will come to order i want to make a couple of brief announcements first of all it will not be a breach of decorum with the current temperature if people remove their jackets i apologize but when they turn from air conditioning to heat they do it with a vengeance in this building i understand the chairman has to leave at so we will be respectful of time as members show up they may or may not get to ask questions madam chair i understand you are the only one that is going to be making an opening statement correct and that ms cross i understand we get to keep you for all of the followup questions very good indicates the historic public market the market we think of as the nasdaq the new york stock exchange and so on is no longer producing the number of initial public offerings as it once did since  we have seen that avenue for capital formation reduced doesn't mean that there aren't plenty of companies who still suit that but today we are asking the question of can america continue to build companies of the future if there is not an additional access to capital for those companies of the future particularly we will be asking the question of whether or not a four hundred and ninety nine limit of investors on private companies is appropriate or whether there can be administrative or legislative fixes to that as a member of a board of a small public company i am well aware of the cost and difficulties of being public we are not the financial oversight committee and we will not assume that we can micromanage what happens in sarbanesoxley doddfrank or any of the other legislation that is well known here on the hill rather we are thrilled to be in the presence of a distinguished first and second panel that are going to help us understand in the broad sense of the word w here america is going and what the great stories of tomorrow are many people have looked at the facebook situation and said ha that is the impetus for this nothing could be further from the truth although it is a high company who only recently went past their five hundred investors it is very clear that that is not the model for which we have a concern we on the committee are concerned for the small and mediumsized companies for companies in which a family or an extended family wish to make sensible plans for the future allowing diversification and at the same time opportunity for investors additionally we would like to understand better from chairman schapiro what the real future of a qualified investor is versus the investment public as a whole as all of us know the sec has a dual mandate one of them of course is notably the protection of the public the other is in fact what is hearing is about here today which is capital formation we hope to come into this and go out of it with the idea that america has an obligation and congress has an obligation to participate in capital formation that leads to greater employment and with nine percent unemployment still lingering with us for over small and emerging businesses gain access to additional capital help them grow and hopefully succeed this issue is critical to the continuing economic recovery and the future success of our great nation if united states firms cannot grow they simply cannot create jobs our examination must begin with the simple concept that permits our markets to function effectively and that is investor confidence people or institutions do not have confidence that our market is safe and sound they simply will not invest and this lack of confidence will impede the ability of growing companies to access muchneeded capital this was a key lesson of the one thousand nine hundred and twenty nine market crash as a result congress created the securities and exchange commission to enforce security laws in a way that enabled firms to access capital while providing investors with sufficient information to have a basic level of confidence in the system we learned this lesson again in two thousand and eight as inadequate financial oversight led to recklessness fraud and unscrupulous behavior resulting in the greatest financial crisis since the great depression we must never forget that  fund invested in mortgagebacked and other risky securities as a result congress passed the doddfrank act last year making critical changes to the u s financial regulatory system to enhance accountability for banks and wall street firms that caused the financial crisis some people now feel we should repeal these protections in their entirety as if the crisis that crippled our great nation and our economy in two thousand  happened in my opinion that is exactly the wrong approach and as a matter of fact it is shocking to the conscience we will not restore lost confidence by removing protections that safeguard investors instead we must find an effective balance and i thank commissioner schapiro for constantly talking about balance one that ensures investors that they will be protected in the future while carefully examining ways to optimize growth i fully support helping u s firms access additional capital but i also believe that this must be done without sacrificing critical protections that assure our fellow citizens that our markets are fundamentally sound it is important to remember that the investors we are trying to protect are everyday americans they are our constituents in fact according to an april survey by gallup a majority of americans hpercent reported owning some form of stock i am encouraged by the fact that since she has begun her tenure chairman shapiro has taken an active role in guiding her staff to conduct comprehensive reviews over a range of issues concerning capital market formations including many of the issues that we will discuss here today the page letter she sent to the committee on aprilh two thousand and eleven demonstrates that she is serious about exploring innovative and new ideas to assist market participants while implementing robust consumer protections that will help investors retain confidence in our markets in that letter she said the following cost effective access t capital for companies of all sizes plays a critical role in our national economy regardless of the form or size of the offering companies seeking access to capital in united states markets should not be overburdened by unnecessary  at the same time all offerings must of course provide the necessary information and protections to give investors the confidence they need to invest in our markets striking the right balance between facilitating access to capital by companies  have seven days to submit opening statements and extraneous material for the record chairman issa we now go to our distinguished panel the honorable mary schapiro is chairman of the securities and exchange commission and ms meredith cross is the director of we appreciate you making time for this hearing and you're recognized ms schapiro thank you chairman issa ranking member cummings and members of the committee thank you for inviting me to testify today on the topic of capital formations as the chairman has said i am joined by meredith cross director sec's division of corporation finance and i regret that a change in the committee schedule for this hearing means that i do have to leave at for a longstanding prior engagement however ms cross will stay to address any questions the committee might have facilitating capital formation protecting investors and maintaining fair orderly and efficient markets is the mission of the sec costeffective access to capital for companies of all sizes plays a critical role in our national economy and companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations at the same time while we have an important responsibility to facilitate growing companies access to america's investment capital we must balance that responsibility with our obligation to protect investors in our market cases investor confidence and the fairness and honesty of our markets is critical to the formation of capital and the protections provided by the securities laws are critical to large and small company investors alike over the years the sec has taken significant steps consistent with investor protection to facilitate capital raising by companies of all sizes and to reduce burdens on companies in making offerings from the introduction of shelf registration in the s to the reduction of the eligibility threshold for shelf in the early s to modernizing communications and the offering process in two thousand and five the sec regularly considers and when appropriate implements changes to our rules to reduce regulatory burdens while maintaining the important investor protections provided under the securities act the sec also has undertaken errors specifically designed to facilitate capital formation for smaller companies by simplifying the regulatory environment for them most recently in two thousand and seven the sec adopted a variety of rules impacting small business capital raising and private offerings a number of which were based on the recommendations of the sec's thenserving advisory committee on smaller public companies among the rules adopted by the commission were those that simplified the disclosure and reporting requirements for smaller companies and expanded the ability to use less burdensome scale disclosure to more companies allowed a company to grant stock options to more than five hundred employees without triggering the requirements to become a reporting company and liberalized the eligibility requirements for certain shortform registration statements and some shelf registration to allow eligible smaller public companies to benefit from greater flexibility and efficiency in accessing the public securit market recently i instructed our staff to take a fresh look at our offering rules and to develop ideas for the commission to consider that would reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection areas of focus for the staff will include the restrictions on communications in initial public offerings whether the general solicitation ban should be revisited in light of current technologies capital raising trends and our mandates to protect investors and facilitate capital formation the number of shareholders that trigger public reporting including questions surrounding the use of specialpurpose vehicles that hold securities of a private company for groups of investors and the regulatory questions posed by new capital raisin strategies in conducting this review we will solicit input and data from multiple sources including small businesses investor groups and the public at large the review will include evaluating recommendations of our annual sec government business forum on small business capital formation and as well as suggestions we receive and have already received through an email box we recently created on our web site in addition i expect our efforts to benefit from the input of the new advisory committee on and emerging companies that the commission is in the process of forming which will provide a formal mechanism for the commission to receive advice and recommendations about regulatory programs that affect privately held businesses and small publicly traded companies any rule proposals that result from this review will of course be subject to a public comment period in advance of any rule changes being adopted we look forward to working closely with congress the investing public and members of the business community as explore the possibilities and challenges in these areas and work to fulfill our mandate to protect investors maintain fair orderly and efficient markets and facilitate capital formation we would be happy to answer any questions the committee might have thank you ipos is considered a good year does that indicate to you that the market for large companies those who are mostly over two hundred million that are doing ipos is in fact a market of the past or is it a recognition that it simply costs more to play in that market and those companies are choosing other alternatives ms schapiro mr hchairman i think the numbers reflect the number of different factors that actually go into the decision the companies have to make about doing an initial public offering certainly economic conditions are very prominent in that decisionmaking process there are also issues about whether founders want to give up their decisionmaking control that they exercise as a private company whether they want to have dilution of their ownership interests there is a potential disclosure of vital business information when you go public chairman issa i don't want to interrupt you unfairly but all of those  ipos up there i suspect foreign companies going public in the u s markets and one of the things we've seen particularly in the last several years is a real maturation of foreign markets that give those foreignbased companies a viable alternative to going public in the united states which i think is a perfectly rational decision for them to make these markets that we are in now liquid have good listing standards have sophisticated shareholder bases that they may not have had ten and hyears ago as represented by  that chart the other thing i think that is important when companies foreign companies make a decision about whether to access the u s ipo market is that it's much less expensive in terms of underwriter fees in europe than it is in the united states it's leaving a lot of your oversight behind it is not just companies that are truly based overseas but also companies who want to be global whose ceo is living here who decides that a foreign market in canada or in europe  makes more sense for them to do ms cross i think i can take this ms cross i think there are some companies in that situation but i think our data which we are happy to supplement for the record doesn't suggest there is a significant number of u companies going offshore for their ipos i think other factors that are relevant certainly we understand that costs are important and we are committed to looking at those costs but i think that for example the alternative of  a sale increased significantly in recent years and has more certainty so if people are trying to get out of their investment the private equity market became quite huge in the last decade and that also provided an alternative but this isn't to suggest we don't think the costs are important i just think there are people have told us there are a number of reasons why companies choose not to go public now chairman issa let me take a slightly different line and i know we want to talk about small businesses and the five hundred cap and so on let me just ask a question when people want to float if you will public debt senior debt and they go through a process of registering debt it's really a onetime event you register the debt it's floated it's bought up and then after that the company that borrows one hundred and fifty million in senior debt in fact it views itself as separate from the debt that it repays to a great extent don't we have a disconnect in that a company can say look i'd like to take on investors i am willing to tell them this but i'd like to be able to have the ability to run my company with those investors understanding at the time they bought in  will not be reported so to a certain extent haven't we lost that middle ground in the public market you're either all public and you have several million dollars cost to go public and several million a year to be public or company you need to follow the reporting and disclosure requirements of the federal securities laws you've taken investors money that is part of the bargain that you have struck with investors is that they'll have the opportunity both for board members to participate meaningful way and that they will have access to information on an ongoing basis that will allow them to make decisions about whether to continue to hold that stock or to sell it in the market chairman issa and the reason i asked that question is since we are not getting the ipos here in the s people are choosing not to go into that market at least for institutional qualified investors why in the world would we have a four hundred and ninety nine cap on how many of them can participate in a company if you are a sophisticated investor why couldn't you choose to be involved in what today is available to these leverage organizations and angel capital and other investors who choose to buy a bigger piece rather than one five hundred chairman that is exactly what our review is really looking at is whether a threshold of four hundred and ninety nine or five hundred is still appropriate as well as a review of the threshold at which a company can cease being a reporting company because of the change in the number of it shareholders and we will as you know do a very rigorous study and gather the kind of analysis and data that is necessary for us to analyze whether those thresholds are still appropriate given how markets are staff and it's been forthright and i really do appreciate it and i think all of us appreciate it there has been a lot of discussion about rolling back the protections congress put in place to safeguard investors in the public we hear that they are too burdensome too costly and that they hurt corporate profits i'd like to return to the fundamental reason we need these safeguards to executives who now run mortgage divisions of goldman sachs bank of america allied financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at bear chairwoman shapiro how can this be how can the same executives responsible allegedly responsible for these abuses now out of the financial crisis and indeed we brought about two dozen cases or so coming out of the financial crisis you mentioned the goldman sachs case but there are many others that name both firms and individuals officers chief financial officers and others and we'll continue to investigate those very aggressively wherever the facts and the laws will take us we will go and if there are appropriate actions to be brought against particular individuals we won't hesitate to bring those cases mister cummings the atlantic article also said this  emails going back as far as two thousand and five highlight bear traders telling their superiors they were selling investors  is and i should add that it is not just the sec that is stepping up here it's the other financial regulators through the mortgage fraud task force and through efforts in conjunction with the department of justice and others to try to bring as many of these cases as we can atlantic reported that the sec has now subpoenaed jp morgan in connection with these allegations chairman shapiro or perhaps you ms cross without going into any sensitive information what can you tell us about these our constituents who have suffered and continue to suffer many of them having lost everything and i just thank you again for the balance that you seek to the balance that you bring to the table  to one of the ways in which a company becomes a reporting company under the sec's reporting regime and there are five different ways but one is if the company has total assets of more than hmillion and five hundred record shareholders  you become a reporting company and you have to file an exchange act registration statement and then ongoing disclosure mister mchenry who are those investors limited to what types of investors accredited investors institutional number includes anyone who is an investor there aren't any under the current rules that are excluded from the count so employees count accredited investors count qualified institutional buyers count that is one of the questions we would be looking at whether we should count them mister mchenry right so why five hundred correct me if i go wrong it is in the statute although we do have the authority to write rules that would change that after the statute was passed the commission did write rules that went to how those five hundred counted so for example there may actually be thousands of investors under that five hundred threshold because we count holders of record so if a brokerdealer is holding thousands and thousands stock for thousands of institutional other customers that counts as one because the broker is that when a company has sufficient following perhaps five hundred is a bit of an arbitrary number that those investors ought to have access to information on an ongoing basis about the company that it has sufficient following that  me that the sec policy is restricting access because small businesses are the ones that we are really talking about here trying to access private capital with these investors so it seems to me that really the sec policy is that you are trying to protect the very people that this president says should pay more in taxes higher taxes or these sophisticated investors at the expense of small businesses accessing credit do you see it that way or to protect you from bernie madoff which clearly the sec didn't do and these folks are very sophisticated and know the decisions they're making and for heaven's sakes if you look at these substantial institutional players they've got n accredited investor not only do you have to have a million dollar net worth but then you have to be accredited saying that you are sharp enough to do this stuff it seems to me i am sort of dismayed that the sec didn't protect  the grandmothers that had their life's savings taken from bernie madoff but are trying to protect these people with a milliondollar net worth in the name of really starving small businesses from capital ms schapiro congressman i would say are receiving a wide range of proposals in this area we are absolutely committed to looking at whether this threshold makes any sense whether the threshold numbers for firms to stop reporting once they've been reporting even though they may have thousands of shareholders is are appropriate too and we intend to do a very thorough and rigorous analysis mister mchenry thank you when do you think you'll have a decision ms schapiro well we've got multiple work streams as you can see from my testimony this is the one work stream that is going to require economic data and analysis because we need to understand the and i would like to examine this claim experts from the sec and the federal reserve analyzed a survey of eighteen thousand ipos from ninety different countries between  five and two thousand and seven and they issued a paper entitled going public abroad and the paper makes the conclusion and it says and i'd like to quote from the report the u domestic market has by a wide margin the largest proceeds of any of the markets worldwide for example the paper finds that the u k saw a decline in the average proceeds generated by domestic and global ipos during this period but the united states did not and the paper says that we did not in the u s see a significant change and basically the paper says that we need to look beyond the number of ipos and examine the question of the amount of is basically on the fact that the article says when excluding the seventeen billion visa ipo in two thousand and eight which was the largest as you know ipo in our country the first quarter and eleven generated the highest first quarter proceeds since two thousand so chairman shapiro these indicators suggest that the u s ipos are schapiro i think there is no question that the ipo market is rebounding and we can see the numbers starting to change and as you point out the fourth quarter of two thousand and ten we saw sixty ipos and this year contribute to the number of many billions of dollars raised in the ipo market but i don't think there is any question but that we are starting to see this market come back and you need only pick up the newspaper virtually every day now to see at least anecdotally particularly look at activity in china and china made the largest ipo ever in the financial sector with a twenty two billion offering but it was of a stateowned commercial bank the agricultural bank of china and ernst and young reported in their report that china's ipo and infrastructure and clean tech was boosted dramatically  government stimulus funding you obviously have a huge ipo if the government is funding it and it goes on to point out that it far outweighed u s stimulus and that china spent over five hundred and eighty six billion in infrastructure and transportation projects and seven hundred and thirty five billion in renewable energy but as we know in our seven hundred and seventy eight billion stimulus package it only had forty eight billion in transportation and sixteen billion inh twenty one billion renewable energy so my question to you madam chairman is how has the sec analyzed the extent to which the ipo growth in china relates to extensive state schapiro congresswoman we have not specifically looked at the issue of the extent to which governmental spending is influencing foreign ipo markets i will say that generally we are seeing much more mature markets abroad than we have historically making them more hospitable and more credible places for companies to do ipos that might have years ago come to the united states market misess maloney the renaissance capital research wrote in an article part of their operations in china actually doing reverse mergers as opposed to ipos and coming into the u s market to list on u s exchanges and there are a number of issues there about which we are quite concerned and working through with the  can you cite me to specific published opinions that support your opinion ms schapiro congressman i think that you raise a very good question with respect to the general solicitation ban and the chairman has raise investors is appropriately balanced with the needs for companies to effectively communicate in order to raise capital and so that is one of the issues that we will be looking at closely mister gowdy well given the fact that it implicates a fundamental right you have the  strictest level of constitutional scrutiny and it has to be as narrowly drawn as it possibly can be if you conclude in your own independent analysis that it is not constitutional will you do what there is some precedent in the executive branch for doing which is not enforcing laws that you don't think are constitutional will you abandon the ban if you conclude that it doesn't pass constitutional muster  gowdy with respect to two thousand and eight do you know or can you tell me the number of defendants who received active prison sentences not fines not promises not to do it again but active prison sentences ms schapiro i really can't speak we don't have criminal authority and we don't prosecute cases in the criminal justice system i can tell you that for the securities and exchange interested because i am asked quite often in south carolina why nobody goes to jail if you are rich and all you do is steal money and you don't go to jail i am very interested and i am also interested in whether or not the sec would have appeared and asked time and nothing gets people's attention quite like an active sentence ms schapiro there is no question about that and we make many referrals to the justice department and we bring many cases jointly with local u s attorneys and district attorney aware we allow and have for a decade or more allowed prescription drugs of all classes but we will just take for example sleeping aids that are prescriptiononly to be advertised with a basically a must see a doctor to get the appropriate advice in a sense as mr hgowdy said if there is an inherent bias towards free speech isn't it most likely that you're going to end up looking at that model and saying wait a second if we limit the purchase of these companies to qualified investors other you know institutions and so on if we are limiting who can buy if any advertising were to explain that you cannot buy it unless you fit in this category what would be the harm any more in a general solicitation than there is in making people aware about a prescription drug knowing that they must go to a doctor before they private placement market and have an easier way to defraud people because of the general solicitation the general advertisement the way to bring more people into a fraudulent scheme that said as you know we are going to look at an offering fraud ms schapiro i would be happy to and i will say that every thursday the commission meets in a closed session to consider a dozen or more enforcement cases and so it's very much on my mind as we go through this process to ensure that we don't lose sight of even though i think there's flexibility there are things we need to look at there are maybe things that we can do quite differently we do not lose sight of the fact that there are investors who need the protections provided by the federal securities laws but what we are offerings by promoters or others of stock in a company where the disclosure has been false or misleading the information has been manufactured where there are u target particular categories of people like the elderly so you see a broad range it is not the kinds of companies that we all think of as appropriately using our exemptions but they drive through those exemptions and go after people who are not able to fend for themselves one of the things that worries me a great deal as we look at the question of loosening the ban which i think is a very important thing to consider is how we then make sure that the people who buy really  the accredited investors who don't need the protections because they do target those people the fraudsters do target those people mister towns if they go in court what is the effect of these frauds on investments and the market if they go schapiro the frauds can be devastating to investors and that is true really of any kind of securities fraud that people have been convinced in many of these schemes to invest their life savings and are left with nothing  at the end of the process communicating for example we've created a research report safe harbor to encourage the publication of research reports during the quiet period we allow freeriding prospectuses which permit offers outside the statutory prospective we allow the media to publish stories about companies or their registered offerings so long as the media is unpaid or not affiliated with the issuer we have done a number of offerings related communication safe harbors again that allow issuers to communicate more details about transactions to potential investors during the quiet period so we've taken a number of steps primarily starting in two thousand and five to try to relax some of the restrictions on issuers during the quiet period mister towns thank you do you give do you view the general solicitation ban as an impediment for capital raising one of the things that we will be looking at as we do our study of the general solicitation ban we want to understand the extent to which it is an impediment or an unnecessary hurdle to capital formation  release and seek information and detail that way and hopefully we will use our new advisory committee on small business activities we have multiple areas we want to explore here and there will be different approaches for each one for example with respect to the their stock how their holders hold their securities whether they hold them in street name or in direct name or so forth so for each of the work streams that we are going to be exploring we've started to lay out the data and the information we think will be most useful for us in trying to strike that appropriate balance chairman issa the gentleman from arizona mr hgosar mister gosar thank you mister chairman let me ask you a question how many regulations are there out there that a small company that supplement for the record it's a pretty tried and true path so for the companies that go through an ipo the advisers to them i used to do this before i came to work at the sec there is a pretty clear path there is a handbook that people hand out to their companies  manageable i think there are definitely a lot of rules but the goal here is to make sure that as companies are accessing the public markets for money that they that investors are protected enough so that they feel confident going in it was a huge overhaul it's what for the first time let companies have free writing prospectuses let them keep talking during quiet periods let them have electronic road shows on line so it was a pretty big change and i think it has really helped that doesn't mean we can't do more to help so we always are looking at our rules to see whether we're doing what we can to facilitate capital formation consistent with investor protection mister gosar so when you are looking at fraud going back to mister gowdy here being a dentist and bringing a private sector aspect and looking at the regulations of the state when there's an ipo that's foreignbased versus a u s predominately based do you see a problem or predilection within those groups of where you have to have more enforcement schapiro i guess i would say that i think it depends on what markets you're looking at there's quite a range of requirements around the world with respect to the process of accessing the public markets i mean the re's no question but that the sec in the united states has one of the best developed enforcement programs and polices the markets we think there's always more to do but pretty effectively but i think other markets now  are stepping up and doing very much the same thing because what they understand is that to be a credible location for an ipo and for people to feel comfortable investing in new companies there has to be a credible enforcement regime around that so that fraud is stopped and people can have confidence in the integrity of the financial statements and the disclosures that the companies are making so i actually think there's kind of a rising tide around the world in this regard mister gosar i'm worried more about right here in the united states reverse mergers of companies whose primary operations are in china although they may not be registered and generally they aren't registered in china and they aren't subject to the jurisdiction of the chinese sec and our ability to deal  with the disclosure shortcomings of some of those companies so we have had a very active program at the sec including suspendingh revoking the registrations of eight chinese companies in the last month or so and suspending the trading in just the last couple of weeks of three more of those i had the opportunity yesterday to meet with the chairman of the china securities regulatory commission and talk about how we can establish a framework for our enforcement and examination staff to have better access to information about these companies who are not incorporated in china but whose primary operations are in china and whose auditors are in china so we can understand the quality and the truthfulness of their disclosures mister gosar one more real quick question is there one part of the marketplace for these particular investments i'm looking at medical devices that are having some problems in which there are public offerings do you see any recourse or any aspect so that you're looking at one segment of the population of investors ms schapiro it's been interesting to me over the years to see that  often have fraud in whatever industry is hottest at the moment so a number of our actions with respect to these companies with operations in china have been in the energy space but they can be in whatever they think investors will be most the extraordinary crash after two thousand and eight you had to somehow encourage continued investment without getting us back into the terrible hole we were trying to get out of now you can have an out the the effect that this collapse had on investor confidence and how it affected the availability of capital in other words if people were not putting their money in the stock market what was the effect on the availability of capital ms schapiro congresswoman i think and i believe this very deeply that the foundation of our markets is absolutely built on investor confidence and we can see how portable capital is and how quickly investors will react to what they perceive to be failures in the marketplace because of fraud because of inadequate information and an issue i'm most particularly familiar with is what happened after may six when our equity markets performed in a very aberrational way as a result of market structure flaws and high frequency trading and we saw for months and months after that a steady outflow of investor funds from equity mutual funds because of concern about the integrity of the trading mechanism in the marketplace so i think for us instilling and restoring investor confidence in the integrity of our markets whether it's the disclosure regime or the market structure itself is really paramount to the ability of companies to do ipos and raise capital and create jobs and grow our economy which is at the end of the day what  all of us want to see happen and for us that means getting this balance right between protecting investors and making access to capital affordable and efficient is really sort of job one right now for  capital markets and to raise money on the stock exchange  would be alleviated what do you think would be the impact on the confidence of american investors if you were to roll back or we were to roll back the investor protections that have recently been instituted or established ms schapiro well while i think it is very worthwhile or for us to look at whether our rules can be altered and tweaked in a way that facilitates capital formation and hminutes ago ms schapiro i do thank you it is not a question that can be answered in generalities i think it's really a matter of looking at each and every one of our rules to see where there might be flexibility that will facilitate capital formation i appreciate your question the xbrl requirements are being rolled out over time based on the original adoption schedule so the next phase of companies is the smallest companies have to start tagging the face of their financials and i think they have to block tag footnotes and the rest of the larger companies will be doing the detail tagging of their footnotes i believe starting at for quarters ending after june time that it takes and so we hear that they would like there to be for example a time delay between when they have to get the xbrl on file compared to when the q for example the quarterly report is due which is a question we've been thinking about we've also been hearing that there are concerns in the smaller business community about the possible costs of taking on this new requirement in june but at the same time i would say that the  usefulness of the information is starting to become more apparent so recently our staff was able to do some really good analysis based on using the tagged information and i was really pleased with what you could do comparing for example pension fund rates  it comes out give me a feel there is somewhat a sense that we can solve a problem dealing with fraud based on adding more text to someone at the beginning if you go to a typical construction site right now there are twenty eight different posters up on the wall in the construction site defining out all the issues that are there if you're going to get a home mortgage be prepared for reams and reams of paperwork that are going to be involved in that the prospectus is rather long for a lot of things is that fulfilling what we hope it would fulfill by continuing to add additional text to different prospectuses to get more information out to it or has it hit a point where no one is going to read it because it's so protracted now ms cross i think that's an excellent question and in fact one of the projects that i have wanted to undertake is a  entity's internal financial controls i know there's been some discussion the first seventy five million is exempted out companies over seventy five million are in some people want to raise it to two hundred and fifty million i would like to have your opinion on the effectiveness companies below seventy five million public float were exempted from the audit requirement under b that actually takes out of the mix hpercent of the public companies which is quite a significant number the staff just posted its study as required by the act of the companies between seventy five and two hundred and fifty and found several important characteristics of those companies one of which is that the companies in that category tend to change a lot so companies in the seventy five to two hundred and fifty may not be the same year after year so changing the application of four hundred and four to that group is very complicated and doesn't really help them very much because they would be moving in and out we also found that the companies in that category don't tend to be particularly different from the companies above two hundred and fifty so it's not a discrete category that has characteristics that lend itself to saying well this is the group that should be out and the benefit of the   go down over time not having that second set of eyes i think is important the other thing is that if you don't have the internal controls audit then the auditors have to do testing of the internal controls to see how much they can rely on the financial increasing globalization and more people come to raise capital in the united states but have significant assets and operations overseas what kind of protections do we have in place to assure that if there is a remedy that needs to be reached that we can get at assets or individuals or otherwise that are operating in these foreign countries ms cross that's a very good question congressman we don't have the same remedies that we do here and the way the  securities laws are structured we deal with that through disclosure we let companies warn investors that they won't have the same remedies if there's a problem with the company we don'th the sec doesn't have a merit regulation screen we don't have authority to tell companies you can't raise money here if you provide sufficient disclosure what we've tried to do though to provide as much investor protection as we can in light of these concerns is for example  met yesterday with the head of the chinese securities regulatory commission to discuss better ways for us to share information to get at our concerns about are these companies for real who are their promoters and we  have a new initiative to get a better sense of how are the audits being done you do have to have an audit and so are we appropriately regulating those auditors are they going over and looking at these companies auditors it's also the ability for sort of the independent analysts that come there's already a shortage of the kind of analysis that we like to be seeing on the market now i think there's been a shrinking of the banking institutions and otherwise commitment to do an analysis are we getting the kind of cooperation to allow analysts to travel to the foreign countries and be given complete access to the information that companies here would be giving to analysts ms cross that's a fair question i don't know the answer to that i think we would be happy to check and get back to you for the record mister meehan let me switch my questioning just on the issue of the cap of the five hundred one of the concerns that i have is in this environment we're seeing a great deal of frustration on the part of entrepreneurs who are trying to raise capital in difficult times obviously one of the things they are looking for is access to the markets one of the things that inspires people to continue to work in  sort of startup companies is the idea that they can take and gain some equity stake by being given shares in the company are we doing anything or can you talk a little bit about what kind of incentives we can give to carve out employees to come work for them and work hard we have done a few things first off the options that are granted to employees don't count against the five hundred so we adopted a rule in two thousand and seven that said you don't have to count the options we have the staff in my division has provided relief also to companies that they don't have to count restricted stock units that are provided to employees so far you still have to count stock they're stockholders like anyone else our review that we're getting ready to undertake of section gs five hundred limit will consider the question of should employees be counted the same way there are concerns there are certainly frauds that happen where employees are the ones who lose both their job and their investment so you do want to watch out you don't want employees to lose everything when there's a fraud at the company they work for so we need to balance those mister meehan my concern as well as the inabilityh or the ability that has to crowd out  the ability for it sort of limits the pool of people as well the five hundred that allows us to raise money if in fact you are including those kinds of shareholders in your number then it makes a smaller pool that effectively you can raise your dollars from which presumably then sort of has would you agree that has a chilling effect then on the ability because i would think that it would cause the cost of that capital to increase for a small business trying to attract investors ms cross we have heard that the five hundred cap is an impediment to capital raising and the question we need to look at is five hundred the right number and are we counting correctly because there's a lot of companies that are actually private companies that trade in the otc markets that have thousands of holders but they are held in street name and so they only count by broker and so we need to look at how are we counting  this stifling new regulations or regulatory environment that in fact choked off ipo activity so if one were to conclude that well you writes the crisis started before sarbanesoxley in two thousand and two the ipo crisis was not induced by sarbanesoxley regulations fair disclosure or nsd rule two  eleven separation of banking and research each of these changes occurred well after the ipo crisis was underway that's what he writes would you agree with that assessment ms cross i think there's a whole host of reasons why ipos are fewer than they were before and i think that i appreciate that different people attribute it to different reasons i think that certainly the market structure has changed there used to be a lot of smaller investment banks who did the small ipos and those small investment banks are mostly gone there used to be research written about little tiny companies but the structure of the investment banking industry no longer supports research about little tiny companies and so the little tiny companies are the ones that are not tapping the public market and i'm sure cost of regulation is one factor in that but i also think that the market changes are also quite important mister connolly well he seems the former vice chairman of nasdaq hardly a gungho regulator he seems to believe that this ipo crisis predates whatever new regulation occurred of where capital went sort of switching from productivityoriented investment opportunities to sort of quick turnaround investment opportunities and you see that reflected in the broad would there be consequences in your view if we sort of had a broad brush elimination of regulations currently governing the ipo market ms cross yes i think there would be very significant negative consequences if that were to occur because then you wouldn't have sort of a level set of minimum investor protections that could be expected as a company enters the public market seeking money so i think that there would be significant adverse consequences both to the public and to the companies because those that are good and honest would be harmed by the bad actors who would cause investor confidence to wane and investor more than caveat emptor maybe the federal government has a role here to try to protect the consuming public and the investing public ms cross absolutely yes we have to calibrate the regulatory environment and  process then the question about accredited investors why is there this class of accredited investors why is that important in the sec's view ms cross well the notion of a accredited investors is to be clear and in the early s it was determined that those are investors who could fend for themselves and didn't need the protections of the securities laws and so they could participate in unregistered private offerings mister mchenry so why limit that number i think that the i will say that since the number was set in the early s one might question whether that is still the right number to identify the people who can fend for themselves but assume that it is then when congress put  n its test in the early sixties for the five hundred did they have in mind that those were companies that were trading and did they for example you don't you have to register if you are trading on the new york stock exchange it doesn't market if your investors are accredited or not so it's a different test if securities are trading in our markets do we want a certain level of information available but it's a fair question for a company that's not trading in a market today should mchenry because i think everybody has this question what is the proper balance now in terms of general solicitation i know there's been an enormous discussion because of what we saw with facebook that in essence out of concern that it was a public solicitation because word got out of this private offering of facebook stock that that meant that they could not offer those securities to american investors so they offered it to foreign investors now i understand there are regs on the books but there is also litigation associated with that is there not a significant amount of litigation on complex than the g five hundred holder workstream so we've started already to put together the research that needs to be done i think my likely recommendation would be for the commission to issue some sort of  asked her about when you gather all the information what are the kinds of things that you will be looking at to strike the balance she told me where the information would be coming from but didn't get into what kind of things you're trying to what goes into that process of striking a balance we've had a wonderful discussion here about the problems and what have you but i'm trying to figure out when you sit down at the table are there certain principles that may be guiding guiding principles so that you can have a way of weighing what you're doing so that you come out withh and i'm not asking you for your final solution i'm just trying to figure out what are the kinds of things that you if we eliminate the ban so that offerings private offerings could be made to accredited investors through publicity through advertising and the like i would  know whether we're confident that the group that's getting sold to is the group that doesn't need protection and that the people that are getting sold to are in fact accredited investors  so those are things that i think will be important in the mix if they don't need the protections of the securities laws then it may make sense to make it easier to reach them if they are the group that needs the protections of the securities laws because either they're not really accredited and they're  g they have fraudulent brokers who are putting them into deals they shouldn't be in so i'm very concerned about that factor so i would like to and so in that area those are the those will be going into our the staff's recommendation on the five hundred holder limit i would like to know what the investor makeup is in these companies and i would like to know what the characteristics are of these companies are these companies that are real companies are they  fraudulent companies that are trading in the sort of dark markets and held in street name and you don't really have they have thousands of investors but they only count as two hundred because they're held through brokers or are these companies that are the engines of growth and they have four hundred and ninety nine holders and they can't raise another dime because they can't get one more holder and those are four hundred and ninety nine actual investors i think those are important points and if the answers come outh we may need different answers for different kinds of companies different situated companies companies who go dark because they are held through street name might need a different test than companies that are held by investors directly and are bumping up against the limit and are in desperate need of capital mister cummings now with regard to those who need to be protected will you be looking at you said that you would you're concerned about them but then going back to some questions that mr hmchenry asked about who it is that is in need of protection so i don't see that as a definition we're changing on the immediate horizon but it is a definition that does need to be a living breathing definition as investors change for example should there be a special accreditation for people who are chartered financial analysts who don't happen to  the current statute envisions that all investors are in one pool so if a company has no program for their employees to own stock no any form of stock options they could have five hundred street name investors which could be thousands of actual investors through their well if a company has one thousand employees they want companies that are traded in the overthecounter markets not on exchanges they are held in street name even though they're not reporting companies those companies could also have their employees hold in street name in theory those are not the kinds of companies we're really talking about issa okay and that was just the point that i wanted to make sure we understood that when we talk about protections that it's in fact not a fixed protection it can be a very large number by comparison if employees are not second panel thank you