[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
THE JOBS ACT AT FIVE: EXAMINING
ITS IMPACT AND ENSURING THE
COMPETITIVENESS OF THE U.S.
CAPITAL MARKETS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
SECURITIES, AND INVESTMENT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
MARCH 22, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-9
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Capital Markets, Securities, and Investment
BILL HUIZENGA, Michigan, Chairman
RANDY HULTGREN, Illinois, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
PETER T. KING, New York BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri KEITH ELLISON, Minnesota
LUKE MESSER, Indiana BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana
C O N T E N T S
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Page
Hearing held on:
March 22, 2017............................................... 1
Appendix:
March 22, 2017............................................... 37
WITNESSES
Wednesday, March 22, 2017
Green, Andy, Managing Director of Economic Policy, Center for
American Progress.............................................. 8
Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc......... 7
Keating, Raymond J., Chief Economist, Small Business &
Entrepreneurship Council....................................... 5
Knight, Edward S., Executive Vice President, General Counsel, and
Chief Regulatory Officer, Nasdaq, Inc.......................... 10
Quaadman, Thomas, Executive Vice President, Center for Capital
Markets Competitiveness, U.S. Chamber of Commerce.............. 12
APPENDIX
Prepared statements:
Green, Andy.................................................. 38
Hahn, Brian.................................................. 57
Keating, Raymond J........................................... 66
Knight, Edward S............................................. 77
Quaadman, Thomas............................................. 85
Additional Material Submitted for the Record
Green, Hon. Al:
Council of Institutional Investors FAQ: Majority Voting for
Directors.................................................. 172
Lynch, Hon. Stephen F.:
Letter from the Council of Institutional Investors, dated
March 13, 2017............................................. 182
Written statement of Mike Rothman, President, North American
Securities Administrators Association, Inc................. 198
Hahn, Brian:
Written responses to questions for the record submitted by
Representatives Duffy and Hultgren......................... 204
Knight, Edward S.:
Written responses to questions for the record submitted by
Representative Duffy....................................... 209
THE JOBS ACT AT FIVE: EXAMINING
ITS IMPACT AND ENSURING THE
COMPETITIVENESS OF THE U.S.
CAPITAL MARKETS
----------
Wednesday, March 22, 2017
U.S. House of Representatives,
Subcommittee on Capital Markets,
Securities, and Investment,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Bill Huizenga
[chairman of the subcommittee] presiding.
Members present: Representatives Huizenga, Hultgren,
Stivers, Wagner, Poliquin, Hill, Emmer, Mooney, MacArthur,
Davidson, Budd, Hollingsworth; Maloney, Sherman, Lynch, Scott,
Himes, Vargas, Gottheimer, and Gonzalez.
Ex officio present: Representative Hensarling.
Chairman Huizenga. The Subcommittee on Capital Markets,
Securities, and Investment will come to order. Without
objection, the Chair is authorized to declare a recess of the
subcommittee at any time. Just for a situational awareness for
everybody, we are anticipating votes on the House Floor
sometime shortly after 3:00, maybe 3:15 or 3:30.
Today's hearing is entitled, ``The JOBS Act at Five:
Examining Its Impact and Ensuring the Competitiveness of the
U.S. Capital Markets.''
I now recognize myself for 3 minutes for an opening
statement.
While small companies are at the forefront of technological
innovation and job creation, they often face significant
obstacles in obtaining funding in the capital markets. These
obstacles are often attributable to the one-size-fits-all
securities regulations intended for large public companies,
which are placed on small companies when they seek to go
public.
Signed into law on April 5, 2012, the bipartisan Jumpstart
Our Business Startups Act, properly known as the JOBS Act,
consists of six bills that originated here in the House
Financial Services Committee to help small companies gain
access to capital markets by lifting burdensome securities
regulation.
By helping small companies obtain funding, the JOBS Act has
facilitated economic growth and job creation. Additionally, the
JOBS Act has fundamentally changed how the Securities and
Exchange Commission approaches securities regulation.
SEC Commissioner Michael Piwowar described how the JOBS Act
has changed the SEC's mission this way: ``The JOBS Act requires
the Commission to think of capital formation and investor
protection in fundamentally different ways than we have in the
past.
``The crowdfunding provision of the JOBS Act forces us to
think outside of our historical securities regulation box and
to create a different paradigm than the one we have used for
the past eight decades.''
The bipartisan JOBS Act was an attempt to remedy the SEC's
inaction on capital formation, and even President Obama called
the law a ``game changer'' for entrepreneurs and capital
formation.
Regrettably, though, the implementation of the JOBS Act by
the SEC languished under the chairmanship of both Mary Schapiro
and Mary Jo White. By failing to fulfill this important part of
its mandated mission, the SEC is hurting small businesses,
impeding economic growth, and hindering the creation of new
jobs.
It is extremely troubling to me that the SEC seems more
intent on pursuing highly politicized regulatory undertakings
outside of its core mission. Instead of working to protect
investors, maintain fair and orderly and efficient markets, as
well as helping to facilitate capital formation, the SEC has
been more focused on exerting societal pressure on public
companies to change their behavior through disclosure rules
such as the conflict minerals and pay ratio rules, et cetera.
It is time to refocus the SEC to advance a broader capital
formation agenda. Let's continue to build upon the successes of
the bipartisan JOBS Act by further modernizing our Nation's
securities regulatory structure to ensure a free flow of
capital, job creation, and economic growth.
It is time to get the Federal Government working to support
innovation and to reward hardworking Americans. I yield back
the balance of my time.
The Chair now recognizes the ranking member of the
subcommittee, the gentlelady from New York, Mrs. Maloney, for 3
minutes for an opening statement.
Mrs. Maloney. Thank you so much, Mr. Chairman, and I look
forward to working with you this Congress. And I want to
welcome everyone to the very first Capital Markets Subcommittee
hearing of the year.
The basic mission of the JOBS Act, and I am proud to have
been a sponsor of this bill, was to make it easier for
companies to raise capital from investors, whether that capital
was being raised in the public markets or the private markets.
Two of the main provisions of the JOBS Act have gone into
effect in the past year-and-a-half: Regulation A+ for small
offerings; and crowdfunding. Both of these provisions were
designed to make it easier and less expensive for small startup
companies to raise capital, and both provisions targeted small
companies that may not have been able to raise capital using
the traditional methods such as an IPO or a private placement
to sophisticated investors.
So this is a good time to step back and evaluate the
progress of these two provisions by asking some simple
questions. Are they working as intended? Are investors using
them? Have they caused any investor protection problems? Are
there any changes that need to be made to improve either of
these provisions?
The preliminary data suggests that both Regulation A+ and
crowdfunding are working broadly as intended, although there is
some room for improvement. Both provisions are being used by
very small startup companies.
The typical company using both Regulation A+ and
crowdfunding only has 3 employees and has less than $5,000 in
cash and no revenues. Crowdfunding is primarily being used by
small companies that can't raise money any other way, and only
to raise a small amount of capital.
The median amount raised using crowdfunding was only
$171,000. Regulation A-Plus, on the other hand, is being used
by a wider range of companies, mostly very small startup
companies, but also some larger ones as well.
Most of the companies that use Regulation A+ have also
raised money by issuing private securities to sophisticated
investors before, which indicates that Regulation A+ is being
used as a supplement to other offering methods.
I am concerned, however, about the fact that FINRA has
already had to terminate one crowdfunding portal for allowing
several companies that appear to be fraudulent from offering
securities on its platform. This raises serious investor
protection concerns that we have to keep in mind as we review
the impact of the JOBS Act.
I look forward to hearing from my colleagues, and from all
of the panelists, and I yield back. Thank you.
Chairman Huizenga. The Chair now recognizes the vice
chairman of the subcommittee, the gentleman from Illinois, Mr.
Hultgren, for 2 minutes for an opening statement.
Mr. Hultgren. Thank you for convening this hearing,
Chairman Huizenga. Access to the capital markets and job
creation is incredibly important to my district and to all of
our districts, and we need to ensure that U.S. capital markets
remain a competitive means of financing.
It is very fitting that a review of the JOBS Act is our
first subcommittee hearing topic in this subcommittee, in this
Congress. Before speaking any further, I would be remiss to not
mention how excited I am to be serving as the vice chairman of
the Subcommittee on Capital Markets, Securities, and Investment
this Congress.
We have our work cut out for us, but I am optimistic that
we can advance policy that will allow our economy to recognize
its true potential. Competitive capital markets are important
to job creators in my State and also to those who work to
provide this financing.
There are a number of important financial services entities
in the Chicago area that are instrumental to ensuring robust
access to financing that make Illinois the home of Midwest
finance.
To the point of today's hearing, I know the JOBS Act has
made a meaningful impact in Illinois and in my district, and I
am eager to hear how Congress can do more. Understanding how
difficult it is to operate as a public company really struck me
the other day when discussing the reasons Michael Dell took his
company private.
This gave Dell, which had long operated as a public
company, more flexibility to pursue what it determined to be
best for its growth. I am sure this statistic is going to be
cited a number of times today, but we should not lose sight of
it.
The number of public companies today is about half of what
it was 20 years ago. We went from about 8,000 public companies
in 1996 to some 4,400 public companies today. We need to learn
more about why this is and how we can help change this
trajectory.
I believe it is important that job creators have both
strong public and private financing options available. I look
forward to the testimony today and to discussing some of the
specific policy proposals mentioned in the written testimony.
And I yield back.
Chairman Huizenga. The gentleman yields back.
The Chair now recognizes the gentleman from Connecticut,
Mr. Himes, for 2 minutes for an opening statement.
Mr. Himes. Thank you, Mr. Chairman, and thank you for
holding this hearing. We rise and fall on our ability to
innovate. Companies everywhere are creating new products and
new services that could change the world, but we might not see
the next Pinterest, Blue Apron, Snapchat, or Google if we don't
make it easier for them to jump from upstart to established.
Next month marks the 5th anniversary of President Obama
signing the JOBS Act into law. The Act is an excellent example,
in my opinion, of how the Federal Government can support
business and job growth in our Nation by allowing fast growing
firms to launch an IPO when they are ready to do so and then
scale up to the full regulatory responsibilities and expenses
associated with being public.
At the crux of the JOBS Act, of course, is the creation of
an IPO on-ramp, which makes it easier for small- to medium-
sized companies to undertake an IPO, and creates a new category
of emerging growth companies (EGCs) that would enjoy certain
regulatory exemptions as a result of that status.
EGCs now apparently dominate the IPO market, accounting for
almost 90 percent of IPOs that have gone effective since the
JOBS Act was enacted in April of 2012. The online travel site
KAYAK, headquartered in my district, was able to go public in
2012, thanks to the JOBS Act, as an EGC.
I am proud of the bipartisan manner in which the JOBS Act
came into existence. It really serves as a model for how
Republicans and Democrats can work together to help advance one
of the primary American competitive advantages, which is good
liquid capital markets.
I do have one question which I hope the panel will address.
In life, there is rarely such a thing as a free lunch. And
obviously, every time we lighten regulations, there is always
the possibility, maybe even the probability that you have more
scope for abuse, bad behavior, and bad outcomes.
So I hope we hear as much as we celebrate this Act and what
it has allowed some companies to do, whether we have seen any
downside or bad outcomes associates with this Act.
But nonetheless, this is proof of the progress we can make
on behalf of the American people when we work together, and I
hope that we won't have to wait another 5 years to see similar
successes.
With that, I yield back the balance of my time.
Chairman Huizenga. The gentleman's time has expired.
Today, we welcome the testimony of Raymond Keating, the
chief economist of the Small Business & Entrepreneurship
Council; Brian Hahn, the chief financial officer of
GlycoMimetics, Incorporated; Andy Green, the managing director
of economic policy at the Center for American Progress; Edward
Knight, the executive vice president, general counsel, and
chief regulatory officer of Nasdaq, Inc., in New York; and
Thomas Quaadman, the executive vice president of the Center for
Capital Markets Competitiveness at the U.S. Chamber of
Commerce. Gentlemen, we welcome you all.
You will each be recognized for 5 minutes to give an oral
presentation of your testimony. As we had said, we are going to
be a little pressed for time for some votes. So feel free to
shorten it up, if you can. We do want to make sure we are able
to get to some questions. And without objection, each of your
written statements will be made a part of the record.
Mr. Keating, you are now recognized for 5 minutes.
STATEMENT OF RAYMOND J. KEATING, CHIEF ECONOMIST, SMALL
BUSINESS & ENTREPRENEURSHIP COUNCIL
Mr. Keating. Mr. Chairman, I am from New York, so I will
talk fast. Mr. Chairman, Ranking Member Maloney, and members of
the subcommittee, thank you for hosting this important hearing
today on the JOBS Act and the competitiveness of U.S. capital
markets.
I am Raymond Keating, chief economist for the Small
Business & Entrepreneurship Council. We are a nonpartisan,
nonprofit advocacy, research, and training organization
dedicated to protecting small business and promoting
entrepreneurship.
Gaining access to financial capital is essential to the
creation and growth of businesses. At the same time, access to
capital remains a major challenge for entrepreneurs starting up
and building enterprises.
In my written testimony, I present data on the recent
trends in banks, small business loans, angel investment, and
venture capital investment. To sum up, the value and number of
traditional small business loans are still down from pre-
recession levels.
Angel investment also remains down from its 2008 level,
while also experiencing stagnation over the last 2 years. In
addition, venture capital has really shown the most life post-
recession, but a decline in 2016 is certainly troubling.
So what is going on? First, it is about reduced levels of
entrepreneurship. We did a study in August on examining levels
of entrepreneurship in the economy. We looked at an assortment
of data, which all pointed to declining levels of
entrepreneurship.
The mid-range of these data points we estimated about 3.7
million missing U.S. businesses in 2015 compared to where we
were at previous times. Reduced levels of entrepreneurial
activity naturally mean reduced loan and investment demand.
Number two is these loans and investment trends again speak
to the struggles of entrepreneurs to gain access to the
financial resources needed to start up and grow. Why does this
matter? We all know, I think, the answer to that. Quite simply,
entrepreneurship is the engine of innovation, productivity and
income growth, and job creation.
And in turn, entrepreneurship depends on the willingness
and ability of investors and lenders to supply investment and
credit.
During the current recovery expansion period, the U.S.
economy has grown at half the rate it should. And that has
largely been about poor private investment growth.
So providing small businesses with more options or avenues
to expand access to financial capital is a clear positive. Two
important parts of the JOBS Act focused on opening up new
avenues for individuals to invest in entrepreneurial ventures,
such as via crowdfunding.
Title II of the JOBS Act was about accredited investor
crowdfunding, and Title III was about crowdfunding for everyone
else, if you will. As for the investment under Title II,
according to a recent Crowdnetic's report, the number of new
offerings actually declined over years 1 to 3, but capital
commitments at the same time rose substantially.
Meanwhile, according to Crowdfund Capital Advisors, since
Title III launched in May 2016, capital commitments registered
almost $30 million as of March 10, 2017.
Even given the positive changes, areas in need of
improvement always exist, including government placing too many
limits on the ability of entrepreneurs to gain access to
capital, and/or on investors' abilities to make investments in
entrepreneurial ventures.
For example, crowdfunding opportunities should be expanded
for businesses of different sizes and stages, and therefore,
the limit of raising $1 million during a 12-month period under
Title III, crowdfunding, should be raised, for example, to $5
million.
Jason Best and Sherwood Neiss of Crowdfund Capital Advisors
have pointed out that 2.2 jobs are created within the first 90
days after a company is successful with a securities
crowdfunding campaign. So we very much see job creation
happening.
Also, the ability of investors to invest should be
expanded. In addition, it should be clarified that funding
portals cannot be held liable for material misstatements and
omissions by issuers unless portals are guilty of fraud or
negligence. This assurance would reduce unnecessary risks for
crowdfunding portals.
In conclusion, U.S. capital markets are the envy of much of
the world, but we must be vigilant in making sure that while
regulatory policy protects against fraud and abuse, it also
reflects the reality that free markets provide the foundation
upon which entrepreneurship investment, innovation, and
business can flourish, thereby providing a breathtaking array
of goods and services and jobs that improve all of our lives.
Financial regulation must recognize these realities,
recognize the transparency that technology has imposed upon the
system, and be built on a respect for free enterprise. Thank
you for your time, and I look forward to the discussion and
questions.
[The prepared statement of Mr. Keating can be found on page
66 of the appendix.]
Chairman Huizenga. Thank you, Mr. Keating.
Mr. Hahn, you are now recognized for 5 minutes.
STATEMENT OF BRIAN HAHN, CHIEF FINANCIAL OFFICER,
GLYCOMIMETICS, INC.
Mr. Hahn. Thank you, Mr. Chairman, and Ranking Member
Maloney. As a CFO of a company that benefited from the JOBS
Act, I would like to personally thank the subcommittee for its
hard work as we celebrate the law's 5-year anniversary.
The JOBS Act was a game changer for biotechs like mine,
because it increases the capital formation potential of an IPO
and decreases the capital diverted from science to compliance.
Two-hundred and twelve biotechs have gone public under the JOBS
Act, a fourfold increase from the 5 years before JOBS.
Since our IPO, we have nearly doubled our employee
headcount, and we have moved two additional new drug candidates
into human clinical trials. These 212 innovators are seeking
treatments for a wide range of devastating diseases.
At GlycoMimetics, we are working toward therapies for
patients suffering with sickle cell disease, acute myeloid
leukemia, and multiple myeloma.
Under the JOBS Act, the industry has seen a surge in IPOs
for diseases that were previously difficult to finance,
including diabetes and Alzheimer's. We have also seen a
dramatic increase in early-stage financing. There were just 3
early-stage IPOs in the 5 years before JOBS, but since JOBS was
enacted, there have been 48.
The JOBS Act's testing-the-waters and confidential filing
provisions were vital to the success of our IPO, and we
continue to benefit from the 5 years of reduced compliance with
costly burdens like SOX 404(b). In short, the JOBS Act has
changed the game for financing therapeutic innovations.
JOBS Act's biotechs have 696 therapies currently in
development, and the FDA has approved 18 new treatments from
JOBS Act's companies. I am excited that the subcommittee
continues to consider ways to build on the success of the JOBS
Act.
Many of the capital formation provisions for the Financial
CHOICE Act would further support the growth of small, public
biotechs. In particular, I strongly support the Fostering
Innovation Act introduced by Representatives Sinema and
Hollingsworth.
The JOBS Act's 5-year SOX exemption has saved millions of
dollars for growing biotechs, but most will still be pre-
revenue when the IPO on-ramp expires.
GlycoMimetics expects annual expense to increase by upwards
of $350,000 starting in year 6 on the market, capital that
could treat over a dozen patients in the clinic.
The Fostering Innovation Act would extend the JOBS Act
exemption for pre-revenue companies. This bipartisan bill
recognizes that a low revenue company that has been on the
market beyond the 5-year EGC window is still very much an
emerging, growing business.
The continued cost-savings in the bill are vital because
every dollar spent on a one-size-fits-all burden is a dollar
diverted from the labs.
I also support Congressman Duffy's Corporate Governance
Reform and Transparency Act. Proxy advisory firms' outsized
influence on emerging companies has proven to be uniquely
damaging to growing biotechs, to say nothing of the firms'
conflict of interest and opaque standard-setting processes.
Mr. Duffy's bill to regulate proxy firms would be a welcome
change from the status quo that forces companies to contort
themselves to satisfy proxy advisors rather than making
decisions in the best interest of the company and its
shareholders.
These important bills and other capital formation
provisions in the CHOICE Act, like cost-savings from XBRL and
SOX, will build on the JOBS Act by supporting the growth of the
212 newly public biotechs that have enjoyed big success over
the last 5 years.
The JOBS Act has shown the strong impact that a
policymaking drive toward capital formation and away from one-
size-fits-all regulatory burdens can have. I applaud the
subcommittee for considering further initiatives to support
small business innovators, and I look forward to answering any
questions you may have.
[The prepared statement of Mr. Hahn can be found on page 57
of the appendix.]
Chairman Huizenga. Thank you very much.
Mr. Green, you are recognized for 5 minutes.
STATEMENT OF ANDY GREEN, MANAGING DIRECTOR OF ECONOMIC POLICY,
CENTER FOR AMERICAN PROGRESS
Mr. Green. Thank you, Mr. Chairman, and Ranking Member
Maloney for the opportunity to testify on this important topic.
I would like to make three points overall. First, the impact of
the JOBS Act has been mixed, although many results are not in.
For the public markets, regulation is not the problem,
rather a focus on structural issues, which is where competition
would be very helpful. And then for the private markets, small
business access to capital impacts have also been mixed and
investor risks remain. A new focus on the wealth, skills, and
network gaps for would-be entrepreneurs is needed.
One of the principal goals of the JOBS Act was to increase
IPOs. For better or worse, the IPO market is now dominated by
EGCs. But being an EGC has nothing to do with any particular
nature of the company itself, whether innovative and exciting
or non-innovative and not exciting. It is just a regulatory
label.
Unfortunately, data suggests that these EGCs tend to be
lower in quality from a listing and investment perspective--46
percent of EGCs that filed a management report on internal
controls reported material weaknesses in those controls.
One study found EGC companies had a 21.8 percent lower
return on assets, and a 3 percent lower stock performance on
average. Capital formation and market liquidity for any stocks
also appears negatively affected. And another study found that
EGCs experienced 7 percent more underpricing than similarly
sized companies prior to the JOBS Act.
Another study was more positive about the JOBS Act effects
on IPOs. It found a 25 percent increase in IPO volume compared
to the 2001-2011 levels. But this was largely due to the
confidentiality and test-the-waters provisions that de-risked
the offerings in terms of their outward-facing communications
with investors.
The de-burdening provisions such as reduced disclosure and
lighter accounting rules were not meaningful. And this is an
important conclusion because it shows that most provisions that
reduce investor protection were not important in terms of
increasing IPO availability. The study also found little
evidence of improved analyst coverage despite the reductions in
investor protection on conflicts of provisions.
Unfortunately, this good news did not last. In 2015 and
2016, IPO volume fell to the lowest level since the Great
Recession. I am not pleased to note this. I would just
highlight that other factors, other than compliance
requirements, may have a much stronger influence in IPO
behavior.
So the question than is whether the lighter compliance
requirements of Title I make sense? It appears that the
confidentiality and test-the-waters provisions seem like good
ideas, seem to be working, and seem to have limited negative
consequences, so let's keep them.
It may make sense to revisit some of the de-burdening
provisions, at least by giving the SEC more flexibility to
restore those that were removed by statute, given the somewhat
lower quality results in EGC companies.
If Congress wishes to boost the viability of the public
markets overall, it needs to turn its attentions to other
factors. One I would particularly like to highlight is
competition policy. Mergers and acquisitions are now the
biggest reason for the market decline in listed companies. And
there is growing evidence of market concentration across the
economy.
Stronger approaches to antitrust enforcement are needed.
The SEC may have a role to play as well. The Exchange Act,
Section 23(a), mandates that the SEC consider competition as
part of its rulemakings.
Competition is sprinkled throughout the Federal securities
laws as an idea. It is even part of the title of this hearing.
And the SEC has a number of tools to boost transparency, better
regulate M&A, and help level the playing field back towards the
public markets.
I don't have specific recommendations today, but I think it
is a topic that I would encourage all of us to think about more
as we think about holistically how to boost our public markets.
Let me briefly say a word about the private market
provisions of the JOBS Act. First, old Rule 506(b) is still
working very well. The market more than doubled from 2000 to
2014 in terms of the amounts raised annually.
The Title II provisions of 506(c) are not widely used. So
506(c) is really the workhorse, and that is still a success.
New provisions, such as Title II crowdfunding, appear to be
working well.
And we are in the early stages of Title III and State-based
crowdfunding, which are not part of the JOBS Act but are part
of the spirit of it. And I look forward to seeing the results
as companies take advantage of it, and it goes well.
Risks are yet to manifest and we still need to be very
careful about those. I remain deeply concerned about the
broader reach solicitation. Even though most companies are not
taking advantage of it, it is still used.
And when there are problems, investors don't get all their
money back, and the SEC does not have enough resources to track
down everything after the fact. That is why stricter
requirements for filing Form D make a lot of sense.
Lastly, I would like to encourage a focus on the wealth,
training, and network gaps that would make a lot of difference
in terms of enabling entrepreneurs from minority and women-
headed households to have more opportunities to access the
capital markets.
There is a lot more I could say, and I look forward to
answering any questions you may have. Thank you very much.
[The prepared statement of Mr. Green can be found on page
38 of the appendix.]
Chairman Huizenga. Thank you.
Mr. Knight, you are recognized for 5 minutes.
STATEMENT OF EDWARD S. KNIGHT, EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL, AND CHIEF REGULATORY OFFICER, NASDAQ, INC.
Mr. Knight. Thank you very much for inviting us here today.
I want to highlight a few elements of my testimony. I have been
general counsel at Nasdaq now for 17 years. I have seen the
markets evolve a lot. One of the most consequential acts of
Congress in that period has been the JOBS Act.
It has been positive for both the public markets and the
private markets. But I want to say up front that Nasdaq
believes in regulation. We do a lot of regulation at Nasdaq. It
is important to protect investors.
We looked at 46,000 SEC filings last year. We deregistered,
delisted 68 companies. We did background checks on 4,100
directors and officers before we allowed them to list.
But there is no doubt that listing on a public market does
have a positive impact in terms of, for instance, jobs
creation. I think there is just irrefutable evidence that jobs
get created once companies go public. Most public companies
grow by 100 percent to 150 percent in terms of their
employment.
In the last 5 years, Nasdaq has taken 621 companies public.
They have a market cap of $850 billion. They raised about $100
billion in new capital in doing that. And it has had a huge
impact, we think a positive impact, on the economy.
The JOBS Act helped with that. I want to summarize what we
see as the effects of it. As others have said, the ability to
file confidentially, the ability to test waters, those
provisions helped immensely, particularly with companies that
were on the edge of going public. It pushed them to do it.
Many in the healthcare area did it. And we have seen, I
think, no adverse impact on investors because of these
provisions. All we have seen is more entrepreneurship, more job
growth, and I think a very positive impact.
But it petered out after a while as the chart will show
you, I think the number 2 chart in my prepared testimony. Over
the last few years, the number of companies going public has
gone down. There are things that can be done to restore the
vibrancy of these markets, to create an ecosystem that will be
more conducive to companies going public. And I want to touch
upon that.
I do want to note that at the same time, while the U.S.
markets have been dropping in terms of IPOs, other markets that
we run in Northern Europe, for instance, are having a vibrant
IPO market. So these things do react to public policy. This is
not necessarily something that has to happen.
I do also want to point out, even when the Government
doesn't regulate, these markets regulate themselves in the
sense that major market participants, institutions, require of
these companies a lot.
It is not for everyone to go public. Not only is there
regulation by the Federal and State Governments, but large
institutions require a lot of these companies. And it is not
for everyone. But what we are hearing over and over again from
companies who are thinking about it, is not necessarily going
private. It is the process of staying private and what they
have to accept in terms of regulation that may not be directly
related to running a company. In a highly competitive, global
marketplace, distraction from the job of running that company
and competing around the world is a cost that these companies
pay.
And you have to ask yourself, is this regulation really
necessary for the running of this company, building these
companies, creating opportunity, creating jobs, and creating
innovation?
Another key aspect of a public company that gets lost
sometimes in the debate is when these companies go public, they
are open to investment by individual investors. You do not have
to be an accredited investor as you have to be in the private
market.
In my testimony, you will see one of the most dramatic
examples: Amazon went from the 1990s with a market cap of $350
million to a market cap of over $350 billion, employing
hundreds of thousands of people. In the last year alone, they
have created 100,000 jobs.
What we think should happen more often is early stage
companies having the opportunity to go public, having a market
that is more inviting than it is today, so that they will go
public and grow in the public markets, not only to create those
jobs but also to give the investing public an opportunity to
grow with them, which they do not always have today.
So there are a number of things we would focus on. One is
the Main Street Growth Act that Congressman Garrett introduced
last year that has been part of the CHOICE Act. We think that
is positive legislation. The proxy reform legislation and
modernizing disclosure in our markets, but we can get more into
that. Thank you very much.
[The prepared statement of Mr. Knight can be found on page
77 of the appendix.]
Chairman Huizenga. Thank you, Mr. Knight.
And Mr. Quaadman, you are recognized for 5 minutes.
STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER
FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE
Mr. Quaadman. Thank you, Chairman Huizenga, Ranking Member
Maloney, and members of the subcommittee. The Chamber
appreciates the continued work of this subcommittee on capital
formation legislation, including recent efforts with the FAST
Act, legislation to create the small business advocate in the
SEC, as well as the Poliquin legislation, which forces the SEC
to either modernize regulations or to explain why not.
Yesterday, the Chamber, in conjunction with RSM, launched
our quarterly middle market survey. And next week, in
conjunction with the Morning Consult, we are going to release
our small business survey.
Both of these surveys find that while economic challenges
still exist, there is increased optimism amongst middle-market
and small business companies. However, that optimism is coupled
with an expectation for Washington to remove barriers to
growth.
We need to have a balanced private and public capital
market system in order to support our diverse economy. The JOBS
Act was a bipartisan and helpful way of trying to address those
imbalances, and it provided rules that would allow businesses
to grow from small to large, make the IPO process easier, and
to help companies to go public and remain public.
There are initial successes with the JOBS Act, but the
progress has been halting, and in some ways the situation is
worse today than it was in 2012. More must be done and SEC
implementation issues have also harmed and blunted the
effectiveness of the JOBS Act.
The public company markets are in worse shape today than
they were 5 years ago. As Mr. Hultgren mentioned, we have less
than half the public companies today than we did in 1996, and
that number has gone down in 19 of the last 20 years.
But let's take a look at 1982. Since 1982, the population
of the United States has grown by 40 percent. Our real GDP has
increased by 160 percent. And we have roughly the same number
of public companies today as we did in 1982. To put it in other
words, the gains of the Reagan Administration and the Clinton
Administration have been wiped out.
There are four main drivers of this problem. One is
structural and managerial issues at the SEC. We have issued
three separate reports on that with 70 recommendations. I am
not going to get into that today. Also, financing issues,
regulatory obstacles, and a 1930's style disclosure regime that
is increasingly used to embarrass businesses and not provide
decision-useful information to investors.
Combined, these issues create a tax on innovation and
growth. And we if take a look at those numbers of public
companies, as Justice Marshall observed 200 years ago, that
power to tax is a power to destroy. We need to restore an
ecosystem of growth that provides benefits throughout the
economy.
The Kauffman Institute did a study which showed that
between 1996 and 2010, IPOs created 2.2 million jobs. Boosting
growth from 2 percent to 3 percent takes 12 years off of the
length of time needed to double the economy, and reduces the
deficit by $3 trillion over 10 years. A 0.5 percent uptick in
growth creates 1.2 million jobs and $4,200 in additional income
for workers.
We need to recreate that culture that rewards success, and
celebrates when a UPS driver or a Microsoft executive assistant
becomes a millionaire when their company goes public. In order
to rebalance this system and reverse this trend, we think the
SEC and Congress should do the following:
Disclosure effectiveness needs to be a top priority. We
shouldn't talk about it any longer. The SEC needs to move
forward and bring a disclosure regime into the 21st Century. We
need to pass proxy advisory reform legislation that creates
transparency, accountability, and oversight over proxy advisory
firms.
We need to recognize that capital formation and corporate
governance are inextricably linked and have 14a-8 reforms,
including resubmission thresholds, overturning the Whole Foods
decision so the SEC is a fair umpire in the shareholder
process, ownership verifications so that we know that a
shareholder proposal proponent actually owns shares in the
company that they are making proposals in. And Reg. D
clarification to make the JOBS Act effective.
We need to fix financing through the passage of BDC
legislation, fixing crowdfunding, the Main Street Growth Act,
as well as providing micro-offering safe harbors.
We need to modernize rules including expanding the
eligibility for Form S-3. Clarifying the definition of
accredited investors exempting emerging growth companies from
XBRL, and simplifying small private equity disclosure and
registration.
And we should also pass those remaining provisions of Title
X of the CHOICE Act. These are, we think, very simple, common-
sense reforms. We think that others can be done as well. And I
look forward to answering your questions.
[The prepared statement of Mr. Quaadman can be found on
page 85 of the appendix.]
Chairman Huizenga. Thank you for that. At this time, the
Chair will recognize himself for 5 minutes for some questions.
Mr. Quaadman, while we were having this discussion, you
noted that, I think, the average initial regulatory cost
associated with an IPO is $2.5 million. And the estimated
annual compliance costs for public companies average about $1.5
million. What are the main drivers of these costs?
Mr. Quaadman. A lot of the costs that are associated with
that are legal costs. And it is also a matter of being able to
go out and talk to investors and the like. The JOBS Act
actually did a lot to help facilitate that. However, with every
IPO, there is a securities class action waiting to happen.
And so the legal costs are actually high and that company
is also going to be expected to be sued. So I would say that
the costs are even more than that, but the regulatory costs are
in that ballpark.
Chairman Huizenga. And the significant portion of these
costs, are they relevant to all publicly traded companies
regardless of size? Or are some of them hit sort of
disproportionally?
Mr. Quaadman. What the JOBS Act did that was very
beneficial is to allow emerging growth companies to ease into
the regulatory process. As you are a public company for a
longer period of time, those costs are going to go up.
And they are going to go up dramatically, because you are
going to start to deal with different rules such as conflict
minerals or whatever, which impose very expensive reporting
regimes on companies.
And that is actually the reason why Michael Dell said he
was no longer going to run a public company, because he felt he
would rather manage a company than having to deal with those
extraneous issues.
Chairman Huizenga. Okay. Mr. Knight, you testified that you
had a number of discussions with CEOs and that the primary
challenge is not about going public, but about being public.
And it sounds like that is a consistent thing that you are
hearing a lot. Why is that? Can you elaborate on that a little
bit?
Mr. Knight. I will give you a statistic. If you asked a
Silicon Valley accomplished lawyer who takes companies public a
few years ago what the rule of thumb was in terms of revenues
for a company before they go public, they would have said $30
million.
Today, they would say $100 million. The infrastructure that
you need in order to support all the reporting requirements and
the regulatory requirements--I am not talking about the
financial disclosure. No one is arguing about financial
disclosure. That is a key to a well-run market and protecting
investors.
It is the other public policy goals that have been put on
the public company model that makes the market look uninviting,
particularly at a time when--
Chairman Huizenga. Put on by whom?
Mr. Knight. By a CEO or a board that is considering
options.
Chairman Huizenga. Okay.
Mr. Knight. Shall we go public? Shall we be acquired? If we
get acquired, maybe some of the R&D we are doing is going to be
thrown overboard and the innovation in that company by the
acquired company. The opportunity for investors to invest in
that company through an IPO will be lost.
The environment does not look very inviting, particularly
when you have $8 trillion in sovereign wealth funds available
to invest in these companies as private companies.
Chairman Huizenga. But to interrupt here just a moment, on
your Chart 1, that did strike me showing that--it is on page 2
for anyone who wants to take a look at it here.
But you talk about the sovereign wealth funds and private
equity firms and how they are the ones now capturing all that
initial growth, rather than the public, who would be investing
on that.
And you kindly included two companies from my district,
Macatawa Bank and Herman Miller, that have had that and have
had challenges. And stock prices are going up and down. But--
Mr. Knight. And there is--
Chairman Huizenga. --elaborate on that a little bit.
Mr. Knight. There is nothing wrong with this. The private
market is vibrant. That is great. It gives people funding
choices they might not otherwise have. But it won't always be.
And the public markets need to be there. And they need to be
there in a modern way.
Many of the issues we are talking about on this panel are
regulatory issues that haven't been revisited in 20 years. We
are not talking about getting rid of them. We are talking about
modernizing them.
We are not talking about getting rid of disclosure. We are
talking about bringing it into the 21st Century where there is
electronic disclosure.
Why do you have to file with the SEC? That is an 18th
Century concept. You can put it on a website. You can use other
electronic means of communication. And modernizing these
markets will make them more competitive with other markets at
the same time.
Chairman Huizenga. I have run out of time, and that was
going to be one of my last questions, is what specifically can
Congress do to alleviate some of those crippling burdens, for
you and for Mr. Keating and others. But hopefully someone will
be able to get to that.
So with that, the Chair recognizes the ranking member of
the subcommittee for 5 minutes.
Mrs. Maloney. Mr. Green, I would like to ask you about
crowdfunding. As you know, the crowdfunding rules have been in
place since last May. The SEC recently did a study of it and
found that it was broadly working as intended, but noted that
one funding portal had been terminated by FINRA for failing to
supervise several potentially fraudulent companies that were
trying to raise money on their platform.
What is your take on how crowdfunding has gone so far? Is
it helping small companies get access to capital like we
intended? And are you concerned that one of the intermediaries
that Congress intended to reduce the risk of fraud has already
been shut down? What is your take on all of this?
Mr. Green. I thank you for that question. I think it is
going well. I think that it has only been a short period of
time and the uptick is increasing. And we need to let the
market mature. I am actually pleased to hear about this
enforcement action because it shows that our regulators are on
the beat.
And one of the most important things to make crowdfunding
be successful is that investors have confidence that when they
go to the market, they are going to have opportunities to pick
from reliable companies via reliable intermediaries, funding
portals, and other broker-dealers that are running portals.
So actually shutting down a portal that is not doing their
job makes me think that things are on the right track.
Mrs. Maloney. Okay. Great. Does everybody agree? Are there
any other takes on it that they would like to add from any
panelists on crowdfunding?
Then, I will go to Tom Quaadman. I noted in my opening
statement that the new Regulation A+ has been used by a wide
range of companies. Some are extremely small, with 2 or 3
employees. Some are much larger.
I found it very interesting that many of the community
banks have chosen to raise money through Regulation A+, even
though they can raise capital in other ways, such as private
placement to sophisticated investors.
Was this the target market? Do you think it is a problem
that companies that can already raise money in other ways have
been using Regulation A+ to raise capital?
Mr. Quaadman. I think what the JOBS Act did is try to
create as many different options as possible for businesses to
raise capital. So if they could do it through Regulation A+, if
they are eligible for it, fine. If there are other ways to do
it, that is fine too.
One of the things that Regulation A+ does is it creates a
system whereby a smaller company can raise capital from a known
investor base, which is why you also don't see the testing of
waters as you do in other places.
And it would make sense actually for community banks to use
that because as a smaller bank in a smaller community, they are
going to know that investor base a lot better. And they are
going to be able to use that as a device to try and raise
capital from them, as well as the fact that there may be other
costs involved with other systems that they may not have with
Regulation A+.
Mrs. Maloney. You mentioned the testing of the waters. The
vast majority of companies that have used Regulation A+ so far
have not taken advantage--
Mr. Quaadman. Correct.
Mrs. Maloney. --of this testing-the-waters option. So what
do you make of this? Is testing the waters with potential
investors just not that important for companies? Or is it too
difficult and time-consuming to go through the testing-the-
waters process? What is your take on all of that?
Mr. Quaadman. No. Actually, I think it is a very important
device to use, and also, you could look at it in one context in
terms of Reg D, general solicitation of Regulation A+. And I
think with Regulation A+, again, you are dealing with sometimes
companies that already exist that have a known investor based
that they can go after.
Obviously, you want to use testing of the waters when you
are talking about a newer company that doesn't have that known
investor base. So I think actually being able to do it both
ways satisfies the needs of companies at different parts of a
maturity scale.
Mrs. Maloney. I would like to go back to Mr. Green. The
current SEC rules require issuers using Rule 506 to offer
private securities to file a form called Form D with the SEC
only 15 days after the first sale. In addition, there is no
penalty or disqualification for failure to file Form D.
The SEC proposed to change these rules in 2013 when it
implemented Title II of the JOBS Act, to lift the ban on
general solicitation. Do you think these safeguards are
important for securities offered under the new rule 506(c)?
Mr. Green. I do think they are quite important. They are
important for a number of reasons. One is baseline data
collection. We don't have a great deal of insights across the
entire Reg D market. So having a full compliance with the Reg D
for the Form D filing would be very helpful.
But the more important aspect really is investor
protection. As we move more towards making the private markets
quasi-public by having public advertising, which is what
general solicitation is, we need to be a lot more concerned
about the impacts on ordinary investors who are liable to make
bad decisions and be taken advantage of.
And there is a very interesting study that the AARP put out
only a couple of days ago that I would recommend that everyone
take a look at. It has some amazing statistics.
Mrs. Maloney. My time has expired. Thank you.
Chairman Huizenga. With that, the Chair recognizes the vice
chairman of the subcommittee, Mr. Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman. Again, thank you all
for being here. I really appreciate your valuable insight and
testimony here today.
Mr. Hahn, I would like to start with you. I was drawn to
this line in your testimony. You said, ``The JOBS Act has been
an unqualified success, enhancing capital formation and
allowing companies to focus on science, rather than
compliance.''
I am also a member of the House Science Committee, and I am
keenly aware of the innovative work that bio and its members
are doing. I wondered if you could provide some insight into
how access to the capital markets is driving changes in
medicine?
We are really talking about making lives better, saving
lives. I wonder if you could just give a little insight into
that?
Mr. Hahn. Thank you. As I had stated in my testimony, the
testing-the-waters provision of the JOBS Act was instrumental
in our successful IPO.
So at GlycoMimetics, it is a very novel, unique approach
that we are taking that takes a very sophisticated approach
that--with a single meeting with an investor before the JOBS
Act in a 2-week IPO roadshow, investors could not get
comfortable with the science and the technology.
And testing the waters allowed enough time leading up in
the months before the IPO to actually get their head around the
technology and the science, and to ask follow-up questions. And
that was instrumental in helping a successful IPO.
Mr. Hultgren. That is great. Thanks.
Mr. Knight, thanks for being here.
Mr. Knight. Thank you.
Mr. Hultgren. I wanted to follow up on your testimony. In
your testimony you mentioned the idea of permitting companies
of all sizes to file for their IPOs with the SEC on a
confidential basis, and permit other types of registration
statements besides IPOs to be initially submitted on a
confidential basis.
Could you explain the benefits of filing under a
confidential basis, and what other type of registration
statements you believe that this might be able to be extended
to?
Mr. Knight. Yes. I think it is important to understand when
companies are considering going IPO, they are also looking at
other options. And they want to be able to explore the option
of going public while looking at these other options.
If you have to file in the public, you are committing
yourself in the sense that if you don't do it, the market will
exact a price on you for having ``failed.'' So they don't want
to fail at that. They want to explore it.
These companies, like all companies, are dealing in a very
competitive marketplace, and these filings often have
information that has a proprietary impact. And it is required.
The public needs to know what your strategic plans are before
they invest. But you are putting them out there for all of your
competitors to see.
So to have the option of deciding not to go public, but
perfecting your disclosure, is very valuable to companies that
are looking at this.
Mr. Hultgren. Mr. Knight, continuing with you, you
mentioned briefly in your testimony about this, but I wanted
just to drill a little bit further. As you are aware, the
former chairman of this subcommittee, Chairman Garrett,
sponsored legislation that would permit exchanges to list
venture securities.
Do you believe such an exchange would improve liquidity and
price discovery for these securities? And could you explain how
intelligent tick sizes would improve liquidity for these
securities? Also, do you have any other feedback on the Tick
Size Pilot currently under way?
Mr. Knight. The Tick Size Pilot, our current assessment is
that it is, frankly, too early. It does look like there is more
liquidity that is being generated, but it is too early to make
conclusions. People are still adjusting to it.
But Congressman Garrett's bill had a number of what we
think are very important features. The market structure that
secondary trading occurs in has a cost associated with it. And
we have a structure today that is designed to facilitate
trading of Google and Amazon, which is great.
But it doesn't work for smaller cap companies. And there
needs to be an examination of that to have a small cap company
trade across 11 stock exchanges in 40 dark pools, fragments
that liquidity. It undermines the price discovery process.
So the Garrett bill would allow the company that lists to
decide to aggregate that liquidity on one market. It would
allow the exchange to adjust the tick size to encourage
liquidity by having wider tick sizes, bringing more market
makers into it.
I would like to point out the Saudi Arabian stock exchange
that we sell technology to. It has intelligence tick sizes. We
don't have it here. We petitioned the SEC to consider it. We
have not ever gotten a response. So we think it is an
intelligent idea, and we are glad it was in that bill.
Mr. Hultgren. Thank you all.
I yield back.
Chairman Huizenga. The gentleman's time has expired.
With that, the Chair recognizes Mr. Lynch for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman. Mr. Chairman, I would
ask unanimous consent to enter into the record a statement
written by Mike Rothman, who is the president of the North
American Securities Administrators Association, Inc. And also,
a communication to the committee from the Council of
Institutional Investors.
Chairman Huizenga. Without objection, it is so ordered.
Mr. Lynch. I thank the chairman.
I want to thank all of the witnesses here today for your
help. It's very important, and Mr. Knight, I want to thank
Nasdaq for its help on the tick size experiment, and I am eager
to hear what the data might show.
Mr. Green, last Congress, we had the chairman's Financial
CHOICE Act, which seeks to expand some of the exemptions that
we included in the JOBS Act. It also increases the penalties
that the SEC might levy against some bad actors. But in an
important way, it imposed significant requirements on the
Commission prior to bringing an enforcement action.
For example, the bill would require the Commission to
conduct a cost-benefit analysis of whether the penalty would
negatively affect shareholders of the company of which we
believe their officers and employees may have broken the law.
In addition, the Financial CHOICE Act would permit
defendants to choose their own venue, which I have a problem
with. It actually creates an ombudsman to separately defend
these bad actors before the Commission. And there are several
other opportunities in the bill to slow down the enforcement
process.
So how would provisions like these, that make it more
difficult for the SEC to hold wrongdoers accountable, harm the
integrity of our markets and a company's ability to raise
capital?
And does this framework that is being suggested here in the
Financial CHOICE Act create a moral hazard where it is so hard
to hold the bad actors accountable, people say why not?
Mr. Green. Congressman, I 100 percent agree that it creates
a very serious moral hazard. I think that there is a lot more
that needs to be done to improve the SEC's enforcement ability
and its scope, but it is not going the direction of tying their
hands and making it harder for them to bring cases.
I think there has been 20 to 30 years of accumulated
Supreme Court and other precedents that make it hard for them
to go after anybody other than the immediate speaker, and a
bunch of other cases make it hard for private attorneys general
to bring cases.
And all those things that you are talking about, being able
to choose your forum, doing cost-benefit analysis, not actually
holding the shareholders accountable for the decisions that
their board and their executives make with their money, those
are all completely the wrong direction.
And I also highlight one more part of the CHOICE Act that
gives me great concern is getting rid of the bad actor
automatic disqualifications.
Mr. Lynch. Right.
Mr. Green. These are forward-looking prophylactic things
that improve investor confidence in our markets. And I think we
have to come back to that, that the strength of our markets is
investor confidence.
Mr. Lynch. But you would be hard-pressed to find an example
of the SEC actually enforcing the bad-actor provision. In case
after case after case after case, they don't enforce that, even
when we have a successful enforcement action.
I have this issue with Sheila Bair and other folks there
who gave rise to this too-big-to-jail accusation and a lot of
criticism at the SEC.
Let me ask you as well, while we are on this, the CHOICE
Act would also allow emerging growth companies to be exempt
from Section 404(b). I know a lot of people hate this, but it
does introduce some accountability where the CFO has to sign
off on the internal controls audit. And I would like to have
your thoughts on that.
Mr. Green. I think the evidence from the data is that the
EGCs that don't have to do this have much weaker internal
controls and are lower performing and there is greater investor
risk. So I think expanding that is the absolutely wrong way to
go.
I think holding people accountable--and that is the point
of capitalism. Your money is on the line. You are the board.
You are the CEO. You ought to sign on the dotted line and take
responsibility.
Mr. Knight, if there were one recommendation that you would
like to make this committee aware of in order to increase the
number of companies going public and creating the jobs--and I
appreciate the work that Nasdaq has done on this--what would
that one suggestion be?
Mr. Knight. Part of the difficulty in answering that is the
problem is death by a thousand cuts.
Mr. Lynch. Yes, okay.
Mr. Knight. It is not one issue.
Mr. Lynch. All right.
Mr. Knight. Two is, I will get back to the 404(b) issues if
I could respond to that also?
Mr. Lynch. Sure.
Mr. Knight. Our experience has been that companies going
public are not taking advantage of that. Why? Because there is
a private ordering that is going along here. Institutions do
not like you not doing 404(b).
Mr. Lynch. Yes.
Mr. Knight. So even though Congress may not require it,
Fidelity may not invest unless you do it.
Mr. Lynch. Yes. That is a good point.
Mr. Knight. So you have to keep that factor in mind also.
Mr. Lynch. Yes, so it is positive peer pressure, as opposed
to--
Mr. Knight. It is the investing community.
Chairman Huizenga. The gentleman's time has expired.
Mr. Lynch. I'm sorry.
Mr. Knight. It imposes a discipline.
Mr. Lynch. I thank you for your indulgence, Mr. Chairman. I
yield back.
Chairman Huizenga. The Chair now recognizes the gentleman
from Arkansas, Mr. Hill, for 5 minutes.
Mr. Hill. I thank the chairman. I appreciate you holding
this hearing to assess what progress we have made under the
JOBS Act, clearly one of the most important and successful
fiscal economic policy acts passed during the Obama days.
I would like to start out--we have talked a lot about the
costs of being a public company and the challenges of being
public because of those costs and the immense size of the
market cap one has to have to really kind of justify going
public and the frustrations of that.
And some of that is 404-related, for example, in hardcore
accounting costs, but I want to talk a minute and get people's
views on the proxy process, and sort of the challenges of being
a public enterprise, 14a-8 for example, on proxy access.
I will start with you, Mr. Quaadman. You referenced this in
your testimony. It was meant to be a way for shareholders and
management to communicate. That is why the Commission organized
it and to have a two-way dialogue, if you will.
But it has really, in my view as a former business guy,
sort of been taken over by various eccentric, occasionally
volatile activist-type topics and can be very distracting to
corporate management, not just on annual meeting day--
Mr. Quaadman. Right.
Mr. Hill. --but as a general matter. Maybe driving up the
cost involved in being public, but maybe driving down the
desire to be public because it just is a distraction from the
core business.
You talked a little bit about a policy that the incoming
Commission might consider withdrawing: Staff Legal Bulletin 14H
CF. Would you comment a little bit more on that topic?
Mr. Quaadman. Sure, and I will actually give you, I guess,
both sides of the coin there. One is 92 percent of CEOs in the
IPO Task Force said that the reporting regime is very
burdensome, and it doesn't allow for them to provide
information in a constructive way to investors.
Stanford University did a study 2 years ago where they
surveyed institutional investors with $17 trillion in assets.
What those institutional investors came back with and said is:
``The proxy is too long; it doesn't provide information; and
only a third of the information is relevant.''
Furthermore, when we were putting together a disclosure
effectiveness report a couple of years ago--and this is
anecdotal--we came up with everybody sort of thought that about
half of the proxy was repetitive for legal reasons, for
liability reasons.
And somebody actually went back and ran some numbers
through EDGAR and it came out to be about a third. So all that
sort of encapsulates that that information, or those
information delivery devices, are not providing decision-useful
information to investors, and unfortunately, the SEC as well.
And this is why, also with what you had raised there, the
SEC has not been acting as the arbiter that they should be,
where they are being the umpire here.
So as an example, with the Whole Foods decision, Mary Jo
White issued it on a Friday night and effectively abdicated the
SEC's role to be able to act as the arbiter for what proposals
should be going forward and not either. So the system is broken
and neither side sees it working.
Mr. Hill. Thanks, Mr. Quaadman. I want to switch gears just
with the time remaining, and one of the issues I have been most
interested in is, can we make progress on crowdfunding?
I introduced a bill that exempts crowdfunding from the
burdens of Subchapter S filing for the IRS code as a way to
encourage people to use the Subchapter S technique.
I'll start with you, Mr. Knight. What problems have you
identified with the SEC's final crowdfunding rule? And then we
probably have time for one other person. If you would respond
to that? What can we do to make it better?
Mr. Knight. Obviously, because there has not been the
public response that people expected, it needs to be revisited.
And I just think from the outset, the SEC's view of it was that
they were not for this. And they made it, shall I say,
needlessly complicated and did not approach it except as this
was something where the public is going to get harmed, and we
need to narrow it as much as possible.
Mr. Hill. Thanks for that.
In my time remaining, Mr. Chairman, I just would say to Mr.
Hahn, I think you referenced IPRs under the patent law in your
short-selling testimony.
I think, potentially, there is abusive use of IPRs. And I
hope that Mr. Clayton, once he gets his team in place at the
SEC, will look at this. I have heard about specific concerns in
the district about that issue. So I appreciate you raising
that.
And with that, I will yield back, Mr. Chairman.
Chairman Huizenga. The gentleman's time has expired.
And just for information, votes have just have been called.
So what I would like to do is go to Mr. Scott for his 5
minutes, and then we will need to break. And hopefully,
everybody can stick around, if that is all right?
We anticipate walking off the Floor at about 3:50. And so I
would ask everybody to get back here as soon as they possibly
can, as a courtesy to our guests, our witnesses.
So with that, I recognize Mr. Scott for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman, for squeezing me in
before the bell. I appreciate that.
Let me ask each of you, if you could change one thing about
the JOBS Act, what would it be? And as you are pondering that,
do you think the JOBS Act went too far in loosening security
regulations? And if so, why?
I understand that some of you certainly want to make it
easier for businesses to raise capital or for entrepreneurs to
start that new company, and so do I. But this is just me
speculating, that is why I want to find out. Do you think we
went too far with these regulations? What do we need to do with
that?
Mr. Green, maybe you can start?
Mr. Green. If I could squeeze two in, it would be Title II,
general solicitation with the exception of the crowdfunding
aspects of it, and also Title V, if I remember correctly, the
one that took it from 500 to 200 shareholders, because I
actually think that works against our desire to have a more
robust public market by making it much easier for companies to
stay big and private for much longer.
Mr. Scott. Okay.
Mr. Hahn? What would you change?
Mr. Hahn. I think targeted bipartisan acts like the
Fostering Innovation Act, is a one-size-fits-all regulation
that--I appreciate some of these large companies, but I am a
very small biotech. So a lot of the regulations that large
companies have to adhere to, I don't think that same one-size-
fits-all is appropriate for a company of my size.
Mr. Scott. All right.
Mr. Knight, what about you?
Mr. Knight. I think extending the confidential filing and
testing-the-waters provisions to all companies would be a
positive development. And I don't think the JOBS Act went too
far.
Mr. Scott. Good. That is what I wanted to hear.
Mr. Quaadman?
Mr. Quaadman. Mr. Scott, I agree with Mr. Knight that the
JOBS Act could have removed more obstacles, but I think, more
importantly, Title I was self-effectuating. The other titles in
the JOBS Act were not, and that allowed a hostile SEC to either
draw out the implementation of the JOBS Act, or in fact, blunt
its effectiveness.
Mr. Scott. Mr. Keating?
Mr. Keating. I certainly don't think that it went too far.
I think I mentioned raising the amount that a company can seek
in a 12-month period would be a good thing.
And one quick comment. I am on board with all of the
comments that we have talked about in terms of the problems of
going public versus staying private.
But when you look at Title III in particular, and what we
are talking about with crowdfunding, we are talking about the
decision really of, should I partake in entrepreneurship?
Should I start up and build a business or not? That is a very
fundamental question, and I appreciate that it was addressed in
the JOBS Act.
Mr. Scott. Good.
Mr. Green, quickly? I have another point.
Mr. Green. I will just supplement by saying that one of the
things that the JOBS Act doesn't do, is it doesn't do things
other than deregulation. I think that deregulation has very
limited, and frankly, a lot of negative implications, a very
limited impacts on increasing access to capital.
We did a report of cap that looked at minority- and women-
owned businesses and the challenges for them in terms of access
to capital. And it is really the wealth gap. The average
middle-class family saw their wealth decline by 49 percent
between 2001 and 2010. And it has only recovered a little bit.
We need to do other programs to boost that.
Mr. Scott. Right. Let me ask you this, because if you
follow this committee, you know that I have been very concerned
about jobs, unemployment, all of that. And while I have this
brain trust before me, how do we put more emphasis on this
other feature of our economy that is moving so fast, that has
an impact on the joblessness rate?
What I am talking about is this rapid expansion of
technology. Technology is being driven so fast that it is
eliminating jobs. And I don't think we are all grabbing this as
quickly as we could.
There are jobs now that we once had, we no longer have
because of automation. I always use the example out there, the
elevator guy or other examples. What do you think of it? Are we
doing enough to call attention to that?
Mr. Green. One of the things that we noted was that there
is a misalignment between the interests of the corporations and
the public interest. And we just took the issue of workforce
training, which is so essential to grappling with that.
And we found that if we increased the disclosure of
workforce training and made it more like R&D, you would
actually incentivize companies to invest in their workforce to
be able to respond to these new, emerging technologies and
changes.
And it is those types of expanded disclosures that are so
important to making the economy work for everyone long-term.
Mr. Scott. It is so true in manufacturing now. We have the
robots doing jobs that we used to do. It is thousands and
thousands. Thank you, Mr. Chairman.
Mr. Green. Yes.
Chairman Huizenga. The gentleman's time has expired.
All right, with that, we will just remind everybody, we are
going to go and vote and then get back here as soon as we
possibly can after votes. And with that, the subcommittee is in
recess.
[recess]
Chairman Huizenga. The subcommittee will reconvene, and I
appreciate the patience of our witnesses. Thank you very much
for that.
And with that, the Chair will recognize Mr. Emmer for 5
minutes.
Mr. Emmer. Thank you. Thanks to the chairman and the
ranking member for having this hearing and examining the JOBS
Act and how successful it has been, and things that still need
to happen. I want to thank the panel for being here. And, like
the chairman, thanks for your patience.
This place just never stops moving. Thank you for waiting.
Very quickly, I come from the great State of Minnesota, where
we still are home to 17 Fortune 500 companies, and agriculture
and manufacturing drive our State's private economy.
But in Minnesota, like in other States in the union, I
suspect, it is imperative that we are constantly starting new
businesses, because today's big business was yesterday's
startup. The Kauffman Index is a publication that comes out and
ranks States based on new startups.
In 2014, in Minnesota again, a State with some very serious
economic activity, we ranked number 44 on the Kauffman Index in
terms of new business startups in this country. In 2015, we
dropped to number 47.
In the most recent rating, we really haven't moved much. We
are still in that mid to low 40s range for new business
startups. And this is a State that is full of innovators and a
highly educated workforce. We have many things going for us.
So what is the problem? We look around and we see that it
is access to capital. It is access to capital that is so
necessary to start up these new businesses.
That is why in the short time that I have, I have a couple
of questions related to accessing capital and what maybe we
could do to hopefully enhance what the JOBS Act started.
Mr. Quaadman, in your testimony today, you talk about the
need to fix the current rules regarding crowdfunding. And to
make them ``workable for businesses and their investors.'' You,
I believe mention, at least in your written testimony,
Representative McHenry's legislation, as well as a bill that I
offered in the last Congress, called the Micro Offering Safe
Harbor Act. It is two steps that would be in the right
direction.
Can you please explain in more detail on the record today
how these bills would help to provide early stage companies
access to the capital they so dearly need?
Mr. Quaadman. Yes. Thank you, Congressman, for that
question. In fact, the head of the Minnesota State Chamber is a
former colleague of mine at the Chamber. He and I have spoken,
so I understand the issues there.
One of the things that we have found consistently, and we
have gone around the country doing different events with State
and local chambers, is that there has been a disconnect between
Main Street businesses and their traditional forms of
financing. So they have been cut off from community banks for a
variety of different reasons and other forms of financing.
And this is a point I was making with my answer to Ranking
Member Maloney before is, what the JOBS Act does and I think
what you are trying to do with your bill, and I think what Mr.
McHenry is trying to do to make crowdfunding more efficient, is
let's create different options that allow those Main Street
businesses to access different alternative means of funding.
And let's create some new ones, and let's see what works and
what doesn't.
I think also to Mr. Himes' point, we have also asked the
SEC as they are putting rules together in each of these, that
they do a post-implementation study, both to check on how
investor protection is working and also how the economics is
working.
So I think your bill is very important. I think we need to
restore that access to funding to actually get the
entrepreneurial machine going again.
Mr. Emmer. And thank you for adding that on the SEC,
because that was going to be one of my questions. What can the
SEC do better? Why don't I move on with the short time I have
left?
Mr. Keating, in your written testimony, you indicate that
despite significant and positive changes created by the JOBS
Act, there is still need for improvement.
And again, back to this crowdfunding, could you please
describe some specific changes that you would suggest in the
crowdfunding regulations? What should be implemented to
maximize the ability of companies to raise capital through that
process?
Mr. Keating. Sure, and quickly, as a background to that,
first off, on our Small Business Policy Index, Minnesota ranks
very poorly. So there are a whole host of issues, I think, in
the State in terms of taxes and regulations that need to be
dealt with.
But when you look at the financing issue, community
banking, earlier somebody mentioned that community banks were
using the JOBS Act. That is encouraging because community
banks, small banks, suffered the greatest declines since 2007.
So the large banks essentially remain steady, the number of
them. The small banks is where we sort of collapse. A Federal
Reserve report said that also there was an unprecedented
decline in new bank entries. So we don't have that replacement
going on, new banks coming into the marketplace.
Mr. Emmer. Right.
Mr. Keating. So these are all critical issues that actually
have to be dealt with on that side, but then in terms of the
JOBS Act, as I said, raising the level that companies can go
out and raise in Title III funding, for example, would be good.
Raising the limits that investors can put into these
companies would be positive. And then, in written testimony, we
listed a whole host of areas where just those costs, the
tremendous--the costs are still significant to go through this
process.
I think it was David Burton at the Heritage Foundation who
did a study not too long ago talking about, when you look at
the total cost of crowdfunding, it is a significant percentage
of what you raise. And obviously the smaller you are, the
greater those costs are.
So anything in terms of lightening those requirements,
those regulatory burdens would go a long way to help.
Mr. Emmer. Thank you very much.
I see my time has expired, Mr. Chairman.
Chairman Huizenga. With that, the Chair will recognize Mr.
Hollingsworth for 5 minutes.
Mr. Hollingsworth. Hi, good afternoon. Thanks so much for
being here. I really appreciate all the testimony this
afternoon and bearing the indulgence of a brief recess as well.
My question is for Mr. Hahn. Tell me a little bit about
some of the cures you are working? What are some of the
ailments you are working on to cure in business?
Mr. Hahn. I'm sorry, some of the--
Mr. Hollingsworth. Ailments, some of the illnesses, some of
the challenges that you are working on cures for?
Mr. Hahn. Our lead asset is in a Phase III right now for
vaso-occlusive crisis for sickle cell disease.
Mr. Hollingsworth. All right.
Mr. Hahn. Our next compound that we have brought in the
clinic is for acute myeloid leukemia. We also have a trial in
multiple myeloma.
Mr. Hollingsworth. Most of those are certainly words that I
probably couldn't even spell, frankly. So I am glad that you
are working on them and not me.
One of the big questions I continue to ask myself is, how
do we get capital in the hands of people who know how to
innovate and develop new products far beyond my meager
comprehension?
And I think one of the things that I introduced, along with
Representative Sinema across the aisle, is the Fostering
Innovation Act that you had mentioned earlier today and how we
enable and empower you to be able to devote more of your
resources to science, as you say, and not compliance.
And so I continue to be a big champion for that innovation.
Tell me a little bit about what the costs of complying with a
404(b) audit might be, both internally and as well as the check
you might have to write to an accounting firm to verify that?
Mr. Hahn. First, thank you for sponsoring that Fostering
Innovation Act. To comply with 404(b), we are looking at
upwards of $350,000. So our external auditors have given me a
number of $150,000 to $200,000.
Right now, we do have an outside firm that is auditing our
internal controls. Those costs would increase up to $100,000
and up to about $100,000 in internal costs, whether it is
personnel or other internal-related costs.
When you first think about a $350,000 to $400,000 number,
it is hard to believe at first. But if you take a step back and
look, the last year our external audit fees, the last year we
were private, we paid just under $50,000. In 2016, we paid
$567,000 alone just to our external auditors.
And that goes back to an earlier comment about the cost of
just being public for us is about $1.8 million to $2 million
between the lawyers, insurance, auditors, and reporting
requirements.
Mr. Hollingsworth. Right. And to the best of your
understanding with regard to the Fostering Innovation Act,
there is nothing in here that says, you absolutely cannot
engage in a 404(b) if you, as a company, deem that it was
necessary to do so.
That you wanted to lower your cost of raising equity and
follow ons, et cetera, or investors pressured you to do so. You
can still go through a 404(b), but it would be a business
decision, not a regulator decision. Right?
Mr. Hahn. Correct. It is optional, and as with growing
companies, it is what makes sense.
Mr. Hollingsworth. Right.
Mr. Hahn. Our 1231 financial statements, 95 percent of the
assets on our balance sheet were cash.
Mr. Hollingsworth. Right.
Mr. Hahn. So it doesn't make sense to me to talk to
investors. They want all of the money they invest to go towards
the science, toward the clinical trials to get these therapies
to market.
And to sit there and tell them, $350,000 just to make sure
our bank reconciliations and the cash confirmations, just to go
an extra layer there, the cost-benefit ratio just doesn't make
sense. Same thing, we do 125 checks a month, and the CEO and I
are still the only check signers in the company.
Mr. Hollingsworth. Right.
Mr. Hahn. So we still have good controls around the cash
disbursements.
Mr. Hollingsworth. Right. And certainly, biotech is a risky
space. It is challenging to develop these new drugs, these new
medical devices, et cetera, and so it is certainly risky and
some of those companies do fail. Either the products didn't
work or they were unable to get the products that they thought
they would when they first raised capital.
But that doesn't mean that we shouldn't lower the
regulatory burden for the many companies that are trying to
succeed and bring drugs to the market. And so I certainly
appreciate you being here, and I appreciate your testimony on
behalf of the Fostering Innovation Act.
And with that, I yield back.
Chairman Huizenga. Okay. The gentleman yields back.
The Chair now recognizes the gentleman from New Jersey, Mr.
MacArthur, for 5 minutes.
Mr. MacArthur. Thank you, Mr. Chairman. This is kind of
like coming back from a rain delay in a ballgame. You have to
get back into the swing of it. I am reminding myself of a few
things that we were talking about before the recess. And I just
want to explore them.
Mr. Quaadman, you represent a host of different kinds of
companies, different sizes, very different capital structures.
And just briefly, because I only have a few moments, would you
just remind us what are the reasons for and the benefits of
companies using a public market capital structure?
Mr. Quaadman. Yes. The traditional form of businesses was
to go public. That was always the goal. And the reason for that
is that you can acquire or traditionally you could have
acquired an amount of capital that you normally could not have.
So if you are a rapidly expanding business, that allowed you to
access those capital markets.
What has shifted in the last 20 years--I think there are
two shifts--one is there is more of a desire to remain private,
partially because of some of the rules that the SEC imposes on
you. And a fear, particularly amongst founders, of losing
control.
The second is that there has been a fundamental shift in
mindset as well. I spoke before, a few years ago, to the top
100 entrepreneurs under 30, and I asked them the question, ``Do
you want to go public, remain private or be acquired?'' And it
broke out, a third, a third, and a third.
If I had asked that question about 10, 15 years ago, it
would have been 95 wanted to go public.
Mr. MacArthur. Yes. And I think that has been my
experience, too. I was a lifelong businessman. And as I was
thinking about your four reasons why you think companies aren't
going public, they were sort of environmentally structural
issues. The way the markets work, and I jotted them down.
You mentioned structural and managerial issues at the SEC,
financial hurdles, the regulatory environment, the disclosure
regime. It got me thinking about, I hit a tipping point in my
business right around that number you mentioned, $100 million
in revenue, and I was growing rapidly, needed to grow more
rapidly, needed capital. And I had to assess how to get it.
Mr. Quaadman. Yes.
Mr. MacArthur. And I wanted to go public. Actually, I was
one of those 15 years ago, 90 percenters who thought that would
be an interesting way to evolve the company.
I chose to go in a different direction, private equity. I
know why I did. I will keep that to myself for a moment. But I
am curious why you think--and Mr. Knight feel free to weigh in,
too--why do you think companies are choosing, beyond the things
you have already mentioned, to avoid the public markets?
Mr. Quaadman. Let me give you one very small example, but
then you start to multiply this out, as I think one of the
issues I was talking about internally, the disclosure regime,
pay ratio. Right?
So Congress decides companies now have to publish a pay
ratio between what the median average worker's compensation is
worldwide versus the CEO. So some people look at that, well,
that is sort of an innocuous thing or whatever.
Courts have recently started holding though, that
disclosures like that are really intended to embarrass
companies, and they violate the First Amendment.
But now look at what is also happening. You now have
jurisdictions that are passing a pay ratio tax, in Portland,
Oregon. You have others that are looking at it. And you sort of
look at the progression of the Soda Tax. This is where it is
going.
So when you start to multiply that out by hundreds, people
look at that those burdens are no longer necessary. You don't
want to go through those in order to have to be public, and
that is why Michael Dell decided to go private.
Mr. MacArthur. So it sounds like you are really saying that
becoming public seems to create an opportunity for the same
size company it was before, same quality, same business,
serving the same customers with the same employees, being
public now means it is an opportunity to have other people
exercising a good deal of control and influence and--
Mr. Quaadman. Control and influence and an injection of
political agendas which have nothing to do with running the
business.
Mr. MacArthur. Mr. Knight, just briefly, do you think we
have evolved into a place where failure and bad management
seems to have been criminalized?
Mr. Knight. I don't think I would say criminalized. But I
think the markets don't seem welcoming to entrepreneurs, the
public markets. And they have alternatives in the private
markets.
But look at a company like Tesla, Elon Musk. He is
investing for the long term. He wants to take us to Mars. You
cannot do that--
Mr. MacArthur. In a quarter.
Mr. Knight. --in a few months or in a quarter. So the
markets aren't designed today to accommodate that kind of
vision. The private markets do have funding available, but the
public markets won't always have it, and they are not for
everyone. The private markets aren't suited, for instance, to
many things in the healthcare area.
Mr. MacArthur. My time has expired, but that, by the way,
is probably the leading reason for me. I didn't want to live
under a quarterly microscope. I had plans that were going to
take some years to evolve, and they did evolve.
But I thank you all for your testimony today.
Chairman Huizenga. The gentleman's time has expired. With
the permission of our witnesses here, we are going to do a
quick second round.
And I recognize Ranking Member Maloney for 5 minutes.
Mrs. Maloney. Thank you.
First of all, I would like to thank you, Mr. Quaadman, for
the Chamber supporting my legislation on just disclosing the
number of women who are on boards. Recently, a statue appeared
in the middle of the night, in the middle of Wall Street, with
a little girl demanding the same thing. And it just took off on
social media with great thunder.
I would like to ask you and Mr. Knight and Mr. Green, and
anyone who would like to comment, first of all, do you think
the definition of accredited investor needs to be revisited?
In 1982, an accredited investor was required to have $1
million in assets or $200,000 in annual income. Now it is over
30 years later and it is still the same definition. Should we
update that and change that?
And secondly, a common theme that we have seen in this
committee's capital markets bills is promoting capital
formation by eliminating or weakening investor protections. But
it is important to remember that investors are the ones who
contribute, and if they don't think it is fair they are not
going to invest or they are going to require a higher return.
The Council of Institutional Investors is very strongly in
support of the principle of one share, one vote, for public
companies. They see this as particularly important. Yet as we
saw earlier this month, Snap Inc., went public with shares with
zero voting rights.
And could you discuss the problems with permitting lower
standards for investors among public companies, particularly
from a U.S. competitiveness perspective? And if anybody would
like to comment on Basel III and whether you think that is fair
to American companies and American banks?
Anyway, just a few ideas if you have any comments on them,
I would like to hear them from anybody on the panel.
But I would start with the Chamber, Mr. Quaadman, in the
district I represent.
Mr. Quaadman. Thank you, Ranking Member Maloney, and I also
enjoyed working with you in a previous life on the 9/11 Health
bill, as well.
Mrs. Maloney. Thank you.
Mr. Quaadman. Let me take those three things, as well. So
one is with the accredited investors, I think we need to look
at the definition of accredited investors and who can be an
accredited investor.
And I think Mr. Schweikert, during his time here, did a lot
of thinking on that, and I think looking at the expertise of an
individual is necessary to do that.
And if we take a look at where the courts have held what
the investment decision-making process is, both in the TSE
case, and basic in their progeny, I think that is something for
us to look at.
With Basel III, Basel III creates different restrictions on
our banks in that banks are no longer acting like banks. So as
an example, under Basel III rules it is a disincentive for a
bank to take business deposits.
That is exactly why banking in the Western world started
since the Renaissance. What was the second question?
Mrs. Maloney. The whole thing about Snap, Inc.--
Mr. Quaadman. Yes, what--
Mrs. Maloney. --that it went public with zero--
Mr. Quaadman. --but what I would say there is we have to
remember that corporate governance ultimately is an outgrowth
of State corporate law. And that has allowed for a diversity of
different structures and different businesses and the like.
And investors can pick and choose exactly where they want
to invest. So if they don't like that class share or whatever
that Snap has, they don't have to invest in that company. So I
think we are trying to drive towards a one-size-fits-all
system, and that is exactly where I think the public company
model is breaking down.
And if we allow for a diverse system that allows for
investors to make choices, let them make those choices, and we
will also have market-based solutions.
Mrs. Maloney. Okay. Would anyone else like to comment on
any of those things?
Mr. Knight. I would agree with Tom, but highlight also that
the flexibility in the capital structure that we allow in the
United States, I think is perfectly suited for our culture and
society and laws and one of our strengths, which is the ability
to attract entrepreneurs to our shores, to grow entrepreneurs
in the United States.
People, again like Elon Musk or Steve Jobs, and people want
to invest in these entrepreneurs. So creating a capital
structure where you have the choice to invest in those
entrepreneurs, I think is uniquely American and something we
ought to preserve. We are not forcing anyone to invest in these
companies.
Mr. Green. If I could add a few thoughts? I am very
concerned about the trend away from one share, one vote. I
think there is a growing problem in this country of
concentration of economic power.
We see it in insufficient antitrust enforcement. We see it
in more concentration. It is the number one reason we are
losing public companies is we don't have sufficient
competition.
And I actually see this problem of corporate governance in
terms of moving away from basic shareholder accountability.
That is capitalism as being a major risk to the vibrancy of our
capital markets and fundamentally to the way our capitalist
system works, which is empowering shareholders and investors to
make good decisions about where to allocate capital over the
long run.
If I could just very briefly add two more thoughts? I would
like to commend the SEC for very recently putting out proposed
new Guide 3, disclosure guidance for bank holding companies.
This is a very important update and Acting Chair Piwowar and
Commissioner Stein have made good progress on that.
And so that is somewhat responsive to the question about
Basel III. I think we need to complement our capital rules with
much greater disclosure so that investors have an understanding
of what our big banks are doing.
Are they investing in the real economy, in the businesses
that need it? Or are they engaged in trading and other
activities that, although somewhat important, are not their
core function?
Mrs. Maloney. Okay. Thank you.
Chairman Huizenga. The gentlelady's time has expired.
I will take my 5 minutes, and I am actually curious, Mr.
Knight, if you could comment on what Mr. Green just talked
about. I too am concerned about a concentration of wealth in
vis-a-vis that people are not having the opportunity to catch
the upside of growth.
And I think that was what your Chart 1 was exactly trying
to address. It would seem to me, though, that continuing to add
more additional regulation, chasing people away from an IPO is
actually maybe compounding what Mr. Green was just talking
about? But I will have you comment, too.
Mr. Knight. Early stage, high-growth companies, ideally
retail investors, can participate in the growth phase of those
companies. My mother paid for my law school education by
investing in a local company. That type of story doesn't happen
very often today.
If you put your savings in a savings account, you will get
1 percent or 2 percent. That could be--
Chairman Huizenga. I would like to know where you are going
to get 1 percent or 2 percent?
Mr. Knight. Yes, if you are lucky.
Chairman Huizenga. Quantitative easing has taken care of
that.
Mr. Knight. But funding education today, how are people
going to do it? One way to do it, of course, is by investing in
early stage companies. These companies, the rules, the market
structure are not attractive for them, and they have other
choices. Without sacrificing investor protection, I think you
can make these markets more attractive.
Chairman Huizenga. Yes, Mr. Green, briefly?
Mr. Green. If I could suggest just though that some of the
innovations in the JOBS Act, like Title III crowdfunding, like
Title II crowdfunding, if there are ways to make it at the very
small levels available, those are exciting things that we
should see if they are working out and provide greater
opportunities.
But I think we also have to be very much aware that a lot
of small companies fail. And given the collapse in wealth in
the middle-class in this country, we just need to be very aware
of that.
Chairman Huizenga. Sure, but that is the risk and reward of
a free market.
Mr. Keating?
Mr. Keating. Yes. I am not worried about wealth
concentration. I am worried about wealth creation. And I want
to see widespread wealth creation, and that is why I was so
excited when the JOBS Act passed because that is another avenue
for entrepreneurship to flourish.
When entrepreneurship flourishes, entrepreneurs create
wealth. They create jobs. They invest in technologies. We heard
about technology earlier today. Technology improves
productivity. Higher productivity means higher incomes. That is
the wonders of the free market.
And if we get our regulatory structure right and our tax
structure right, we can unleash some great things in this
country, I think, once again.
Chairman Huizenga. Right.
Mr. Hahn, I have a quick question for you. To the extent
that XBRL tagging may be of some use to small companies, do the
benefits for companies outweigh the cost at this point, and
particularly for smaller public companies with fewer resources?
Mr. Hahn. We support the Small Company Disclosure
Simplification Act targeting the XBRL. We spend upwards of
$75,000 a year for the XBRL that, again, the cost-benefit ratio
right now for our size company, it is just not a benefit for
us.
Chairman Huizenga. Okay. And I believe that is, was Mr.
Hurt's bill from last Congress and is part of the CHOICE Act at
as we are looking at it. And then I guess I will close with
this in my remaining--
Mrs. Maloney. Then may I make a last question on XBRL?
Chairman Huizenga. I will yield to the gentlelady.
Mrs. Maloney. Okay.
I just want to share, the former Secretary of the Treasury,
Jack Lew--the financial crisis started in America, yet we
rebounded faster than the rest of the world.
And the reason he gave--I would probably give the usual,
that our private sector is so innovative--was the amount of new
things that not only the private sector did but government did.
We just kept trying one thing after another. And if it
worked, we kept it. If it didn't, we dropped it. And he
attributed that to why we came back so fast. But on XBRL, it
became a debate amongst some of us on this committee that it
may not be as beneficial to small companies as to large
companies.
But I personally think it is extremely beneficial to small
companies. And my question is, does this make sense? Investors
to have to do the research to figure out where to invest, they
will go to the big companies because it is out there, it is
tested.
But if you had an easy way that they could access
information, which is what XBRL would give you, they would be
able to make a comparison between companies with innovation,
ideas, which Mr. Knight, you just mentioned the one area we
lead the world in from the beginning of our country is
entrepreneurship.
That is the one thing that we do brilliantly and so much
better than practically all the other countries combined. But
it seems to me, as a small investor, to be able to compare the
data that is accurate, assuming it is accurate, then you could
see a trend or an idea or an innovation or a management team
that was standing out.
And it seems like it would help small companies, because
oftentimes investors don't have the time to read through the
big investor portfolios, much less the small investor
portfolios.
My friend, Mr. Hurt--whom I have missed because he
retired--and I had many conversations because I would argue
with him that in my opinion as a small investor, the XBRL to
smaller companies would increase the flow of money going to
smaller companies.
And I represent a large investment community. And they tell
me that they would love that data. These angel investors are
constantly looking for the next new ideas. And I would like to
ask that question because this is an issue before the committee
that the chairman pointed out. So would anybody like to
comment?
Chairman Huizenga. Yes, and yes, reclaiming my time.
Mr. Quaadman. Sure.
Chairman Huizenga. Go ahead, Mr. Quaadman.
Mr. Quaadman. Sure.
Chairman Huizenga. And I think the point of my question was
though, the cost. If it is costing $75,000 a year to a small
company, I understand how an angel investor would love to have
standardized information at no cost to them. It is the cost to
that business owner.
So maybe, Mr. Hahn, I will have you just answer that, and
then we will go to Mr. Quaadman.
Mr. Hahn. I think from our company, from GlycoMimetics, a
biotech company, more emphasis is put on the actual science,
the actual technology, more of the scientific publications. We
have ASH in December, EHA in June. And I think most of our
investors dig into the scientific aspects of it.
The angel investors aren't really the ones that we see or
have conversations with. The amount of capital we need to raise
on any given round, we are talking $20 million, $30 million,
$40 million, $50 million. It is the large institutional
investors who have the M.D.'s and the Ph.D.'s on staff, who dig
in to understand the science.
So, I understand from being able to see the data, but in
all of our investor meetings, it is always about the science
and what does the data show, what are the risks around the
data, not necessarily the overall details in all the filings.
Chairman Huizenga. And we are a bit over time.
A bit, but Mr. Quaadman, if you could maybe really quickly
address sort of this disproportionate burden that may be
hitting small businesses?
Mr. Quaadman. Yes. So just a short-term and a medium-range
answer. I agree with Mr. Hahn. One is there is a Columbia
University study showing that less than 10 percent of investors
use XBRL. So in that way, it is not an effective delivery
device for investors to get information.
The second is a little longer-term answer, and this
actually goes to Mr. Scott's point about technological changes.
Companies are looking at a blockchain for settling. If you have
companies connected through a blockchain on a common electronic
ledger, XBRL is out of date.
That has a real-time component for corporate disclosures
and financial reporting. That is what the SEC should be looking
at. So I think technology is outstripping this question
actually.
Chairman Huizenga. Okay. And my time is well over.
But with that, I will recognize the gentleman from Ohio,
Mr. Davidson, for 5 minutes.
Mr. Davidson. Mr. Chairman, thank you very much, and thank
you all very much for your testimony and the time that you
spent here before the subcommittee. It is an honor to just
participate in this dialogue.
One of the questions that I had is, with the propagation of
exchanges that are out there, how is that affecting small
capital, whether it is venture-backed or private companies
looking to become public companies? I won't ask anything
further to kind of lead the angle, but I'm just curious how you
see that affecting small capital?
Mr. Knight. If I could, the purpose of the statutes that
created public stock exchanges is to create price discovery.
With clear price discovery, you attract liquidity. When you
fragment that price discovery across 11 stock exchanges and 40
dark pools, that might work for Google, for Apple in trading.
There is enough liquidity there that the price discovery
process goes forward. But for a company that has a market cap
of less than $50 million, it means the price discovery process
breaks down and makes it more difficult for large institutions
to invest and makes the public company model less attractive.
And that is why we have said that market structure has a
cost associated with it. The SEC's approach, although
thoughtful, has not kept up with the needs of the marketplace.
And they take a one-size-fits-all approach.
We think there needs to be more flexibility, and that was
an idea that wasn't also part of the venture market legislation
that was introduced last year that we support.
Mr. Davidson. Thanks. Does that speak for everyone, the
same kind of observations?
Mr. Green. To be honest, I would have to think about it
some more.
Mr. Davidson. Okay. Yes, that is my main question. I think
all the others have really been asked pretty extensively.
But I think one of the other key takeaways that I have on,
not so much public companies, but maybe you could give some
thought to it is, there is a large space between bank debt and
mezz financing. And do you see anything out there that bridges
that gap?
Do the market rules basically crowd that out? Are there
regulations that you see as helpful to creating some gap
between the cost of capital in the bank debt world? And then
you have a, I don't know, 9 percent plus spread between bank
debt financing and mezz financing for most markets, which is a
pretty big spread?
Mr. Quaadman. Yes, if I can answer it, and this relates
back to my answer also with Ranking Member Maloney on Basel
III. A lot of the Basel III capital rules are making banks
recede from giving business loans.
So therefore we are seeing alternative means of financing
grow up or sort of become attractive. This is what I was
mentioning before, the legislation regarding business
development corporations. Making them a more active participant
is something that can help fill that space.
So I think unless the capital rules start to change and the
risk weights start to change under Basel III, we are going to
have to look at these other alternatives means of financing to
help bridge that gap.
Mr. Davidson. All right, thanks.
I yield back.
Chairman Huizenga. Actually, will the gentleman yield to--
Mr. Davidson. Yes, sir.
Chairman Huizenga. The ranking member has a question.
Mrs. Maloney. Yes. I am incredibly interested in Basel III
and I will ask the chairman if he would have a hearing on it.
I hear from some banks that they feel like it is imposed on
them but it is not imposed on other banks around the world. In
other words, we have very tough regulation. I think that is one
of the reasons people like to invest in our markets. They trust
them more.
But on the other hand, they feel like they are held to a
higher standard with capital requirements that put them at a
disadvantage. But I am fascinated with the fact that Basel III
is discouraging two of the main functions that the banking
systems was created for: taking deposits; and making business
loans.
And now I understand for the first time why some of my
constituents, who are extremely profitable, can't get business
loans. So this is really bad. If we want to talk about getting
capital out for entrepreneurs and businesses, it is figuring
out why in the world would Basel III discourage business loans?
It makes no sense. That was the main reason for banks to
get out and help start financing homes and financing
businesses. So could you comment on that? I am shocked at this.
Mr. Quaadman. What Basel III does is it--it is looked at in
two different ways. Remember, it is supposed to be an
international standard. However, European banking regulators
look at it as a ceiling. American banking regulators look at it
as a floor. So traditionally, American banking regulators make
it very tough.
The other thing it does is it creates an incredibly complex
and intricate set of risk weights that investors don't
understand what they are looking at.
And then what that does is it creates perverse sets of
incentives and disincentives for activities for banks to
undertake. And frankly, you get to a point where some banks,
some of the larger banks have global presence and can work
around those rules and adjust their activities accordingly.
But when you start to get into the regional banks,
including the Dodd-Frank systemic risk thresholds, they
suddenly have to start to recede from activities where they are
in fact the primary liquidity provider for regions in the
country. So that is what has caused this disconnection between
financing and Main Street businesses.
Mrs. Maloney. What I don't understand is if you are a
regional bank and a community bank, why are you being held to
international banking standards, because they are not involved
in international banking?
Mr. Quaadman. That is a question we have asked as well.
Chairman Huizenga. Yes. And one we will continue to ask. I
appreciate our witnesses being here today. I feel we had a
great hearing.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, again, thank you gentlemen for your time and
your patience as we had to break. And our hearing is adjourned.
[Whereupon, at 4:34 p.m., the hearing was adjourned.]
A P P E N D I X
March 22, 2017
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