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


                     A ROADMAP FOR GROWTH: REFORMS
                     TO ENCOURAGE CAPITAL FORMATION
                      AND INVESTMENT OPPORTUNITIES
                           FOR ALL AMERICANS

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 19, 2023

                               __________

       Printed for the use of the Committee on Financial Services      
   
                           Serial No. 118-14
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________
                               
                               
                           U.S. GOVERNMENT PUBLISHING OFFICE
52-392 PDF                        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:
    April 19, 2023...............................................     1
Appendix:
    April 19, 2023...............................................    37

                               WITNESSES
                       Wednesday, April 19, 2023

Brooks, Brandon, Founding Partner, Overlooked Ventures...........     4
Lubin, Melanie Senter, Commissioner, Maryland Securities 
  Division, Office of the Maryland Attorney General, testifying 
  on behalf of the North American Securities Administrators 
  Association (NASAA)............................................    10
Sampson, Rodney, CEO and Co-Founder, Opportunity Hub, Inc........     5
Trotter, Joel H., Partner, Latham & Watkins LLP..................     7
Ward, Henry, CEO & Co-Founder, Carta, Inc........................     8

                                APPENDIX

Prepared statements:
    Brooks, Brandon..............................................    38
    Lubin, Melanie Senter........................................    47
    Sampson, Rodney..............................................    91
    Trotter, Joel H.,............................................    98
    Ward, Henry..................................................   131

              Additional Material Submitted for the Record

McHenry, Hon. Patrick:
    Written statement of the American Securities Association.....   139
    Written statement of the Biotechnology Innovation 
      Organization...............................................   142
Waters, Hon. Maxine:
    Written responses to questions for the record submitted to 
      Commissioner Lubin, Mr. Sampson, Mr. Trotter, and Mr. Ward.   148

 
                     A ROADMAP FOR GROWTH: REFORMS
                     TO ENCOURAGE CAPITAL FORMATION
                      AND INVESTMENT OPPORTUNITIES
                           FOR ALL AMERICANS

                              ----------                              


                       Wednesday, April 19, 2023

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 2128, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Sessions, 
Huizenga, Hill, Mooney, Steil, Meuser, Garbarino, Lawler, Nunn, 
Houchin; Sherman, Vargas, Gottheimer, Casten, Nickel, Lynch, 
and Cleaver.
    Ex officio present: Representative McHenry.
    Also present: Representative Foster.
    Chairwoman Wagner. The Subcommittee on Capital Markets will 
now come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``A Roadmap for Growth: 
Reforms to Encourage Capital Formation and Investment 
Opportunities for All Americans.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    First, I would like to thank you all for joining us today. 
It was a pleasure to meet all of you prior to this hearing, as 
we bring our four-part capital formation series to a close. As 
I outlined in the previous three hearings, I have heard from 
small businesses, the absolute backbone of our economy, and we 
must ensure that our markets are working efficiently and 
effectively to provide companies access to the capital that 
they need to innovate, to grow, and to create jobs.
    To accomplish that goal, we must also ensure a regulatory 
framework that is streamlined and not overly-burdensome. As we 
have heard throughout our capital formation hearings, a 
framework that fails to, I will say right-size regulation, will 
stifle innovation. It will limit wealth-creating opportunities 
for investors and prevent small businesses from reaching their 
potential.
    Over the past several months, we have had the opportunity 
to hear from a range of experts and stakeholders on the ways in 
which Congress can help promote economic growth and investment. 
At our first hearing, we heard how our private markets have 
been reserved for the wealthiest Americans. Our witnesses also 
shared insights into the challenges that entrepreneurs face 
when raising capital, and identified some of the senseless 
regulations that limit their pool of investors. Their testimony 
proved the need for commonsense reforms that expand wealth-
creating opportunities to those Americans who have effectively 
been relegated to the sidelines.
    Our second hearing was on the critical role of small 
businesses and entrepreneurs in driving economic growth and job 
creation in the United States. We discussed several ways to 
reduce obstacles, and our witnesses identified policies to 
promote capital formation for small businesses across the 
country. From this discussion, it became clear that Congress 
must do more to enhance the ways in which small businesses 
raise capital in our markets.
    At our third hearing, we focused on the role of public 
markets in promoting economic growth and investment. We found 
that many companies are delaying their initial public offerings 
(IPOs) or are remaining private to avoid unreasonable 
regulatory and disclosure obligations. Witnesses also discussed 
their concerns with declining IPOs, a reduction in the number 
of publicly-traded companies, and the impact of these trends on 
investors and, I would say, the broader economy. Their 
testimony underscored the need for proposals that again, right-
size regulation, making public markets more attractive without 
compromising investor protection.
    As we begin our final hearing, it is clear that these 
issues are deeply interconnected. Expanding investment 
opportunities for all Americans, improving access to capital 
for small businesses, and strengthening our public markets are 
all critical components of a healthy and vibrant economy. As we 
look ahead, there is much work to be done to ensure that our 
capital markets are functioning efficiently and effectively for 
all Americans. This includes supporting policies that promote 
investment, encourage innovation, and remove unnecessary 
regulatory burdens.
    Thank you again to my colleagues and today's witnesses for 
joining us in this important undertaking. Your insights and 
contributions are invaluable, and I think we all look forward 
to today's discussion.
    I am now pleased to recognize the ranking member of the 
subcommittee, Mr. Sherman of California, for 4 minutes for an 
opening statement.
    Mr. Sherman. This is our fourth subcommittee hearing on the 
most-important thing that financial institutions and capital 
markets do, which is provide capital for businesses, 
particularly small, medium-sized, and growing businesses. Most 
mainstream businesses turn to banks for loans, and they are 
increasingly not getting those loans because our system, 
presided over by the regulators and this committee, is tilted 
against banks making business loans. We saw what happened with 
Silicon Valley Bank. They didn't go bad because they made bad 
business loans; they went under because of their bad bond 
investments. So, what are the problems?
    First, credit unions face severe and unjustified limits on 
making any business loans at all. Second, the Current Expected 
Credit Losses (CECL) accounting system brutally and 
unjustifiably penalizes any bank that does make a business 
loan. If a bank creates a portfolio of business loans by making 
highly-profitable, very-secure business loans, it must still 
list those loans on its balance sheet at less than par.
    Third, the rival to making business loans for a bank is 
investing in securities, chiefly bonds, and our system rewards 
banks by a bizarre accounting system. If they list these bonds 
as held-to-maturity and the bonds happen to go down in value, 
well, heads, I win, tails, no bet. You can still list those 
bonds on the balance sheet at par, even though they aren't 
worth par. But if the bonds go up in value, the bank simply 
sells one group of bonds, replaces them with another group of 
bonds, and puts the gain right there on the balance sheet.
    Finally, we have a system where business development 
companies (BDCs) are unduly penalized by the SEC because those 
mutual funds that invest in BDCs are penalized by having to 
show wrongful overstatement of their costs. And that is why, 
Madam Chairwoman, I am glad you have included in the bills we 
are considering today the bill I introduced, along with 
Representative Huizenga, to change this bias.
    The other avenues for businesses to get capital are 
partially foreclosed by unjustified laws, so businesses will 
often turn to private placements. Critical to a private 
placement is the definition of, ``accredited investor.'' I 
agree with the Majority that our current definition is unfair 
and illogical. It should be replaced by a definition that does 
two things: first, it doesn't include or allow a private 
placement in which any individual credited investors put more 
than 5 or perhaps 10 percent of their net worth in any one 
offering, or more than 50 percent of their net worth in all 
private offerings; and second, it makes sure that accredited 
investors have expertise, or have truly independent advisors 
who have the expertise to evaluate the investment.
    I agree with the Majority that simply saying somebody has a 
million dollars in net worth, therefore, they are accredited, 
is unfair to those who don't have a million dollars in net 
worth, and ridiculously complimentary to assume that anybody 
with a million bucks is sophisticated and knowledgeable.
    Finally, in defining the difference between a public and a 
private company, Congress set the limit at a very generous 
2,000 shareholders. But the SEC, in counting shareholders, uses 
a funny math in which you can have thousands and thousands of 
shareholders and still be under the 2,000 limit, and we will 
explore that during my question time. I yield back.
    Chairwoman Wagner. We will now turn to our witnesses.
    First, Mr. Brandon Brooks. Mr. Brooks is a founding partner 
at Overlooked Ventures, a venture capital fund investing in 
historically-overlooked founders. Additionally, he is the 
founder of Zinsu, a platform to increase efficiency in the 
entrepreneurial ecosystem. Prior to Zinsu, and Overlooked 
Ventures, he started the first Black-owned crowdfunding 
platform in the U.S.: Inventrify.
    Second, Mr. Rodney Sampson. Mr. Sampson serves as the 
executive chairman and CEO of Opportunity Hub, which he founded 
in 2013 in Atlanta, Georgia. Today, Opportunity Hub is a 
business and foundation with an ecosystem-building venture 
fund. It is a leading technology startup and venture ecosystem-
building platform created to ensure that everyone has equitable 
access to the future of work.
    Third, Mr. Joel Trotter. Mr. Trotter is a partner at Latham 
& Watkins, and the co-chairman of the Latham & Watkins National 
Office, a central resource for clients and Latham lawyers 
facing complex issues arising under the U.S. securities laws. 
Mr. Trotter was a leading member of the IPO Task Force, and 
served as a principal author of the IPO-related provisions of 
the JOBS Act in 2012.
    Fourth, Mr. Henry Ward. Mr. Ward is a co-founder and CEO of 
Carta, an organization that helps issuers, investors, and 
employees manage and value equity ownership from idea to IPO. 
Carta is trusted by more than 30,000 companies, over 5,000 
investment funds, and half-a-million employees for cap table 
management, compensation management, liquidity venture capital 
solutions, and more. Carta's liquidity solutions have returned 
$13 billion to shareholders in secondary transactions.
    And last, but certainly not least, we have Commissioner 
Melanie Senter Lubin. Commissioner Lubin was appointed in 1998 
by the Maryland Attorney General as a Maryland Securities 
Commissioner for the Securities Division. In September of 2021, 
Ms. Lubin began her 1-year term as the 104th president of the 
North American Securities Administrators Association, the 
oldest international organization devoted to investor 
protection and responsible capital formation.
    I want to thank each 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. Brooks, you are now recognized for 5 minutes for your 
oral remarks.

   STATEMENT OF BRANDON BROOKS, FOUNDING PARTNER, OVERLOOKED 
                            VENTURES

    Mr. Brooks. Thank you. Good afternoon, esteemed members of 
the House Financial Services Committee. I stand before you 
today as a representative of the voiceless, the marginalized, 
the overlooked, and the underestimated. I stand before you to 
speak on behalf of the forgotten founders who were never given 
a chance to showcase their potential and the hard-working 
people who were being shut out of investment opportunities 
because they don't belong to the elite class of the wealthy.
    Today, I bring a message of hope and a call to action. The 
time has come to break down the barriers that have held back 
our economy and empower the next wave of American innovation. 
The time has come to put the American Dream back within reach 
of all those who seek it.
    It is time for IPO reform, support for overlooked founders, 
and safer investment opportunities for non-wealthy investors, 
and if you don't act now, the consequences will be dire. The 
American Dream will become nothing but a distant memory, and 
the economic gap between the haves and the have-nots will grow 
wider than ever before, but together we can make a change. 
Together, we can create a better future for all Americans. 
Thank you for your attention.
    According to a report by the National Venture Capital 
Association, the number of IPOs has declined by more than 38 
percent since 2014. This decline is troubling because IPOs 
provide a critical source of capital for companies to grow and 
expand. By going public, companies can access a larger pool of 
investors and raise the capital they need to expand the new 
products, hire more employees, and expand in the new markets. 
But going public is a daunting process for many companies, 
especially the smaller ones. It is expensive, time-consuming, 
and comes with a host of regulatory requirements that can be 
overwhelming. That is why we need to make it easier and more 
attractive for companies to go public.
    The reality is that many talented entrepreneurs don't have 
access to the resources and networks they need to start and 
grow successful companies. Women, Black founders, and people 
who exist outside the lines of the traditional startup 
ecosystem, in particular, face significant barriers when it 
comes to accessing capital and building the networks that are 
necessary for success. To address this, we need to create more 
opportunities for overlooked founders to access capital and 
build networks.
    Finally, we need to make it easier for everyday Americans 
to invest in the future of our economy. The reality is that 
most Americans are excluded from investing in early-stage 
companies because they simply don't have the financial 
resources to do so. To address this, we need to create more 
opportunities for non-wealthy investors to invest in early-
stage companies.
    In conclusion, we are at a crucial moment in our nation's 
history. The old rules no longer work and the status quo is 
holding us back, but we have an opportunity to chart a new 
course, one that empowers overlooked founders, opens up 
investment opportunities to all, and drives economic growth for 
all Americans. It won't be easy and it won't happen overnight, 
but if we have the courage to act, we can create a future that 
is more just, more prosperous, and more equitable for all. 
Bless you, and thank you all.
    [The prepared statement of Mr. Brooks can be found on page 
38 of the appendix.]
    Chairwoman Wagner. That's very kind of you, Mr. Brooks. 
Thank you.
    Mr. Sampson, you are now recognized for 5 minutes to give 
your oral remarks.

 STATEMENT OF RODNEY SAMPSON, CEO AND CO-FOUNDER, OPPORTUNITY 
                           HUB, INC.

    Mr. Sampson. Good afternoon, Chairwoman Wagner, Ranking 
Member Sherman, and members of the subcommittee, and thank you 
for the opportunity to appear before you today. I am humbled to 
have my wife, Shanterria Alston Sampson, and our children here 
with us as well.
    Today, I am here as a pioneer and a stakeholder in our 
nation's Black technology startup and venture ecosystem, an 
ecosystem that I have been a part of building from the ground 
up as a founder, investor, and ecosystem builder for nearly 23 
years. And in the last decade as the co-founder, executive 
chairman, and CEO of Opportunity Hub, the nation's leading 
innovation, entrepreneurship, and investment ecosystem-building 
organization created to ensure that everyone, everywhere, has 
equitable opportunities in the fourth industrial revolution and 
beyond as a path to creating new multi-generational wealth with 
no reliance on pre-existing multi-generational wealth.
    Twenty-three years ago, I co-founded my first technology 
startup company in Atlanta, Georgia. This was my first 
introduction to the venture capital and angel investing 
ecosystem, and I learned very fast that access to early-stage 
private capital in America was not equal. In our era, there 
were only three Black technology founders who had raised 
millions in venture capital for their startups: Omar Wasso at 
BlackPlanet.com, Clarence Wooten at ImageCafe.com, and me at 
Multicast Media Technologies and Streamingfaith.com. As a note 
of outcome, all three of our companies were successfully 
acquired.
    In 2021, Harlem Capital reported that less than 1,000 Black 
and Hispanic startups had ever raised over $1,000,000 in angel 
and venture capital in American history. When juxtaposed to the 
over 15,000 startup investments that were consummated in 2021, 
and again in 2022, according to a report by Pitchbook and the 
National Venture Capital Association, the amount of capital 
invested in socially- and economically-disadvantaged 
individuals who have experienced institutional, personal and 
interpersonal racism, discrimination and bias in the American 
startup ecosystem is dismal, negligible, and shameful.
    In my 2021 report entitled, ``Building Racial Equity in 
Tech Ecosystem To Spur Local Recovery,'' published by the 
Brookings Institution, where I serve as a nonresident senior 
fellow, I point out that approximately $26 billion annually 
should be going to the Black technology, startup, and venture 
ecosystem to build tech hubs in hundreds of American cities to 
rapidly upskill millions for existing software, sales, cyber, 
new energy, and AI technology careers; incubate thousands of 
new high-growth ventures leveraging edge technologies, and back 
them with the early startup capital to hire build, go to 
market, sell, and grow.
    Ecosystem-building organizations like Opportunity Hub, 
venture capital firms like 100 Black Angels & Allies Fund, and 
angel investors like my wife and I are exhausted from asking 
the existing private markets to invest in the thousands of 
brilliant Black technologists, operators, and founders who are 
a part of our growing ecosystem. Outside of the performative 
pitch competitions and diversity announcements of 2020, no 
consistent private commitment exists to fund Black-founded 
early-stage startups, venture funds, tech hubs, incubators, 
accelerators, upskilling schools, and ecosystem-building 
organizations at scale.
    The current relevant public sector commitments, like the 
State Small Business Credit Initiative (SSBCI), EDA's Build 
Back Better Regional Challenge, Regional Tech Hubs, and NSF 
Engines in the CHIPS and Science Act, are very exciting for 
overall global American innovative competitiveness. Yet, there 
is little hope in the Black technology startup and venture 
ecosystem that this funding will actually make it to America's 
overlooked and under-invested communities with any sizable 
traction or scale.
    The Black technology ecosystem has started to innovate from 
within. When possible, we invest in each other's companies and 
initiatives. Opportunity Hub created the Black Technology 
Ecosystem Investors Certificate in collaboration with the 
University of North Carolina, Duke, Stanford, and The Links, 
Incorporated. To date, nearly 50 Black affluent and accredited 
men and allies have been certified. Imagine this certificate in 
collaboration with FINRA as a path towards accreditation.
    In closing, I would like to thank you for your time. If we 
do not get on the capitalization tables of these startups that 
are transforming society as we meet today, we will have future 
generations in America of haves and have-nevers. Thank you.
    [The prepared statement of Mr. Sampson can be found on page 
91 of the appendix.]
    Chairwoman Wagner. Thank you very much, Mr. Sampson. Mr. 
Trotter, you are now recognized for 5 minutes to give your oral 
remarks.

  STATEMENT OF JOEL H. TROTTER, PARTNER, LATHAM & WATKINS LLP

    Mr. Trotter. Good afternoon, and thank you, Chairwoman 
Wagner, Ranking Member Sherman, and members of the 
subcommittee. It is a pleasure to be here today appearing 
before you. Based on my experience as part of the IPO Task 
Force leadership, I am pleased to share my perspectives on 
reforms to encourage capital formation and investment 
opportunities.
    The JOBS Act of 2012 is a bipartisan success story and a 
model for the innovative solutions we are now considering. By 
an overwhelming bipartisan majority, Congress enacted the IPO 
Task Force On-Ramp proposal as Title I in the JOBS Act, and 11 
years ago this month, President Obama signed it into law. Title 
I has been called the most-successful title in the JOBS Act, 
and academic research has demonstrated that the on-ramp 
provision significantly increased IPO volume overall. We should 
encourage more IPO activity. The research of the IPO Task Force 
showed that companies that go public experience more than 90 
percent of their job growth after their IPO.
    Today, however, public companies face higher compliance 
burdens than ever before. And the SEC has formally acknowledged 
that when its rules increase the cost of being a public 
company, that discourages some companies from accessing the 
public markets. For this reason, the JOBS Act offers an 
important series of lessons for successful bipartisan 
legislation. I will highlight four of these lessons.
    First, find small changes that will have a big impact. The 
IPO On-Ramp comprised multiple small changes that had an 
outsized impact. Together, these changes streamlined the IPO 
process, and made it easier to transition to public company 
status.
    Second, use a balanced approach that scales the regulatory 
burden to accompany size and maturity. The IPO On-Ramp concept 
allowed the regulatory burden to scale to the size of the 
company, a simple, but powerful concept borrowed from SEC 
rules. In the debate over more versus less regulation, this is 
a compelling way forward rather than more versus less 
securities regulation, a balanced regulation that scales over 
time. This approach encourages IPO activity while maintaining 
the existing and continuously-increasing level of securities 
regulation for mature public companies.
    Third, remember that the innovations under consideration 
will not reduce the demanding and rigorous liability provisions 
of the Federal securities laws. The JOBS Act changed none of 
the robust anti-fraud provisions of the Federal Securities 
Laws. This is of paramount importance in understanding the 
limited nature of the changes. There is a long list of 
liability provisions and compliance obligations that apply to 
all public companies. They are extensive and rigorous, and they 
will remain undiminished by any of the proposals before you.
    Fourth, use self-executing statutory text that will become 
immediately effective and will not burden an already-busy 
agency. The IPO On-Ramp statutory text was self-executing 
rather than relying on SEC rulemaking. In this regard, the JOBS 
Act is a study in contrast.
    As I sat in the Rose Garden on April 5, 2012, I watched the 
IPO On-Ramp provisions become effective at the moment President 
Obama signed them into law. In contrast, other provisions of 
the JOBS Act required SEC rulemaking by specified deadlines, 
none of which were met.
    The Dodd-Frank Act of 2010 presents a similar dichotomy. 
The self-executing provisions were immediately effective, 
whereas the Dodd-Frank mandate for an executive compensation 
clawback rule will have taken 13 years to implement when the 
final rules become effective later this year.
    You have the ability and the opportunity to build on the 
success of Title I of the JOBS Act and the lessons that offers 
us today. Given the direct connection between capital formation 
and job creation, that opportunity is compelling. I welcome 
your questions.
    [The prepared statement of Mr. Trotter can be found on page 
98 of the appendix.]
    Chairwoman Wagner. Thank you very much, Mr. Trotter.
    Mr. Ward, you are now recognized for 5 minutes to give your 
oral remarks.

     STATEMENT OF HENRY WARD, CEO & CO-FOUNDER, CARTA, INC.

    Mr. Ward. Chairwoman Wagner, Ranking Member Sherman, and 
members of the subcommittee, thank you for the opportunity to 
be here. My name is Henry Ward, and I am the CEO and co-founder 
of Carta, a financial technology company that sits at the 
center of the innovation economy. I am proud to be here today 
as an advocate for the venture ecosystem, for the entrepreneurs 
who have an idea for the startups they create, for the 
investors who support them, and for the employees who build for 
them.
    Startups are America's innovation engine, and it is this 
venture ecosystem that allowed us to build Carta. We started 
Carta with the vision of connecting startups with their 
investors and employees by lowering barriers for companies to 
issue and manage equity. We launched our product in January of 
2014 with seven employees. Our first customer paid us $120. As 
an entrepreneur, you never forget the first time someone paid 
you for something you built. Today, we are 2,000 employees 
across 9 offices with $300 million in revenue. We continue to 
grow by supporting the founders that start companies and the 
investors that back them.
    I understand the words, ``venture capital,'' may not elicit 
the most positive response today, but I am here to remind us 
why entrepreneurs and the ecosystem that support them are vital 
to America's growth story and leadership in the world, and 
allow me to explain why.
    First, the venture ecosystem drives innovation and growth. 
Most of our innovative companies have been backed by venture. 
Apple was venture-backed. Uber was venture-backed. Amazon was 
venture-backed. Moderna was venture-backed. We take for granted 
what venture does for America's innovation and how it has 
transformed our lives. So much of the technology we use today 
is a direct product of startups and venture capital. America 
has driven every major technological innovation in the last 30 
years, not China, not Russia, not Europe, not Asia. It is one 
of the most important ways we lead the world, and most of that 
innovation has come out of the venture ecosystem, and we must 
not take that ecosystem for granted.
    Second, we can't make the venture model work better. 
Innovation requires time to build, experiment and scale, and 
uncertainty and volatility is inherent in building something 
new. The private markets provide patient capital with a 
tolerance for risk that allows entrepreneurs to transform 
concepts into companies. This is the innovation engine of 
America and it should not be limited to coastal regions. It 
should be accessible to more.
    Much of the criticism of venture--the concentration, lack 
of diversity, and exclusivity--are largely reflective of the 
private market regulatory framework. Let me give you two 
examples.
    First, the primary avenue to raise capital requires 
entrepreneurs to have, ``a preexisting relationship with an 
investor.'' This rewards those who are in the club and excludes 
those who are not. It creates a slanted system where it isn't 
what you know, but whom you know.
    Second, the accredited investor definition limits investing 
to the wealthy. This rule, coupled with the pre-existing 
relationship rule, makes things worse. It limits access to not 
just people you know, but only the rich people you know. If we 
want to democratize access to America's growth engine, we 
should take a hard look at this framework.
    Third and last, a thriving venture ecosystem is the future 
of public markets. A growing criticism is that private 
companies take too long to go public and that regulations 
should push companies public earlier. This is not a good idea 
for the company, the employees, the investors, or the public 
markets. Every entrepreneur dreams of building a company that 
goes public. When companies wait to go public, it is not 
because they don't want to; they wait because they are not 
ready to. Public markets have changed. Companies that went 
public 20 years ago could not go public today. The expectations 
for scale, quarterly predictability, resiliency of business 
model, and financial means have grown. For companies that have 
achieved this level of maturity, the public markets are a 
wonderful place, but for companies that have not, the public 
markets are unforgiving.
    We saw this recently with the Special Purpose Acquisition 
Companies (SPAC) craze, where many private companies were taken 
public prematurely. Those companies, employees, and investors 
were severely punished and they are now picking up the pieces. 
The answer to creating more public companies is not to make 
private markets more hostile but to make private markets work 
better. Doing so makes it easier to start companies, nurture 
their growth, and create the pipeline of tomorrow's great 
public companies. And that is why I am here today, to advocate 
for your involvement in creating a better framework for private 
markets and America's innovation economy.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Ward can be found on page 
131 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Ward. And Commissioner 
Lubin, you are now recognized for 5 minutes to give your oral 
remarks.

   STATEMENT OF MELANIE SENTER LUBIN, COMMISSIONER, MARYLAND 
 SECURITIES DIVISION, OFFICE OF THE MARYLAND ATTORNEY GENERAL, 
     TESTIFYING ON BEHALF OF THE NORTH AMERICAN SECURITIES 
               ADMINISTRATORS ASSOCIATION (NASAA)

    Ms. Lubin. Good afternoon, Chairwoman Wagner, Ranking 
Member Sherman, and distinguished members of the subcommittee. 
My name is Melanie Lubin. I am a 36-year veteran of the 
Division of Securities within Maryland's Office of the Attorney 
General, and of the North American Securities Administrators 
Association (NASAA). Last year, I served as NASAA's president. 
Since 2015, I have also served as NASAA's non-voting 
representative to the Financial Stability Oversight Council 
(FSOC).
    State securities regulators play several vital roles in 
responsible capital formation. For example, many of our 
regulators support the business community by working with local 
organizations to conduct seminars for small businesses by 
responding regularly to capital-raising inquiries, and by 
maintaining websites devoted to capital formation resources. We 
also protect and educate investors working to build secure 
financial futures. At the end of the day, our work helps to 
ensure the integrity and efficiency of the capital markets that 
power our economy.
    Today, we are examining legislation that is intended to 
help entrepreneurs and small businesses to increase 
opportunities for investors and to strengthen public markets. 
NASAA supports these laudable goals. Unfortunately, we 
respectfully submit that many of the proposals under discussion 
today are counterproductive to our collective efforts to 
achieve these goals. In particular, we urge Congress to reject 
proposals that would take away certain longstanding State 
authorities to promote responsible capital formation, including 
the Small Entrepreneurs' Empowerment and Development Act of 
2021 (SEED Act), the Improving Crowdfunding Opportunities Act, 
the Restoring the Secondary Trading Market Act, and the 
Unlocking Capital for Small Businesses Act.
    If these preemption bills were to become law, State 
Governments likely would reduce funding for the great work that 
State securities regulators are doing to empower entrepreneurs 
to understand their capital-raising options and avoid 
compliance mistakes. Meanwhile, Congress would not increase 
resources for the Federal Government to fill the regulatory and 
boots-on-the-ground gaps created by preemption.
    At the same time, we believe there are proposals under 
discussion today that should be pursued. By way of example, 
NASAA endorses the Promoting Opportunities for Non-Traditional 
Capital Formation Act, which lawmakers noticed for today's 
hearing. This legislation would expand the functions of the 
Office of the Advocate for Small Business Capital Formation at 
the SEC and require meetings with State securities regulators 
at least annually. In addition, we endorsed the legislation 
under discussion that would direct the SEC to revise their 
definition of, ``accredited investor,'' to exclude retirement 
accounts from the net worth calculation used to determine 
eligibility. At NASAA, we firmly believe that we all need to 
heed the lessons learned from the past JOBS Act.
    Importantly, it would be a net negative for everyone to 
continue down a de-regulatory path in which we further expand 
the private securities markets at the expense of the public 
markets. These private markets are rife with scams and frauds 
because of their lack of transparency. These frauds or, rather, 
their consequences, typically affect not only the harmed 
investors but also the hardworking Americans who hear about 
events like the FTX collapse and begin to question the wisdom 
of participating in our markets.
    As we heed these lessons learned, we need to refine the 
securities regulatory framework so that it better balances the 
needs of entrepreneurs and retail investors. I expect that we 
all agree that entrepreneurs are not automatically entitled to 
the hard-earned money of Americans. I expect that we also agree 
that retail investors are entitled to disclosure. In turn, we 
should all work together to refresh the regulatory framework in 
ways that better reflect these principles.
    In closing, I want to emphasize that we understand and 
share the same goals as the Members of Congress who support 
robust public markets. State securities regulators want to 
continue helping entrepreneurs and small businesses. We also 
want to increase opportunities for investors and strengthen 
public markets. I look forward to answering your questions 
today. Thank you very much.
    [The prepared statement of Commissioner Lubin can be found 
on page 47 of the appendix.]
    Chairwoman Wagner. Thank you, Commissioner Lubin.
    We will now turn to Member questions, and the Chair 
recognizes herself for 5 minutes.
    Mr. Trotter, last year, the U.S. IPO market reached one of 
its lowest points on record. In fact, the U.S. has recently 
recorded several of its worst years on record for IPOs, as the 
cost to go public has more than doubled since the 1990s. In 
addition, regulatory burdens on public companies, along with 
the ongoing compliance costs for publicly-traded companies, are 
likely to continue to rise, especially if the SEC continues to 
finalize burdensome rules, such as the climate rule.
    Mr. Trotter, as a leading member of the IPO Task Force and 
principal author of the IPO-related provisions of the JOBS Act, 
please explain how the policies in our capital formation 
package will help make our public markets more attractive?
    Mr. Trotter. They will build on the success of the JOBS 
Act. They have all of the four ingredients that I outlined in 
my opening remarks. And it is critical to help for purposes of 
fostering IPO activity and making it easier to go public and 
encouraging job creation, to streamline the IPO process, and to 
continue to build on the success of past legislative reform. We 
have seen that it helps a lot. You can put together a 
collection of small changes that have a big impact in 
combination. And you can approach the streamlining process 
using scaled disclosure, a balanced approach that cuts through 
the debate of more versus less, and you can do all that and 
make a meaningful impact in fostering IPO activity. So, we need 
more of that. We have had over a decade, 11 years of successful 
experience. It is time to build on that and do more.
    Chairwoman Wagner. Yes. And as you know, Mr. Trotter, SEC 
rules allow all issuers to test the waters with qualified 
institutional buyers and institutional accredited investors, 
either prior to or following the filing of a registration 
statement, to gauge potential interest in a contemplated 
registered security offering. Prior to the IPO, SEC staff 
reviews test-the-water materials to make sure that the 
information is consistent with the information presented in the 
company's registration statement.
    Would requiring issuers to include test-the-waters 
materials, such as slide decks, in their S-1 registration 
statement be unnecessary and potentially harmful to both 
investors and issuers?
    Mr. Trotter. It would be not only unnecessary, but a 
terrible step backward, and let me explain why. Testing the 
waters was implemented through Section 5(d) and its power is in 
its simplicity. It cuts through a problem, a communications 
restriction that made sense in 1933 but makes no sense in 2023, 
and that is, you need to be able to communicate with 
prospective investors about your potential IPO. And the 
investor protection that is included in 5(d), which implemented 
testing the waters is based on the audience, so communicate 
away, as long as you are speaking with institutional accredited 
investors and qualified institutional buyers. And Section 
163(b) recognized the success of that and expanded it to all 
issuers. If you destroy the simplicity of that by loading it up 
with additional requirements, again, it is just going to be a 
step back.
    Chairwoman Wagner. My bill in our capital formation 
package, the Encouraging Public Offerings Act, aims to simply 
codify the current SEC rules allowing issuers to test the 
waters prior to an IPO.
    Mr. Trotter, would requiring these testing-the-waters 
materials to be filed as part of a company's registration 
statement represent a significant step backwards, even if done 
in conjunction with codifying the current rules. Yes or no?
    Mr. Trotter. Yes.
    Chairwoman Wagner. Thank you. Mr. Ward, millions of 
investors rely on closed-end funds as an important source of 
retirement savings and for investment opportunities. However, 
the SEC's 15-percent limitation on a closed-end funds 
investment in the private markets effectively denies retail 
investors access to the private markets. Given that closed-end 
funds are strictly regulated and professionally managed, do you 
think it is appropriate to limit their investment in the 
private market and exclude so many Americans from potential 
high-growth opportunities?
    Mr. Ward. I think the closed-end funds are a very 
responsible way to give retail investors exposure to private 
assets. There is a lot of portfolio theory and modern financial 
theory on how much you should diversify a fund and investments 
across different asset classes. I think that should be the 
North Star of how the individual fund managers decide how much 
to allocate into illiquid or private market assets on behalf of 
their investors. As part of their fiduciary responsibility, it 
doesn't make sense to me that it would be a regulatory number 
that decides how to diversify a portfolio.
    Chairwoman Wagner. Thank you. I am out of time, but I have 
so many more questions.
    I now recognize the distinguished ranking member of the 
subcommittee, Mr. Sherman, for 5 minutes for questioning.
    Mr. Sherman. It is frustrating to see people get rich when 
they invest in just one thing, and you wish it had been you. 
But keep in mind, I would like to think I would have invested 
in Apple, but I might have invested in pear or in banana or in 
kumquat and lost all my money. Wages are too low, most 
Americans are living close to paycheck to paycheck, and, 
frankly, people shouldn't be investing in private offerings 
until they have several months of living expenses in the bank.
    That being said, a system in which to be an accredited 
investor means you are a millionaire, in other words, if you 
are not a millionaire, you can't invest, is hard to defend, and 
I would not try. But keep in mind, the professionals who do 
this, the venture capitalists say you are going to lose money 
on 9 out of every 10 investments and make it all back hopefully 
on the 10th. If you can't afford to lose money 9 out of 10 
times, this may not be the market for you.
    If you are trying to raise money to run your business, you 
have a tendency to look at each element of investor protection 
as a barrier to you doing what you need to do for your 
business, but ultimately, if you don't have investor protection 
in the economy, you don't have investors. Investor protection 
is not the antithesis of capital formation; it is a necessary 
antecedent.
    Mr. Trotter, you have a good point when you say that we 
ought to pass laws that become effective immediately. I think 
we should do that, but then we should give the SEC the right to 
make modifications by regulation. The chairwoman pointed out 
that a statistic that it now costs twice as much to go public 
as it did in the 1990s. But tomatoes are 5 times as expensive 
as they were in the 1990s. I don't know if that number is 
inflation-adjusted. I do know that the biggest cost in going 
public is what you give the underwriter for selling the 
investment rather than the governmental costs.
    Does anybody know, on an inflation-adjusted basis, if the 
cost to prepare, not the underwriters fee, but the cost to 
prepare the going public document, has more than doubled or has 
even gone up at all? I am looking for a witness to raise their 
hand. I don't see one, so I will invite you all to respond for 
the record, and go on to another question.
    At least the way Congress wrote the law, once a company has 
2,000 beneficial owners, it is a public company, and yet we 
have a circumstance where you can have hundreds of owners all 
use the same street name. I am at Merrill Lynch. Merrill Lynch 
may have 500 of us who have invested in one company. It is 
listed as just one. That is kind of an absurd definition of 
private company that has 5,000 or 10,000 different beneficial 
owners. Now, when I say, ``beneficial owner,'' I mean the 
entity. For example, in Mr. Smith's estate, he may have eight 
children. I am counting Mr. Smith's estate as one beneficial 
owner even though there are eight descendants who benefit.
    Ms. Lubin, does it make any sense to count each street name 
as just one beneficial owner? Can we, as a practical matter, 
make sure that in street name-listed securities ownership, we 
identify how many beneficial owners there are?
    Ms. Lubin. Thank you for that question. I think you are 
exactly right. I think it is antithetical to the idea that 
there is one public company, but then if you just count the 
broker-dealer that lists the name, you can have thousands and 
thousands of shareholders underneath that, and you are only 
counting them as one shareholder.
    Mr. Sherman. I would point out that the SEC hasn't done its 
job in defining it, and even worse, some of my colleagues want 
to lock in and prohibit the SEC from changing how it counts.
    Ms. Lubin, does it make any sense to say you are an 
accredited investor just because you have a million-dollar net 
worth, and that if you don't have a million-dollar net worth, 
you are not accredited? And when I say, ``million-dollar net 
worth,'' or, ``a quarter-million-dollar income,'' then I know 
there are some adjustments.
    Ms. Lubin. Thank you for that. The accredited investor 
definition is complicated, and it is being looked at by the 
SEC, and there are a lot of different standards. I think there 
are a lot of proposals on the table to take a look at it, the 
net worth, the income level, could an independent adviser help 
someone who has no conflicts or their possible--
    Mr. Sherman. My time has expired. I will ask you to respond 
at greater length for the record.
    Ms. Lubin. Okay. Thank you. We would be happy to do that.
    Chairwoman Wagner. The Chair now recognizes the Chair of 
the full Financial Services Committee, the gentleman from North 
Carolina, Chairman McHenry, for 5 minutes.
    Chairman McHenry. I want to thank the Chair for yielding, 
and I want to thank the panel for being here. You have all 
testified before in different environments. Mr. Trotter, thank 
you for your work on the original JOBS Act, in particular. And 
thank you all for your help in reviewing the legislation that 
has been put forward before this committee, some bipartisan, 
most bipartisan, and some that don't have full bipartisan 
support, but I am grateful for that.
    I want to continue the theme that the ranking member had 
with you, Mr. Sampson, about accredited investors. Right now, 
we have income thresholds of net worth of over a million 
dollars and very high-income threshold for folks to be 
considered an accredited investor. My question for you is, do 
you think that unfairly represents or fairly represents 
people's capacity to invest, and what are the economic impacts 
of that accredited investor standard and the limitations 
thereof?
    Mr. Sampson. Thank you for the question. Just because 
someone has the ability to generate a million dollars, perhaps 
as an entertainer, as a professional football player, or even a 
professional, does not mean they have the sophistication to 
look at this asset class, and it does not mean they have the 
sophistication to make a decision on understanding the risk 
outside of them, perhaps being able to afford the risk. When 
you look at the lack of capital contextually that has gone to 
Black founders in an asset class, that is maybe 50- to 60-
years-old, but if you look at the last 20 years or so, less 
than 1 percent going to Black founders in particular, the 
current framework is not working for all Americans.
    I know the devil may be in the details and there may be 
some nuances to kind of reach bipartisanship, but we have to do 
something. And I don't see a lot of legislation stopping folks 
from buying Yeezys, or flying to Vegas and purchasing non-
appreciating assets. Yet, if I want to invest in my fraternity 
brother, my classmate that I know, and I have some knowledge on 
the particular industry of this particular offering, I think 
there should be an opportunity to invest.
    Think about the professionals who come into entry-level 
careers, or even the gig workers or the suppliers who are 
contractors to those respective companies. They work for 5, 10, 
15, 20, or 30 years and they leave with a fake gold watch, 
never having been given the opportunity to actually invest 
$100, $500, or $1,000. Maybe, there is a small equity package 
that they are given, but the multi-generational wealth creation 
is happening amongst the founders in the C-suite.
    So, if you really talk about democratizing access to wealth 
creation in the fourth industrial revolution, amending the 
definition to include people who may have been certified by 
some type of FINRA tests or some type of institutional test is 
incredibly important, or who have domain expertise in a 
respective supply chain industry and/or problem.
    Chairman McHenry. Austin, Boston, and Silicon Valley still 
have a disproportionate share of venture capital investment in 
this country. We have diverse founders who are being left 
behind, not because of any other reason than the statistics 
that are evident that we know this to be true. And this cannot 
simply be true that if you are born in the right ZIP Code in 
America, you have better ideas than if you are born in the 
wrong ZIP Code. That doesn't make a bit of sense. So, 
everything we can do to make sure that we link capital with the 
best ideas in our economy is going to be a useful thing. We can 
protect consumers absolutely, and we should. We should protect 
investors, but we should also give them the economic 
opportunity for the upside benefit as well. So, Mr. Sampson, 
thank you for speaking to that.
    Madam Chairwoman, I yield back. Thank you.
    Chairwoman Wagner. The gentleman from California, Mr. 
Vargas, is now recognized for 5 minutes.
    Mr. Vargas. Thank you very much, Madam Chairwoman, and 
Ranking Member Sherman. Again, I appreciate the opportunity.
    Now, this is a little odd for me, because normally the way 
it works is when the Democrats are in charge is we have the 
first four witnesses who testify basically saying what we 
believe, and then you have the Republican at the end basically 
saying what they believe. But since the Republicans are in 
charge now, normally you would have the first four basically 
stating the facts as the Republicans would believe, and then we 
would have the Democrats at the end basically saying what we 
believe. However, I found very little to disagree with in what 
was said, with most of what everybody said. There were some 
discrepancies, and I do want to probe them a little bit.
    And I would state at the outset that I do believe in 
disclosures, and I especially believe that ESG disclosures are 
material. I do like, again, where this is going on that. I will 
set that aside because that is one thing we just like to fight 
about here.
    But, Mr. Trotter, you said some things that were very 
interesting. First, you said that you have these basic four 
facts or four issues that are important. And second, you 
mentioned a balanced approach to scale regulatory burden to the 
size of the company. I think that is what you said. I don't 
want to put words in your mouth.
    Mr. Trotter. That is correct. I did say that.
    Mr. Vargas. Okay. And I think that what Commissioner Lubin 
said is, well, this has kind of taken us down a deregulatory 
path where we shouldn't go.
    Ms. Lubin. I did say that.
    Mr. Vargas. But there seems to be some logic in what Mr. 
Trotter said. It would seem to me that as the company is small, 
you wouldn't have to necessarily load it up with all of the 
burdens that you would want to load up on a larger company. For 
example, we do that with the banks. Obviously, if a bank is 
significant and it is going to have systemic issues, we want to 
do stress tests that are very important to make sure that we 
don't have massive failures. But if it is a community bank, we 
don't require all of that. We allow them to exist, but we don't 
require all of those regulations. There seems to be some logic 
to that. What do you think?
    Ms. Lubin. There are a lot of issues that we are trying to 
tackle and a lot of these issues become conflated. We have very 
small businesses on the one hand that we are trying to take 
care of, the mom and pops, the pizza shops, the beauty salons, 
and things like that, and those are very small businesses that 
are taken care of very adequately under provisions that we all 
have in our statutes. And there are some bills here that we 
don't like, that are going to give them--
    Mr. Vargas. Right, but let's move forward. It is the ones 
that are ready to go up to the IPO.
    Ms. Lubin. Right. There are some really big businesses 
right now, really large companies that are sitting in a space 
where they don't have to go public because they are so 
comfortable in the private market, when they really ought to be 
public companies. And they are the companies that everybody is 
lamenting, we have enough IPOs, we don't have big companies, 
and there isn't disclosure in the market. There isn't the 
information.
    Mr. Vargas. Right.
    Ms. Lubin. There aren't rules about the auditors. There 
aren't rules about third party--
    Mr. Vargas. I am going to interrupt you just for a second 
because I think you are taking this in a different direction 
than what I was asking. I am talking about companies that want 
to go to the IPO and want to be in the public side. That is 
what I am asking about. Obviously, there are large private 
companies that I think would benefit from going IPO, but they 
don't because they are comfortable because they have the 
backing that they need.
    Mr. Trotter, why don't you comment on this? It seems to me 
that it would make some sense for the smaller companies that 
want to go into this IPO.
    Mr. Trotter. Absolutely, and I will start with a comment 
that I have heard Ranking Member Sherman make in the past, 
which is, ``You can't give 404(b) relief.'' You can't give 
relief from the Sarbanes-Oxley internal controls audit 
requirement because then you are going to have more WorldComs 
and Enrons. WorldCom and Enron were mega cap companies. 
WorldCom had $30 billion in revenue. Enron had reported $100 
billion in revenue--$10 billion in revenue 4 years before it 
melted down, right? So, they would never have qualified as an 
emerging growth company. And this is exactly the point.
    If you had a time machine, and the JOBS Act existed 
previously, and Sarbanes-Oxley existed previously, they would 
have been mega cap companies. They would have had to comply 
with the full panoply of regulation exactly as you are 
describing, and a startup that is trying to enter a public 
company status gets relief. And it is based on an original SEC 
rule that says, when you initially go public, even if you are a 
mega cap on day one, you have until your second annual report 
before you have to comply with 404(b), even for the largest 
company. So, the idea of the IPO On-Ramp was, let's extend 
that. We did it for 5 years. It is time to extend it more.
    Mr. Vargas. My time is up, and I apologize because I had 
more questions with that. I thank you, and I yield back.
    Chairwoman Wagner. I appreciate it. The gentleman from 
Michigan, Mr. Huizenga, who is also the Chair of our 
Subcommittee on Oversight and Investigations, is now recognized 
for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman, and at the risk 
of appearing like I am picking a fight, which I am not trying 
to do, I can't let stand exactly what my friend from California 
seemed to be creating the image of, because I can tell you that 
back in February, we had a similar hearing on wealth creation 
and opportunity that specifically plumbed the depths of 
qualified investors. And a friend of mine, David Olivencia, who 
runs Angeles Investors, testified, along with Eli Velasquez, 
the founder and managing partner of Investors of Color, and a 
woman from Washington, D.C., named Omi Bell, who runs Black 
Girl Ventures. And we also had a Duke Law University professor, 
who literally, after they went through the opportunities that 
they could have had and how they had been stymied, sat at the 
end of that panel saying, in fact, these people shouldn't be 
able to invest. And I have to tell you, way too often, we have 
seen regulators, academics, and, yes, politicians who have 
said, no need to apply because you are not wealthy enough, and 
we don't think you are sophisticated enough.
    And Mr. Sampson, I know you have been here, and Mr. 
Trotter, Mr. Ward, and Mr. Brooks, I am going to ask you this 
question in the same good-natured way that I asked my friend, 
David Olivencia, and I hope you take it the same way he did. 
Are you a sucker, are you a dupe, because I can tell, based on 
your Twitter account, you are not. I looked you up. I retweeted 
you, by the way, because I know you are very excited about 
this, and hopefully, my 30,000 followers will be able to 
comingle with your 30,000 followers and vice versa. But I can 
tell you it is frustrating to me. It is frustrating to me when 
we have people saying, you know what, we are just not sure. We 
don't think you can really handle this.
    Mr. Ward, in your testimony, you said, ``Investors often 
turn to their local communities for support to get their ideas 
off the ground.'' And that is interesting, because in a 
subcommittee hearing, that February hearing that we had, I 
noted that of the 50-plus proposals from the Securities and 
Exchange Commission Chair on his regulatory agenda, none, zero 
of his proposals focused on supporting capital formation, none 
of them, let alone updating the definition of, ``accredited 
investors.'' And we are just having a chat up here, and there 
are rumors out there that they may even go in the opposite 
direction.
    So, I actually introduced the Accredited Investor 
Definition Review Act, which, among other things, would require 
the SEC to review the list of certifications, designations, and 
credentials for individuals to qualify as an accredited 
investor.
    Mr. Ward, quickly, what is your definition of a, 
``sophisticated investor?''
    Mr. Ward. I look at a sophisticated investor as someone who 
has unique expertise or knowledge in the area in which they are 
investing.
    Mr. Huizenga. Okay. Mr. Sampson, do you believe that the 
SEC has overstepped their authority by basically telling 
investors what and where they can invest?
    Mr. Sampson. I don't know if I would go as far to say they 
have overstepped it. I think there is definitely--
    Mr. Huizenga. Have they fostered that?
    Mr. Sampson. I think about some of the titles--Title VII of 
the JOBS Act actually created a diversity, equity, and 
inclusion officer, and some of the outreach they have done to 
underrepresented communities. I think they definitely tried. I 
have worked closely with the SEC throughout my tenure. I did 
want to say something really quickly to the gentleman, and I 
have jokingly said this to Congressman McHenry over the years--
we haven't agreed upon much politically, but I have been voting 
since 1991, since I was an undergraduate in New Orleans at 
Tulane University, and David Duke was running. We registered to 
vote so that David Duke wouldn't become governor, and I have 
voted Democrat all of my voting career. But when it comes to 
capital formation from the JOBS Act, to redefining the 
definition of an, ``accredited investor,'' and some of the 
other regulatory frameworks, I have agreed with the GOP on that 
in specific.
    Mr. Huizenga. To be honest, I am not concerned about 
whether you are a Republican, a Democrat, or an independent, or 
whether you are Black, White, or green. It doesn't really 
matter. It is about opportunity, freedom, and liberty, and way 
too often, you are seeing government get in the way of that, 
and I will finish with that. We don't want to see these rules 
hurt private companies seeking capital. My time is up, and I 
blew up my whole plan on what I was going to do, but I just 
felt that I couldn't let that stand.
    I want to say thank you all for what you are doing, what 
you are fighting for, and what you are standing for, because 
you are exactly the voices and the faces that we need to see, 
that the American people need to see, and that, frankly, Chair 
Gensler needs to see to make sure that we are going in the 
right direction. I yield back. Thank you.
    Chairwoman Wagner. And let the record reflect that Mr. 
Brooks was also applauding and giving a thumbs up.
    The gentleman from Missouri, Mr. Cleaver, is now recognized 
for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. Commissioner, I 
am curious about the type of population that the accredited 
investor definition intended to capture. What group are we 
trying to capture? What segment of our population is the 
accredited investor definition intended to seduce?
    Ms. Lubin. Thank you for the question. Originally, when Reg 
D was set up back in the early 1980s, less than 2 percent of 
the population qualified to be accredited investors. And the 
theory behind it was that investors who would be in a position 
to protect themselves, who had the wherewithal to lose the 
money if they were going to lose that investment money, would 
be putting their money into these private deals.
    Now, because the numbers have not been adjusted for 
inflation, the only real change to it that had a meaning over 
the past 40 years was to take the primary residence out of that 
calculation. It now covers 13 percent of the population. And 
some of these proposals will expand it well beyond that to a 
group when you think that a significant number of Americans 
only have $65,000 in their savings account, and that is all 
they have. It will expose significant money to the riskiest 
investments in the market.
    So, I understand that people should have freedom, but you 
don't get the phone calls I get on a regular basis. You don't 
see the arbitrations I see filed. You don't get the complaints 
we see where people are losing their money all the time. And 
this is their life savings that they are losing, people who do 
not have the ability to go in and re-earn the money that they 
have earned because they lose them in these kinds of 
investments. There are private deals. There is no backup. There 
is nobody else. There is no way for them to get their money 
back and replenish it, and the money is gone. The deals are 
gone, and they can't get it back. And the more these standards 
are liberalized, the more people are going to lose their money 
and not have the ability to get the money back.
    The problem with these deals is the more investors who get 
into them, they will not have any transparency. There is not 
going to be information. There is not going to be the ability 
to have a line of sight into the deals and see what the 
financials are, what the background is, what is really going on 
inside those businesses and have the ability. There are 
wonderful entrepreneurs. I saw the prior hearings. But there 
are also a lot of people out there who are interested in taking 
advantage of these investors.
    Mr. Cleaver. I want to follow up. Do you believe that the 
existing thresholds are accomplishing that?
    Ms. Lubin. Over all my years in the Securities Division, I 
think the existing thresholds at this point need to be 
adjusted. I think things like pulling out savings accounts, and 
adjusting the numbers up to reflect inflation is important. I 
think if you look at a lot of the bills that were noticed for 
this hearing, they were adjusting the numbers up for thresholds 
for the businesses, and giving them more leeway.
    Some of the billion-dollar businesses are being adjusted 
for inflation, so they continue to qualify for a lot of the 
standards and will continue to qualify. I think we should give 
the investors the same leeway and let their standards give them 
the protections they will get by adjusting their numbers, the 
same way we are giving the businesses the benefit of being able 
to be bigger and still qualify for some of the breaks that they 
get.
    Mr. Cleaver. So, you believe that lowering these standards 
will somehow accomplish the objective?
    Ms. Lubin. No. I think, actually, that we need to raise the 
standards for accredited investors so that they continue to 
have the protections that were originally intended. I think 
there are other things that we can do to maybe free up some of 
the requirements.
    Mr. Cleaver. My time is running out. Do you have any ideas 
on what we could do instead of lowering the threshold?
    Ms. Lubin. There are some other things that the SEC is 
considering, that I think we can talk about, and we would be 
happy to provide some additional information for you.
    Mr. Cleaver. Okay. Thank you.
    And thank you, Madam Chairwoman.
    Chairwoman Wagner. The gentleman from Wisconsin, Mr. Steil, 
is now recognized for 5 minutes.
    Mr. Steil. Thank you, Madam Chairwoman.
    Mr. Trotter, you are one of the creators of the IPO On-Ramp 
in Title I of the JOBS Act. And as Commissioner, a few of them 
noted last month, Title I is the most successful title in the 
JOBS Act, and significantly increases IPO volume overall. I 
have a handful of questions here, so if you can please be 
concise, why should policymakers be interested in increasing 
the volume of IPOs?
    Mr. Trotter. Because it is directly linked to job creation. 
Over 90 percent of a company's job growth when it goes public 
occurs after the IPO.
    Mr. Steil. Job creation in the United States of America. 
Title I created the emerging growth company construct, giving 
new and growing companies balanced regulation that scales over 
time. How should we quantify the cost savings that come with 
scaled emerging growth company (EGC) disclosures?
    Mr. Trotter. They are readily apparent to anybody who lives 
in the IPO ecosystem. I hear a lot of criticism from academia, 
and I hear criticism from lawyers who have never done an IPO, 
but for any IPO practitioner, it is readily apparent and makes 
a big difference. You don't have to present a third year of 
financial statements; you can go public with two. That is a 
meaningful cost savings. You are not subject to Sarbanes-Oxley 
404(b), which is a huge cost savings, at least a million 
dollars a year.
    Mr. Steil. So, significant cost savings--you reference that 
people do have criticisms of this, claiming that it will put 
investors at risk and all sorts of claims that we see out 
there. How do you respond to those criticisms?
    Mr. Trotter. That is my point number three in my opening 
remarks. Every public company, including every EGC, including 
any company after all of the things that are being proposed 
right now, is subject to immense liability and compliance 
obligations. None of that changes. That is why the doom and 
gloom is wrong because all of the liability remains intact.
    Mr. Steil. I agree. I think a lot of regulatory things are 
still intact. EGC is a great on-ramp for companies to create 
jobs here in the United States of America. Would you agree that 
existing qualification thresholds for EGC status should be 
revisited? Yes or no?
    Mr. Trotter. Absolutely, yes.
    Mr. Steil. I have a bill that addresses this. It would 
raise the EGC threshold so more companies can continue to 
benefit from the IPO On-Ramp that you helped build. How would 
this impact startups overall in the United States if we 
revisited that threshold?
    Mr. Trotter. Your bill would be a game changer. I highly 
recommend it.
    Mr. Steil. Thank you. Let me shift gears with you. I am 
going to stay with you though, if I can, Mr. Trotter. I have 
another bill regarding the Well-Known Seasoned Issuer (WKSI) 
status. Can you explain really quickly the WKSI status, and, in 
particular, the proposal to lower the public float threshold 
from $700 million to $75 million, that minimum companies would 
qualify for use of short-form registration. Would you support 
lowering the threshold from $700 million to $75 million?
    Mr. Trotter. Yes, I do.
    Mr. Steil. And why do you believe we should lower it to $75 
million, or maybe you have a different number? Mine is $75 
million. What would you do?
    Mr. Trotter. No, I applaud your number. The SEC said that 
is the number, that is the amount of float that gives you 
analyst following, and that was the basis of the Well-Known 
Seasoned Issuer definition. When the SEC proposed it in 2004, 
they actually proposed $300 million as a possibility, back when 
it was still an experiment. Now, we have almost 20 years of 
experience. It works. It is time.
    Mr. Steil. Then, the follow-up question would be, some 
people would say, oh no, it might not be safe, it might not be 
this, or it might not be that. If you look at WSKI over the 
time that it has been available, has it proven to be safe and 
effective over the last 2 decades since its introduction?
    Mr. Trotter. Absolutely. It is a resounding success. All 
companies are required under Sarbanes-Oxley to be reviewed by 
the SEC at least on a 3-year basis, so all of the companies are 
having their filings reviewed.
    Mr. Steil. Is it safe to say that your view is we could go 
back, review, and analyze these constructs inability to a lot 
more companies to become public companies here in the United 
States. We have a sufficient and substantive regulatory 
framework to provide protection for investors. And if we take 
advantage of that opportunity, it will actually help to create 
jobs here in the United States of America?
    Mr. Trotter. Yes, 100 percent. Well said.
    Mr. Steil. Thank you very much. I appreciate you being 
here. And I appreciate all of our witnesses. Thank you, Madam 
Chairwoman. I yield back.
    Chairwoman Wagner. The gentleman from North Carolina, Mr. 
Nickel, is now recognized for 5 minutes.
    Mr. Nickel. Thank you so much, Chairwoman Wagner. I am very 
glad you are holding today's hearing on capital formation, as I 
share your goal of improving our markets and increasing access 
to capital for small businesses. One of my main priorities in 
Congress is ensuring equity and access to capital. According to 
recent studies, 6 in 10 Black entrepreneurs faced challenges in 
obtaining capital. When women and minorities can access capital 
for their small businesses, our entire economy benefits from 
it.
    Commissioner Lubin, what should Congress do to improve 
minority access to capital through our public markets?
    Ms. Lubin. Thank you for the question. I think there are a 
lot of things going on. I have listened to the prior hearings, 
and I think one of the things that I have heard a lot of 
venture capitalists and a lot of entrepreneurs say is that one 
of the things that happens is that the venture capitalists and 
the entrepreneurs aren't seeing each other. I have heard a lot 
of discussions about what goes under the coast; you have to be 
in the right cities.
    And I think one of the things that we all could do together 
is to do a better job of introducing people and getting them 
together, and one of the things that we were asked is, what 
could we do as securities regulators? I think expanding some of 
the projects we have of getting people to meet and to network 
and going into some of the programs and trying to set things 
up, like having clinics where we have pro bono attorneys 
meeting up with entrepreneurs and getting some venture 
capitalists involved in it and having people meet each other, 
because what I have been told and what we have seen is that 
good businesses get funded, and people just need to meet each 
other.
    So, I think if we can facilitate that and get people 
meeting each other and talking to us some more, because they 
talked to us about, how do we get into compliance, so we can 
help them avoid some pitfalls. For example, we have some small 
business programs in Maryland where we say, look, you are 
probably in the position where you want to take on shareholders 
right now, because there are a lot of things small businesses 
don't understand about that, but maybe you want to take on some 
debt and do debt offerings. So, there is a lot that we do to 
help businesses develop things and do those kinds of programs.
    Mr. Nickel. Thank you. I applaud the efforts to enhance 
capital formation and remove roadblocks to ensure that 
entrepreneurs can access the resources they need to be 
successful. But at the same time, we need to ensure that new 
investors are adequately protected. Underrepresented 
entrepreneurs often struggle to find capital, and they would 
benefit from a larger pool of more-diverse investors who look 
like them.
    Some of my colleagues on the other side of the aisle 
proposed changing the requirements to qualify as an accredited 
investor. One example would be to include individuals who pass 
an exam established and administered by the Securities and 
Exchange Commission (SEC) or the Financial Industry Regulatory 
Authority (FINRA).
    Mr. Sampson, you discussed in your testimony wanting to 
grow the pool of Black investors in this ecosystem. Would this 
proposal to allow people to become an accredited investor after 
taking an exam do that?
    Mr. Sampson. It absolutely will. We created a Black 
Technology Ecosystem Investors Certificate Program during my 
visiting professorship at Kenan-Flagler at the University of 
North Carolina, in collaboration with Duke and Stanford, and 
The Links, Incorporated was a national organization of many 
affluent and wealthy Black women in this country. We graduated 
50 people in that program, who now understand the asset class, 
know how to identify deal flow, and know how to invest in 
venture funds and startups. We need to do that at the level of 
the thousands. Why? Because it is not that founders are not 
meeting investors. They are getting in the rooms and they are 
still getting told, no.
    So, the meetups are not working, the conferences are not 
working, and we have to develop a new investor class who is 
educated to actually make investments in respective companies. 
And I think we will see traction with increasing that less than 
one percent and getting it to more equitably around 13 to 20 
percent.
    Mr. Nickel. Thank you, Mr. Sampson. You have identified 
some outstanding research universities there.
    Mr. Ward, what are your recommendations to ensure that such 
a test is as robust as possible?
    Mr. Ward. If you want to do a knowledge-based testing into 
accreditation, I think the fastest path is through FINRA, where 
they already have a series of exams that test financial 
literacy. I think that is the first step. I think if you want 
to extend that, there is accreditation into different sectors. 
For example, a doctor might not pass the financial test but may 
pass a sector-specific test. But I think the fastest path would 
be through the FINRA registration exams that already exist.
    Mr. Nickel. Thank you so much to all of the witnesses for 
joining us. Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman from New York, Mr. 
Garbarino, is now recognized for 5 minutes.
    Mr. Garbarino. Thank you, Madam Chairwoman, and thank you 
for holding this hearing. We have some great witnesses today. I 
want to touch on something I know that Chairwoman Wagner and 
Chairman McHenry both spoke about. I got this text from a buddy 
of mine a couple of weeks ago, and he said, ``Are you guys 
doing anything about that B.S. accredited investor rule? I am 
shut out of investing in my 5,000-employee major company with a 
1-to-1 investment match because I am not worth enough money 
under the rule. I am allowed to invest in highly-risky penny 
stocks and bitcoin, but not my own company. Such a dumb rule.''
    Mr. Brooks, the current definition of, ``accredited 
investor,'' limits private markets investments to those it 
deems to be sophisticated. However, using wealth as the sole 
indicator of sophistication excludes a significant amount of 
potential investors who may possess other forms of knowledge 
and expertise. Can you discuss your thoughts on expanding the 
definition to include other criteria?
    Mr. Brooks. Yes, that is asinine. It is simply asinine that 
we are allowing this. One of the most open secrets in Silicon 
Valley is these people just get money from their friends. One 
of the fourth or fifth investors in Uber got a $25,000 friendly 
check to invest in Uber and ended up making tens of millions 
off of that, and is now one of the most well-known angel 
investors in the world, who has written the handbook on angel 
investing. But I couldn't get a loan from that firm. I didn't 
have friends and family who could give me that, so it is an 
asinine rule.
    I guess if I were to step back for a second, when I started 
my company, I was living out of a Jeep Patriot that didn't have 
roll-up windows and didn't have locks in the car. That was 7 
years ago. I am sitting here today because I don't want 
entrepreneurs and founders to go through that same thing that I 
had to go through. That struggle, the sacrifices that I have 
had to make to sit here today is asinine. Those accredited 
investor rules weren't in place. Maybe I could have asked, if I 
even knew what venture capital was, and have gotten some better 
things.
    What the SEC wants to do is an overstep of their power. Who 
am I to speak on that, Brandon Brooks with no college degree? 
And I am not as fancy as everybody else here on this panel, but 
you know what? I have put in the work, and so I think I have a 
right to speak on this. What the SEC is doing and others who 
want to heighten the accredited investor regulations is 
asinine.
    Mr. Garbarino. I appreciate that, and if you actually have 
specific thoughts of what we should do, if you could respond in 
writing, I would love it, because there is a lot. But I do want 
to get to Mr. Ward, because I have a question about venture 
facility and venture funding across the country.
    Mr. Ward, first-time fund managers and regional emerging 
managers drive capital beyond the traditional hubs. Can you 
explain why these entities are a crucial part of venture 
funding, and what role they play in the startup ecosystem 
compared to larger funds located in the established venture 
hubs?
    Mr. Ward. In this country, we are very good at producing 
accountants, lawyers, and doctors. We are not so good at 
producing entrepreneurs. The best way we know how to do that is 
to activate these emerging managers, these angel networks that 
go out around the country and find entrepreneurial talent, 
cultivate that talent, and help them grow both through advice 
and through funding their companies. So, if we want to create 
more entrepreneurs in this country, it starts with creating 
more emerging managers and more angels that can go find these 
entrepreneurs and develop them.
    Mr. Garbarino. What is Washington's role in facilitating 
increased capital access?
    Mr. Ward. Anything Washington can do to lower the barriers 
of entry for these angel networks and emerging managers so that 
they can start aggregating capital to support these 
entrepreneurs, I would applaud. As we bring more and more 
angels into the heartland of America, you will start to see 
these ecosystems pop up. We know that almost all startups start 
with early seed funding from angels, not institutional capital. 
And without those strong angel networks in regions, we can 
never graduate those companies into institutional capital, and 
eventually, public markets.
    Mr. Garbarino. I appreciate that. And the investment into 
other venture capital funds is currently classified as non-
qualifying investments for the purposes of exemption from 
registration under the Investment Advisers Act. If we were to 
include fund to fund investments as qualifying investments, 
would this help unlock capital that is otherwise competing for 
late-stage allocations?
    Mr. Ward. It would dramatically increase capital into these 
sectors in part because there would be more capital going to 
them. But these institutional investors use these investments 
in emerging managers to create the deal flow that goes into 
their larger investments, and that is how they find these 
early-stage entrepreneurs.
    Mr. Garbarino. Thank you very much. I am out of time, so I 
yield back. Thank you, Madam Chairwoman.
    Chairwoman Wagner. The gentleman from Illinois, Mr. Casten, 
is now recognized for 5 minutes.
    Mr. Casten. Thanks so much to our Chair. I want to start 
just--I think you have probably seen up here that there is 
bipartisan agreement that private markets are bigger than 
public markets right now, and that there is a concern about 
some risk of arbitrage and the opportunities that affords. I 
think where there might be a difference of opinion is whether 
that is necessarily a bad thing and what the causes are.
    I wouldn't argue with someone who ran private equity-backed 
companies. I didn't run private-equity backed companies because 
it was a compliance issue. There was just a lot of money. And 
40 years ago, if you were managing the Harvard endowment, you 
were in T-bills, and all of a sudden, there was this huge surge 
of institutional money that created opportunities to grow. And 
I think it would be disingenuous to say that somehow, it is a 
surfeit of investor protection rules that made private equity 
markets grow. At the same time, the distinction between those 
matters, because in one case, investor protection is done 
through disclosures, and in the other case, investor protection 
is done through these accreditation rules. And you can't lower 
one without increasing the need for the other, and we have to 
find some balance there.
    Mr. Ward, you and I talked before and I appreciate your 
time. I just want to make sure that I have some of the facts 
right. Did I get right that you said that the private equity 
markets are about 6 times as big as venture capital markets in 
the United States?
    Mr. Ward. That is what we think. Yes.
    Mr. Casten. Okay. So when we are talking about private 
markets, we are really talking about private equity right now.
    Mr. Trotter, I have never seen the analysis, but if you 
look at the ultimate owners of capital in private markets, not 
the private equity funds, pension funds, endowments, sovereign 
wealth funds, individuals, do you have any sense of what 
portion of that money is institutional and what portion is 
individual?
    Mr. Trotter. I cannot say that I do have any sense of that. 
There has been a lot studied in this area, that sort 
retailization. I think Mr. Ward could speak to that.
    Mr. Casten. I guess if I could make just a qualitative 
observation, in my own experience raising money, there is a lot 
of institutional money out there. There is a very small number 
of sort of wealthy family offices--yes, there are some. But my 
gut feeling, and I see heads nodding, is that mostly they 
disagree that the bulk of the money in private markets right 
now is institutional.
    Mr. Ward. I think that would be fair, but I do think in the 
last decade, we have seen the emergence of the family office 
that competes through institutional capital.
    Mr. Casten. Sure. Someone once told me that the least-
sophisticated, and the way that you all are using the word, 
``sophisticated,'' not the way that we define, 
``sophisticated,'' the least-sophisticated people in the world 
are pension fund managers. None of them trust themselves to 
actually do an analysis of a deal. They entrust their money to 
a venture capital fund, to a private equity fund, and say, I 
want you to do the diligence to sit on the board to do the 
governance to evaluate the deal and essentially outsource that 
responsibility, right?
    So, they are providing that investor protection and their 
fiduciary obligation, not because they are sophisticated in the 
Oxford English Dictionary sense, but because they are 
sophisticated in the legal sense, and can afford to hire those 
people to do it. I say that because when we frame this as, 
shouldn't we let more individuals, I think we are missing the 
point that the investor protections that are there right now 
are to protect the institutional folks.
    And I guess either Mr. Trotter or Mr. Ward, whomever wants 
to answer this, how easy is it for someone who doesn't have the 
ability to get the phone call from Tiger Global Management Fund 
for, would you like to be an LP in my next raise, how easy is 
it to look at a private equity deal and say, I know who is 
conflicted up and down the capital stack, I know who has step-
in rights in this deal, I know who has governance provisions? 
How easy is it to find that out if you are not the size of a 
CalPERS or a Harvard or Yale endowment?
    Mr. Ward. I have a perspective on this, Congressman. I 
think it is difficult. I think all financial markets are led by 
institutional investors and followed by retail investors. That 
is true in the public markets and that is true in the private 
markets.
    Mr. Casten. I am close to the end of my time, but 
Commissioner Lubin, I would love to just give you the last word 
here. If private markets are dominated by institutional people 
who can afford to hire very sophisticated people to do their 
analysis on the back end, and if we are to make it easier for 
people who don't have that level of wealth to participate, who 
is going to win?
    Ms. Lubin. Investors, the retail investors who are on the 
ground to protect are going to lose. They always do.
    Mr. Casten. And is it safe to say that the bills noticed 
for this hearing are primarily going to serve as a wealth 
transfer from those small individual investors to the big 
institutional players?
    Ms. Lubin. To them, or to the scam artists.
    Mr. Casten. Thank you. I yield back.
    Chairwoman Wagner. The gentleman from Pennsylvania, Mr. 
Meuser, is now recognized for 5 minutes.
    Mr. Meuser. Thank you, Madam Chairwoman. And thank you very 
much to our witnesses. I also thank the Chair of the Full 
Committee, and you, Chairwoman Wagner, for these four hearings 
on capital formation, as they are very important. These 
hearings are showing us that our capital markets have been 
clogged, and they could perhaps become more clogged with 
government regulations. And we are here to figure out real 
solutions that help all investors and all of our capital 
formation, so our committee is doing what we can do to fix 
these problems. We are here to talk about what we can get done, 
and we appreciate the feedback being received.
    Mr. Trotter, as you know, the sale of securities is 
regulated both on the Federal and State levels. While there 
have been efforts to provide greater clarity and uniformity 
between Federal and State laws by providing exemptions from 
certain State-level blue sky laws, Federal and State securities 
regulation remains burdensome and, in fact, is considered a 
patchwork system. Can you explain some of the challenges 
companies face when forced to navigate the burdensome patchwork 
system of State and Federal securities regulations?
    Mr. Trotter. You summed it up nicely when you just 
described the list, and that is, you are just getting started 
there. So the compliance obligations, even after you chip away 
when these small ways that are being proposed, are still 
onerous, but what we are proposing or what we proposed with the 
IPO Task Force is scale the regulation, and we have discussed 
this already.
    But it is not about more versus less regulation so much as 
balancing the regulation so that it scales to the size of the 
company that is regulated. If you are a mega cap, all of the 
rules apply to you, and there are going to be more rules every 
year as we go forward, right? If, however, you are a company 
that is trying to enter the public company system, you should 
be encouraged, not discouraged. And you can do that through 
scale disclosure through the on-ramp type of concept. We have 
11 years of successful experience with the JOBS Act and 
emerging growth companies. We have almost 20 years of 
successful experience with Well-Known Seasoned Issuers. Those 
are both categories that should be expanded significantly.
    Mr. Meuser. Thank you. Secondary market transactions take 
place on exchange or off exchange. Some States have laws that 
limit off exchange secondary trading and securities. Can you 
explain how this approach interferes with capital formation 
without promoting investor protections?
    Mr. Trotter. I'm sorry. Can you--
    Mr. Meuser. Let's move on. I want to get to some other 
questions in regards to a bill, H.R. 2506, the Restoring the 
Secondary Trading Market Act, which I am introducing, that will 
prevent State laws from limiting off-exchange secondary trading 
and securities of an issuer that makes current information 
publicly available. And I would like to get the panel's 
feedback on this bill.
    Mr. Trotter. I would be happy to look at that and follow up 
with you.
    Mr. Meuser. Great. Thank you.
    Mr. Trotter, staying with you, the House passed the JOBS 
Act, as you well know, in 2012. At the time, the North American 
Securities Administrators Association released a statement 
saying that the JOBS Act sacrifices essential investor 
protections without offering any prospects for meaningful 
sustainable job growth. Were these predictions correct?
    Mr. Trotter. They were 100-percent false.
    Mr. Meuser. Right. So in your view, has there been 
weakening investor protections or an increase in fraud since 
the JOBS Act was passed?
    Mr. Trotter. No, because the liability provisions of the 
Federal securities laws remained unchanged from the JOBS Act, 
as well as all of the provisions that you are looking at today.
    Mr. Meuser. Okay. I appreciate that. Obviously, access to 
capital is very vital.
    Mr. Brooks, I am interested in you. You are making some 
faces over there, and there are a lot of emotions and feelings 
going on. Tell us some of your thoughts on the questions and 
some of the answers from both sides of the aisle.
    Mr. Brooks. Yes. I guess overall, I think it is really 
interesting to see who has stayed, and who has left. Just from 
my point of view sitting here, I think it is really interesting 
hearing the questions and just who has put in the work to 
understand the struggle of being a Black founder, to talk with 
real Black founders, to talk with real women founders, and to 
talk with real Latino founders, those who exist outside the 
lines. I don't know a single one that I have talked with or 
myself that would not agree with what we are trying to do here 
today, expanding access to more people who look like me, and 
unfortunately, many of the people who have left the room today.
    Mr. Meuser. I look forward to keeping the conversation 
going with you. I appreciate you being here, and I yield back, 
Madam Chairwoman.
    Chairwoman Wagner. He said the Latinos, too.
    The gentleman from New York, Mr. Lawler, is now recognized 
for 5 minutes.
    Mr. Lawler. Thank you, Madam Chairwoman. Mr. Brooks, I 
couldn't agree more with your comments. In 2020, the SEC 
adopted amendments to Reg D to allow for certain demo day 
communication to be exempt from being considered general 
solicitation or general advertising. The amendment also 
defined, ``angel investor group,'' for the purpose of Federal 
securities laws. These changes were made to support startups 
discussing their products and business plans, demo day events 
without it being considered an investment offering. Given that 
Reg D reform is on the SEC's Reg Flex agenda, and Democratic 
Commissioners expressed their intention to chill private 
offerings, how critical are these changes made in 2020 to 
capital formation, and should Congress solidify these changes 
by codifying them into law?
    Mr. Brooks. Yes, absolutely. It is a no-brainer because it 
makes it easier for people who exist outside the lines to get 
it in front of people without getting expensive attorneys and 
people involved. If you have $10 in your bank account, how are 
you going to pay an attorney thousans of dollars just to prove 
that you can present on demo day that you can raise money? It 
is crazy.
    Mr. Lawler. Right. Thank you.
    Mr. Ward, as you know, Regulation A enables companies to 
sell securities to the public with limited disclosure 
requirements compared to public companies. Despite its 
potential benefits, Regulation A still seems to be 
underutilized. How would amendments to Regulation A help small 
businesses raise capital?
    Mr. Ward. I think Reg A, and I will also include Regulation 
CF, are two great ways for companies to start their journey of 
raising initial capital. The thing I worry about in Reg A and 
Reg CF is creating two paths for companies, a Reg D path and a 
Reg A path. I think it creates issues around adverse selection 
bias and picking which path they should take. What I would be 
supportive of is a way to merge Reg CF and Reg A with Reg D, so 
that Reg CF/Reg A could be a way to jump-start companies to get 
their local communities to raise their initial seed capital. 
And then, they move on to Reg D status to start raising more 
institutional capital over time.
    Mr. Lawler. Would companies benefit from Regulation A if 
Congress raised the offering cap?
    Mr. Ward. I think companies may benefit from that. I think 
it will benefit the larger, higher-scale companies, but I still 
think there needs to be a path to Reg D. The amount of money 
most companies need these days to get to an IPO far exceeds the 
current Reg A limits.
    Mr. Lawler. I appreciate that.
    Mr. Ward, there is currently no suitable regulatory 
framework for finders who, incidental to their primary 
business, help match potential investors with private issuers 
and receive payment for successful introductions. Today, 
finders are treated as broker-dealers due to the mishmash of 
SEC staff interpretations and no-action letters. Is this a 
problematic framework for those seeking to make connections 
between investors and private companies seeking capital?
    Mr. Ward. I think so. Today, the way that finders work in 
practice to circumvent the broker-dealer rule is they are 
usually anointed as advisors and given equity in the company to 
help the company. It is unclear if advisors will be a big part 
of the ecosystem. I think we are still learning about what role 
intermediaries have in the venture ecosystem and how to connect 
founders to investors.
    Mr. Lawler. Would exempting finders from broker-dealer 
registration eliminate ambiguity about when companies can 
engage finders who are not registered as broker-dealers, and 
would this help facilitate small business capital formation?
    Mr. Ward. Yes. I think much like when we liberalized 
investment banking licenses to help founders sell their 
companies, I think if we can exempt finders from broker-dealer 
registration to seed an ecosystem of finders to help founders 
find capital, I think that could catalyze a much more-liquid 
market for financings.
    Mr. Lawler. Thank you. In the time I have left, Mr. 
Trotter, during the passage of the JOBS Act, you were a leading 
member of the IPO Task Force and served as a principal author 
of the IPO-related provisions. Can you compare today's kind of 
political and economic climate to when that passed a little 
over a decade ago?
    Mr. Trotter. There is one comparison that is clear to me 
and, again, you have this debate over more versus less 
regulation, and you know where that ends. It ends in stalemate. 
But my answer to that is to follow the path that the JOBS Act 
took in Title I, the IPO On-Ramp provisions. It is not about 
more versus less. It is about scaling the regulation. It is 
about balanced regulation so that the full seed of regulations 
apply to the largest enterprises, and the new companies that 
are entering the public company system get a break. It has 
worked very successfully for 11 years.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Lawler. Great. Thank you.
    Mr. Trotter. And it is time for more.
    Chairwoman Wagner. The gentleman from Iowa, Mr. Nunn, is 
now recognized for 5 minutes.
    Mr. Nunn. First, Chairwoman Wagner, thank you very much for 
calling this hearing, specifically to build upon the important 
goals of bolstering our private markets, expanding accredited 
investments, and encouraging investments in small businesses 
throughout the country. I want to thank each of you on the 
panel who took time out of what I know is a very busy daily 
life to come and do what is on no one's bucket list: to testify 
before Congress. So, compliments to each of you, and to the 
family members who are here, thank you for supporting your 
family in this.
    Look, you all have very, very incredible stories to share, 
and it is truly, I think, a lot of Cinderella stories that have 
been made successful. Mr. Ward, I am now focusing on you. You 
had to leave your hometown to go to California, to network, to 
find angel investors. You went through this process over a 
decade ago and the challenges--as Mr. Brooks said earlier, 
great ideas and American Dreams happen all across this country. 
But you were forced to find capital in those very select 
markets, specifically, as we have identified in this committee, 
basically three States--Massachusetts, New York, and 
California--and there are a lot more out there and a lot 
greater potential.
    I would like to point out that in my home State of Iowa, 
and a number of us represent smaller States on this, just for 
the rest of the world watching this, 33,000 new small 
businesses were started in Iowa alone last year, and they did 
it without the benefit of being in Silicon Valley. Now, imagine 
for a second what this entire country might look like if we 
were discussing what is capable this afternoon and we built 
upon the JOBS Act of 2012, just a decade later.
    So, Mr. Ward, share with us, first of all, just that story 
for of how you got to California and really what that meant for 
what you left behind?
    Mr. Ward. I arrived in California in 2010, and I didn't 
know anybody. I didn't have a job. I was brought there for 
family reasons. I decided to start a company as one does if you 
move to Silicon Valley against your will, and part of that 
process was trying to meet other founders, trying to meet other 
investors. The rule back then, which hasn't changed today, is 
if you want to get an investor, you have to find an 
introduction to an investor. You have to meet that investor 
personally. And it was months and months of just networking and 
finding people, and that hasn't changed today. If you are 
someone who is not in California in the thick of it, it is 
extremely hard to do if you are in Iowa. It might even be 
impossible.
    I think the path to creating an on-ramp for founders in 
different geographies and regions is to create strong, robust, 
emerging managers and angel networks in those regions. And we 
are starting to see this happen in different hubs like 
Nashville, Tennessee, Austin, Texas, and Atlanta, Georgia, and 
there is no reason why we can't do that in places like Iowa as 
well.
    Mr. Nunn. Let me ask then, you have seen this landscape 
change dramatically just in the last decade. What other 
opportunities are there for new and emerging businesses to be 
able to tap into those markets without having to move to the 
place where the network already exists? How do we expand that 
network out there, and what kind of things can we be doing on 
this panel?
    Mr. Ward. Yes. I think expanding accredited investor rules 
will help a lot. For example, in Iowa, an accredited investor 
rule is the same rule but has different impacts in Iowa than in 
California. So, I think creating those angel networks by 
lowering the barriers for access to capital, lowering barriers 
for angel investors who want to graduate into running their own 
committed funds. I think will help as well. I think one of the 
things that we forget is that all investors are entrepreneurs 
also. They start their own funds, and so anything we can do to 
help those entrepreneurs build their businesses, which is to 
invest in other entrepreneurs, has a flywheel effect on the 
ecosystem.
    Mr. Nunn. Mr. Ward, I couldn't agree with you more, and 
compliments on what you have done with Carta in such a short 
time.
    Mr. Brooks, I would like to return to you here on this idea 
of really expanding the American Dream. I think one of the 
things that we underappreciate is just how many dreams are out 
there that have yet to be fulfilled. Perhaps, you could give us 
just a little bit of perspective as a father of five daughters, 
one who is biracial, on how you have managed this, and what are 
we leaving off the table that we can really grow?
    Mr. Brooks. Just more access, more opportunities, and it is 
really so simple. It is a fantastic place to be. It was on my 
bucket list. I am crossing that off today. I thank you. But 
really, it is so simple and it is creating more opportunities. 
That is it. This expanding accredited investors creates more 
opportunities for people to invest, yes. You are going to get 
some wrong, but guess what? I can go to the craps table and hop 
the yo as many times as I want, but I can't sit here and invest 
in a great company that my friend is starting, that I know will 
be fantastic. But the rich, wealthy, elite class, White male 
mostly, who live in Silicon Valley, can go and invest in my 
friend and become a multibillionaire maybe because of it while 
I sit here in the same position.
    Mr. Nunn. Thank you, Mr. Brooks. I would say, always bet on 
the Heartland. You may find yourself very surprised. With that, 
I yield back.
    Chairwoman Wagner. Hear, hear, says the gentlewoman from 
Missouri. Now, I recognize the gentleman from Texas, Mr. 
Sessions, for 5 minutes.
    Mr. Sessions. Madam Chairwoman, thank you very much, and 
let me say, as our colleague, Mr. Vargas said, thank you for 
having not only a subcommittee hearing that is seemingly 
bipartisan, but also for your leadership, and Mr. Vargas, for 
taking the time to stick around to hear all of this great 
information. It proves how we do need a better roadmap for this 
integrity.
    I would like to ask you all, because I have been working 
with the SEC, and we have spent a lot of time in here worried 
about rules, regulations, investor rules, all those kinds of 
things. But I find that the Securities and Exchange Commission 
is a huge hindrance to the effectiveness of IPOs becoming 
capable of what they want to do. I engaged the SEC Chair and 
the entire SEC last year and found that they were asleep at the 
switch, did not come to work, gave conflicting information to 
the investors, weren't willing to stand behind it, and then 
held it against the investors when their own lawyers were 
quoted to the Department. The SEC Chair point-blank told me 
that he was not going to respond back to a request that was 
made by an IPO investor when they intentionally provided all of 
the information that they thought they needed to provide, and 7 
or 8 months later said, no, we are not going to even respond 
back. We won't respond back to you, and we are not going to 
respond back to them.
    Tell me about the SEC being a hindrance to people 
effectively building this wealth and wealth creation of IPOs, 
because of their oversight of blunders and inattention to 
capital formation. Anyone?
    [No response.]
    Mr. Sessions. Okay. I guess I will continue on then, since 
no one has any direct information. I find that we need, as I 
spoke to the Chair yesterday about a process whereby the SEC 
would be able to recognize that they are not being forthright 
about solving problems that when investors have problems as 
they move forward. If you can get in trouble, you ought to be 
able to get out of trouble.
    But simply to have information, because someone makes a 
claim against you and not even sharing that information with an 
investor group or a group of people to where they can resolve 
that, but waiting months and months, maybe up to a year, 
perhaps more, when they have contracts, when they have 
agreements, when they are trying to put together a company as 
they are going through their formation, whether it be in the 
stock market or in NASDAQ, I find that disturbing.
    And I told a story yesterday I remember that when my dad 
became the FBI Director for President Reagan, the Department of 
Justice tended to have a viewpoint that they would not discuss 
any part of the work that they did, even after an indictment, 
even with proper counsel, and he changed that. He decided that 
proper counsel does exist in this company, lawyers who were 
beholden to a bar, to a court that could for any ethical 
challenges or mismanagement or things that took place where 
they did not properly take that information and work for 
resolution could be held by a court.
    I believe that we should have a better process at the SEC 
for anyone who has a problem when the SEC begins an 
investigation, that there should be legal counsel that could be 
brought in on behalf of this IPO or anybody--where there is 
this recognition to resolve matters, not to wait a year and 
delay them and last them out. I find it obnoxious, I think it 
is unprofessional, and I believe it is an intentional effort 
that has been made by the SEC to bludgeon investors in this 
country.
    [No response.]
    Mr. Sessions. Madam Chairwoman, I heard no response, so I 
will yield back my time.
    Chairwoman Wagner. The gentlewoman from Indiana, Mrs. 
Houchin, is now recognized for 5 minutes.
    Mrs. Houchin. Thank you, Chairwoman Wagner and Ranking 
Member Sherman, and thank you to the witnesses for coming to 
speak with us today. Mr. Brooks, you certainly seem happy to be 
here. That is refreshing.
    Among the greatest strengths of the American economy are 
our public markets and the ability for retail investors to buy 
shares in companies they support. By expanding access to our 
public markets for companies, Americans across the country, 
including Southern Indiana, can build wealth and encourage 
economic growth. In recent years, however, companies have been 
pushed away from public markets, and often businesses find that 
the reasons against pursuing an IPO outweigh the benefits of 
going public.
    Mr. Trotter, the raw number of IPOs has declined 
significantly in recent years, with the U.S. experiencing some 
of its worst years on record in 2016, and again in 2022. Recent 
reports indicate the downward trend in IPOs will continue into 
2023. Could you please explain the factors contributing to such 
a steep decline in the number of IPOs and what that means for 
everyday investors?
    Mr. Trotter. When a company that is backed by early-stage 
investors reaches the point where it is ready to go to the next 
level and return capital to those early-stage investors, it has 
a choice. It can find a buyer and sell the company and become 
an acquisition target, or it can follow an IPO, pursue an IPO, 
and become a new public company, and those are very different 
paths. And with the public markets less-hospitable to private 
companies, they are going to be more likely to follow the 
mergers and acquisitions (M&A) path.
    Now, a company should do what makes sense for the company, 
but if you have tilted the balance away from IPOs and toward an 
M&A exit scenario, then you are going to see fewer IPOs. So, 
the IPO On-Ramp was an effort to redress that balance. We have 
had a decade-plus of successful experience. You have seen the 
positive impact that it can make. And I have said it a couple 
of times already, but I don't tire of saying it, it is time to 
expand that category of emerging growth companies.
    Mrs. Houchin. Thank you. With fewer IPOs and a shrinking 
number of companies on public markets, not only do local 
businesses have fewer options to raise capital, but retail 
investors have fewer opportunities to build wealth and secure 
their futures.
    Mr. Ward, Regulation A enables companies to sell securities 
to the public with limited disclosure requirements compared to 
public companies. Despite its potential benefits, Regulation A 
seems to be underutilized. How would amendments to Regulation A 
help small businesses raise capital? Would more companies 
benefit from Regulation A if Congress raised the offering cap?
    Mr. Ward. I think raising the offering cap and anything we 
can do to make Reg A more attractive would be helpful to 
founders. I do think there is a concern around having a two-
track system for capital formation in the private markets. The 
most-successful regulation framework we have today is Reg D, 
and I strongly encourage all of us to look at, is there a way 
that we can use Reg A and other capital formation regulations 
like crowdfunding and marry them with what is working in Reg D?
    Mrs. Houchin. That is great. Thank you. Earlier this week, 
I introduced my first bill in Congress, the Regulation A+ 
Improvement Act of 2023. It would raise the cap for Regulation 
A and allow more small to mid-sized companies to sell 
securities on public markets. As a member of this committee, I 
am committed to cutting red tape to make it easier for local 
businesses to grow while also expanding opportunities for 
everyday investors to build wealth to secure their financial 
futures. I look forward to continuing to work on this issue 
with the subcommittee. I thank the chairwoman, and I yield 
back.
    Chairwoman Wagner. I would like to thank all of our 
witnesses for their testimony today. I would also like to take 
a moment to invite any of our witnesses who have family 
members, not staff, but family members with them to recognize 
them. Mr. Sampson?
    Mr. Sampson. Sure. Thank you for that. Joining me today is 
my wife of nearly 25 years, Shanterria Alston Sampson. She is 
also my partner in business and investing as well. My oldest 
son is here today, Rodney Sampson II. He is a recent graduate 
of Morehouse College and is headed to Georgia Tech to work on 
his graduate degree in computer science, and he is Phi Beta 
Kappa.
    Chairwoman Wagner. Congratulations.
    Mr. Sampson. And Rodney III--you are going to see a trend 
here. Rodney III is a junior at Morehouse College as well and 
just secured his first summer internship at Harvard Business 
Publishing.
    Chairwoman Wagner. Wonderful.
    Mr. Sampson. Rodney IV just turned 17 and is a freshman at 
Morris Brown College as well. He is also a software engineer 
and a gamer as well, so we are really excited about him.
    Chairwoman Wagner. Good.
    Mr. Sampson. Rodney V is here as well, and, of course, we 
have Sophia, our youngest.
    Chairwoman Wagner. At last, thank heavens.
    Mr. Sampson. Our oldest daughter couldn't make it. She is a 
graduate of Spelman.
    Chairwoman Wagner. Sure.
    Mr. Sampson. Phi Beta Kappa, working on her Ph.D. at UPenn 
in computer science.
    Chairwoman Wagner. Wow. Congratulations to you--
    Mr. Sampson. Thank you.
    Chairwoman Wagner. --and your wonderful family, and to your 
wonderful wife, who is also a partner with you in business. It 
is heartwarming to see, so thank you.
    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 3:57 p.m., the hearing was adjourned.]

                            A P P E N D I X


                            April 19, 2023
                            
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                  [all]