enough companies going 
public. Part of that is because we made it so easy for them to 
stay private with the JOBS Act of 2012. We are told that the 
costs of going public have doubled since 1992. Madam 
Chairwoman, you cited that statistic, but I haven't been able 
to figure out whether that statistics has been adjusted for 
inflation. Everything has doubled since 1992 in nominal terms. 
The investors want investor protection. All over the world, 
people send their money to New York and sometimes to London to 
seek investments in a regulated market. They don't send their 
money to Tonga. In Tonga, every company could offer anything, 
no register, no costs, zero. Yes, there it is. Do you know why 
companies don't go to Tonga to raise capital? Because investors 
don't want to invest capital in Tonga.
    I have been here on this committee for 27 years. Soon after 
I got here, we experienced the big catastrophes, the big 
frauds. The giant ones were here in the United States: Enron; 
and WorldCom. More recently, we have cleaned that up, and the 
big frauds have been Luckin Coffee in China, and FTX. I want to 
give a shout-out to some of the bros in the crypto world who 
sent their money to the Bahamas and now blame Gary Gensler for 
not protecting them. We can only protect investors who invest 
in the United States.
    Some would describe it as lowering the barriers. Others 
would talk about weakening the protection. The fact is that we 
need the best blend of protection on the one hand, and access 
to capital investment opportunities on the other. There are 
those who say we should allow public light, that is to say more 
and more companies that can be public companies without the 
internal control audits. I will just point out that WorldCom 
and Enron stand as reasons why we need those internal control 
audits. They were enacted as part of the Sarbanes-Oxley Act, 
and we see Mr. Oxley's picture smiling down upon us, a 
Republican Chair of this Committee, who recognized that we need 
internal control audits for our bigger companies.
    Staying private is another option. There are over 1,000 
unicorns, that is, billion-dollar companies with many 
shareholders, but not publicly registered. They can have up to 
2,000 shareholders. That is a big number, but what makes it a 
giant number is our method of counting up to 2,000, where if 
you have all of the investors of Merrill Lynch who invest in a 
company, they are counted as one if the security is held in 
street name, which is typically how it is done. Unfortunately, 
one of the bills that we are considering today would prohibit 
the SEC from rationalizing how we count the number of 
investors. There are new disclosures that I think are important 
for public companies to make, such as ESG. But in ESG, I see a 
need for Scope 1 and Scope 2. If you still have to go to Scope 
3 and even scope 4, you are probably a bridge too far.
    And finally, I hope my colleagues will join with me in 
introducing legislation so that our big public companies 
identify their China risk. As a former Chair of the Asia 
Subcommittee, I will simply point to the recent statements of 
the Chinese foreign minister. He thinks we are headed toward a 
breakdown in the business relationship. So, investors should 
want to know if the companies they invest in are resilient, 
and, more importantly, if our nation will want to prod our big 
companies into competing for capital by creating a more-
resilient company that can survive, if necessary_and I hope it 
is not necessary_an interruption in the U.S.-China economic 
relationship. I yield back.
    Chairwoman Wagner. Thank you. We now welcome the testimony 
of our witnesses.
    First, the Honorable Michael Piwowar. Mr. Piwowar is the 
Executive Vice President of the Milken Institute. He previously 
served as a Commissioner at the SEC and was designated acting 
Chairman of the Commission in 2017. He also served as the 
Republican Chief Economist for the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs on the four SEC-related 
titles of the Dodd-Frank Act and the JOBS Act.
    Second, Sue Washer. Ms. Washer is a former CEO of Applied 
Genetic Technologies Corporation (AGTC), a biotechnology firm 
that develops genetic therapies for rare inherited conditions. 
She has extensive experience in pharmaceutical management and 
research and took AGTC public as an emerging growth company in 
2013.
    Third, Anna Pinedo. Ms. Pinedo is a partner in Mayer 
Brown's New York office and co-leader of the Global Capital 
Markets Practice. She specializes in securities and 
derivatives, and has co-authored several leading capital market 
treatises, including the JOBS Act QuickStart, and has been 
involved in drafting American Bar Association comment letters 
on securities offering reform and other matters.
    Fourth, Stacey Bowers. Professor Bowers is a professor of 
the practice of law at the University of Denver Sturm College 
of Law, specializing in corporate law, and has been teaching 
there since 2002. She has 15 years of experience in corporate 
and securities law, including working at the U.S. Securities 
and Exchange Commission, and holds a JD/BS in accounting, and 
an MLIS and a Ph.D. in curriculum and instruction.
    I want to thank each and every one of you for taking the 
time to be here. Each of you will be recognized for 5 minutes 
to give an oral presentation of your testimony.
    And without objection, each of your written statements will 
be made a part of the record.
    Mr. Piwowar, you are now recognized for 5 minutes for your 
oral remarks.

 STATEMENT OF THE HONORABLE MICHAEL S. PIWOWAR, EXECUTIVE VICE 
          PRESIDENT, MI FINANCE, THE MILKEN INSTITUTE

    Mr. Piwowar. Good morning. Thank you, Chairwoman Wagner, 
Ranking Member Sherman, and members of the subcommittee for 
inviting me to testify here today. My name is Mike Piwowar, and 
I am the Executive Vice President of MI Finance at the Milken 
Institute.
    Chairwoman Wagner, in your opening statement, you said the 
JOBS Act provides a blueprint as this subcommittee looks at 
additional ways to improve access to capital. I couldn't agree 
more. And as you mentioned, I had the pleasure of serving as 
Chief Economist on the Senate Banking Committee during the 
passage of the JOBS Act, the overwhelmingly bipartisan JOBS Act 
of 2012. After that, I served as Commissioner and acting 
Chairman of the Securities and Exchange Commission as we 
implemented rules required by specific provisions in the JOBS 
Act. In both of those roles, I saw firsthand how the JOBS Act 
improved access to capital and job creation by small businesses 
in the United States. I also saw how it helped refocus the SEC 
on the important third part of its mission, promoting capital 
formation, so that capital markets work as intended and work 
for everyone.
    As this subcommittee explores reforms for making our public 
markets more attractive for small and emerging companies 
raising capital, I believe there is a great opportunity to 
build on the success of the JOBS Act, particularly Title I. 
Accordingly, my written testimony contains the following: a 
background on the JOBS Act; recommendations for building on the 
success of Title I of the JOBS Act; and recommendations for 
improving equitable opportunities for investments in small and 
emerging companies. I am happy to provide more information on 
my recommendations and give my views on the various bills that 
are included in today's hearing.
    The U.S capital markets are the deepest, most liquid, and 
most transparent in the world. They are the most efficient at 
allocating capital by hardworking and saving Americans who are 
saving for lifetime financial security and allocating that 
capital to job-creating entrepreneurs, but we cannot take our 
capital markets for granted. Hearings like this one help ensure 
that American capital markets continue to run smoothly and, 
Chairwoman Wagner, as you mentioned, remain the envy of the 
world. These efforts will also support this subcommittee's 
oversight role of the SEC by again refocusing the SEC on the 
third part of its noble mission: promoting capital formation.
    Chairwoman Wagner, thank you again for bringing attention 
to reforms critical to ensuring that our public capital markets 
work for every American. And thank you again for the 
opportunity to testify here today, and I am happy to answer any 
questions you may have.
    [The prepared statement of Mr. Piwowar can be found on page 
57 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Piwowar. Ms. Washer, you 
are now recognized for 5 minutes to give your oral remarks.

   STATEMENT OF SUSAN B. WASHER, FORMER CEO, APPLIED GENETIC 
                TECHNOLOGIES CORPORATION (AGTC)

    Ms. Washer. Good morning, and thank you, Chairwoman Wagner, 
for the opportunity to speak here today. As you mentioned, I 
have developed a broad career with diverse experience in the 
pharmaceutical industry, extensive corporate startup 
experience, and significant community and industry association 
leadership. At Applied Genetic Technologies, or AGTC, I secured 
private and public investments of over $300 million, negotiated 
and closed 2 major collaborations with top biotech companies, 
resulting in an additional $160 million of cash inflows, and 
led the company in efficiently completing numerous critical 
scientific milestones, which culminated in the successful sale 
of the company in November 2022.
    Technical innovation is critical to the development of new 
treatments for human disease, improved industrial practices, 
and efficient agriculture. And access to capital is 
exceptionally important due to the high costs of development, a 
median of $980 million, and timelines as long as 12 years from 
discovery to implementation in the market. Development is also 
very risky, with only 8 to 10 percent of discovery-phase 
products making it to the market. So broad, appropriate, and 
geographically-widespread access to the public capital markets 
needs to be maintained. The JOBS Act paved the way for smaller, 
more geographically-dispersed, and diverse innovative companies 
to access public markets in order to fund full development of 
new products in biotechnology.
    The recent constriction of the biotech markets, which 
Chairwoman Wagner discussed, shows that the provisions of the 
JOBS Act remain vital, especially for smaller innovative 
companies in areas outside of New York, Massachusetts, and 
California. Problems of access to capital are further 
compounded for minority- and women-led companies. Seventy-eight 
percent of entrepreneurs say access to capital is limiting the 
growth of their business and the development of new 
technologies. The flexibility afforded by the rules for small 
and emerging growth companies, including exemptions, scaling, 
and phase-ins for new requirements where appropriate, does 
allow smaller companies to build their business and balance the 
needs of the company with the needs of the investors while 
promoting strong and effective U.S. public markets.
    Smaller companies do not usually have the same immediate 
and ongoing access to investors as do established entities. The 
JOBS Act allowed AGTC to spend several months meeting with 
multiple investors, which we believe helps investors as well as 
companies. Further, the ability to phase in the more extensive 
reporting and internal accounting procedures meant we were able 
to spend more of our funds on product development.
    A study by PricewaterhouseCoopers (PwC) says that the cost 
of going public for smaller companies is up to $16 million, and 
ongoing compliance costs are approximately $1.4 million, which 
has recently increased by 27 percent. A lack of access to JOBS 
Act provisions would only increase these numbers, and extending 
the emerging growth company exemptions for another 5 years 
would enhance capital utilization.
    Even after a small company is public, staying public and 
having ongoing access to capital can be challenging. From 1982 
to June 2022, the number of small, listed companies drastically 
declined from 4,144 to 1,587. Smaller companies have less 
research coverage, poor access to meeting with investors, and 
are more adversely affected by market downturns as investors 
and research analysts focus their attention on the larger 
monetary holdings. Legislators and regulators should continue 
to recognize these differences when reviewing laws and 
regulations in order to not take on a one-size-fits-all 
approach.
    In life sciences, the vast majority of small companies do 
not become ready for the public capital markets without 
substantial prior access to private funds, including seed 
funding and venture capital. Therefore, it remains important to 
promote a diverse ecosystem of investors, including support of 
small, regional, and local funds, support of diversified pooled 
investors, and a, ``do no harm,'' approach to any changes in 
the current Reg D rules.
    In conclusion, I believe that technology innovation is 
important to the U.S. economy and its citizens' well-being, and 
a broad and diverse ecosystem of capital markets is important 
to the success of small innovative companies. Thank you.
    [The prepared statement of Ms. Washer can be found on page 
69 of the appendix.]
    Chairwoman Wagner. Thank you very much, Ms. Washer. Ms. 
Pinedo, you are now recognized for 5 minutes to give your oral 
remarks.

 STATEMENT OF ANNA T. PINEDO, PARTNER AND CO-LEADER OF GLOBAL 
                CAPITAL MARKETS, MAYER BROWN LLP

    Ms. Pinedo. Thank you. Chairwoman Wagner, Ranking Member 
Sherman, members of the subcommittee, thank you very much for 
inviting me to appear before you today. I have been a 
securities lawyer for 30 years now, and I am a partner at Mayer 
Brown in New York. My comments today are my views alone and not 
those of the firm nor attributable to any client. I work with 
private and public companies of all sizes, including 
entrepreneurial companies as well as some of the largest 
companies in the world, and I represent them in connection with 
private placements, and public offerings, including IPOs, as 
well as a variety of securities offerings, including complex 
offerings.
    Over the time that I have been practicing in the last 30 
years, I have witnessed a dramatic change in the capital 
markets. It was once the case that the capital-raising 
trajectory for companies was very predictable. Entrepreneurial 
companies raised money from friends, family, and angel 
investors, and if they were successful, they went on to raise 
money from venture investors. Entrepreneurs really aspired to 
take their companies through an IPO. While the private markets 
provided significant capital for growth, a company that really 
wanted to succeed and wanted to raise capital did so through an 
IPO. That is no longer the case.
    While an IPO was once a signifier of success and an 
important milestone for a company, most companies that pursue 
IPOs now have other reasons for doing so, usually providing 
liquidity for existing security holders. There used to be an 
ecosystem, when I began practicing and for many years 
thereafter, that supported smaller and medium-sized companies, 
and that ecosystem included equity research analysts, coverage, 
market makers, and institutional investors, all of whom 
provided coverage and market-making in the secondary market.
    As Chairwoman Wagner noted in the opening remarks, if you 
look back at IPO statistics, you will see that there were a 
significant number of IPOs and IPOs of smaller and medium-sized 
companies in the 1990s and the early 2000s. We can't deny that 
the market has changed. Exempting hybrid offerings has become 
far more commonplace as the private markets have grown, and 
that is largely due to the proliferation of private capital 
sources. The shift away from IPOs and the shift away from the 
public markets can also be attributed to an increase in 
regulation from the Sarbanes-Oxley Act, and from the Dodd-Frank 
Act, among other things.
    As a result, again, as the chairwoman noted in her opening 
remarks, there are significantly fewer public companies today 
than in 2021. In 2021, we had 4,071 U.S. public companies 
compared to 4,071 U.S. public companies in 1997. It is also 
notable that the companies that are going public today are 
significantly larger when they approach our public markets now. 
For years now, reliance on private funding or the otherwise 
exempt markets has outpaced reliance on SEC-registered 
offerings. I think it is important to state that there is 
nothing inherently wrong with having vibrant public markets, 
and there is also nothing inherently wrong with fostering the 
private markets.
    Smaller and medium-sized companies would certainly benefit 
from better access to the public markets and should benefit 
from being public companies once they do undertake IPOs. 
Although, companies should have the opportunity to stay 
private. They should have the opportunity as well to go public 
once they mature.
    The way to increase the attractiveness of our public 
markets is not by imposing regulation designed for public 
companies on the private markets. That is only going to shrink 
the size of our private markets and impede the ability of 
smaller and medium-sized companies to obtain critical 
financing, as Sue Washer pointed out. Instead, we need reforms 
that tailor public company regulation to the circumstances of 
smaller companies.
    Smaller companies face a number of impediments not faced by 
larger, more-established companies. That includes 
disproportionately high regulatory costs, limited equity 
research coverage, lack of liquidity in the market for their 
securities, a significantly higher cost of capital, and limited 
financing alternatives, even once they are public. All of these 
things have to be addressed.
    The bills proposed today for the subcommittee's 
consideration help address many of these problems and would 
strengthen the public markets. Perhaps most important among 
today's bills is the extension of the well-known seasoned 
issuer (WKSI) status to a broader array of seasoned issuers. 
This would facilitate capital formation in the public markets. 
And it would significantly reduce the cost of capital for 
issuers.
    Several bills would build on the success of the JOBS Act, 
and these are particularly important because the JOBS Act has 
been one of our most successful experiments. Today's proposed 
measures are a step in the right direction. I thank you for the 
opportunity to appear before the subcommittee, and I would be 
happy to answer any questions you may have.
    [The prepared statement of Ms. Pinedo can be found on page 
48 of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Pinedo. Professor Bowers, 
you are now recognized for 5 minutes to give your oral remarks.

  STATEMENT OF STACEY L. BOWERS, PROFESSOR OF THE PRACTICE OF 
         LAW, UNIVERSITY OF DENVER STURM COLLEGE OF LAW

    Ms. Bowers. Chairwoman Wagner, Ranking Member Sherman, and 
members of the subcommittee, thank you for the opportunity to 
speak with you today. As Chairwoman Wagner noted, I am a law 
professor at the University of Denver, but I am also of counsel 
at a small law firm where I help companies and their executives 
seeking to raise capital. I speak as both an academic and as a 
practitioner who represents firms in the private capital 
markets.
    While we all know that strong capital markets are the 
bedrock of a healthy economy, few seem to recognize that they 
are also the product of Federal securities laws designed to 
ensure that all investors have the information needed to make 
informed decisions. But the securities laws are not just about 
protecting investors. They are also about ensuring that 
capitalism works. They are about preventing another Great 
Depression or market meltdown. Disclosures and corporate 
accountability are essential for that.
    The securities laws intended to and initially did make the 
public markets the primary method that companies used to raise 
capital. As the number of public companies exploded, the U.S. 
became the dominant market, attracting companies and investors 
from around the world. Private offerings were relatively 
limited, and the market was small. That is no longer the case. 
Today, after decades of deregulation, coupled with the 
expansion of exemptions from registration, the vast majority of 
capital raised in the U.S. is through the private markets. Some 
have claimed that this dramatic shift is because public 
companies are overburdened with disclosures and accountability 
requirements.
    The proposed legislation being considered today is aimed at 
generally reducing those requirements, ostensibly with a goal 
of enticing more companies to go public. However, past efforts 
along these lines have failed, and these will likely fail, too. 
Not one of the bills noticed today would entice my clients to 
forego a private offering for a public offering when they can 
raise from hundreds or thousands of investors with limited 
requirements. You can't lower the public company disclosures 
and accountability enough to compete with that. Restoring the 
public markets should focus on investors, the ones who are 
providing the capital and the ones that the Federal securities 
laws were meant to inform and protect.
    Not only will the bills proposed today fail to spur more 
public companies, they will also reduce investor confidence, 
interest, and trust in our struggling capital markets. 
Lessening the information investors have and its reliability 
simply increases their risks and potentially makes them less 
likely to invest. Investors around the world are increasingly 
demanding more information and transparency, not less. China 
has recently strengthened its disclosure requirements and 
appears to be seeing results as a result of doing so.
    We should not overlook market returns, particularly for 
newer companies. The returns for these companies have been 
dismal for years. Approximately 25 percent of the companies 
that undertook a public offering in 2020 and 2021 trade at less 
than $2 per share, putting them at risk of delisting. That is 
potentially billions of dollars in losses for investors. The 
beneficiaries of reducing disclosures and transparency are 
certainly not the investors who funneled their precious savings 
into public companies. It appears that the true beneficiaries 
will be the companies that take advantage of the reduced 
disclosure scheme, potentially wasting investors' capital, 
capital that could have funded better and more-diverse 
businesses.
    If the goal is to revitalize the public markets and entice 
more companies to participate, this committee should consider 
other avenues of change. One idea would be to raise the bar for 
companies in the private markets. Good companies will not go 
public if they can raise the capital they need without facing 
significant disclosure or accountability. The committee should 
consider requiring public companies to provide basic 
disclosures, at a minimum.
    Separately, the path for companies into the public markets 
is not perfect. One potential area to address would be 
underwriters and their long-term practice of charging issuers 
unreasonable fees as high as 7 percent of their overall deal 
size. That is a huge cost to any small company.
    In sum, restoring the public markets is not just about 
lowering burdens on issuers. It is about making the markets 
more attractive to both issuers and investors. That requires 
improving access to information, not removing it. The 
legislation and other efforts designed to reduce accountability 
will be unlikely to entice my clients to undertake a public 
offering. However, it will further undermine the standing of 
the U.S. as the primary capital market in the world for both 
companies and investors. The proposed legislation lowers 
transparency at the same time that other countries around the 
world are recognizing its importance.
    Thank you for the opportunity to speak, and I look forward 
to your questions.
    [The prepared statement of Professor Bowers can be found on 
page 34 of the appendix.]
    Chairwoman Wagner. Thank you, Professor Bowers. We will now 
turn to Member questions, and I will recognize myself for 5 
minutes for questioning.
    Mr. Piwowar, last year, the U.S. IPO market reached one of 
its lowest points on record. According to a report by PwC, 
there were only 93 traditional U.S. IPOs in 2022, of which only 
19 raised more than $100 million. Without appropriate action, a 
combination of economic factors such as inflation, high 
interest rates, and a likely recession, on top of increased 
costs to comply with an onslaught of new SEC rules, suggest 
another slow year for IPOs in 2023.
    Democrats and SEC Chair Gensler are almost certainly aware 
of this problem. In December, even Fortune Magazine stated in 
the title of an article that, ``The IPO drought will see little 
relief in 2023.'' However, Chair Gensler's solution is to force 
companies into public markets either by making private markets 
less attractive or revising the definition of securities, 
``held of record.''
    Mr. Piwowar, as an economist and former SEC Commissioner, 
can you please explain the problem with Chair Gensler's 
approach and why we should instead focus on making our public 
markets more attractive?
    Mr. Piwowar. Thank you, Chairwoman Wagner, for that 
question. You mentioned the onslaught of rules that the SEC is 
trying to move forward. I am fond of what is called the, 
``pebbles in the stream'' analogy. If you think of capital 
flowing in our capital markets as a stream, and you start 
throwing pebbles into that stream, if you start adding burdens, 
any single pebble is not going to stop the flow of capital 
flowing, but over time, if you have enough of those, it can 
actually stop the public capital markets from working as 
intended. And then, when you look back, you can't look back and 
say that any one particular pebble was the one that actually 
stopped the capital markets or made them less enticing. It is 
actually the accumulation of all of those.
    The SEC, even with its best efforts on any particular 
rulemaking, does cost-benefit analysis on each one of their 
rules, but there is no mechanism for them to look at the 
cumulative effect of all of those rules. And that is why I 
think it is important for this subcommittee, in particular, to 
look at those cumulative effects and take that into account, 
and help the SEC rebalance its focus on capital formation.
    Chairwoman Wagner. Thank you. Ms. Pinedo, a lot of the 
policies considered today are modest, incremental improvements 
to existing law that when taken together, would have a 
significant positive impact on our public markets, removing 
some of those pebbles. Can you explain how some of the policies 
considered today work together to facilitate capital formation 
without compromising investor protection in our public markets?
    Ms. Pinedo. Yes, I would be happy to. I think it would be 
incorrect to say that the measures that are being considered 
today would be deregulatory or would reduce the type of 
information that is available to investors. I think that is 
important to clarify because some of the statements that were 
made earlier might suggest that investors might receive less 
information, and that is not correct.
    Today's bills codify some measures that the SEC already has 
adopted. The SEC, for example, in 2017 extended the ability of 
issuers to submit registration statements on a confidential 
basis for IPOs and follow-on offerings. In 2019, the SEC made 
it possible for issuers, through Rule 163B, to conduct test-
the-waters conversations with institutional investors. Today's 
bills would codify those measures, and that is important 
because it would provide certainty to market participants. 
Providing that certainty to all market participants is 
important. It doesn't reduce the mix of information that is 
available to investors.
    Chairwoman Wagner. Thank you very much. Ms. Washer, from 
your experience as a former CEO of an emerging growth company, 
can you provide any real-world examples showing how companies 
may benefit from testing-the-waters communications?
    Ms. Washer. Yes. Thank you for the question, Chairwoman 
Wagner. I think the testing-of-the-waters process is critically 
important, especially to companies in the high-tech world where 
our new technologies are very complex. Having the ability over 
a long period of time to have one-on-one meetings with 
institutional investors and really walk through and educate 
them about our technologies and about the products we are 
developing is critical to their understanding and their 
decision-making as to whether or not to invest in the company. 
And I think it is actually beneficial to the investors.
    Chairwoman Wagner. Thank you very, very much. The Chair now 
recognizes the ranking member of the full Financial Services 
Committee, the gentlewoman from California, Ms. Waters, for 5 
minutes.
    Ms. Waters. Thank you very much, but before I begin my 
questions, I ask for unanimous consent to enter into the record 
three letters expressing various levels of concerns about the 
bills posted for today's hearing. These letters are from AARP, 
the Consumer Federation of America, and Public Citizen.
    Chairwoman Wagner. Without objection, it is so ordered.
    Ms. Waters. Thank you very much. I would like to direct my 
question to Professor Bowers. Your testimony discusses the 
dangers of misallocation of capital. This is when investors 
make poorly-informed decisions in the absence of robust 
disclosures to invest their hard-earned savings and investment 
into companies that have little prospect of generating returns 
on that capital, ultimately wasting their hard-earned money. 
Your testimony also explains that deregulating our public 
markets and reducing disclosures may drive U.S. investors to 
companies or countries that have stronger disclosure regimes. 
Could you please illustrate those two themes for us now?
    Ms. Bowers. Thank you for that question, Ranking Member 
Waters. As we continue to deregulate, we provide less 
disclosure to investors, and they bear the brunt of that. They 
need that information in order to make investment decisions 
because they are the ones who have the potential to lose the 
money. In order for them to feel comfortable and deploy that 
hard-earned money, they need to trust what a company is telling 
them. They need to feel secure that they are getting all of the 
material information, that the financial statements are 
audited, that they are reliable.
    One thing that concerns me is that emerging growth 
companies don't have to have an auditor attestation report on 
their internal controls. Internal controls help to detect and 
prevent fraud. Without that attestation, investors' money is 
more at risk.
    In regard to your second question about investors going 
elsewhere, I think it ties together. If investors can't trust 
the information that is out there and trust that the U.S. 
markets are being transparent, they are likely to take their 
funding elsewhere or to put it into safer avenues. While the 
United States is currently looking at reducing levels of 
transparency, other countries are increasing it, and I fear 
that investors may take that into account when they make their 
investments.
    Ms. Waters. Why do companies choose to go public? 
Republicans argue that the current rules in place for entering 
the public markets limit the number of companies that go 
public. However, according to the Council of Institutional 
Investors, a trade association for pension funds, ``The number 
of U.S. IPOs has little to do with overregulation, and the U.S. 
capital market for emerging companies is vibrant.'' They 
explain that new companies today are less reliant on public 
markets due to other, more-attractive sources of capital 
contained in the private markets. Do you agree with that?
    Ms. Bowers. Thank you for that question. Yes, I do agree 
with that. I think that the private markets have very few 
regulations. They are very easy to enter. There is little 
barrier of entry, and I think many companies choose to raise 
their capital in the private markets for those reasons. I agree 
that the JOBS Act increasing capital for small businesses was a 
great idea, but that is now being abused. It is being abused by 
institutional investors. It is being abused by venture capital 
firms. Companies can go into the private markets, and they can 
raise millions and billions of dollars from thousands of 
investors, and yet have no accountability or disclosure 
requirements. It is hard for us to compete with that. I am not 
sure the public markets can compete against no disclosure and 
very little accountability.
    Ms. Waters. I agree with you. That was a bipartisan effort, 
and now, I am very concerned with how you just described it. 
Why is less disclosure bad for ordinary investors?
    Ms. Bowers. I'm sorry. Excuse me, ma'am?
    Ms. Waters. Why is less disclosure bad for ordinary 
investors?
    Ms. Bowers. Yes, thank you for that question. Ordinary 
investors or retail investors don't have the same power as 
institutional investors, particularly in the private markets. 
The large investors are the companies, They have the ear of the 
founders of the companies that are raising money. They often 
negotiate better deals for themselves. The retail or the small 
investor doesn't have that opportunity in the private markets. 
So, what they really need is public markets where they can have 
access to that particular information to be able to make 
informed decisions. In reality, the private markets really 
discount the retail investor, and their choice is to look to 
the public markets.
    Ms. Waters. So based on your testimony, you would agree 
that for both retail and institutional investors, decreasing 
security disclosures increases the risk of fraud as opposed to 
investors?
    Ms. Bowers. Absolutely. Reducing disclosures takes 
information out of investors' hands, no matter who they are, 
and increases the ability for there to be fraud. Thank you.
    Ms. Waters. Thank you very much for your testimony here 
today, and I yield back the balance of my time.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from Wisconsin, Mr. Steil for 5 minutes.
    Mr. Steil. I always appreciate the true Luxembourgish 
pronunciation of the name, Former Ambassador Wagner. Thank you 
very much.
    This is a really important topic, and I want to kind of 
buzz through a handful of questions, because getting this right 
for our U.S. capital markets is so absolutely important. So, 
let us do a quick stage setting if I can with you, Mr. Piwowar. 
We look back to the JOBS Act that created emerging growth 
companies to give small companies or smaller companies an 
ability to kind of navigate a regulatory framework. Could you 
stage set very briefly why that was done, what was it intended 
to solve, and is it working, in a short amount of time?
    Mr. Piwowar. Sure, just very quickly, right. As we know, 
companies going public face an incredible set of new burdens 
that they have, regulatory legal burdens, and the costs were 
quite high. So if the costs were here for a private company, 
they immediately went up here for a public company. The intent 
of Title I, and it has worked out to be that, is to provide an 
onramp, so you have scaled disclosures until the companies can 
get big enough to incur those fixed costs.
    Mr. Steil. Do you think it is working or not working?
    Mr. Piwowar. I absolutely think it is working. And if I 
may, to address a concern that Professor Bowers mentioned that 
somehow less disclosures could harm investors, I am a former 
academic myself and I used to think about theoretical harms, 
but I was also, as I mentioned, at the SEC for 5 years. I voted 
on 3,458 enforcement actions, and not one of them involved any 
particular company that was harming investors specifically 
caused by Title I of the JOBS Act.
    Mr. Steil. Thank you. Let me jump to Ms. Washer. One of the 
questions then becomes, if it is working well, as Mr. Piwowar 
states, and as I believe it is, what are the challenges? Are 
companies falling out of this status too soon? Yes or no, and 
maybe a couple of comments on it?
    Ms. Washer. Yes, thank you for the question. And my answer 
would be we are falling out too soon, especially in the 
biotechnology space, where companies take up to 12 years, as I 
stated, to reach revenue and to have a product approved. And I 
think that we would benefit from raising that hurdle because 
since the JOBS Act was enacted, companies have actually gotten 
larger just due to inflation, so just indexing that to current 
time would be helpful.
    Mr. Steil. Ms. Pinedo, do you want to comment on that as 
well?
    Ms. Pinedo. Yes. I think the part of the JOBS Act emerging 
growth compqny (EGC) definition that has the 5-year time 
period_the 5-year time period is arbitrary. And so, among the 
bills that you have for consideration today is one that would 
allow companies to remain EGCs if they remain low revenue, if 
they fit the other prongs of the EGC definition, regardless of 
the 5-year period, to Sue's point. And I think that is 
important because, to Mike's earlier comment, the whole 
objective of the JOBS Act was right-sizing regulation. Five 
years is arbitrary. Companies should face regulation when they 
are prepared to undertake the costs of regulation, and we are 
not deregulating anything. They are providing the same 
disclosures that we have gotten accustomed to since 2012. The 
investors are not receiving less or lower-quality disclosures.
    Mr. Steil. Yes. I think we have a real opportunity, I think 
you are spot on, to make sure we are modernizing this 
definition. As you noted, there is a bill before us. In fact, 
it is my bill, that would allow us to look at ways to modernize 
how we are looking at this inside EGC companies to make sure 
that we are getting more companies to take advantage of this 
opportunity to go public. The more companies that are public, 
the better off we are, because retail investors have an 
opportunity to actually gain the growth value of companies 
earlier rather than just letting the big boys on Wall Street 
take away some of that benefit.
    Let me shift gears pretty dramatically, and see if I can do 
this in a minute. I am going to go to you again, Ms. Pinedo, if 
I can. I just want to talk a little bit about the WKSI status 
of an issuer. The construct is to help reduce costs and 
complexity. Could you just comment very briefly on the 
implications of lowering the thresholds for WKSI qualification?
    Ms. Pinedo. Sure. One of the great things about being a 
WKSI is the ability to file an automatically-effective shelf 
registration statement. That is an incredibly powerful tool for 
an issuer. An issuer needs volatile markets to be able to 
access the capital markets when there is a window. They need to 
be able to raise capital in a follow-on offering when there is 
an ability to do so.
    Mr. Steil. Quickly, please, cognizant of the fact that we 
have about 10 seconds left.
    Ms. Pinedo. Yes.
    Mr. Steil. How impactful is that in reducing costs to 
companies to be able to continue to access the public markets, 
the costs?
    Ms. Pinedo. It is hugely impactful. It reduces their cost 
of capital because the alternative would be a private placement 
as a public offering, and that comes with a liquidity discount. 
So, this is enormous.
    Mr. Steil. Thank you very much. There are huge costs, and 
even an attorney who bills hours on this says that we can 
actually reduce costs by looking at this regulatory burden. 
Thank you for your time. I yield back.
    Chairwoman Wagner. The Chair now recognizes the ranking 
member of the subcommittee, the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. I think we have seen something supernatural 
happen right in this room. I have been coming here for decades 
when I have seen the picture of Chairman Oxley smiling down on 
us. And as we talk about jettisoning the idea of internal 
control audits, he is not smiling anymore. We need internal 
control audits for a huge chunk of our economy. I am not saying 
that they are needed absolutely everywhere, but having lived 
through Enron and WorldCom, the idea that we are finding 
political slogans to justify less auditing is something we 
should be skeptical of.
    I am also a little concerned about the idea of codifying 
something that has been a practice of the SEC, if it is a 
stupid practice. I am familiar with counting. Believe it or 
not, I think I can count up to 2,000. The idea of counting to 
2,000, 1, 2, 3, well, there is another 3, there is another 3, 
that one counts as part of 3, that is 3, you can see that is a 
stupid way to count.
    Professor Bowers, am I correct in saying that you could 
have many thousands of beneficial owners, and under current SEC 
rules, be told you have only 2,000 shareholders of record?
    Ms. Bowers. Yes, that is a great question, and it is 
absolutely true. When counting the ownership to determine if a 
company should register as public, we look to record holders 
versus beneficial owners. And as a result, a lot of private 
companies, particularly unicorns, have many more than 2,000_
    Mr. Sherman. I think there are now over 1,000 of these 
unicorns. These are companies that are worth over a billion 
dollars, and yet they are able to avoid making the disclosures 
we require of public companies on the theory that, well, if you 
go 1, 2, 3, oh, there is a 3, there is a 3, they have under 
2,000 shareholders.
    Ms. Bowers. That is correct.
    Mr. Sherman. That is something I want to codify. Professor, 
do we have fewer IPOs because it has become more burdensome to 
go public or because it has become less burdensome to stay 
private under the JOBS Act?
    Ms. Bowers. That is a great question. Frankly, IPOs had 
been on the decline well before the JOBS Act, and they have 
continued since then. So, I don't think the JOBS Act has played 
a role in increasing IPOs, and I do believe the ability to 
raise capital_
    Mr. Sherman. Yes, the JOBS Act should have decreased IPOs.
    Ms. Bowers. _in the private markets, that is part of the 
ease of doing that. That is why we are seeing less IPOs.
    Mr. Sherman. If you were investing in a large company, 
would you want to know what would happen to that company if 
there was a disruption in the U.S.-China relationship, the 
economic relationship?
    Ms. Bowers. Yes. As a potential investor, I would want 
access to all the necessary information I would need to make a 
decision.
    Mr. Sherman. Would you want to know whether they are 
investing in their workforce? I know we require putting right 
on the income statement the amount they spent on research. 
Wouldn't you want to know the amount they had spent over a 
period of time on employee education and training?
    Ms. Bowers. That is a great question, and honestly, I don't 
think it is up to me. I think it is up to all investors, and I 
think investors want access to that information to make 
informed decisions, and what they want should control what is 
available.
    Mr. Sherman. We have this idea for Regulation D of 
accredited investors which goes back to 1982. The dollar 
figures in that haven't even been indexed. I remember when a 
million dollars was real money, metal. But does it make any 
sense to think that because somebody has, what, I think an 
income of over, correct me if I am wrong, $250,000, that they 
somehow are a more sophisticated investor than someone who has 
an income of $200,000?
    Ms. Bowers. Thank you for that question, and I do think the 
definition of, ``accredited investor,'' needs to be examined 
and researched to see what would be the best fit and how to 
potentially adjust that terminology to be more efficient in the 
market.
    Mr. Sherman. And we have heard that underwriters are taking 
up to 7 percent. Is that new, or is that something that they 
have been taking for a long time, and is it justified?
    Ms. Bowers. Underwriters have taken significant fees in 
IPOs since the beginning of time, and that hasn't changed. What 
is interesting is that even with less disclosures, underwriters 
are still taking the same type of percentages.
    Mr. Sherman. I yield back.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from Pennsylvania, Mr. Meuser, for 5 minutes.
    Mr. Meuser. Thank you very much, Madam Chairwoman. Madam 
Chairwoman, I request unanimous consent to enter into the 
record a letter in support of the policies discussed today from 
the American Securities Association.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Meuser. Thank you.
    And I thank all of our witnesses very much. It is certainly 
an interesting and important subject. Markets in the U.S. have 
become overregulated and overly-expensive. Just a few years 
ago, it was normal to have hundreds of IPOs each year. Last 
year, my information tells me that we had 74 companies going 
public. This subcommittee is discussing the 10 years since the 
JOBS Act, which clearly did some tremendous improvements to 
this situation. Our public markets are, however, overregulated, 
slowing our American economy. This makes it difficult, 
primarily for small businesses, to raise capital by going 
public.
    Very simply, our discussions here are on raising of capital 
in the public sector for creating the most-competitive economy 
possible. But regulatory burdens, as you all know, have doubled 
in the last, probably 10 years, but my notes here are telling 
me 20 years. I think it is shorter than that. And these 
regulatory burdens lead companies forced to raise capital 
within the private markets, all things that we understand.
    Mr. Piwowar, you have quite a background. The companies 
obviously need access to capital. The public markets are 
overly-expensive. This definitely impacts company behavior. 
Companies are seeking many other methods for not expanding if 
the capital is not available, or are going abroad, which is far 
worse. So, what are your thoughts on the cost of regulation, 
and litigation, and the risk associated with disclosure? Has 
that, in your view, become a significant deterrent for a small 
company to go public?
    Mr. Piwowar. Yes, and I sort of alluded to this in my 
answer to Congressman Steil, that when you think about 
regulatory burdens that are applied to all companies, and those 
have a fixed cost of regulation, that burden falls hardest on 
the small companies, right? If you think of Sarbanes-Oxley 
404(b), that was intended to deal with large companies like 
Enron and WorldCom. And when those regulations come forward, 
maybe they are quite appropriate for large, complex companies 
like that, but when you look at the costs and benefits of those 
things for smaller companies, the costs are much higher for 
those. So, dealing on a cost-benefit analysis, that then leads 
to potentially scaled disclosures or potentially exempting them 
from various disclosures.
    Mr. Meuser. Could you provide any sort of outline, maybe 
not right now, on some of the solutions and suggestions you 
have to minimize these regulations and costs?
    Mr. Piwowar. Sure, absolutely. I think, as Chairwoman 
Wagner mentioned, the EGC status in Title I of the JOBS Act is 
a great blueprint.
    Mr. Meuser. Sure.
    Mr. Piwowar. And I know that there are a number of bills 
that are on the subcommittee's radar screen looking forward as 
tweaks to that, additions to it. I think it is entirely 
appropriate 11 years later to look at some of those. In fact, I 
will note it was exactly 11 years yesterday that the JOBS Act 
was introduced to the House and then it passed less than a 
month later.
    Mr. Meuser. Thank you.
    Ms. Washer, can you walk us through perhaps your compliance 
cost of going public with your company and how that factored 
into your decision-making process?
    Ms. Washer. Thank you for the question. It is a very 
important question, and we thought very carefully about the 
costs of going public. We were a very small company when we 
went public, with less than 30 employees, and only 2 people in 
our finance and accounting department. So, the burdens of 
disclosure, of walking forward, and the ongoing compliance 
costs, which for our company were about $1.7 million on an 
ongoing basis, was something we thought about distinctly.
    I want to be clear that even as an emerging growth company, 
when we did not have to have the auditor make an attestation 
about internal controls, the management team still had to make 
an attestation about internal controls, and we were held liable 
for that. We also made regular disclosures every single 
quarter, and we had fully-audited financial statements, even as 
an emerging growth company, and that is what cost the $1.4 
million to $1.5 million. Once we needed to follow the 404(b), 
that almost doubled our accounting fees, so that is an 
additional amount of money that would be spent on just 
accounting rather than research and development.
    Mr. Meuser. Thank you. I yield back.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from California, Mr. Vargas, for 5 minutes.
    Mr. Vargas. Thank you very much, Madam Chairwoman. I 
appreciate the opportunity to speak. First of all, I think that 
this hearing has been great. It really has. I think we have had 
a lot of good information, and I appreciate that very much. I 
think each one of the people here testifying has given us a lot 
of great information.
    I do have some concerns. Some of the concerns involve the 
issues with fraud, problems sometimes with lack of disclosures, 
but there were a couple of things that caught my attention.
    Ms. Pinedo, it caught my attention when you said no longer 
is an IPO to raise money. Now, it is more for the liquidity of 
investors. I think that is what you said. Could you expand a 
little bit more on that?
    Ms. Pinedo. Yes. I think that it is important to point out 
that we are setting up a little bit of a false dichotomy in the 
comments today. There is very little of a public ecosystem to 
support smaller companies when they go public. If we are 
saying, let's force all of these smaller companies to go 
public, there is no ecosystem to support them once they are 
public.
    So, the companies that are going public these days are 
much, much larger. They are waiting 12 to 15 years before they 
go public. That is not necessarily by choice. It is that those 
are the companies that succeed once they are public because 
there aren't institutional investors that invest in small-cap 
or micro-cap companies anymore. And the companies that choose 
to go public go public largely because they want to provide 
liquidity for their existing security holders. There are very 
few equity research analysts that provide coverage on small cap 
companies, so we are setting up a situation that is really a 
myth. We are saying companies should go public earlier, but 
there isn't any infrastructure anymore to support those 
companies that we are saying should go public earlier.
    Mr. Vargas. Thank you. Professor Bowers, it was interesting 
for me to listen to you when you said that none of the changes 
that are being proposed here today would actually change the 
minds of your investors about staying private as opposed to 
going public. It is a little bit different from what Ms. Pinedo 
said, but in a sense, it is somewhat similar. Could you comment 
on that?
    Ms. Bowers. Thank you for that question. Yes, I represent 
small companies that are raising capital, and some of them have 
gotten the benefit of the JOBS Act, and I think they are using 
it in the correct way. They are raising small capital from a 
small number of investors, and there is no incentive to leave 
those private markets. They don't have a lot of burdens. It is 
very easy to enter them. There is little accountability. On the 
flip side of that, it is dangerous for the investors. Even 
though they are my clients, they are investing in companies 
where there is not adequate disclosure. So, I do think it is 
sort of the flip side of the same coin.
    Mr. Vargas. Okay. Kind of switching gears here, I do want 
to ask you about ESG. It is something I believe in, and I, for 
a long time, have believed that climate is changing. I was in 
the insurance business for a while, and certainly our actuaries 
could tell you that the climate is changing, and the cost 
associated with what was called catastrophes, or we call it 
CATS, was supposed to happen every 25, 50, 100 years, and those 
were happening every 5 years. And now, the cost of climate 
insurance companies is gigantic. Could you comment a little bit 
about ESG and disclosures for that?
    Ms. Bowers. Yes. Thank you for that question. I think that 
it doesn't really matter what I think. I think it matters what 
the investors want, and the investors want ESG disclosures. 
They want to know what is going on environmentally, and 
socially. They want to understand the human capital of the 
businesses in which they are investing. And I think it is 
important to recognize that is information that investors want 
to know and need to know to make an informed decision. As a 
result, I think we should rely on the investors who are clearly 
telling us they want that disclosure.
    Mr. Vargas. Okay. Thank you. Dr. Piwowar, and I apologize, 
if I mispronounced your name, could you comment on that, 
because I imagine you probably have an opposite view?
    Mr. Piwowar. Not necessarily an opposite view. The SEC is 
charged with implementing the Federal securities laws, and 
under those laws, information has to be disclosed to investors 
if it is material, and the materiality standard is determined 
by the Supreme Court. There is a decision, TSC Industries, Inc. 
v. Northway Inc., which was written by Justice Thurgood 
Marshall, which recognized that there is a balance here. On the 
one hand, you want to provide the reasonable investor 
information so that they can make informed decisions when 
buying, selling, or voting their shares. On the other hand, you 
don't want to overload them with an avalanche of information so 
that it is impossible for them to find the right information 
that is in there.
    And the SEC has always operated under that materiality 
standard. Let's take climate risk or environmental type of 
disclosures. For some companies, those are very, very material 
pieces of information, and those are already disclosed. For 
others, it may not be, and so the SEC already has a disclosure 
framework that works for that.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Vargas. Thank you very much.
    Chairwoman Wagner. The Chair now recognizes the Vice Chair 
of the subcommittee, the gentleman from New York, Mr. 
Garbarino, for 5 minutes.
    Mr. Garbarino. Thank you, Madam Chairwoman. Thank you very 
much for hosting this very important hearing, and thank you to 
the witnesses for being here.
    Ms. Pinedo, I was going to ask you what factors companies 
consider when deciding whether to raise capital to go public, 
but it sounds like, from what you have been saying, these 
companies aren't going public to raise capital. They are going 
public to diversify their investors. Is that what you were 
saying?
    Ms. Pinedo. It is not always the case. There are many 
reasons that companies choose to go public, and it is often 
dependent on the sector. For example, life sciences companies 
have less access to capital in the private markets than do 
companies in other sectors, and life sciences companies often 
have to go public earlier than companies in other sectors. It 
is differentiated by industry sector, so that is not always the 
case.
    As a general rule, and as I cited in my written testimony, 
if you look at the statistics and the median age of companies 
at the time that they have gone public over the last 10 to 12 
years, yes, most companies that have gone public in the last 10 
to 12 years are much more seasoned companies, and they have a 
much larger market cap at the time that they are going public. 
It has very, very little to do with the fact that there is less 
regulation. As far as the private markets, it has much more to 
do with the market structure changes that we have been talking 
about today regarding the proliferation of private capital, and 
the fact that there are many more private capital sources, and 
that larger companies fare better once they are public.
    Mr. Garbarino. Okay. In your opinion, though, now we have 
larger companies that need to go there. They have a higher 
market cap, and they will go public, but not necessarily for 
capital purposes, or we have life sciences, which are younger 
and they don't have the access to the capital in the private 
markets. So in these two decisions, do regulatory burdens or 
high compliance costs play a decision here?
    Ms. Pinedo. Absolutely. They play an essential role, and 
companies that are low-revenue companies should continue to be 
able to go public, and we should continue to right-size 
regulation. We should continue to phase in regulation and 
continue to extend the benefits of EGC status for a longer time 
period. We should continue to encourage the accommodations that 
are available for EGCs for a longer period of time for those 
companies that meet the EGC prongs. And we should continue to 
look for ways to encourage smaller and medium-sized companies 
to go public because, again, that is going to revitalize the 
public capital markets. We should also look for ways, like the 
WKSI bill, to allow existing public companies that are smaller 
and medium-sized companies to continue to benefit from raising 
capital, including follow-on offerings through follow-on public 
offerings.
    Mr. Garbarino. I am happy you talked about extending some 
of the benefits of EGCs and the timelines that they have. EGCs 
are allowed to use test-the-water communications with qualified 
institutional investors and institutional accredited investors, 
and I know we talked a little bit about this before. They use 
this to gauge interest in registered securities offerings, 
either prior to or when filing the registration statement. Can 
you provide any real-world examples explaining how expanding 
this accommodation to all issuers will benefit non-EGCs who 
currently can't use this accommodation?
    Ms. Pinedo. Sure. We have had this provision for quite some 
time because the SEC has made this available through SEC 
policy, so we have already seen the benefits of allowing all 
issuers to test the waters. This has been a great benefit to 
all companies because institutional investors have the ability 
to engage in discussions with companies that may want to raise 
capital in the public markets, and to understand the company's 
business plan, to understand complex technologies that 
sometimes require additional time. That may include life 
sciences companies. It may include companies that focus on 
cyber or artificial intelligence that have great innovations 
that can benefit society, and that really take more attention 
than can be explained in a 15-minute roadshow. So, yes, test-
the-waters meetings work. We have seen that they work well_
    Chairwoman Wagner. The gentleman's time has expired. The 
Chair now recognizes the gentleman from Illinois, Mr. Casten, 
for 5 minutes.
    Mr. Casten. Thank you, Madam Chairwoman, and thanks to all 
of our witnesses here. Before I came to Congress, I was in the 
energy industry and I built a couple of companies. The most 
recent one was from an idea that I turned into an $80-million 
company, all with private equity. And I think, like all private 
equity-backed CEOs, some days I was grateful to have access to 
capital, and some days I was fed up by the hordes of young 20-
somethings with fancy MBAs in my accounting department and my 
human resources department, telling me that while my ideas on 
strategy were interesting, if I wanted more capital, I was 
going to have to listen to their strategic ideas. And at the 
risk of saying something that is going to be clipped and used 
against me in an attack at some point in the future, I have 
deep sympathy for the struggles faced by CEOs whose lives are 
burdened by disclosure.
    [laughter]
    Mr. Casten. At the same time, it looks good on your resume 
to build an $80-million business. By rights, that was a small-
cap company. I was too small to go public. When I talked to 
friends who, had been a little bit more successful than me, 
they said that going public has its own issues. Yes, it is 
tempting to not have hordes of young 20-somethings running 
through your business. On the other hand, there are different 
disclosure obligations you have to have because you do have 
this more diverse pool, and frankly, being a thinly-traded 
small cap is not without its own challenges.
    I guess my first question in light of that for you, 
Professor Bowers, is, I don't think my experience would have 
been possible if I was born 30 years earlier. So what I am 
wondering is, from your perspective, how much of the story we 
tell about declining participation in public markets really is 
just a reflection of the successful growth of private markets 
and the ability to provide a path for others? Is this really a 
bad thing, or is it just that our markets have become more 
diverse?
    Ms. Bowers. I think that the private markets have drawn 
companies away from the public markets. I think the access to 
the capital, for instance, the situation you were talking about 
with your company, that makes it much easier for a company to 
stay in the private markets to grow significantly and to avoid 
those disclosure requirements of the public markets. And what I 
see is that the private markets are continuing to draw more and 
more people away, when the goal of the JOBS Act was really to 
bring emerging growth companies into the public markets and to 
create a path for them. I don't think it has been successful at 
that. I don't think this legislation is going to do that 
either.
    And again, I think these are risky companies, emerging 
growth companies, so scaling back their disclosures concerns 
me. And to just comment on one of the things that was said 
here, the test-the-waters, yes, the SEC also had that 
implemented, but I think maybe people are failing to realize 
that by allowing all issuers to test the waters, and not just 
emerging growth companies, you might actually be further 
hurting emerging growth companies in being able to get the ear 
of those potential institutional investors because now they are 
competing with more-established companies and issuers.
    Mr. Casten. One of the crazy things about this job is you 
always think about the people who have sat in the chair you are 
sitting in, before you sat in it. A couple of months ago at the 
dais you are sitting at, we had John Ray talking about guiding 
what he described as a paperless bankruptcy, and millions of 
dollars lost and missing, couldn't track it because the company 
was able to raise that money with QuickBooks as their 
accounting system and audits. And it is a little bit head-
rattling to now be sitting here saying that maybe disclosures 
are a problem.
    My second question for you, Ms. Bowers, is while we are 
talking about public markets today, how concerned should we be 
about the rise in access to larger pools of less-sophisticated 
capital and private markets that allowed people to raise huge 
amounts of money from companies, like Sequoia, without anybody 
going out and actually having the kind of diligence that would 
have protected those capital providers? Is that a concern we 
should have because, again, speaking for our nation's CEOs, if 
I could have a ton of dumb money with no accountability, boy, 
that is sure tempting.
    Ms. Bowers. I think that is a great question. I think the 
private markets have created a situation where there are 
millions and billions of dollars being invested with very 
little disclosure. So companies, particularly unicorns, 
billion-dollar valued companies can go out there and raise 
capital from thousands of investors and not share information. 
And what is even more frightening is that the institutions in 
the private markets are getting access to information, but 
retail investors, sort of those people who sit on the fringes 
of accredited investor status, don't have that same kind of 
power to demand access and information. So, I do think it is 
concerning that those markets continue to be fairly 
unregulated.
    Mr. Casten. Thank you.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Casten. I have more questions, but I'm out of time, so 
I yield back.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from Texas, Mr. Sessions, for 5 minutes.
    Mr. Sessions. Madam Chairwoman, thank you very much. Madam 
Chairwoman, I request unanimous consent to enter into the 
record letters in support of the policies that we are 
discussing today from the U.S. Chamber of Commerce, the 
National Association of Manufacturers, and the National Venture 
Capital Association.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Sessions. Thank you very much, Madam Chairwoman. Before 
I get too much into this, Ms. Pinedo, I would like to aim a 
question at you, and I think it is fair to tell you ahead of 
time rather than at the end and then you saying, please repeat 
that question. Each of you have indicated how important it is 
to have robust markets, markets that follow capitalism. If 
there is one thing our young chairwoman stands for and our 
Chairman McHenry stands for, and I think the Members on this 
side, it is capitalism. A fair opportunity to make money, an 
opportunity to have a balanced marketplace of rules and 
regulations, I think each of you have affirmed that mostly. So 
what I would like to do is to talk about something, and I plan 
to introduce a bill in the next few days that would codify an 
SEC no-action letter that allows broker-dealers to continue 
accepting cash or hard-dollar payments for research reports in 
order to comply with the EU directive.
    The reason why this is important is because we believe that 
if no action is taken by July, the SEC's Investment Management 
Division Director has said that he will simply allow it to fade 
away. I think each of you have delineated the things in rules 
and regulations that have allowed not only the furthering of 
information, but also get into the balance of these rules and 
regulation, and this comes directly at the point. Would the 
gentlewoman have a comment about that?
    Ms. Pinedo. Yes, I do. I think it would be difficult to 
overstate the importance of research for vibrant capital 
markets. I think that codifying the SEC's no-action letter 
relief for method two is extremely important. I think that the 
broker-dealers in the United States are struggling with the 
sunsetting of the relief. And it is important to understand 
that this affects investment managers that are located both in 
the European Union, in the United Kingdom, and elsewhere. And 
if nothing is done, then it may subject broker-dealers to 
regulation under the Investment Advisers Act, which is 
completely different than the regulation to which broker-
dealers are already subject to as registered broker-dealers 
with the SEC and subject to regulation by FINRA. So, it is 
really quite essential that action be taken.
    Mr. Sessions. And it keeps those companies that can utilize 
that data out of a regulatory environment that really puts 
them, I think, at a disadvantage.
    Ms. Pinedo. I would agree with that. And I think that 
additional time is necessary in order for a framework to be 
devised that is appropriate and that would allow for research 
to continue. We have seen a reduction in the availability of 
research since all of this has been announced, and any 
diminution in research is bad for the capital markets.
    Mr. Sessions. Thank you. Your colleague evidently has an 
opinion on that. Sir?
    Mr. Piwowar. Sure. Thank you, Congressman. I was at the 
Commission when we approved the original no-action relief, and 
we put it for 30 months to buy some time to allow the Europeans 
to go back and reconsider their rules, and it has since been 
extended, and as Ms. Pinedo mentioned, it ends in July unless 
the SEC extends it. And I find it unconscionable that the SEC 
would not extend it, for the reasons that Ms. Pinedo said, 
especially when we are finally getting to the point where the 
Europeans are actually thinking about walking back that 
requirement, so I think it is now more than necessary. We need 
to have that in place, and I think codifying it would be the 
right thing to do in this situation.
    Mr. Sessions. It is rather interesting that we find 
ourselves having to pass a piece of legislation to get the SEC 
to do what is probably very apparent to each of you. And this 
is where we find ourselves in today's world, that seemingly 
what is apparent to you and apparent to us that would help the 
capitalist ideas to be able to gain this information that you 
speak of, used effectively to the advantage of the investor.
    I want to thank both of you. Madam Chairwoman, thank you so 
much for not only calling this hearing, but for your attention 
to the details therein. I thank the gentlewoman.
    Chairwoman Wagner. I appreciate it.
    Mr. Sessions. I yield back.
    Chairwoman Wagner. The gentleman yields back, and the 
gentleman from New York, Mr. Lawler, is now recognized for 5 
minutes.
    Mr. Lawler. Thank you, Madam Chairwoman. And thank you to 
all of the witnesses for being here today and for sharing your 
insights and your experiences with the committee.
    Ms. Pinedo, based on your experience, what factors do 
companies consider when deciding whether to raise capital 
through a public offering?
    Ms. Pinedo. Companies consider alternatives, first of all, 
how much capital would be available in the public markets 
versus the private capital markets. They consider their cost of 
capital once they are public. They consider the regulatory 
costs associated with being a public company. They consider how 
having a listed equity security will benefit them, for example, 
having acquisition currency, having the ability to reward 
employees with stock-based compensation, and how that will 
benefit the company through its growth. They consider as well 
the additional prominence that comes with being a listed public 
company. So, there are many factors that go into the 
considerations associated with being public. And of course, 
regulatory costs factor into that.
    Mr. Lawler. So the regulatory burdens and the high 
compliance costs play probably one of the most significant 
roles in determining whether or not to go public?
    Ms. Pinedo. Certainly, as well as liabilities associated 
with being a public company. Those who are top of mind for 
directors and officers, which we have not discussed, but yes.
    Mr. Lawler. Would you like to elaborate on that a little 
bit?
    Ms. Pinedo. For directors and officers, and prospective 
directors and officers, it is often difficult to consider or to 
contemplate going public because we obviously, in the United 
States, live in a very litigious society. And as we burden 
public companies with often immaterial disclosures, those 
burdens become more and more challenging, and that is something 
that boards certainly consider.
    Mr. Lawler. Thank you. Would any of the policies that have 
been discussed today over the course of the conversation be key 
to helping address the unnecessary regulatory burdens or 
compliance costs, or otherwise make our public markets more 
attractive?
    Ms. Pinedo. First off, I want to say that we are not in the 
proposed measures being considered today. None of the measures 
would significantly reduce the amount of information available 
to investors. That is important to say. All of the changes that 
are suggested are incremental, and many of the changes are 
codifications of existing SEC policy, and we have lived with 
the existing mix of information that EGCs provide for many, 
many years now, so it is something that investors are familiar 
with as well as regulators. The changes that are being proposed 
today would help companies and would help companies that are 
considering the path to an IPO, particularly the ability to 
preserve EGC status. If companies don't become large, 
accelerated filers, and don't cross the revenue threshold, the 
fact that they could remain EGCs for longer than the arbitrary 
5 years is important.
    For low-revenue issuers to be able to continue to forego 
the Section 404(b) compliance is significant. The SEC's own 
Office of the Advocate for Small Business Capital Formation has 
shown in its 2022 report that the costs at 404(b) attestation 
are relatively and disproportionately more significant for 
smaller public companies. And there are many, many academic 
studies that have shown that there is no necessary correlation 
between the attestation and improved reliability of financial 
statements.
    Mr. Lawler. Terrific. Thank you. In the limited time I have 
left, Ms. Washer, I know my colleague, Mr. Meuser, touched on 
this with you. But the SEC estimates that the average cost of 
achieving initial regulatory compliance for going public with a 
traditional IPO is about $2.5 million, with an annual 
compliance cost averaging $1.5 million thereafter. How did 
these costs influence your decision to take AGTC public?
    Ms. Washer. Thank you for the question. It is a very 
important question. And my comment would be that I think that 
those numbers are underestimated, and it really cost us much 
more to go public, and our ongoing compliance costs were at 
that until we lost ESG, and then they went up.
    Chairwoman Wagner. The gentleman's time has expired. The 
Chair now recognizes the gentleman from Michigan, Mr. Huizenga, 
who is also the Chair of our Subcommittee on Oversight and 
Investigations, for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman, and I am very 
pleased that we are holding this hearing. And Ms. Washer, I 
want to touch on something, and first comment that your 
emerging growth company coming public in 2013 was exactly what 
we intended with the JOBS Act, exactly what we intended, so I 
want to explore that really briefly with you. At some point, 
maybe offline, I want to talk to you about your experience with 
the SEC Small Business Capital Formation Advisory Committee.
    But what was the motivating factor for you? What was the 
sort of thing that you made you say, aha, we have to do this? 
And then, I am curious, can you talk about your employment and 
what some of the benefits might have been?
    Ms. Washer. Yes. Thank you so much for that question, Mr. 
Huizenga. When we looked at being a biotech company that was 
developing a novel technology from discovery through approval 
by the U.S. FDA, that takes, in our industry, upwards of a 
billion dollars. And there really is no way for the 
biotechnology industry, which addresses human health, 
agricultural growth, and industrial improvements to raise that 
kind of money in the private markets. It is a risky business, 
and there aren't enough people focused on the life sciences in 
the private markets, and so it was really that access to 
capital. And something else that my colleague mentioned was 
also the recognition that when you become a public company, 
there is more disclosure. And disclosure does have benefits, 
and that is that there are more people who know about your 
company and a potential wider pool of investors into your 
company, and so those are the things we took into account.
    However, the other side was that, as I mentioned earlier, 
we only had 30 employees, and 2 people in our finance and 
accounting department. So, we had to walk very carefully 
through whether we could comply, and we determined we could 
with our small staff. And then, the other thing I will mention 
is the Directors and Officers (D&O) insurance issue. We had a 
board that were private individuals and investors, and so to be 
able to go public, we had to take on D&O insurance, which is 
another added cost. Our D&O insurance towards the end was 
almost $700,000.
    Mr. Huizenga. Good grief.
    Ms. Washer. And for a very small company, that was a 
consideration, but all-in-all, for us, it was access to 
additional capital.
    Mr. Huizenga. Okay. So, you were at 30 employees?
    Ms. Washer. Yes.
    Mr. Huizenga. How quickly did it grow, your employment 
base?
    Ms. Washer. We doubled our employment almost immediately, 
and when we sold_
    Mr. Huizenga. I am sure these are entry-level jobs, right?
    Ms. Washer. No.
    Mr. Huizenga. Please, I am glad you caught my sarcasm on 
that. I am assuming these are very high-paying jobs?
    Ms. Washer. Yes. At the very low end of the salary range in 
our company in biotechnology was $35,000 for, say, lab techs 
who were cleaning the lab, but on average, our salaries were 
over $100,000 because they are very high-level jobs. When we 
sold the company in November 2022, we had over 120 employees, 
so the access to the capital markets definitely increased.
    Mr. Huizenga. Four times the size.
    Ms. Washer. Yes.
    Mr. Huizenga. Okay. I have a couple of minutes here, and I 
have a few things I have to hit on. Last year, I introduced the 
Improving Disclosure for Investors Act, a bipartisan bill that 
directed the Securities and Exchange Commission to engage in 
rulemaking that would allow registered investment companies to 
deliver regulatory documents to investors using electronic 
means.
    Currently, the SEC permits electronic delivery of certain 
documents under Federal securities law, subject to requirements 
that a registrant provide notice that the information is 
available electronically. The investor has effective access to 
such information, and the registrant either obtains evidence to 
show actual delivery or obtains information consent from the 
investor. The SEC has not comprehensively updated the framework 
in over 20 years. My legislation offers a simple solution: 
promote positive investor engagement by making it easier for 
investors to find information most relevant to them. And we are 
not going to be discarding a whole lot of paper. That is 
happening, and I think number of us believe that is a positive.
    Having had older parents, I was also very sensitive to what 
this meant for seniors and their investments. So, I worked with 
Congressman Auchincloss to insert a provision that would 
provide safeguards, allowing investors to once again receive 
paper statements. Madam Chairwoman, I would like to ask 
unanimous consent to enter into the record a letter from SIFMA 
containing survey results of all of its members.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Huizenga. Thank you. Mr. Piwowar, I want to focus on a 
couple of things from your testimony. First, you indicate that 
Congress and this committee should consider legislation that 
does not require SEC rulemaking. Yesterday, the Subcommittee on 
Oversight and Investigations, which I chair, heard from the 
SEC's Inspector General about the impact these rulemakings have 
on the Agency with staffing, morale, and capacity. So, I am 
wondering if you could quickly explain that, and we will see if 
we can get to another question.
    Mr. Piwowar. Sure. Just very quickly, if you look at the 
JOBS Act overall, some of the titles required SEC rulemaking, 
and Title I did not. It went in and surgically amended various 
parts of the 1933 Act and the 1934 Act, and it was self-
effectuating; it became effective immediately upon enactment. 
That is one of the reasons it was so successful, and the SEC 
was so far behind and actually screwed up some of the other 
rulemakings. In fact, I even dissented on the crowdfunding 
final rule because it was so far away from congressional 
intent.
    Chairwoman Wagner. The gentleman's time has expired. The 
Chair now recognizes the gentleman from North Carolina, Mr. 
Nickel, for 5 minutes.
    Mr. Nickel. Thank you, Chairwoman Wagner, and thank you to 
our witnesses for coming to testify today. The U.S. public 
markets are frequently referred to as the envy of the world. 
And I agree with my Republican colleagues that the strength of 
U.S. public markets is essential for our economy to thrive, but 
it is important to remember that securities laws are what make 
our capital markets so strong. As Professor Bowers talked about 
in her testimony, our regulatory framework ensures transparency 
and fairness in trading, providing investors with confidence in 
the marketplace.
    Professor Bowers, North Carolina's Research Triangle Park 
has a huge impact on my district. We have many small minority-
owned biotech companies that face barriers to accessing capital 
in public markets. Can you provide some insight on how 
companies can overcome this issue, especially through the 
public markets?
    Ms. Bowers. Thank you for that question. I think one of the 
ways to overcome that issue is to provide disclosures to 
investors. I think the more investors know, the more likely 
they are to invest in a company, whether it be a small company 
or a large company. I would like to address one of the things 
that was said about emerging growth companies and the idea that 
some of these proposals don't extend, don't reduce disclosure. 
But by allowing a company to be an emerging growth company for 
10 years, you are effectively doing that, because during that 
10-year time, which is now 5, they continue to have a pass from 
those accountability requirements. So, allowing emerging growth 
companies to remain in that category for 10 years, I think is 
also significant as far as disclosures to investors.
    Mr. Nickel. Professor Bowers, we had Fed Chair Jerome 
Powell in just the other day, and he spent a lot of time 
talking about the debt and the debt ceiling. Can you explain 
how the consequences of the United States defaulting on our 
debt would affect our capital markets?
    Ms. Bowers. Thank you for that question. And I didn't have 
time to completely prepare for that, but I think that if the 
U.S. defaults on its debt ceiling, that trickle-down into our 
public markets is going to have a drastic impact. I think stock 
prices, which we are already seeing declining, are going to 
continue to decline. I think that is going to impact emerging 
growth companies even further and push many of them to the 
brink of possibly having to delist. So I think as a result of 
all of that, we will see billions of dollars being lost by 
investors.
    Mr. Nickel. Thanks so much. Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the gentleman from Iowa, Mr. Nunn, for 5 minutes.
    Mr. Nunn. Thank you very much, Chairwoman Wagner, for 
calling this timely hearing on how we can improve our public 
markets to make them more attractive for both small and 
emerging companies.
    I would like to start by looking at the historical 
statistics of last year, according to Ernst & Young. IPOs 
basically crawled to a halt in 2022. The number of deals in the 
U.S. fell roughly 78 percent from a year earlier. There were 
only two IPOs on the U.S. exchange that had more than a billion 
dollars of proceeds compared to 30 in 2021. Further, the number 
of IPOs with proceeds under $50 million represented roughly 80 
percent of the U.S. IPO activity in 2022. Let's put this in an 
historical context. On average, over the last decade, 
approximately 80 percent of U.S. IPO had proceeds under $50 
million.
    Now, I know that many factors can contribute to this, 
including significant regulatory costs associated with initial 
public offerings and ongoing reporting as a public company.
    Director Piwowar, I would like to begin with you, sir. 
First, thank you very much for spending a very busy schedule 
with us here in the Financial Services Subcommittee on Capital 
Markets. I also read that you are a former assistant professor 
at Iowa State University.
    Mr. Piwowar. Go Cyclones.
    Mr. Nunn. There we go. Exactly. We will see how Bailey does 
tonight, but thank you very much for coming in here and working 
with us. As you were also the leading economist on the Senate 
Banking Committee during the original JOBS Act, I would like to 
ask you the following question. We talked about the declining 
number of IPOs on numerous occasions today. With high interest 
rates and a likely recession potentially by the end of this 
year, and several new SEC regulations that will increase the 
cost to issuers, the downward trend in IPOs will likely 
continue. Could you share with us what a declining IPO means 
for everyday investors, including folks from the heartland, 
like those in Iowa?
    Mr. Piwowar. Sure. You mentioned higher interest rates and 
higher inflation going forward. Low interest rates is one of 
the reasons why the private markets were so competitive vis-a-
vis the public markets for so long. So if you think of private 
equity firms investing in portfolio companies, a lot of times 
they use debt to finance those purchases. And we are going to 
see that the private markets are probably going to become less 
competitive, and that is why it is even more important that the 
public markets remain competitive.
    To your question about why the public markets are so 
important, Chairwoman Wagner had mentioned the fact that the 
way that most everyday Americans actually save for their 
retirement is by investing in public companies. In the interest 
of comity, I was critical of my fellow witness, Professor 
Bowers', views on one thing. I will say I agree with her that 
we need to revisit the accredited investor definition because 
so many Americans are locked out of investing in high-growth 
private companies and companies that are staying private 
longer, as Ms. Pinedo mentioned, and so everyday investors are 
basically locked in, in many ways, to investing in the public 
capital markets. So, that is why we need to do both. We need to 
make sure that investors have more equitable access to 
opportunities in the private market companies, but also we need 
to make sure that our public markets remain competitive so that 
the funds that are already invested there, they can use to save 
for retirement and education.
    Mr. Nunn. Very poignant to this. So from your perspective 
both as an economist, but also, I think it is worth noting, as 
a former SEC Commissioner, I want to talk about the pace of 
rulemaking coming out of the SEC.
    Mr. Piwowar. Yes.
    Mr. Nunn. Will the magnitude of these rules raise the cost 
in any way that makes our public markets less attractive for 
those interested in raising that capital?
    Mr. Piwowar. Yes. The pace of rulemaking_when I was there, 
we had a high pace of rulemaking, but that was mandated 
rulemaking by Congress. We had the Dodd-Frank Act, and then we 
had the JOBS Act, and those were mandated rules. If you look at 
what is going on at the Commission right now, it is 
unprecedented in terms of the number of rulemakings that are 
going through on a discretionary basis. And as I mentioned 
earlier, it is the accumulation of all of the rules together, 
right?
    Mr. Nunn. Right.
    Mr. Piwowar. On any individual basis, you may say, well, 
the cost is maybe worth the benefits. But over time, we know 
that it is the accumulation of those rules that could actually 
gum up the markets.
    Mr. Nunn. With the SEC basically doing the legislation that 
has traditionally been done by Congress, let me ask you this: 
Are there things that Congress needs to be doing now either to 
rein in the SEC or to make this more effective or at least more 
attractive for our public markets?
    Mr. Piwowar. Yes. One is, we mentioned the bills that are 
here. There are amendments to the JOBS Act and how the JOBS Act 
actually helped the SEC refocus on the often-forgotten third 
part of its mission, right? Everybody remembers protecting 
investors, and maintaining fair, orderly, and efficient 
markets. And over the past few years, we had the pandemic and 
concerns about the markets running through that. We have had 
the meme stock trading in 2021 that, really, the SEC on some of 
the market structure stuff. Similarly, because of Dodd-Frank, 
the SEC was mandated to do over 100 rulemakings, and that 
returned them to the capital formation piece, and I think 
similarly, amendments could do the same.
    Mr. Nunn. Powerful. Thank you, Mr. Piwowar. With that, I 
yield back.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the gentleman from Arkansas, Mr. Hill, who is also 
the Chair of our Subcommittee on Digital Assets, Financial 
Technology and Inclusion, for 5 minutes.
    Mr. Hill. Over the past few weeks, under Chairwoman 
Wagner's leadership, the subcommittee has examined ways 
Congress can help improve capital formation in the United 
States. We have investigated how expanding the definition of 
an, ``accredited investor,'' can help increase inclusion in the 
capital markets, and I am proud to have sponsored legislation 
on that important topic and debate. We also examined how to 
better direct venture capital and angel investors towards the 
backbone of America: entrepreneurs and small businesses like 
the ones back home in Central Arkansas.
    Now, comes the last piece of the puzzle, which is, how do 
we increase access to the public markets? Public markets in the 
U.S. have moved further and further out of reach with initial 
public offering levels declining each year. I would say 
parenthetically, without the help of the emerging growth work 
of the JOBS Act, that would be an even more despairing 
statistic. In fact, in the 4 decades I have been involved in 
investing in the markets, there are half the number of public 
companies than they were when I started my career, which means 
fewer options for 401(k) plans, fewer options for union pension 
plans, and fewer options for everyday investors who are looking 
for a good idea, and for people obsessed, and there are many 
obsessed in the government with exchange-traded funds, fewer 
options to go into an exchange-traded fund or into a mutual 
fund. Bottom line, that is not smart. It is not good for the 
U.S.
    The SEC's mission is to protect investors, maintain fair, 
orderly, and efficient markets, and facilitate capital 
formation. The Commission's rulemaking has done nothing but 
hamper capital formation in this Administration, and that hurts 
the everyday investor. If Chair Gensler wants to fulfill those 
core missions, then he should make it easier for companies to 
enter the public markets, not harder.
    The Commission estimated, and I think this is a dated 
figure of going public, those out-of-pocket costs to be $2.5 
million. I think that is low, but that is what we used 8 years 
ago when I think we started talking about that number, with 
annual compliance costs of $1.5 million. Well, you just heard 
testimony that somebody's D&O insurance coverage is $700,000 a 
year, and if you comply with Section 404 in Sarbanes-Oxley, you 
are talking about $400,000 a quarter, so $1.5 million in 
compliance costs annually seems like a joke to me. So, we need 
public markets that welcome new companies and unlock the power 
of public investment for our growing business enterprises, and 
Republicans, under Chair Wagner's leadership, and under Chair 
Huizenga's leadership, have certainly been there.
    Commissioner Piwowar, it is good to see you. Thanks for 
taking time out of your busy day to spend some time with us. 
How do you assess those costs as the detriment to going public, 
the upfront costs and the ongoing costs, and the higher those 
costs are, of course, the higher the market cap has to be to go 
public. When I started my career, it was a dream come true to 
go public, and going public public at an $100-million to $200-
million valuation was a no-brainer, and now we are talking way 
over a billion dollars. Can you reflect on those costs, and 
besides emerging growth companies, how could some of these 
ideas lower those costs?
    Mr. Piwowar. Yes. The costs have gone way up, and what that 
means is for companies to be able to amortize those costs, they 
have to get bigger before they go public, just as Ms. Pinedo 
mentioned. And what is missing there is the ability for 
everyday investors to invest in those companies during their 
growth stage, because they are remaining private during those 
particular growth stages. And I think one of the things that 
Ms. Washer mentioned was that it is not just the cost in terms 
of dollar amounts, but it is the opportunity cost of those 
dollars that you mentioned. You add up millions of dollars in 
compliance costs that could otherwise be used by R&D, otherwise 
be used for drug trials to find the next cure for the next 
disease and actually save lives. So, this is really about 
saving lives.
    Mr. Hill. I thank you for your testimony, as well as 
everyone's written testimony on the panel. And let me just 
publicly thank the Milken Institute for your work, not only in 
the public capital markets, but for the work you are doing to 
try to expand ownership for the millions of Americans who work 
for private companies, which has grown so much over the last 40 
years because of what we are talking about today, which is 
there are so many cost barriers to going public. Thanks for 
your time, and I yield back, Madam Chairwoman.
    Chairwoman Wagner. The gentleman yields back. I think that 
completes our questioning today. I want to thank the 
subcommittee for very robust participation, and I would like to 
thank our witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 11:50 a.m., the hearing was adjourned.]

                            A P P E N D I X



                             March 9, 2023
                             
                             
                             
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