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86–760 PDF 2014

S. HRG. 113–178 

THE JOBS ACT AT A YEAR AND A HALF: 

ASSESSING PROGRESS AND UNMET OPPORTUNITIES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE IMPLEMENTATION OF THE JOBS ACT AND THE 

OPPORTUNITIES THAT THE ONGOING RULEMAKING MAY CREATE 

OCTOBER 30, 2013 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT

JON TESTER, Montana, Chairman 

MIKE JOHANNS, Nebraska, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

MARK R. WARNER, Virginia 

KAY HAGAN, North Carolina 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

BOB CORKER, Tennessee 

RICHARD C. SHELBY, Alabama 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

TOM COBURN, Oklahoma 

ALISON O’DONNELL, Subcommittee Staff Director 

BRYAN BLOM, Republican Subcommittee Staff Directorr 

KELLIN CLARK, Legislative Aide 

(II)

C O N T E N T S 

WEDNESDAY, OCTOBER 30, 2013 

Page 

Opening statement of Chairman Tester ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Johanns ............................................................................................... 2 

WITNESSES 

Keith Higgins, Director, Division of Corporation Finance, Securities and Exchange Commission .............................................................................................. 4 

Prepared statement .......................................................................................... 32 

Responses to written questions of: 

Senator Hagan ........................................................................................... 72 

Senator Toomey ......................................................................................... 72 

Alan Lewis, Director of Special Projects, Natural Grocers by Vitamin Cottage, 

Inc. ......................................................................................................................... 13 

Prepared statement .......................................................................................... 40 

Robert R. Kaplan, Jr., Managing Partner, Practices, Kaplan Voekler 

Cunningham and Frank, PLC ............................................................................. 15 

Prepared statement .......................................................................................... 45 

Rick Fleming, Deputy General Counsel, North American Securities Administrators Association, Inc. ....................................................................................... 17 

Prepared statement .......................................................................................... 55 

Sherwood Neiss, Principal, Crowdfund Capital Advisors LLC ............................ 19 

Prepared statement .......................................................................................... 62 

(III)

(1) 

THE JOBS ACT AT A YEAR AND A HALF: ASSESSING PROGRESS AND UNMET OPPORTUNITIES 

WEDNESDAY, OCTOBER 30, 2013 

U.S. SENATE, 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met at 10 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Jon Tester, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN JON TESTER 

Chairman TESTER. I will call to order this hearing of the Securities, Insurance, and Investment Subcommittee, a hearing titled 

‘‘The JOBS Act at a Year and a Half: Assessing Progress and 

Unmet Opportunities’’. I am glad we are having this hearing this 

morning. I look forward to hearing from our witnesses about the 

challenges and opportunities associated with implementing the 

JOBS Act. 

Since arriving in the Senate, I have held several small business 

opportunity workshops across the State of Montana, and without 

fail, during every one of those workshops, capital was always at the 

forefront of issues that I would hear from entrepreneurs. Capital 

allows business to grow, take calculated risks, and create more 

jobs. 

In 2011 the Economic Policy Subcommittee, which I chaired, held 

a hearing to examine the challenges and opportunities that are facing innovative small businesses, many of which present the greatest opportunity for job creation in this country. What came out of 

that hearing was a plea from businesses for better access to capital, 

particularly for firms based across this country, small startup 

firms. 

In response to that hearing, Senator Toomey and I introduced a 

piece of legislation that has become known as ‘‘Regulation A Plus,’’ 

which ultimately was included in the JOBS Act. The opportunity 

for growth within businesses across America is enormous, and we 

need to do all we can to empower them with the tools they need 

to bring innovative products and ideas to the marketplace. 

Entrepreneurs are incredibly important to our economy, particularly in a frontier State like Montana, because they embody the 

spirit of self-reliance that keeps rural America strong and the econVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
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omy competitive. Without access to capital, the next-generation 

idea may not become a reality, and that is why I worked so hard 

last year to get the JOBS Act to the President’s desk, because I believe the JOBS Act will provide new opportunities for startups to 

raise capital and will democratize access to capital for smaller 

firms. 

The idea behind the bill is to provide firms with more access, 

more choice when it comes to raising capital in a manner most appropriate for different firms at different stages of their development, whether that means going public or remaining private, because what is right for one firm may not be right for another. And 

from my perspective, it was very important to ensure that this bill 

works for all entrepreneurs, regardless of where they live. 

During the financial crisis, we saw traditional forms of business 

lending freeze, dried up, and businesses across this country were 

forced to become more creative when it came to raising capital. I 

believe the JOBS Act has and will continue to provide access as it 

continues to be implemented. The opportunities will continue to 

grow. 

I do have some concerns about the pace of implementation of the 

JOBS Act. After nearly a year and a half, there is rulemaking that 

has still yet to be proposed. I understand that we have some new 

folks in place who were not at the SEC when this legislation was 

signed into law, but when we have so many businesses desperately 

in need of access to capital, every week counts. And within that 

context, the pace of progress that we have seen from my perspective is not acceptable. 

I am optimistic that we can get this done sooner rather than 

later, and through my conversations with Chairman White, I am 

confident that this is on the SEC’s front burner. The JOBS Act is 

truly bipartisan, and I think all of us up here today want to see 

this done in the right way, as it was intended to work for entrepreneurs and small businesses that need it. 

In a place that often gets stuck in politics, I was extremely 

pleased that we were able to pass a strong, bipartisan piece of legislation that ensures that businesses have access to capital that 

they desperately need, but now is the time to ensure that this vision becomes a reality. 

We have some great witnesses with us here today, and I look forward to hearing from all of them. We will drill down on this important topic. 

With that, I welcome Senator Reed, but turn it over to my Ranking Member, Senator Johanns. 

STATEMENT OF SENATOR MIKE JOHANNS 

Senator JOHANNS. Thank you, Mr. Chairman, for calling this 

hearing today, and I also look forward to hearing from the witnesses. 

The JOBS Act, which is the topic today, is a law that truly had 

bipartisan support. As the Chairman indicates, it did take a lot of 

work to get there, but think about these numbers. It was supported 

by roughly 90 percent of the House. These days that is remarkable. 

It was supported by 73 percent of the U.S. Senate, and it was endorsed by the President of the United States. 

3 

You do not see those numbers very often associated with a significant piece of legislation, so it is very important to all of us that 

it is carried out as directed and as intended. 

The purpose of the JOBS Act, or at least one of the purposes, is 

pretty straightforward. It makes it easier for small companies to 

access capital markets and grow. This includes small companies 

from across the country that want to hire, expand, move their businesses to another level. 

For instance, a representative from Natural Grocers will testify 

today, a company that utilized the JOBS Act to expand. The company actually just opened a new store in Omaha, Nebraska, just 

this summer. That makes three stores overall in Nebraska—two in 

Omaha, one in Lincoln. We hope there are more coming. 

New stores mean more jobs in Nebraska for Nebraskans. This is 

the type of economic growth that was intended by the JOBS Act. 

While I am encouraged that implementation of the JOBS Act has 

helped many companies and implementation continues to move 

along, I would be less than candid if I did not say I am not terribly 

pleased with the pace of the rulemaking. We are 11⁄2 years removed 

from the enactment of the law, and many rules are yet to be finalized. For instance, as the Chairman noted, Regulation A Plus in 

Title IV of the bill remains to be implemented. This provision increases the cap on how much money companies can raise in an IPO 

without having to register with the SEC. 

The old cap was $5 million, which was outdated. It had been in 

place for over two decades, and it just simply was not helpful. It 

would be lifted to $50 million if the SEC would act. This relief allows smaller companies to focus more on building the company in 

the early stages as opposed to jumping through all sorts of hoops 

and being weighed down with mountains of paperwork from the 

get-go. 

Like most of the JOBS Act, this section garnered a lot of bipartisan support. Unfortunately, it has been over 18 months since the 

Act’s passage, and the SEC has not established the rules that will 

enable businesses to access the benefits and, therefore, create the 

jobs. 

But I am hopeful that the SEC can move quickly in finalizing 

Regulation A Plus, and I am pleased that we have finally seen 

progress on Title II and Title III, the general solicitation and overcrowding provisions. 

I remember Mary Jo White testifying before the Banking Committee in March on the importance of finalizing the JOBS Act. She 

said in reference to the act, and I am quoting: ‘‘Completing these 

legislative mandates expeditiously must be an immediate imperative for the SEC.’’ I agree. 

I look forward to hearing from the witnesses today to find out 

where progress has occurred, where work remains to be done in regard to the JOBS Act, and how we get it to the finish line. There 

are many job creators who eagerly await full implementation, and 

we are all keenly interested in moving this forward. 

With that, again, I welcome the witnesses, and I thank the 

Chairman for bringing this hearing together. Thank you. 

Chairman TESTER. Yes, thank you, Senator Johanns. 

4 

We were going to have a vote at 10:30, so what I hope to happen 

is we will have your testimony, Mr. Higgins, and then the questions, and then we will probably go vote and come back for the second panel. 

So with that, I want to welcome our first witness, Keith Higgins, 

joining us from the SEC. I want to thank you for your willingness 

to testify before us today. 

Mr. Higgins is Director of the Division of Corporation Finance at 

the Securities and Exchange Commission. Prior to his current role, 

Mr. Higgins was a lawyer with Ropes and Gray LLP where he was 

a partner in its Boston office for 30 years. At Ropes and Gray he 

advised public companies about security offerings, mergers and acquisitions, compliance, and corporate governance. 

Welcome, Mr. Higgins. You have 5 minutes for your oral remarks, but remember your full written remarks will be a part of 

the record. You may proceed. 

STATEMENT OF KEITH HIGGINS, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION 

Mr. HIGGINS. Thank you, Senator. Chairman Tester, Ranking 

Member Johanns, Senator Reed, and Members of the Subcommittee, as the Senator said, my name is Keith Higgins, and I 

am the Director of the Division of Corporation Finance at the Securities and Exchange Commission. I appreciate the opportunity to 

testify today on behalf of the Commission to discuss our implementation of the JOBS Act, which, as the Senator noted, the Chairman 

has said is one of the Commission’s top priorities. 

The JOBS Act made significant changes to the Federal securities 

laws. Some of the provisions were effective immediately upon enactment, while others required Commission rulemaking. 

Immediately upon enactment, the SEC staff took steps to inform 

the industry about the operations of the act. Among other things, 

we provided guidance about the IPO on-ramp provisions, and we 

provided guidance about changes to the requirements for registration and deregistration of securities under Exchange Act Section 

12(g). 

At the same time, teams from across the agency, including economists from our Division of Economic and Risk Analysis, began 

working on rulemaking recommendations for the Commission’s consideration, including the assessment of the potential economic impact of these rules. To increase the opportunity for public comment, 

we put a page on our Web site so that interested parties could provide comments in advance of the rulemaking. The Commission and 

staff met with industry participants and others to come in to talk 

about the JOBS Act and the impending rulemaking. And the rulemaking teams have used this input in putting together proposals 

for the Commission’s consideration. 

In July of this year, as the Chairman noted, the Commission implemented Title II by amending Rule 506 to permit issuers to use 

general solicitation to offer securities, provided that all investors in 

the offering were accredited investors and that the issuer took reasonable steps to verify that accredited investor status. The ComVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
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mission also amended Rule 144A to permit general solicitation in 

offerings to qualified institutional buyers. 

In addition to amending these rules, on the very same day the 

Commission adopted rule amendments implementing provisions of 

the Dodd-Frank Act to disqualify felons and other bad actors from 

participating in Rule 506 offerings. We also proposed additional 

rule and form amendments related to offerings that are conducted 

under Rule 506. 

Earlier this month, the Commission took yet another step and 

proposed rules to implement the crowdfunding exemption in Title 

III of the act. Under the proposed rules, an issuer could use this 

exemption to raise up to $1 million in any 12-month period. Investors would be permitted during a 12-month period to invest a maximum amount based on their annual income or net worth. Issuers 

would be required to conduct these crowdfunding transactions 

through either a broker-dealer or a new type of intermediary called 

a ‘‘funding portal,’’ and the proposed rules would set up a registration and regulatory framework for these funding portals. Eligible 

issuers would be required to file specified disclosures with the 

Commission and to provide those disclosures both to the intermediary and to investors. We look forward to receiving and considering the public comment on these proposals. 

Title IV of the JOBS Act, as noted, also required the Commission 

rulemaking to create a new exemption similar to Regulation A, 

Regulation A Plus, for certain offerings up to $50 million in any 12- 

month period. The staff has met with market participants, industry 

groups, State securities regulators, and other interested parties, 

and we are working hard to finalize recommendations on that rule. 

The JOBS Act required the Commission to conduct several studies and to prepare reports to Congress. In July of last year, the 

staff submitted a report on decimalization and its impact on the 

number of initial public offerings. The staff currently is working 

with the exchanges to develop and, if possible, to present to the 

Commission a plan that would implement a pilot program to allow 

smaller companies to use wider tick sizes. 

In October of 2012, the staff submitted a report that examined 

the Commission’s authority to enforce the anti-evasion provisions of 

12g5-1, which deals with the record holders under 12g. 

And, finally, the staff is finalizing a report on Regulation S-K 

looking at determining how we can modernize that rule and make 

it less burdensome and costly for emerging growth companies and 

really for all issuers, and we expect to make that study public very 

soon. 

Finally, the JOBS Act mandated that the Commission provide 

online information and conduct an outreach program for small and 

medium-size businesses and for women-, veteran-, and minorityowned businesses about changes that were brought about by the 

statute, and we are working on an implementation plan to tailor 

to these constituencies. 

The Commission and the staff continue to work diligently to implement the JOBS Act rulemaking as well as those remaining 

under the Dodd-Frank Act, and we look forward to completing the 

remaining provisions as soon as practicable. 

6 

Thank you again for inviting me to testify, and I would be happy 

to answer any questions you may have. 

Chairman TESTER. Well, thank you, Mr. Higgins. Right down to 

the second. 

Mr. HIGGINS. I know. 

Chairman TESTER. That is pretty darn good. 

[Laughter.] 

Chairman TESTER. I think we have got about 21 minutes. I think 

we will put 7 minutes on the clock, and if we do not run over, everybody will get a chance to ask a fair number of questions. 

Once again, I want to thank you for being here today, Keith. In 

my opening statement, I indicated that I was not happy with the 

pace of implementation of the JOBS Act. I think the Ranking Member talked about the same thing. 

But I am also aware of the fact that most of the movement that 

we have seen, not including staff work behind the scenes, has occurred since you arrived at the SEC back in July, so I am going 

to view you as my lucky charm key to getting this bill fully implemented. 

In terms of finalizing all of the existing rules and having them 

fully operational for use by entrepreneurs, when can we expect to 

have the JOBS Act fully off the ground? 

Mr. HIGGINS. Senator, as Chair White, who sets the agenda for 

the Commission, has said to you personally and has testified, completion of the JOBS Act rulemakings and the Dodd-Frank 

rulemakings are the Commission’s top priority. And if it is a priority for her, I can assure you it is a priority for me. 

It is really impossible for me to say with any certainty when all 

the rules will be completed, but what I can say with absolute certainty is we understand the importance of them, we recognize the 

mandates, and we are working diligently to get them done. So we 

will get proposals done that we—we will put them out for comment, and we hope to get them done just as diligently as possible. 

But I cannot promise a particular date. 

Chairman TESTER. Not to push you, but I am going to a little bit. 

Mr. HIGGINS. Sure. 

Chairman TESTER. By the end of the first quarter next year? 

Mr. HIGGINS. Again, I think it is really impossible. There are a 

lot of factors that go into it: the extent of the public comment—I 

mean, we had a lot of control over the proposals, and I can tell you 

we will get the proposals out in relatively short order. We have got 

a couple remaining. 

Chairman TESTER. OK. 

Mr. HIGGINS. Look, I would love to get it next year. 

Chairman TESTER. Right. If you give me a date certain, I would 

hold you to it. 

Mr. HIGGINS. Right. I have heard, right. 

Chairman TESTER. Yes, exactly. Well, let us just talk about the 

rulemaking for just a second. It seems to me the A Plus rulemaking would be a little more straightforward than the other provisions of the JOBS bill. Correct me if I am wrong on that. Do you 

envision a lengthy comment period with the rulemaking after they 

are proposed? 

7 

Mr. HIGGINS. I would not expect a lengthy comment period. I 

think typically comment periods are 60 days. I think with 

crowdfunding we wound up with 90 days because with 

crowdfunding we are really proposing, in addition to the exemption, 

a whole new regulatory structure for crowdfunding portals, and I 

think it really deserves a little bit more time. But a 60-day comment period I think would be a reasonable thing, but we have not 

really determined that yet, Senator. 

Chairman TESTER. OK. My biggest interest with respect to the 

JOBS Act implementation, A Plus is unfinished. The legislation 

very clearly contemplates and, in fact, envisions the SEC developing as a part of this rule a definition of ‘‘qualified purchasers,’’ 

a class of sophisticated investors to be defined by the SEC that 

would qualify for an exemption from State security laws. While 

some have questioned whether an issuer would utilize this QP exemption over Regulation D, for example, there are clear benefits in 

terms of transparency, disclosure, and liquidity. 

Is the staff considering how to structure this definition? 

Mr. HIGGINS. We are, Senator. The issue of qualified purchaser 

and really the relationship to State registration and qualification 

laws, the preemption, is an important factor in our rulemaking. We 

have heard in prior comments or the comment letters that have 

come in, many commenters have suggested that the cost and burdens of State registration and qualification have been a principal 

reason that the existing Regulation A has not worked, that we only 

had 20-some-odd offerings in the last year, and I think, you know, 

fewer than 100 over the last 7 years. 

Chairman TESTER. OK. 

Mr. HIGGINS. On the other hand, there are other commenters 

who have said that State registration qualification is an important 

investor protection aspect that we should not lose sight of, and so 

we are trying to look at both sides of the coin and balance those 

views. 

Chairman TESTER. Are there certain metrics or benchmarks that 

you are utilizing? 

Mr. HIGGINS. Well, nothing—what we do not want to do is to get 

ahead, I do not believe, of—we are working on the ‘‘accredited investor’’ definition as we are required to work on by the middle of 

next year under the Dodd-Frank Act. And we are concerned about 

not wanting to front-run that and create some sort of new class of 

investor, so we are looking at ways in which we can design a system where, between a combination of our review of a registration, 

a qualification, or offering materials under Regulation A as well as 

some characteristics of the purchaser could work to create a qualified purchaser under Regulation A. 

Chairman TESTER. OK. In your testimony you discussed the 

many steps that the SEC is taking to inform the industry about the 

JOBS Act. You know from your past life how critically important 

it is to reach out to entrepreneurs so that they fully understand the 

impact and implications of how they can access capital. How can 

we better educate entrepreneurs about opportunities for access to 

capital in the JOBS Act? 

Mr. HIGGINS. Interesting. We, meaning the SEC, the public generally, I mean, we put guidance out on our, you know, outreach. 

8 

I think that once we get our rules done—and we are committed to 

getting them done as promptly as we can—the industry and market participants will be aware of them and that they will be used, 

and we are willing to work with any groups to try to make our 

rules more workable and usable. 

Chairman TESTER. I appreciate that. I will tell you that I think 

as we get the rules out—and I am sure you will soon—I think it 

is going to be critically important to be able to do the kind of outreach we need, and maybe some folks on the next panel can talk 

about how we can do that, too, to make sure that some of their 

folks that they represent or that they know can better utilize some 

of the benefits out there. 

With that, I will turn it over to Senator Johanns. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Mr. Higgins, again, thanks for being here, and thanks for your 

work on something that obviously we care about in a very bipartisan way. We want to see this work. 

Let me, if I might, focus a question on investors. As you know, 

in addition to trying to help small companies compete with larger 

companies, the JOBS Act also seeks to help smaller investors compete with larger investors. Let me, if I might, explain that a little 

bit. 

The SEC defines ‘‘accredited investors’’ as individuals with a net 

worth of at least $1 million, not including the value of their residence, or with an income of at least $200,000 each year for the last 

2 years. 

I am wondering about the possibility of more flexibility in this 

idea, the pros and cons of that. Is income or net worth really the 

best indication of a quality investor? Of course, you do not want 

someone throwing away their life savings, putting everything at 

risk as if they are playing in a poker match. But you also want to 

make sure that you have a place for those outside the top 1 percent, if you will. Talk us through that. Where does the JOBS Act 

work here? What are the pros and cons? What should we be thinking about here? 

Mr. HIGGINS. Well, Senator, we have begun, the staff has begun 

work on a review of the accredited investor standard as it applies 

to natural persons, and the income and net worth test that you 

talked about relate to the natural persons test. By the middle of 

next year, we are required to come up with a report about that. 

That was mandated under the Dodd-Frank Act, and we have begun 

to work on it. 

The GAO put out a study fairly recently on accredited investors 

to talk about other things that might be added. It seems to me the 

Holy Grail is how do you define the sophistication necessary to be 

able to understand investment risks, and I do not know whether 

anybody has really quite yet found what the answer is to that 

question. The GAO suggested investor education might be—you 

know, we would put something like a Series 7 exam. You know, 

something like that might be a little difficult to administer. Participation by an investor adviser or a broker-dealer in the investment. 

There is talk about investment limitations, something a la the 

crowdfunding, where you are only allowed to put a certain percentage of net worth or annual income into—so all of those are on the 

9 

table for natural persons, and our work has begun in trying to figure out the best way to attack the accredited investor. But you are 

absolutely right. It is an issue, and I do not think anybody is particularly happy with the current $1 million net worth and that 

$200,000—— 

Senator JOHANNS. So your thinking is that the report that is 

called for will be out by—— 

Mr. HIGGINS. By the middle of July. 

Senator JOHANNS. The middle of July of next year. 

Mr. HIGGINS. Next year. 

Senator JOHANNS. And what are you anticipating? Will that report indicate some strategies for Congress to look at? Or is it just 

too early to tell where the direction of that report might go? 

Mr. HIGGINS. Well, I think it is too early to tell, but I believe that 

the Commission has the necessary rulemaking authority to address 

the issue. 

Now, Congress has said in Dodd-Frank that we cannot move the 

$1 million net worth test until July of 2014. We were prohibited 

from changing that, so that needs to stay in place. But I think the 

Commission’s rulemaking authority ought to be sufficient to address the issues. But, again, it is a little early to tell where we will 

come out. 

Senator JOHANNS. Looking at the totality of the JOBS Act, is it 

possible to give us a summary of what is left in terms of implementation? You would not necessarily have to do it today from memory, 

but a scorecard would be helpful to us. 

Mr. HIGGINS. Right. Well, we can certainly provide you and the 

staff with a detailed scorecard. In general terms, Title I was largely 

self-implementing with the on-ramp provisions. 

Title II, we have adopted the rules for general solicitation, and 

those are done. We had some companion rulemaking that was related to that, which is still ongoing and which we are taking comment on. 

Title III, the crowdfunding provisions were just proposed. There 

is a 90-day comment period after which we will look at the comments and begin to get done. 

Title IV, Regulation A Plus, again, top priority. I guess I would 

say the Chair had indicated that her front-burner items for the fall 

were pay ratio, crowdfunding, and Regulation A Plus, and two of 

those three are already out, so we are working hard on the third. 

Title V and Title VI relating to the registration provisions, there 

is a little bit of rulemaking to do to clarify some of the provisions, 

to provide the safe harbor for employees. We expect those to be out 

soon, but we do not yet have a proposal out on that. 

And then Title VII is the outreach. 

Senator JOHANNS. Let me ask one more question, and this may 

be a bit of a stretch but—because we are pushing you on getting 

JOBS Act rules and regulations in place, but I am thinking about 

a JOBS Act II. This had so much bipartisan support. I would like 

to challenge you, as you are seeing this implementing and as you 

are working with those who are taking advantage of the JOBS Act, 

to keep us in the loop on what might be next, what is working, 

what is not working. I think this is one of those rare cases where 

you have a bill that Congress would be willing to take another look 

10 

at at some point, probably after I am gone, and see if there are 

other steps that maybe we overlooked in JOBS Act I. So I will just 

use the balance of my time to urge you to do that and keep this 

Subcommittee and the Banking Committee in mind as those are 

things that pop up and you think about. 

Mr. HIGGINS. Thank you, Senator. We will do that. 

Senator JOHANNS. Great. 

Chairman TESTER. Senator Reed. 

Senator REED. Thank you, Mr. Chairman, and thank you, Mr. 

Higgins, for your testimony. 

The JOBS Act requires the SEC to adopt rules that, in the legislation language, ‘‘require the issuer to take reasonable steps to 

verify that purchasers of the securities are accredited investors, 

using such methods as determined by the Commission.’’ Can you 

let us know briefly what are some of those methods that they can 

use to verify? 

Mr. HIGGINS. Yes, Senator. Our rules came out with—the principal method is a principles-based method of verification, which depends on the facts and circumstances of the particular offering. It 

does not prescribe a one-size-fits-all method of reasonable 

verification. It says you look at the nature of the offering, the nature of the purchaser, the information that you already know about 

the purchaser, the size of the investment limitations in the offering, to determine what steps would be reasonable. 

We wanted to be as flexible as possible in allowing companies to 

comply, but that was a little—it is a little uncertain what reasonable steps are, and commenters said to us, gee, we would like some 

certainty, we would like to have a safe harbor where we know for 

certain. 

If we are not sure that our steps were reasonable, if we do certain things, it will be absolutely clear that we took reasonable 

steps. So we created in the final rules four safe harbors. One safe 

harbor deals with the annual income test and allows you to establish it via tax returns. 

The net worth test you can do it—and, again, this is for natural 

persons. You can do it through bank statements or other kinds of 

financial records along with a consumer report about the debt side 

of that equation. 

Third, we provided registered CPAs, attorneys, registered brokerdealers, investment advisers could provide certification that a person as an accredited investor, and that would work. 

And then, finally, to address companies that had accredited investors before the JOBS Act was adopted, we said if you were an 

accredited investor before these new rules took effect you could 

self-certify and continue to be able to invest. 

And so that is the way we tried to balance a principles-based approach with an approach that gave issuers certainty should they 

choose to do it. 

Senator REED. Do you have the capacity to check or do you plan 

to check, either spot-checking or sort of significant checking, that 

this is being followed by the issuers? 

Mr. HIGGINS. We do indeed, Senator, in some instances. A couple 

of things. One, the proposal that we put out the same—that the 

Commission proposed the same days as the general solicitation ban 

11 

being lifted requires in the Form D that we would require to be 

filed an issuer to explain the verification procedures that it undertook to satisfy itself of accredited investors. So that is one way we 

can do it. 

Another way is that we have built in—we have a comprehensive 

work plan to look at how these general solicitation rules are going 

to work, and one of the things we have done is our Office of Compliance Inspections and Examinations has added to their examination report for broker-dealers and investment advisers questions 

about what they are doing to ensure in offerings with which they 

are involved that the accredited investor—that the reasonable 

verification procedures are in place. 

So those are a couple of the things that we are doing to monitor 

the marketplace to make sure that issuers are taking the right 

steps. 

Senator REED. But you do not have within your plan even sort 

of spot-checking going into an issuer and looking at the records and 

looking at what they have said they have done; they have actually 

done? 

Mr. HIGGINS. I am not sure that I—I would have to check with 

the enforcement and the OCIE folks about what they intend to do. 

Obviously the inspection function will be—they will be asking for 

records from the broker-dealers and the investment advisers. I 

would have to check to see what we are planning on the issuers. 

Senator REED. But the issuers, you know, are a critical part of 

this—— 

Mr. HIGGINS. Absolutely. 

Senator REED. ——since you can conduct one of these offerings 

without broker-dealers. 

Mr. HIGGINS. That is correct, Senator. 

Senator REED. And that would probably be an area you would 

have to pay attention to. 

Going back to the issue that Senator Johanns raised about the 

accredited investor definition, I know you are going to—next year, 

next July, under Dodd-Frank Act you will have a formal sort of 

statement about your position. But just remind me, when was the 

$1 million standard and the $200,000 standard adopted? 

Mr. HIGGINS. It has been around for a pretty long time. 

Senator REED. I think we were children then, yes. 

[Laughter.] 

Mr. HIGGINS. So a while ago. 

Senator REED. But the standard really started with a significant 

amount of capital, either, you know, wealth or income, which today 

now is much, much less in terms of real dollars than it was back 

then. And, you know, the notion of lowering that, it seems to me 

to raise some interesting questions. I think it originally was proposed to not only sort of be a proxy for sophistication, but also to 

be a measure of how much you could actually absorb the entire loss 

of the investment, and that is another factor. 

Are you considering those factors as you go forward? Or I guess 

the question would be: Is the tendency to raise that level from the 

1980s, let us say, to 2013? 

12 

Mr. HIGGINS. The notion of raising is certainly something that is 

raised by commenters who have commented on the rules that it 

should be inflated to reflect current values. We have heard those. 

There are other folks who say that, you know, having too high 

a standard impedes capital formation. So there is another—you 

know, there are other people who come in and say, gee, you do not 

want to raise it any higher because that will impede our ability to 

go after—so I think we need to look at a range of different ways 

to come at it. I am not sure that the existing pure net worth and 

income is the right way to go. 

Senator REED. What we are working off is a basis of the—you 

know, there was a general rule of no public solicitation. So as soon 

as you saw popping up on the screen someone offering a security 

that was not registered, you sort of—you know, you were sort of 

queued up as to this could be—and the burden of proof really was 

on the other folks, not you. 

Mr. HIGGINS. Right. 

Senator REED. Now you can do general solicitation, but that has 

to be to accredited investors, and yet we are looking at a standard 

which is several decades old—and as I would suggest, it does not 

just suggest or reflect sophistication, but it also reflects the ability 

to absorb the loss, and I think that has to be considered. 

The final point I would make a comment in response is that if 

you are considering testing people to be accredited investors, is 

that a serious proposal? 

Mr. HIGGINS. It has been offered as, you know, some sort of investor education or testing, but I think it would be a little difficult 

to implement, Senator. 

Senator REED. I think you are right. Thank you. 

Chairman TESTER. Well, thank you, Senator Reed and Ranking 

Member Johanns, and most importantly, thank you, Mr. Higgins, 

for being here. I think—it was not too bad, was it? All right. The 

key is that I think there is a tremendous effort that needs to be 

done to get these rules out, and I think there is a lot of attention 

that this Committee will be paying. We have got to do them right, 

and we have got to be thoughtful. But I think that time is important, especially as we are trying to get the economy moving forward again in a way that best addresses the needs of this country. 

So we will be watching. You may be coming back in again. Hopefully it will be with good news, and we look forward to that. We 

very much appreciate your work, Mr. Higgins, and look forward to 

seeing you again. 

They have called a vote, so we will recess until we get back, 

which will be in pretty short order. I apologize to the next panel, 

but we will get back here pretty darn quickly. 

[Recess.] 

Chairman TESTER. We will call the Committee back to order. 

Senator Johanns is en route, but being a good Senator, he has already read all your testimony, and so I think we will get going with 

our second panel of witnesses. 

The first one is Mr. Alan Lewis, who currently serves as the director of special projects for Natural Grocers by Vitamin Cottage, 

Incorporated. Mr. Lewis also directs Government affairs and food 

and agricultural policy for Natural Grocers. Mr. Lewis is also acVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
13 

tive in several trade organizations and sits on the Boulder County, 

Colorado, Food and Agriculture Policy Council. I will tell you from 

a personal standpoint, welcome, Alan. I appreciate you making the 

trek out here, and I appreciate what you do. 

Mr. LEWIS. Thank you. 

Chairman TESTER. Mr. Robert Kaplan, Jr., is our second panelist. He is a founder and managing partner at Kaplan Voekler 

Cunningham and Frank, PLC. Mr. Kaplan’s practice is concentrated in the area of securities, business representation, and 

real estate investment. His experience representing businesses is 

wide-ranging, including business formation, mergers and acquisitions, general corporate and commercial law, securities compliance, 

private offerings, tax and strategic partnerships, joint ventures. 

You have got a full plate. Welcome, Mr. Kaplan. 

Mr. KAPLAN. Thank you, Senator. 

Chairman TESTER. The third witness is Mr. Rick Fleming, who 

serves as deputy general counsel for the North American Securities 

Administrators Association, where he is active in developing model 

State rules, drafting and reviewing comment letters and amicus 

briefs, and providing assistance to State securities regulators. Prior 

to joining NASAA, Mr. Fleming was general counsel for the Office 

of the Kansas Securities Commissioner. Welcome, we appreciate 

your work. 

And last, but certainly not least, is Mr. Sherwood Neiss, who 

serves as principal of Crowdfund Capital Advisors and worked to 

develop the crowdfunding framework in the JOBS Act. Mr. Neiss 

travels the world presenting to entrepreneurs, professional investors, and institutions, educating them on how to harness emerging 

crowdfunding investment opportunities and how to build 

crowdfunding ecosystems to support innovation, strengthen business, and create thousands of jobs. And we appreciate the work 

that you do, Mr. Neiss, and we thank all the witnesses for being 

here today. 

As with the previous witness, there will be 5 minutes put on the 

clock for oral statements. Your written testimony in total will be 

a part of the record. 

We will start with you, Mr. Lewis. Please proceed. 

STATEMENT OF ALAN LEWIS, DIRECTOR OF SPECIAL 

PROJECTS, NATURAL GROCERS BY VITAMIN COTTAGE, INC. 

Mr. LEWIS. Good morning, Chairman Tester, Ranking Member 

Johanns, and other Members of the Subcommittee. Thank you for 

the opportunity to testify about the impact of the JOBS Act on Natural Grocers and our ability to raise capital to support job creation 

and contribute to the economic growth of the Nation. 

My name is Alan Lewis, and as director of special projects at 

Natural Grocers and an active member of our IPO team, I participated in drafting the Registration Statement on Form S-1 and in 

making decisions about using certain beneficial provisions found in 

the JOBS Act. I also continue to provide investor relations support 

to the analyst and investor communities on behalf of Natural Grocers. Very briefly, I would like to share the introduction to our company and our path to completing our IPO. 

14 

Natural Grocers is in many ways the quintessential American 

business success story. Starting from humble mom-and-pop beginnings in the 1950s, we have grown to operate over 70 grocery 

stores in 13 States while staying true to our original founding mission, which is helping people stay healthy through better food and 

nutrition. Of our roughly 2,000 employees, most are well-paying, 

full-time jobs and are eligible for affordable health care benefits. 

In 1998 Natural Grocers was acquired from its founders by their 

four children. Over the following 10 years they grew the business 

through long hours and hard work, primarily depending on internal cash-flow and bank loans for capital. Subsequently, they carefully hired additional professional staff and began putting in place 

the sophisticated accounting, technology, and operational infrastructure needed to support a robust expansion strategy. 

Beginning in 2009, in the midst of the recent economic downturn, 

our leadership team began laying the groundwork to raise outside 

capital through an initial public offering. At about the same time, 

Congress began addressing the need for economic stimulus by proposing a number of bills designed to prompt public and private investment to generate new jobs. A number of these initiatives were 

eventually passed into law in the form of the JOBS Act, which was 

signed into law just when Natural Grocers was preparing to submit 

its Registration Statement on Form S-1 to the SEC in anticipation 

of an IPO during the summer of 2012. 

Because we clearly qualified as an ‘‘emerging growth company,’’ 

many of the key provisions of the JOBS Act were anticipated by 

our legal, accounting, and investment banking advisers. So as a 

group, we paused to consider which opportunities we would take 

advantage of, keeping in mind we would likely be among the first 

companies to launch an IPO under this new regulatory regime, and 

that investors might be skeptical of some of the new relaxed rules. 

Here are just two highlights from the JOBS Act provisions covered in our written testimony: 

First, confidential submission of our S-1 greatly reduced the complexity, stress, and risk of undertaking a public offering within 

such an unsure market environment. 

And, second, the reduced requirement for audited financial reports lowered the expense and time needed to prepare for our S1 but did not seem to impact the acceptance of our offering. 

We decided not to opt out of maintaining compliance with new 

or revised accounting standards, but we elected to fully disclose our 

executive pay. 

Chairman Tester, you have asked us to describe our experience 

filing confidentially and using some of the reduced compliance provisions under the JOBS Act. In the additional written testimony 

submitted to each of you, we have discussed in some detail our experience with these and other decisions. I will be happy to answer 

your questions, of course, within the constraints placed on our corporate communications by Regulation FD and our upcoming fiscal 

year end earnings announcement. 

And speaking of regulations, I would like to yield myself 20 seconds to remind everyone that all statements made in this testimony other than statements of historical fact are forward-looking 

statements. All forward-looking statements are based on current 

15 

expectations and assumptions that are subject to risk and uncertainties. Actual results could differ materially from those described 

in the forward-looking statements because of factors such as industry, business strategy, goals and expectations concerning our market position, the economy, future operations, margins, profitability, 

capital expenditures, liquidity and capital resources, other financial 

and operating information, and other risks detailed in the Form 10- 

K filed by Natural Grocers for the year ended September 30, 2012. 

The information we present is accurate as of the date of this testimony, and we undertake no obligation to update forward-looking 

statements. 

In the final analysis, our IPO was a success on many levels. Our 

IPO priced at the high end of our range and the stock price held 

a healthy but reasonable premium on the first day of trading and 

thereafter. As one financial commentator stated in an article titled 

‘‘The Greedy Sit Out an IPO’’, ‘‘[Natural Grocers] has begun its 

publicly traded life in an environment of fair and balanced trading 

[ . . . ] How refreshing.’’ 

So, in conclusion, we believe that the JOBS Act is a successful 

piece of legislation. Key provisions of the JOBS Act enabled Natural Grocers to successfully navigate the financial markets and do 

exactly what the JOBS Act intended: grow our company and add 

jobs to the American economy. 

Thank you again for all your support of American small business 

and job growth and for allowing me to be here today to present our 

experience with the JOBS Act. I am happy to answer any questions 

you might have. 

Chairman TESTER. And we will have questions after the panelists are all done. Thank you for your testimony, Mr. Lewis. 

Mr. Kaplan, you may proceed. 

STATEMENT OF ROBERT R. KAPLAN, JR., MANAGING PARTNER, PRACTICES, KAPLAN VOEKLER CUNNINGHAM AND 

FRANK, PLC 

Mr. KAPLAN. Thank you, Chairman Tester, and thank you, Ranking Member Johanns, for allowing me the opportunity to come before you today to discuss the implementation of the JOBS Act and 

in particular the importance of Title IV, commonly referred to as 

‘‘Regulation A Plus.’’ 

Again, my name is Rob Kaplan, and I am managing partner for 

practices and founder of the law firm of Kaplan Voekler 

Cunningham and Frank, headquartered in Richmond, Virginia. We 

are a boutique firm with one of our areas of emphasis being on securities and capital formation. Our practice includes public and private securities, and we represent clients in various capacities of all 

sizes, from multi-billion-dollar enterprises to fledgling startups. 

But the bulk of our practice resides amongst what I referred to in 

my comments as ‘‘Main Street businesses,’’ companies in the lower 

mid-market or smaller, typically with revenue in the $5 million to 

$150 million range. 

My written testimony and your questions will provide greater detail, but in short, our view is that, to date, little movement has occurred to implement those aspects of the JOBS Act that we believe 

16 

address most ably the needs of Main Street businesses where so 

many of America’s jobs have historically been created. 

Main Street suffers presently from a lack of viable options for 

capital raising. Regulation A Plus presents the most potentially 

impactful piece of the JOBS Act in aiding Main Street businesses 

and providing a rational balance between regulatory oversight and 

access to publicly formed capital. And in turn, Regulation A Plus 

should provide greater investment options to the American public 

than what can be found now. 

The forms and procedures currently existing under Regulation A 

can readily be applied to Regulation A Plus, thus obviating the 

need for further delay in implementing Regulation A Plus. SEC’s 

rulemaking in this context should be balanced so as not to make 

Regulation A Plus overly burdensome but foster issuer transparency and the efficient dissemination of information to support 

a market for these securities. 

At the same time SEC should adopt a workable definition of 

‘‘qualified purchaser’’ which affords investor protection but eliminates unnecessary and obstructive layers of regulatory procedure. 

Recently we have seen movement on the implementation of the 

JOBS Act beyond the IPO on-ramp provisions of Title I, and specifically I am referring to the adoption of Rule 506(c) and the release several days ago of the proposed rules related to 

crowdfunding. But we believe that Regulation A Plus can be leveraged by a greater diversity of companies who are responsible for 

much of the job growth in this country. 

Senators, Main Street businesses are not going to be, for the 

most part, in our view, likely candidates for crowdfunding or these 

506 options. Crowdfunding addresses a capital need by companies 

that are much smaller and in an earlier stage of growth than the 

companies we typically represent. And in the 506 context, we have 

seen a steady decrease in the amount of accredited investors that 

may be the potential audience for investment. We have also seen 

those investors shying away from restricted securities, and we have 

seen the regulatory environment, which I am not necessarily commenting to the wisdom or efficacy of that, but the practical reality 

is that some of the new rules that are coming into place that I discuss in my written testimony are really producing a chilling effect 

with brokerages and investment banks that may assist issuers in 

forming company capital in the private context. 

So what we see is the market being predominated by institutional investors, and those investors have return demands which 

often do not fit with the types of companies that could really benefit from Regulation A Plus. 

The reason we see Regulation A Plus as so important here is 

that, unlike a lot of other aspects of the JOBS Act, what it truly 

does, in concert with the intent of the Act, is create a balance between regulation and capital formation. It literally offers an exchange of access to a greater segment of the investing public in exchange for submission to a regulatory regime which ensures a 

standard of disclosure which allows for transparency, and that 

transparency can allow for a modest but workable market in these 

securities, which also provide risk mitigation for the investors. 

And, finally, because of that standard of disclosure, it can provide 

17 

access to greater investment options that they can look at with 

their advisers. 

We believe it could be implemented under the current forms and 

the current rules. We urge this because, quite frankly, we have 

such a small volume of these deals that we believe the SEC should 

foster the use of it so they can have the appropriate rules made. 

We also believe that a ‘‘qualified purchaser’’ definition is absolutely necessary. As I discuss in my written testimony, some of our 

experiences we believe, looked at in the context of a broader market, could potentially chill or obstruct the use of what could be a 

very balanced approach to capital formation. 

We have suggested a ‘‘qualified purchaser’’ definition with a net worth of $500,000 or a gross annual income test of $150,000 with 

a net worth of at least $250,000, and we have also suggested that 

that definition would perhaps have an investment cap for natural 

persons where they cannot invest more than 20 percent of their net 

worth. We think this is a reasoned balance between the legitimate 

investor protection concerns of NASAA and Congress in enacting 

the act. But I think it is important to allow this method of capital 

formation to move forward and for a viable market to be developed. 

Thank you, and I am, of course, available to answer any questions you may have. 

Chairman TESTER. Thank you for your testimony, Mr. Kaplan. 

Mr. Fleming, you may proceed. 

STATEMENT OF RICK FLEMING, DEPUTY GENERAL COUNSEL, 

NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC. 

Mr. FLEMING. Thank you. Good morning, Chairman Tester, 

Ranking Member Johanns, Senator Reed, and other members of 

the Subcommittee. My name is Rick Fleming, and I am an attorney 

for NASAA, the association of State securities regulators. I would 

like to note that the president of our association, Ohio Securities 

Commissioner Andrea Seidt, regrets that she is unable to testify 

today, but we are certainly appreciative of your willingness to allow 

me to testify in her place. 

Prior to joining the NASAA staff 2 years ago, I was the general 

counsel for the Office of the Kansas Securities Commissioner, and 

in that role, I spent 15 years protecting Main Street investors by 

prosecuting scam artists and by bringing disciplinary actions 

against licensed individuals who engaged in dishonest or unethical 

business practices. 

But I also during that time worked with many Main Street businesses and their counsel to help them understand the various options for raising capital under State and Federal law. And like my 

colleagues in other States, I had absolutely no interest in throwing 

up needless barriers to economic development in the State of Kansas. 

So drawing upon our experience with small business issuers who 

want to create jobs, the States are committed to exploring new and 

innovative ways of fostering small business capital formation. But 

our experience with investors tells us that we also need to create 

an environment in which those investors feel sufficiently protected. 

The trick is to balance the legitimate interests of investors with the 

18 

legitimate goals of entrepreneurs and to adopt policies that are fair 

to both. 

Under President Seidt’s leadership, NASAA is embarking this 

year upon a campaign for what she calls ‘‘smarter regulation,’’ 

meaning regulation that takes advantage of technology to make the 

offering process more efficient for small businesses without sacrificing important protections for investors. And a first step in this 

direction involves Regulation A Plus. 

Given the risky nature of investments in startups generally and 

the fact that the States have traditionally been the primary regulator of small business offerings, NASAA believes that State oversight of these offerings is essential. However, we also recognize the 

need to change some of our longstanding policies to make Regulation A offerings as successful as possible. And toward that end, a 

NASAA project group has consulted with a task force of the American Bar Association to develop an initial proposal that peels back 

some of our normal guidelines to accommodate this new type of offering. And as part of that proposal, we have designed a multistate 

review process in which one or two States will take a lead role in 

reviewing a registration application and work with the company 

that is issuing the securities to resolve any deficiencies in that application. 

In addition, we are developing a multistate electronic filing platform that will allow a one-stop filing process with all the States, 

and we intend to build out that system to accommodate Regulation 

A Plus filings. 

This past August, a draft proposal to establish this new 

multistate review program was submitted to our NASAA members, 

the State regulators, for what we call an ‘‘internal comment period.’’ And, in addition, the proposal was discussed during our last 

face-to-face meeting, which was actually earlier this month. And I 

am pleased to report that the comments that we have received 

from our members have been favorable and that the proposal will 

be issued for public comment later today. 

As NASAA moves through this process, we will, of course, continue to coordinate and communicate with the SEC in an effort to 

keep both the Federal and the State requirements in sync. 

With respect to Title II of the JOBS Act, NASAA remains deeply 

concerned that the lifting of the ban on general solicitation will attract even more con artists to the Rule 506 marketplace, and that 

those persons will ultimately poison the well so that investors are 

reluctant to invest in even the most legitimate private companies. 

So to avoid this type of unintended consequence, NASAA asked the 

SEC to enhance investor protections in Rule 506 by adopting a 

number of further changes to that rule while it was in the process 

of lifting the ban on general solicitation. We are pleased to see that 

the SEC proposed many of our suggested changes, and we continue 

to urge their swift adoption. 

In particular, we consider it vital for the Commission to require 

the filing of Form D before a company begins to advertise for investors. We have also asked the Commission to establish meaningful 

consequences for issuers who fail to file the form because, absent 

the filing of a Form D, the States will have no information about 

19 

offerings that are being advertised to investors in our own back 

yards. 

As you know, last Wednesday the SEC released its proposed 

rules on the crowdfunding portion of the act. The SEC is required 

to consult with the States about those rules, and we are currently 

doing a thorough analysis of that proposal. 

Thank you again, Mr. Chairman and members of the Committee. 

I would be pleased to answer any questions. 

Chairman TESTER. Well, thank you for being here. Thank you for 

your flexibility to be here, Mr. Fleming, and thank you for your testimony. 

Mr. Neiss, you may proceed. 

STATEMENT OF SHERWOOD NEISS, PRINCIPAL, CROWDFUND 

CAPITAL ADVISORS LLC 

Mr. NEISS. Chairman Tester, Ranking Member Johanns, and 

Senator Reed, thank you for holding this hearing. My name is 

Sherwood Neiss. I am a pharmaceutical at Crowdfund Capital Advisors. CCA works with Governments, multilateral organizations, 

investors, and entrepreneurs on creating crowdfunding ecosystems. 

I am also an entrepreneur and one of the cocreators of the Startup 

Exemption, the framework used by Congress to create Title III, 

crowdfunding. 

If there is one thing I want to stress in my speech, it is that 

while the proposed rules are fair, we need a few more changes to 

create an efficient crowdfunding ecosystem. This law will allow entrepreneurs to use their social networks and regulated Web sites 

to raise capital for their endeavors from people who believe in 

them. This law allows supporters to pledge their support in the 

form of equity investments or loans to promising businesses. This 

law addresses the funding void faced by startups and small businesses and, if implemented according to the intent of the law, may 

result in much needed economic growth, innovation, and jobs. 

Last week the SEC voted unanimously in favor of the proposed 

rules related to Title III. I would like to commend the SEC and 

their staff for their incredibly hard work and detailed analysis of 

regulation crowdfunding. This legislation effectively solves earlier 

problems with easing regulations around capital formation by deterring the ‘‘pumping’’ of securities by disallowing compensation 

tied to the success of an offering unless that individual is a registered broker. And the legislation deters the ‘‘dumping’’ of securities by requiring them to be held for 1 year. It deters potential 

scam artists from entering the market by have background checks 

performed, disclosures mandated, and transactions taking place on 

regulated intermediaries. This entire process happens online, creates a digital footprint that can easily be referenced if anything 

goes wrong. 

Now to the proposed rules. First, I will discuss some positive elements and then go into areas that are less appealing. There are 

five positive components issuers should pay attention to. 

First, while issuers must hit 100 percent of their funding target 

or no money is exchanged, they can exceed their offering amount 

as long as they disclose what they will do with that extra money. 

20 

Second, unlike Title II, investors are allowed to self-certify their 

income or net worth, which will reduce the compliance burden on 

issuers. 

Third, issuers can verify product interest with a crowdfund campaign and not worry about triggering the feared 2,000-investor filing cap. These are all good. 

Fourth, issuers can do a parallel offering, effectively allowing 

them to test market demand while attracting more sophisticated 

capital. 

And, fifth, the SEC added the flexibility of dynamic pricing which 

gives both issuers and investors more flexibility. These are all 

great things. 

Next are three parts of the rulemaking that could make this offering less appealing to prospective issuers. 

First, the biggest hurdle is compliance. There is a lot of reporting 

in the system. While such reporting will promote transparency and 

deter fraud, it may also deter the honest but overwhelmed issuer 

from deciding to crowdfund. 

Second, while the legislation mandates it, we were hopeful that 

the SEC would understand the impracticality of audited financials 

for small businesses seeking to raise in excess of $500,000. Audited 

financials are beneficial for large complex corporations, but 

crowdfunding corporations are smaller and more transparent by 

nature. 

Two years of audited financials, which are required in the legis- lation, could easily represent 10 percent of a $500,000 raise. This 

might deter some issuers. We would hope the audit requirement 

would be adjusted. 

And, third, I believe the crowdfunding industry might be better 

served if it were overseen by industry participants itself who are 

solely concerned about developing an efficient, credible, transparent 

crowdfunding marketplace. 

There are two things problematic in the rules. 

First, the proposed rules do not allow funding portals much flexibility when determining who can list on their sites. Not giving 

them the flexibility to deny a business they believe is not ready for 

crowdfunding or will not be successful may increase failures. Portals should be given more leeway in making decisions prior to listing companies. 

Second, the proposed rules leave liability with the funding portals for material misstatements by issuers when the portals play a 

limited role in crowdfunding. It is the role of the crowd to do the 

diligence on the issuer and question disclosures on the common 

pages of the campaign, not the funding portals. Funding portals 

should be allowed to explicitly state on their Web sites that it is 

the job of the issuers to review the disclosures for nonfactual statements and that the portal is just providing the matching service. 

This was the intent of the legislation. Without these changes, I believe it will be very hard for portals to flourish. 

In sum, the potential for equity and debt crowdfunding is there, 

but will be constrained by the proposed regulations—as they now 

stand—to implement Title III of the JOBS Act. With a few 

changes, I do believe a robust and efficient crowdfund investing 

market may develop in the United States. 

21 

I look forward to your comments. 

Chairman TESTER. Thank you, Mr. Neiss. Thank you for your 

testimony, as I thank all of you for your testimony. 

I think we will put 7 minutes on the clock again and proceed— 

I think we have got plenty of time—because there is a vote again 

at noon, but I think we will be done before that pretty easily. 

Mr. Lewis, Natural Grocers has a great business model and remains, even after the public offering, a family run business. You 

need to be congratulated on that. And I would also note that you 

recently opened up a store in Kalispell, Montana. Thank you for 

that. And when Natural Grocers did go public in July of 2012, it 

was kind of guinea pig for the JOBS Act, filing as an emerging 

growth company. 

So could you talk a little bit more specifically about which provisions were most important to you? 

Mr. LEWIS. Yes, very simply, that confidential filing provision is 

just very helpful. Specifically, we have to remember that it was a 

very difficult environment, an unsure environment. We had some 

difficulties with the Facebook IPO just the month before we were 

starting our road show. And, to have the S-1 submitted confidentially, and then to work through the SEC staff comment process— 

without disclosing all of the secrets and other trade information in 

the S-1 to our competitors—was especially helpful in case the market did not recover or respond initially to our expectations. 

Chairman TESTER. You opted out of some of the provisions in the 

JOBS Act. Could you talk briefly about that and, specifically why? 

Mr. LEWIS. For example, we have extensive disclosures in our 

Form S-1 regarding executive pay. For us, it was an obvious decision—something we are proud of—to disclose how our executives 

are paid, based on their roles and individual responsibilities. That 

was something we wanted to include. 

In regard to the financials, in the reduced requirement for 2 

years of audited financials, we had 3 years of audited financials 

prepared plus the 9 months or three quarters of interim financials 

that would eventually be audited at the end of the fiscal year. In 

2007 and 2008, there were issues with changing audit firms and 

a change of year-end and the cost and complication of complying 

with those just seemed too high in relation to the benefit it would 

have given to the potential investors, those after 2 years. 

Chairman TESTER. OK. What has been your experience after you 

have decided to go public? Has it fulfilled the projections you had 

hoped for? Or has it failed the projections you had hoped for? 

Mr. LEWIS. In terms of our business, we have set the expectations in the market, and we have met them successfully quarter 

after quarter. And, of course, that all depended on having the proceeds from the IPO and using them as we did. So I would say it 

was very successful. 

Chairman TESTER. Good. Thank you. 

Mr. Kaplan, I agree completely with the statement that you 

made in your testimony that Regulation A Plus was probably the 

least understood provision in the JOBS Act. We have heard from 

a number of folks about the potential of this provision to provide 

a new avenue for access. You talked about it in your testimony. I 

think the potential benefits of this could be very positive. 

22 

Can you discuss the benefits of raising capital through Regulation A Plus versus other methods for raising capital as well as for 

the capital markets more broadly? 

Mr. KAPLAN. Sure, Senator. Traditionally the dichotomy in capital raising in this country has been between public registration 

and private placement of securities, most commonly under Regulation D. 

The interesting thing about Regulation A and, in concert, Regulation A Plus, is, rather than being a transactional exemption, you 

are exempting the securities themselves. So now we move away 

from the accredited investor requirements. We can engage in general solicitation. We also have a security that is freely tradeable, 

but this is done within the construct of regulatory oversight that 

can give the market confidence in the securities that are being sold. 

What we have seen—and I alluded to this in my opening remarks—in the Regulation D marketplace is that that audience is 

shrinking, and we believe it is going to shrink significantly more 

in light of some moves that will be made regulatorily by the Commission based on suggestions by the GAO and others. We do not 

speak to the wisdom of that. Again, that is the practical reality. 

But what Regulation A Plus will allow is the ability to go to a 

broader audience, and we personally believe, because of that standardized disclosure and the size of the deals and companies we are 

dealing with, there has been any number of brokerages and investment banks around this country that have been iced out, for lack 

of a better term, of the public IPO marketplace. 

You know, there are somewhere just south of 5,000 broker-dealers in the United States, and so if you are dealing with these Main 

Street businesses, as I have coined the phrase, you have the ability 

potentially to have placements done on a regional level. Being done 

on a regional level means an enhanced layer of transparency for 

the investor and the brokerage houses that work with these 

issuers. They are going to be the subject of articles in the local 

business section of the local paper every day. They are going to be 

on the news. 

And so, you know, I think what is really interesting about Title 

IV and really where the utility is going to be seen is the fact that 

you are creating this intermediate level of securities which allows 

for a greater diversity of professional vendors, brokerages, analysts, 

news reporters, everybody to come to the marketplace and create 

a greater variety of securities for individuals. 

Chairman TESTER. And not to put words in your mouth because 

I think you have indicated with the words you have already spoken 

that you feel like there is solid demand for the Regulation A Plus 

once the rules get through the process. 

Mr. KAPLAN. Senator, I conservatively take about 15 calls a week 

from potential issuers out there asking when Regulation A Plus is 

going to be promulgated. There is a small handful of brokerages 

that are trying to work with Regulation A right now to move up 

the learning curve. But, yes, I believe the demand will be there. 

Do I believe that the dollar level of these securities in the near 

future will be that of the Regulation D marketplace? No. That is 

predominated by institutional investors that put out lots of money. 

23 

But I do believe that it will be a very viable and working marketplace very quickly. 

Chairman TESTER. Super. Very quickly, because I am out of time, 

what is the benefit of the qualified purchaser exemption? Do you 

see a benefit, and what is it? 

Mr. KAPLAN. I do. I see the qualified purchaser exemption, the 

primary benefit being is that right now we are dealing with a situation where we have Federal Government oversight and we have 

layered upon that the potential State oversight of 50 States. I applaud some of the moves that NASAA has made, but the reality is 

we are dealing with 50 different State administrators. They apply 

their rules differently. We have seen, you know, lack of activity by 

administrators. We have seen overreaching by administrators. And 

so, if issuers of the size that I am talking about who really create 

the majority of jobs in this country are going to have the confidence 

to pay a lawyer a retainer and the costs associated with doing this 

deal and do audited financials and subject themselves to this, there 

has got to be some definition that gives them confidence they can 

go efficiently raise this capital. 

I totally acknowledge the State administrators’ and NASAA’s 

concern and Congress’ concern about investor protections, but I do 

think we need to strike a balance here to get this market stimulated. 

Chairman TESTER. Thank you for that. We will probably get to 

Mr. Fleming in the next round. 

Senator Johanns. 

Senator JOHANNS. Thank you, Mr. Chairman. In fact, Mr. Chairman, I am going to jump right into that. 

You know, one of the advantages of sitting up here is you get to 

watch the body language of all the witnesses, and sometimes you 

learn something from that. When Mr. Fleming was offering his testimony, Mr. Kaplan, Mr. Lewis, you were kind of sitting there wondering—and maybe I could say the same about Mr. Neiss. You can 

see that we like the idea of the JOBS Act. I even asked about is 

there a JOBS Act II. It has broad bipartisan support, it has Presidential support, and these days in Washington that is a bit of an 

unusual creature. And we see it as offering the same opportunities, 

Mr. Kaplan, that you are talking about: a pathway for that smaller 

operation to access capital, to grow and create jobs in our States 

and in our communities. 

But at the same time, we can imagine, I think, some of the 

things that Mr. Fleming is concerned about. You come from the 

State of Kansas. Much like the State of Nebraska—— 

Mr. FLEMING. Right. 

Senator JOHANNS. ——we kind of pride ourselves in not being 

overly regulatory. We try to hit the light touch and do it right. 

What I am trying to figure out here, Mr. Kaplan, to follow up on 

a statement you made, what is the right balance here? You have 

got a lot of people out there who are probably interested in investing. That is especially true in an atmosphere where that CD pays 

1.5 percent or 1 percent, and they are trying to take that retirement money maybe and make it into a bigger thing. 

So I am going to start with you, Mr. Fleming. Is there something 

we are missing here? How significant a red flag are you raising? 

24 

And how do we fix that? And then I am going to ask all of you to 

react to what Mr. Fleming is saying. I will put you on the spot, Mr. 

Fleming. 

Mr. FLEMING. I do not think I am really raising a red flag on 

Regulation A Plus. We really see that as kind of a step forward in 

that it really allows the States to be the primary regulators of really small business offerings. And we think that—you know, we understand the concern with duplicative regulation, but we think for 

small business offerings it really should be the States that are kind 

of the lead of that. And so Regulation A creates an exemption 

under Federal law and kind of leaves it to the States to be the primary regulators, which we think is good thing, a good model, that 

if we can be successful in Regulation A, maybe we can expand into 

other areas. 

But, you know, obviously to be successful we realize that you 

have to have rules that are consistent from State to State. You also 

have to have rules that, you know, make sense in the context of 

a very small business offering and those types of things. You have 

to have a one-stop filing system. So we are trying to develop those 

things so that Regulation A Plus can be as successful as possible. 

Senator JOHANNS. When do you think you will have that in 

place? Do you think you are on the same track as Regulation A 

Plus? 

Mr. FLEMING. With the SEC? 

Senator JOHANNS. Yes, time-wise. 

Mr. FLEMING. We are probably a little ahead of them right now. 

Senator JOHANNS. OK. 

Mr. FLEMING. We are getting ready to go out for public comment 

with our proposal this afternoon, actually, and we will have a 30- 

day comment period. There may be—you know, based on the comments that we receive, we may have to go back and tweak some 

things. It is possible we could have an additional comment period 

after that. But, you know, I suspect if things follow their normal 

course, this type of rule proposal would be considered at the next 

face-to-face meeting of our members, which is scheduled for next 

April. 

Senator JOHANNS. Next April. 

Mr. Neiss, let me start with you. What is your reaction to what 

Mr. Fleming is saying? 

Mr. NEISS. I personally think that the regulators play an important role. However, if you look at the issuer and the size of the 

issuer and what they are trying to do, there is just no way they 

can be compliant with filing with each of the 50 States. The bureaucracy and the costs would be too overwhelming for a small 

issuer to go out there. 

I think the answer is not looking at regulators as the people that 

are policing the market, even though they play that important role, 

but looking at technology as a solution to how we can efficiently 

build markets. 

So that is the beauty about crowdfunding, is we are forcing people to use the Internet and technology to put their listing up there, 

and the information is stored online, so they can do their job, any 

State regulator can do their job of policing what is going on in the 

market without an individual person having to register in all 50 

25 

States. I think technology is something that we get in front of, not 

behind, and if we can enable it in this capacity, we can probably 

get more businesses going. 

Senator JOHANNS. Mr. Kaplan. 

Mr. KAPLAN. Yes, Senator. Well, first off, I have to say, with all 

due respect, I disagree with the statement that the Federal Government defers to the State in regulating Regulation A securities. 

These securities actually go through a very thorough process of 

being vetted for disclosure and adequacy of that disclosure at the 

Federal level. The exemption is an exemption from registration. It 

does not exempt them from regulation at the Federal level. 

Second, you know, many of the State securities regulators defer 

to the review of the Federal Government in the review of Regulation A securities. But the biggest point of concern I have, given our 

experience, is with all the things that NASAA is doing, respectfully, NASAA does not police the actual examiner who is working 

with the potential issuer, and that is where we are seeing the 

breakdown here in many instances. 

In other instances, we have perfectly good experiences with regulators. The people in California have been great, for example. But 

in other instances, we have had absolutely, for lack of a better 

term, frustrating experiences that have, you know, unnecessarily— 

unnecessary delays in registrations. One we filed in December of 

last year we still have not heard from them. We have had investigations that have been instituted by the investigations departments of examiners against our issuers who are just complying 

with the law. 

And so, you know, the motivation for our qualified purchaser definition is, look, this is going through a very sophisticated process 

at the Federal level. We are layering more onto that in Regulation 

A Plus. We certainly understand that there has got to be a line. 

But at the same time, we have been given this qualified purchaser 

opportunity. Let us find a reasoned definition where now that we 

have disclosure that is vetted by the regulators, that is based upon 

a discipline that is analogous to registration, that is in plain language, you know, let us find a level of investor that can understand 

that; and perhaps with the caps on investment you still maintain, 

as Senator Reed pointed out this morning, that containing the risk 

that any given investor could have in that investment. And those 

securities can move beyond the State registration process. If they 

want to go to a broader audience, submit to the process. 

Senator JOHANNS. Mr. Lewis, I am out of time, but I have one 

thought here, if the Chairman will indulge me, or one additional 

question. With what NASAA is talking about doing and with Regulation A Plus making its way through the process, admittedly slower than we would probably like, is there a brewing storm out there. 

Is there a conflict waiting to happen between NASAA and what we 

are trying to do with the JOBS Act? I just get this feeling that 

NASAA is kind of out there doing what it thinks is best, and there 

is conflict on the horizon. Am I missing something here? 

Mr. FLEMING. I do not see any particular conflict with the JOBS 

Act. I think obviously the intention of the JOBS Act was to make 

investment opportunities available to more people. We get that. EsVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
26 

sentially the investment limit was raised from $5 million to $50 

million. 

I think a lot of the criticisms that Mr. Kaplan has are with existing Regulation A, as opposed to what has been proposed, and Regulation A Plus, and with the system that we are trying to create. I 

think a lot of his concerns will be ameliorated when we get this 

new system up and running. 

Senator JOHANNS. OK. Thank you, Mr. Chairman. 

Chairman TESTER. Thank you, Senator Johanns. 

Senator Reed. 

Senator REED. Thank you, Mr. Chairman. 

Mr. Fleming, in your testimony you make, I think, several very 

important suggestions, particularly with respect to the Rule D, 

Regulation D, Rule 506 type offerings, where you are suggesting 

that there be a prior filing of the Form D. Can you elaborate on 

why that would be critical? 

Mr. FLEMING. Sure. You know, before the JOBS Act, when we 

would get a call from an investor about an offering where they are 

being solicited, you know—and we encourage people to call our offices to check out investments that may be, you know, not on a 

market or something like that. When we would get those calls, the 

first thing we do is determine whether it has been registered, and 

if not, whether it would qualify for an exemption. 

Well, prior to the JOBS Act, we could easily determine that it 

was not—it would not qualify for an exemption because they were 

making a general solicitation. We did not need a Form D to tell us 

that. 

Now when an investor calls, we will walk through that same 

process. Is it registered? No. Is it exempt from registration? That 

is where we get the hangup. We do not know—if an advertisement 

can be made to the public but the filing does not have to be made 

until later, there is no real way that we can tell at a glance, you 

know, is this an issuer that is trying to comply with Regulation D? 

And we can kind of separate the wheat from the chaff that way. 

The other reason it is important is that it does have some information on it that is helpful to investors. For example, it requires 

the disclosure of control persons of the issuer. So an investor that 

calls us and asks about an offering, we can take that Form D, and 

we can look at the control persons; we can, you know, look at 

whether we have had any prior regulatory problems with them, 

that type of thing. That is helpful to an investor when they are 

doing their due diligence. 

Senator REED. So there is a potential, you know, if we do not do 

something like this, have the Form D filed prior to the offering, 

that you just will not know what is going on. Someone will call you 

up and say, ‘‘I was solicited over the Internet,’’ and you have no 

idea who the issuer is, really, who the controlling parties are, et 

cetera, and you will be stymied in terms of giving advice to potential investors and also enforcing the law. Is that correct? 

Mr. FLEMING. That is exactly right, although I would point out 

that the rule proposal has come out with a 15-day advanced filing 

requirement before the use of a—so you would have to file your 

Form D 15 days before you advertised. We do not really need a 15- 

27 

day advanced filing. For our purposes, it would be sufficient just 

any time prior to the advertising. 

Senator REED. Very good. The other thing, obviously, as you emphasize in your testimony, is that with the lifting of the ban on 

general solicitation under Rule 506, there is an enhanced possibility of fraud, and you have reflected that in terms of the initial 

discussion we have had. But could you elaborate on other aspects 

of fraud that could take place? 

Mr. FLEMING. In Rule 506? 

Senator REED. The 506, the Regulation D process, with now the 

lift on general solicitation. 

Mr. FLEMING. Yes, we do see—you know, we have always seen 

a lot of fraud—well, to us, a lot of fraud in this area, and we expect 

with the lifting of the ban on general solicitation that is just going 

to increase. Regulation D offerings are always on our top ten list 

of potential investor traps, and they are normally number one in 

terms of State enforcement actions, at least for the last few years. 

We would anticipate that with the lifting of the ban on general solicitation and broadening the pool of potential investors in this 

marketplace, fraud is going to increase not decrease. 

Senator REED. Let me ask you another question, too, the jurisdictional one. If the offering is made out of State, in some cases—and 

I do not know if this is feasible these days, but with the Internet 

you have to think even globally of, you know, sites popping up offering, maybe deliberately and fraudulently offering securities 

under the new procedures that you can buy, is that a problem that 

you are anticipating in terms of, you know, you might have Kansans who have been victimized, but you cannot even—you cannot 

even reach, you know, the issuer or the sponsor or the controlling 

entities? 

Mr. FLEMING. Yes, that is definitely a problem. I do not know 

that the JOBS Act necessarily changes that. 

Senator REED. No, I think that is just one of the problems today 

of an Internet-based global economy. 

Mr. FLEMING. Sure. 

Senator REED. And, Mr. Lewis, again, thanks for your leadership. 

Actually, I think if—I have been in Kalispell, Montana. 

Chairman TESTER. Yes. 

Senator REED. And he has not been in Rhode Island, so I am 

ahead of him on this. 

[Laughter.] 

Chairman TESTER. I am due. 

Senator REED. He is due. But this whole issue of fraud, which 

I spoke to Mr. Fleming about, I think looking at—and we looked 

back at your 10-K for 2012. As an emerging growth company, you 

have highlighted the possibility that the market might react to the 

status not because of what you have done—in fact, I compliment 

you for the disclosures you have given and the accounting rules 

that you have—the rigorous path you have taken. But there is a 

fear, I suspect, in this of a spillover effect if we do not police this 

market very well, that even legitimate, bona fide principal issuers 

like yourself might suffer. Is that a concern? 

Mr. LEWIS. I think that is a fair concern of yours, yes. 

28 

Senator REED. Well, I think, you know, we—this is a potentially 

very powerful tool, but if we do not put in reasonable controls on 

issuers and give the regulators the ability to check effectively, it 

could not be as powerful or as useful, and I think that is a point 

that we should make. 

The other issue that I think is important to emphasize is that 

we are in a situation where we want to encourage capital formation, but we also want to make sure that we protect investors and 

we protect individuals. You do, too. I mean, that is the essence of 

what you have done with your company. 

So I think we have a lot to do, and it comes back to that sort 

of often used term of balance between investor protections, State 

regulation, Federal regulation, and capital formation. So we are 

going to continue and we have to continue to monitor this, too, because if it takes off in the right direction, we want to applaud it. 

If it starts going the wrong direction, we want to be able to step 

effectively in and put in the brakes. 

Thank you, Mr. Chairman. 

Chairman TESTER. Thank you, Senator Reed. 

I have got a couple more, and I am going to start with you, Mr. 

Neiss. We talked a lot about what Senator Reed was talking about 

as it relates to your perspective. You discussed some of your concerns that relate to the proposed crowdfunding rules, suggesting 

that without some modifications the bar would be set so high that 

some could be priced out of crowdfunding as a viable option. I 

would like you to elaborate more specifically on your suggestions 

for how to balance crowdfunding so it remains a reliable option yet 

offers protection for investors. 

Mr. NEISS. OK. There are two areas that I would talk about: one 

would be the audit requirement, and the other would be the cost 

of capital related to raising money on the portals because of the responsibilities the portals have. 

So when you are going out and raising capital, there are three 

tiers in crowdfunding. If you are raising under $100,000, it can just 

be self-certification by essentially an executive in the company. Between $100,000 and $500,000, you have to have a CPA review. And 

over $500,000, it is where you have to have the audited financials. 

The audited financials I think are the challenging part, particularly for startups, because they might have a zero balance sheet, 

and how do you audit that? 

Those type of requirements are onerous, and the cost of capital 

will come out of the money that is raised. So I do not think—if 10 

percent of a $500,000 offering goes to an audit outside of what they 

have to pay for getting the forms together and hiring an attorney 

perhaps to help them do this, it could cost them up to 20 percent 

to do an offering. That does not really make sense. 

The second part of it comes down to the funding portals themselves. The burden of having to go through the compliance and registration with FINRA for them, when it was meant to be really a 

broker-dealer-light solution, a very light touch on them, the cost of 

that compliance, too, is just going to come out of how much investors have to pay and issuers have to pay the portals themselves for 

the use of that service. 

29 

Now, people are talking about that could be between 7 and 14 

percent of the offering. Again, if you look at those costs, the more 

compliance that portals have to have and the more burden that is 

placed on them, they are just going to take it out of how much 

money is raised. 

The whole point of crowdfunding, if you look at what happens in 

donation and perk space, it is a very much hands-off approach. The 

crowd comes in and says, listen, let me look at everything that you 

have. Let me look at your disclosures, let us talk about it amongst 

ourselves and see if this is something that we want to get behind. 

That is the crowd wisdom, and that is the diligence that goes into 

it. They absorb a lot of the costs related to doing these offerings, 

and that is the benefit of crowdfunding. 

If you force the portals to do all the regulation that is going into 

it—and that is what is in the proposed rules—I just fear that this 

is going to end up costing the individuals, the issuers and the investors, more of their capital that they really want going into businesses. 

Chairman TESTER. OK. So what you are saying is the balance 

really falls upon the investor. Is that fair to say? 

Mr. NEISS. Yes, I mean, the investors are—when we look at a 

constellation of trust that is built around this entire ecosystem, it 

is not the entrepreneur that is in the middle. It is the investor that 

is in the middle, because it is the investor’s money that they are 

deploying into these businesses. Anything that we are doing that 

increases the burden on entrepreneurs or portals really affects the 

investor because it is their capital that is paying for all of this. 

Chairman TESTER. I got you. 

On the previous panel we talked about outreach for education, 

and I kind of indicated that we would talk about that a little bit 

with this panel, so this question is to anybody who wants to talk 

about it. Ensuring good information gets out to entrepreneurs and 

investors about the JOBS Act I think is very important. From your 

perspective how do we better educate entrepreneurs and investors 

about the JOBS Act so that they are empowered to make informed 

decisions? And anybody can start. 

Mr. NEISS. Well, I will just tell you, in Title III it is mandated 

education. So investors have to essentially take an investor education series to understand the risks involved in investing in 

startups and small businesses, that there is no guarantee of return, 

that if they see their money, it might not be what they put into 

it. So there is a list of questions that they essentially have to certify that they understand. I think that is a really important part 

of Title III, and I think it is really beneficial for investors that are 

going into it that they understand that there is no guaranteed return on anything when you invest in the private capital markets. 

We are as an industry incredibly focused on education. We understand that it is investors and it is entrepreneurs. Entrepreneurs 

need to understand the responsibilities that they have when taking 

investors’ monies. But investors need to understand the risks associated with this as well. 

You know, I think it would be great if other parts of the JOBS 

Act had this in there. 

Chairman TESTER. OK. Anybody else want to talk about—— 

30 

Mr. FLEMING. I think NASAA is—we are pretty much in agreement with Mr. Neiss’s group as far as the importance of investor 

education. We have put out an investor alert to walk investors 

through these types of things that they need to consider before 

making an investment decision in a crowdfunded offering. 

In addition to that, though, we have issued what we call an 

‘‘Issuer Alert’’ that is directed to the small business and helping 

them evaluate whether crowdfunding is the right option for them. 

You know, do they want to have a whole bunch of people out there 

that think they own the business and might have some say in how 

it is run? That type of thing. 

Chairman TESTER. How do the alerts get out? How broad of a net 

is this? 

Mr. FLEMING. We put them on our Web site. We issue a press 

release. We encourage the States to push them out to the press. 

That type of thing. 

Chairman TESTER. All right. Thanks. 

Mr. KAPLAN. Senator, at the risk of sounding trite, my answer 

is get the rules out there. Get the rules for all of the options under 

the JOBS Act, because the most efficient way to get education out 

there is to have the private market, the brokerage community, the 

banking community, the legal community, all of these understanding the options and being able to provide a comparative analysis, and you will get that education quickly because that is how 

they make their money. 

Chairman TESTER. OK. Mr. Lewis, would you like to respond? It 

is up to you. 

Mr. LEWIS. Yes, thank you, Senator. In my world, if I need to 

find out about something, I have more than enough ability to find 

out about it, and once I start looking for it, they magically know 

I am wanting it and sending it to me endlessly. So I do not think 

it is as hard as it was 20 years ago to get this information out. But 

I would definitely recommend getting all the rules out because that 

is exactly what will happen. They will be promulgated in every 

which way. 

Senator JOHANNS. I am good. 

Chairman TESTER. Senator Johanns is good. Well, I just want to 

thank all the witnesses here today. I want to thank Senator 

Johanns for being here. I very much appreciate his line of questioning. I especially want to thank you guys for what you had to 

say and being up front and frank about it. I appreciate that. That 

is what hearings should be about. It is about getting good information so that as policy makers we can make decisions that are effective and basically good. 

I think the hearing underscored it best. I think you said it at the 

very end, Mr. Kaplan. You have got to get the rules out. Once you 

get the rules out, I think we can have a positive impact on economic growth in this country through the JOBS bill, and I look forward to continued progress on this issue. 

Just a little housekeeping for the record. This record will remain 

open for 7 days for additional comments and any questions that 

can be submitted for the record at that point in time. 

31 

So, with that, once again I want to thank you all for your time 

and for your testimony and for your frank answers. We are adjourned. 

[Whereupon, at 11:50 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

32 

1See, http://www.sec.gov/divisions/corpfin/cfannouncements/draftregstatements.htm. 

2See, http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm, http:// 

www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htm, http://www.sec.gov/divisions/ 

marketreg/tmjobsact-researchanalystsfaq.htm, http://www.sec.gov/divisions/marketreg/ 

tmjobsact-crowdfundingintermediariesfaq.htm, and http://www.sec.gov/divisions/marketreg/exemption-broker-dealer-registration-jobs-act-faq.htm. 

PREPARED STATEMENT OF KEITH HIGGINS 

DIRECTOR, DIVISION OF CORPORATION FINANCE, SECURITIES AND EXCHANGE

COMMISSION

OCTOBER 30, 2013 

Chairman Tester, Ranking Member Johanns, and Members of the Subcommittee, 

I appreciate the opportunity to testify today on behalf of the U.S. Securities and Exchange Commission (Commission) regarding the Jumpstart Our Business Startups 

Act (JOBS Act). Implementation of the JOBS Act is one of the Commission’s top priorities, and my testimony will discuss the efforts of the Commission and staff since 

enactment of the JOBS Act last year. 

The JOBS Act made significant changes to the Federal securities laws, including: 

• changing the initial public offering process for a new category of issuer, called 

an ‘‘emerging growth company,’’ by, among other things, permitting these companies to submit draft registration statements for review on a confidential 

basis, providing exemptions for such companies from various disclosure and 

other requirements for up to 5 years following their initial public offerings, and 

relaxing certain restrictions on communications by issuers and their underwriters; 

• requiring the Commission to modify the prohibition against general solicitation 

and general advertising in Rule 506 of Regulation D and Rule 144A under the 

Securities Act of 1933 (Securities Act); 

• requiring the Commission to implement exemptions under the Securities Act for 

crowdfunding offerings and for unregistered public offerings of up to $50 million; and 

• increasing the number of holders of record that triggers public reporting under 

Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act) and increasing the number of holders that permits deregistration and suspension of 

reporting under the Exchange Act for banks and bank holding companies. 

The JOBS Act also required the Commission to conduct several studies and prepare reports to Congress. In addition, the JOBS Act mandated that the Commission 

provide online information and conduct outreach to small and medium-sized businesses and businesses owned by women, veterans, and minorities about the changes 

made by the new statute. 

As you know, certain provisions of the JOBS Act became effective immediately 

upon enactment, while others require Commission rulemaking. These rulemaking 

mandates are in addition to a significant volume of Commission rulemaking required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

The Commission staff has taken steps to inform the industry about the operation 

of the JOBS Act, beginning immediately after enactment. On the day of enactment, 

for example, staff in the Division of Corporation Finance provided information on 

the Commission’s Web site that explained how emerging growth companies could 

submit draft registration statements for confidential nonpublic review as permitted 

by the JOBS Act. 1 On the same day, the staff received the first confidentially submitted registration statement from an emerging growth company that used these 

new procedures. 

Soon after enactment, the staff prepared and posted on the Commission’s Web site 

answers to what the staff anticipated would be interpretive and implementation 

questions that companies and their advisors would have regarding the initial public 

offering ‘‘on-ramp’’ and the changes to the requirements for Exchange Act Section 

12(g) registration and deregistration. The staff has continued to provide guidance, 

including by providing answers to frequently asked questions about the JOBS Act 

and its effect with respect to rules relating to research and research analysts and 

about the crowdfunding and other provisions of the JOBS Act. 2 In addition, the 

staff has discussed and answered questions relating to the provisions of the JOBS 

Act with companies, their advisors and other interested parties at conferences and 

seminars. 

For the JOBS Act provisions requiring Commission rulemaking, teams consisting 

of staff from across the Commission, including economists from the Division of EcoVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00036 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
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3See, http://www.sec.gov/spotlight/jobsactcomments.shtml. 

4See, id. As of October 15, 2013, the Commission has received 230 comment letters relating 

to the provisions in Title I, 84 comment letters relating to the provisions in Title II, 216 unique 

comment letters and 126 form letters relating to the provisions in Title III, 25 comment letters 

relating to the provisions in Title IV, 27 comment letters relating to the provisions in Titles V 

and VI and 6 comment letters relating to Title VII. 5The comment file for each title provides information about JOBS Act-related meetings in 

which members of the Commission and the staff participated. See, http://www.sec.gov/spotlight/jobsactcomments.shtml. 

nomic and Risk Analysis (DERA), have been working on rulemaking recommendations, including the assessment of their potential economic impact, for the Commission’s consideration. The Commission has adopted rule amendments that lifted the 

restriction on general solicitation in offerings conducted pursuant to Rule 506 and 

Rule 144A, thereby implementing Title II. It also has proposed rules to implement 

a new exemption to permit crowdfunding in connection with the implementation of 

Title III. 

To aid the rulemaking process and increase the opportunity for public comment, 

the Commission established a page on its Web site through which, prior to the 

issuance of proposed rules, interested parties are able to submit comments on the 

various provisions of the JOBS Act. 3 Since the Web page was established in April 

2012, a wide range of interested parties have provided feedback and insights relating to the Commission’s implementation of the JOBS Act, and these comments are 

publicly available on the Commission’s Web site. 4 Commissioners and staff also 

have participated in meetings with a wide array of interested individuals and 

groups regarding the implementation of the JOBS Act. 5 The input the Commission 

and the staff have received through these written submissions and meetings has 

been very helpful to the rulemaking teams as they work to comply with the JOBS 

Act’s mandates. 

Below is a more detailed description of the efforts taken to date to implement the 

various provisions of the JOBS Act. 

Title I 

Title I of the JOBS Act created a new category of issuer called an ‘‘emerging 

growth company,’’ which is defined as a company with total annual gross revenues 

of less than $1 billion during its most recently completed fiscal year. Only companies whose first registered sale of common equity securities occurred after December 

8, 2011, may be considered emerging growth companies. A company retains its status as an emerging growth company until the earliest of the following: 

• the last day of its fiscal year during which its total annual gross revenues are 

$1 billion or more; 

• the date it is deemed to be a large accelerated filer under the Commission’s 

rules; 

• the date on which it has issued more than $1 billion in nonconvertible debt in 

the previous 3 years; or 

• the last day of the fiscal year following the fifth anniversary of the first registered sale of its common equity securities. 

As referenced above, emerging growth companies may confidentially submit draft 

registration statements to the Commission prior to the company’s initial public offering date. All such submissions and amendments to those submissions must be 

filed publicly no later than 21 days before the date the issuer conducts a road show. 

To date, the Commission has received more than 300 confidentially submitted draft 

registration statements for nonpublic review as permitted under Title I. Of those, 

more than 170 have completed their initial public offering. 

Under Title I, emerging growth companies can take advantage of scaled disclosure 

and other requirements, including with respect to the Commission’s financial statement and selected financial data requirements and certain executive compensation 

disclosures. Emerging growth companies are exempted from the audit of internal 

controls required under Section 404(b) of the Sarbanes-Oxley Act of 2002 and from 

any potential future rule the Public Company Accounting Oversight Board issues 

with respect to mandatory audit firm rotation or the auditor reporting model. In addition, under Title I, emerging growth companies cannot be required to comply with 

any new or revised financial accounting standard until the date that a nonissuer 

would be required to comply. 

Title I also made important changes with respect to communications around securities offerings and the provision of research and securities analyst communications. 

The law provided a Securities Act exemption for emerging growth companies and 

34 

6See, http://www.sec.gov/comments/jobs-title-i/general/general.shtml for comments on Title 

I. 7See, http://www.sec.gov/divisions/corpfin/cfannouncements/draftregstatements.htm. 

8See, http://www.sec.gov/divisions/corpfin/cfannouncements/ 

drsfilingprocedures101512.htm. 9See, http://www.sec.gov/comments/jobs-title-i/tick-size-study/tick-size-study.shtml for comments on Section 106(b) of Title I. 10See, http://www.sec.gov/news/studies/2012/decimalization-072012.pdf. 11 Id. at 22. 

persons authorized to act on their behalf to ‘‘test the waters’’ for an offering by communicating with potential investors that are qualified institutional buyers or institutional accredited investors prior to or following the filing of a registration statement. In addition, Title I provided an exemption under the Securities Act for the 

issuance of research reports before, during and following initial public offerings and 

other offerings for emerging growth companies by underwriters engaged in such offerings. It also prohibited the Commission and national securities associations from 

adopting or maintaining rules: 

• restricting, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between a securities analyst and a potential investor; 

• restricting a securities analyst from participating in communications with an 

emerging growth company’s management team that also are attended by any 

other associated person of a broker, dealer, or member of a national securities 

association, whose functional role is not that of a securities analyst; and 

• restricting brokers, dealers, or members of a national securities association, 

from publishing or distributing research reports or making public appearances 

with respect to the securities of an emerging growth company within a specified 

time period after the emerging growth company’s initial public offering or prior 

to the expiration of a lock-up agreement. 

The provisions of Title I were effective upon enactment without Commission rulemaking. 6 As noted above, immediately following enactment of the JOBS Act, the 

staff developed and published procedures for emerging growth companies to submit 

draft registration statements for confidential nonpublic review. 7 The staff has continued to work to simplify that process, and, since October 2012, companies have 

been required to submit their draft registration statements electronically on the 

Commission’s EDGAR system. 8 As noted above, through the issuance of responses 

to frequently asked questions, the staff has provided guidance on the application of 

Title I in light of the Commission’s existing rules, regulations and procedures. The 

staff is continuing to work with companies and practitioners when questions arise 

concerning the application of Title I and provides guidance when needed. 

Title I also required the Commission to submit two reports to Congress. Section 

106(b) required that the Commission, within 90 days of enactment of the JOBS Act, 

conduct a study and report to Congress on the transition to trading and quoting securities in one penny increments—also known as decimalization—and the impact 

decimalization has had on the number of initial public offerings since its implementation. 9 Section 106(b) also permitted the Commission, if it determined that the securities of emerging growth companies should be quoted and traded using a minimum increment of greater than $0.01 to designate, by rule, a minimum increment 

for emerging growth companies that is greater than $0.01 but less than $0.10. 

The report to Congress on the staff’s study under Section 106(b) was submitted 

on July 20, 2012. 10 In conducting the study, the staff reviewed empirical studies 

regarding tick size and decimalization, considered the views expressed about market 

structure at a June 2012 open meeting of the Commission’s Advisory Committee on 

Small and Emerging Companies and surveyed tick size regimes in non-U.S. markets. Based on the review, the staff found that ‘‘[a]lthough mandating an increase 

in tick sizes to levels greater than those that are presently dictated by market forces 

may provide more incentives to market makers in certain stocks, the full impact of 

such a change, including whether or not an increased tick size would indeed result 

in more IPOs, and whether there would be other significant negative or unintended 

consequences, is difficult to ascertain.’’ 11 The staff, therefore, recommended at that 

time that the Commission should not proceed with rulemaking to increase tick sizes, 

but should consider the steps needed to determine whether rulemaking should be 

undertaken in this area in the future. In this regard, the report noted the staff’s 

belief that the Commission should solicit the views of interested parties on the 

broad topic of decimalization, how to best study its effects on initial public offerings, 

trading and liquidity for small and middle capitalization companies and what, if 

35 

12For further information about the decimalization roundtable, see, http://www.sec.gov/spotlight/decimalization.shtml. 13For further information about MIDAS, see, http://www.sec.gov/marketstructure/. 14See, http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml for comments on Section 108 of Title I. 15 17 CFR 230.506. Rule 506 of Regulation D under the Securities Act is a nonexclusive safe 

harbor under Section 4(a)(2) (formerly Section 4(2)) of the Securities Act, which exempts transactions by an issuer ‘‘not involving any public offering’’ from the registration requirements of 

Section 5 of the Securities Act. Under Rule 506 prior to the amendments, an issuer could offer 

and sell securities, without any limitation on the offering amount, to an unlimited number of 

‘‘accredited investors,’’ as defined in Rule 501(a) of Regulation D, and to no more than 35 nonaccredited investors who meet certain ‘‘sophistication’’ requirements. The availability of the safe 

harbor was subject to a number of requirements and is conditioned on the issuer, or any person 

acting on its behalf, not offering or selling securities through any form of ‘‘general solicitation 

or general advertising.’’ The amendment to Rule 506 adopted by the Commission eliminated this 

prohibition on general solicitation and general advertising for offerings in which issuers take 

reasonable steps to verify that purchasers are accredited investors. 16 17 CFR 230.144A. Rule 144A is a nonexclusive safe harbor exemption from the registration 

requirements of the Securities Act for resales of certain ‘‘restricted securities’’ to qualified institutional buyers, or QIBs. Prior to the amendments adopted by the Commission, Rule 144A did 

not include an express prohibition against general solicitation, but did provide that offers of securities under Rule 144A must be limited to QIBs, which had the same practical effect. A QIB 

is defined in Rule 144A and includes specified institutions that, in the aggregate, own and invest on a discretionary basis at least $100 million in securities of issuers that are not affiliated 

with such institutions. Banks and other specified financial institutions also must have a net 

worth of at least $25 million. A registered broker-dealer qualifies as a QIB if it, in the aggreContinued 

any, changes should be considered. The staff also recommended that a roundtable 

be convened to determine how to best structure a potential pilot program. 

In February 2013, the staff held a roundtable to discuss the impact of decimalbased stock trading on small and middle capitalization companies, market professionals, investors and U.S. securities markets. 12 The staff is still considering the 

comments received at the roundtable, including those suggesting that the Commission evaluate the current ‘‘one-size-fits-all’’ approach to tick size through the implementation of a pilot program that would alter the minimum tick size for a control 

group of stocks of different types of companies. Although panelists expressed different views on the impact of tick sizes on initial public offerings, research coverage 

and market liquidity, most panelists supported the idea of a pilot program to empirically test the effects of increasing tick sizes to greater than one penny for the 

less-liquid stocks of smaller capitalization companies. 

In addition, the SEC’s recently implemented Market Information and Data Analytics System (MIDAS) 13 provides depth of order book detail beyond the publicly 

posted best bid and ask prices, which, in the context of a tick size pilot, would enable SEC staff to better investigate the impact of increasing tick sizes on the liquidity provision across the entire limit order book. Posting the results of these investigations online also could allow the public to examine book liquidity measures over 

the period of a pilot program. 

Currently, the staff is working with the exchanges as they develop and, if possible, present to the Commission for its consideration a plan to implement a pilot 

program that would allow smaller companies to use wider tick sizes. 

Section 108 of the JOBS Act required the Commission, within 180 days of enactment of the JOBS Act, to conduct a review of Regulation S-K to determine how it 

may be modernized and simplified to reduce the costs and other burdens for emerging growth companies. 14 The Commission also is required to transmit a report to 

Congress on this review. The Commission’s staff is finalizing this report and expects 

to make it public very soon. 

Title II 

Title II of the JOBS Act required the Commission to revise the Rule 506 safe harbor of Regulation D 15 from registration to allow general solicitation or general advertising for offers and sales made under Rule 506, provided that all securities purchasers are accredited investors. Title II stated that ‘‘[s]uch rules shall require the 

issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.’’ Title II also 

stated that Rule 506 will continue to be treated as a regulation issued under Section 

4(a)(2) of the Securities Act, and that offers and sales under Rule 506 as revised 

will not be deemed public offerings under the Federal securities laws as a result of 

general solicitation or advertising. 

In addition, Title II required the Commission to revise Securities Act Rule 144A 16

to provide that securities sold under that rule may be offered to persons other than 

36 

gate, owns and invests on a discretionary basis at least $10 million in securities of issuers that 

are not affiliated with the broker-dealer. The amendment to Rule 144A adopted by the Commission permits issuers to offer securities to persons other than QIBs provided that securities are 

sold only to persons the seller and any person acting on behalf of the seller reasonably believe 

are QIBs. 17Securities Act Release No. 33-9415 (Adopting Release), 78 Fed. Reg. 44771 (July 24, 2013), 

available at http://www.sec.gov/rules/final/2013/33-9415.pdf. Commissioner Luis A. Aguilar 

dissented from the Commission’s action. Statements from the July 10, 2013, Open Meeting regarding the Adopting Release are available on the SEC’s Web site at the following links: Chair 

White statement: http://www.sec.gov/News/Speech/Detail/Speech/1370539689380; Commissioner Aguilar’s dissenting statement: http://www.sec.gov/News/Speech/Detail/Speech/ 

1370539684712; Commissioner Gallagher statement: http://www.sec.gov/News/Speech/Detail/ 

Speech/1370539665007; Commissioner Paredes statement: http://www.sec.gov/News/Speech/ 

Detail/Speech/1370539701591; and Commissioner Walter statement: http://www.sec.gov/ 

News/Speech/Detail/Speech/1370539699218. 18 Based on the information reported in the initial Form D filings reviewed by DERA, as of 

October 18, 2013, there have been 170 new offerings made in reliance on the new Rule 506 exemption that became effective on September 23, 2013, with approximately $911 million in total 

amount sold in these offerings. In addition, 44 offerings that commenced in 2013, but before the 

effective date of the new Rule 506 exemption, were subsequently converted to offerings relying 

on the new exemption. Since the new rules became effective, the average offering size for Rule 

506(c) offerings was $6.1 million, as compared to $22.8 million for Rule 506(b) offerings; the median offering size for Rule 506(c) offerings was $1.3 million, as compared to $1.8 million for Rule 

506(b) offerings. 19Securities Act Release No. 33-9414, 78 Fed. Reg. 44729 (July 24, 2013), available at http:// 

www.sec.gov/rules/final/2013/33-9414.pdf. 20Securities Act Release No. 33-9416, 78 Fed. Reg. 44806 (July 24, 2013), available at http:// 

www.sec.gov/rules/proposed/2013/33-9416.pdf. Commissioners Daniel M. Gallagher and Troy 

A. Parades dissented from the Commission’s action. Statements from the July 10, 2013, Open 

Meeting regarding the proposing release are available on the SEC’s Web site at the following 

links: Chair White statement: http://www.sec.gov/News/Speech/Detail/Speech/ 

1370539689380; Commissioner Aguilar statement: http://www.sec.gov/News/Speech/Detail/ 

qualified institutional buyers, including by means of general solicitation or advertising, provided that the securities are sold only to persons reasonably believed to 

be qualified institutional buyers. 

On July 10, 2013, the Commission implemented Title II by adopting amendments 

to Rule 506 and Rule 144A. 17 These amendments became effective on September 

23, 2013, and issuers have begun making offerings under the new rules. 18

Specifically, the Commission adopted new paragraph (c) to Rule 506, which permits issuers to use general solicitation and general advertising to offer securities 

under Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors. The Adopting Release explained that, in determining 

the reasonableness of the steps that an issuer has taken to verify that a purchaser 

is an accredited investor, issuers should consider the facts and circumstances of the 

transaction, such as the type of purchaser and the type of accredited investor that 

the purchaser claims to be, the nature of the offering, and the amount and type of 

information that the issuer has about the purchaser. 

In addition to this principles-based facts and circumstances method of verifying 

accredited investor status, the Adopting Release included a nonexclusive list of 

methods for verifying the accredited investor status of natural persons that issuers 

may rely upon to establish whether they have satisfied the verification requirement. 

The Adopting Release also preserved the existing portions of Rule 506 as a separate 

exemption so that issuers that wish to conduct Rule 506 offerings without the use 

of general solicitation and general advertising would not be subject to the new 

verification requirement. 

With respect to Rule 144A, the Adopting Release amended the rule to provide that 

securities sold may be offered to persons other than qualified institutional buyers, 

including by means of general solicitation, provided that the securities are sold only 

to persons whom the seller and any person acting on behalf of the seller reasonably 

believe are qualified institutional buyers. 

In addition to adopting these amendments to Rule 506 and Rule 144A, the Commission took two other actions on July 10, 2013. First, the Commission adopted rule 

amendments that disqualify felons and other ‘‘bad actors’’ from participating in Rule 

506 offerings, as required by the Dodd-Frank Act. 19 Second, the Commission proposed additional rule and form amendments related to offerings conducted in reliance upon Rule 506 that ‘‘are intended to enhance the Commission’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506.’’ 20 To proVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00040 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
37 

Speech/1370539698546; Commissioner Gallagher’s dissenting statement: http://www.sec.gov/ 

News/Speech/Detail/Speech/1370539665007; Commissioner Paredes’ dissenting statement: 

http://www.sec.gov/News/Speech/Detail/Speech/1370539701591; and Commissioner Walter 

statement: http://www.sec.gov/News/Speech/Detail/Speech/1370539699218. 21 17 CFR 230.500 through 230.508. 22See, http://www.sec.gov/divisions/marketreg/exemption-broker-dealer-registration-jobs-actfaq.htm. 

vide the public with additional time to consider the matters addressed by, and comments submitted on, the proposal, the Commission recently re-opened the comment 

period until November 4, 2013. To date, the Commission has received more than 440 

unique comment letters and 45 form letters on the proposed amendments. 

Finally, Title II amended Section 4 of the Securities Act to provide a narrow exemption from the requirement to register with the Commission as a broker-dealer 

in connection with certain limited activities related to Regulation D 21 offerings. In 

February 2013, the Commission’s Division of Trading and Markets posted on the 

Commission’s Web site answers to frequently asked questions about these provisions, including confirming that the exemption does not require the Commission to 

issue or adopt any rules. 22

Title III 

Title III of the JOBS Act provided a new exemption from Section 5 of the Securities Act for offers and sales of securities through crowdfunding, an evolving method 

to raise capital using the Internet. Crowdfunding using donation-based or rewardbased models has been used by small and start-up businesses to raise capital to 

start a business or develop a product and by individuals or entities seeking financial 

contributions to support artistic and charitable projects or causes. An entity or individual raising funds through donation-based or reward-based crowdfunding typically 

seeks relatively small, individual contributions from a large number of people. 

To implement Title III, the Commission must create a new regulatory regime for 

issuers seeking to engage in crowdfunding transactions, including ongoing reporting 

requirements, and for intermediaries seeking to facilitate crowdfunding transactions. The new exemption provided in Title III would allow businesses to use 

crowdfunding to offer and sell securities without registration under the Securities 

Act, subject to certain conditions. Among its conditions, Title III limited the maximum amount that may be raised by an issuer and the maximum amount that an 

individual investor may invest in a 12-month period. Title III also required that an 

offering made in reliance on the exemption be conducted through an intermediary 

that is either a registered broker or a registered ‘‘funding portal.’’ A funding portal, 

which is a new entity under the Federal securities laws, would be subject to an exemption from broker registration. 

Title III included other requirements for issuers and intermediaries, including disclosure obligations and restrictions on advertising the terms of the offering. The 

Commission also was required to establish disqualification provisions for certain bad 

actors and exempt securities issued in reliance on the crowdfunding exemption from 

the calculation of record holders for purposes of Section 12(g) of the Exchange Act. 

On October 23, 2013, the Commission proposed rules that would implement Title 

III. Under the proposed rules, an issuer could raise a maximum aggregate amount 

of $1 million pursuant to the exemption in any 12-month period. Investors would 

be permitted, during a 12-month period, to invest up to: 

• $2,000 or 5 percent of their annual income or net worth, whichever is greater, 

if both their annual income and net worth are less than $100,000; or 

• 10 percent of their annual income or net worth, whichever is greater, if either 

their annual income or net worth is equal to or more than $100,000. During 

the 12-month period, these investors would not be able to purchase more than 

$100,000 of securities through crowdfunding. 

The proposed rules would exclude certain issuers from relying on the exemption, 

including non-U.S. issuers, Exchange Act reporting companies, investment companies, issuers that have not complied with annual reporting requirements under the 

proposed rules, and issuers that have no specific business plan or that have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies. 

The proposed rules would set up a registration and regulatory framework for 

funding portals that limits their securities activities to acting as intermediaries in 

crowdfunding securities transactions and prohibits them from engaging in certain 

activities, such as offering investment advice or handling investor funds. Funding 

portals would be required to register with the Commission by filing a new form and 

38 

23Today, FINRA is the only registered national securities association. 24 17 CFR 230.251 through 230.263. 25See, http://www.sec.gov/comments/jobs-title-iv/jobs-title-iv.shtml for comments on Title IV. 26See, http://www.sec.gov/comments/jobs-title-iv/jobs-title-iv.shtml. 

to become a member of FINRA or any other registered national securities association. 23 The proposed rules also would require the funding portals to, among other 

things: 

• provide investors with educational material that informs them about the risks 

associated with crowdfunding securities; 

• obtain information about investor income, net worth, and other crowdfunding 

investments, for purposes of determining investment limitations; 

• make available on its platform the information provided by the issuer; 

• take steps to ensure the proper transfers of investor funds and securities; and 

• comply with anti-money laundering and privacy requirements. 

The proposed rules also would require eligible issuers to file specified disclosures 

with the Commission and provide the disclosures to both the intermediary and investors, including disclosures concerning the issuer’s officers and directors, as well 

as owners of 20 percent or more of the issuer’s securities; the issuer’s business; the 

intended use of proceeds; the terms of the offering; and the financial condition of 

the company. 

Consistent with Title III, issuers also would be required to provide financial statements. Financial statements would be required to be prepared in accordance with 

U.S. GAAP and cover the shorter of the two most recently completed fiscal years 

or the period since the issuer’s inception. For offerings of $100,000 or less, financial 

statements would be certified by the principal executive officer and issuers would 

be required to provide income tax returns for the most recently completed fiscal 

year. For offerings of more than $100,000, but not more than $500,000, the financial 

statements would need to be reviewed by an independent accountant. For offerings 

of more than $500,000, the financial statements would need to be audited by an 

independent auditor. 

Issuers also would be required to file annual reports with the Commission. The 

disclosure would be similar to that required when the issuer is offering securities, 

but would not include offering-specific information. 

The proposed rules also contain measures intended to reduce conflicts of interest 

and the risk of fraud. Among other things, the proposed rules prohibit an intermediary from having any financial interest in an issuer using its services, and require background and regulatory checks on an issuer and each officer and director, 

and certain security holders. The proposed rules also contain a safe harbor for certain insignificant deviations from the requirements; impose resale restrictions on securities purchased in crowdfunding transactions; disqualify certain bad actors from 

relying on the new exemption; and exempt securities issued in reliance on the new 

exemption from the record holder count for purposes of Exchange Act Section 12(g). 

The comment period for the proposed rules will be open for 90 days after publication in the Federal Register. We look forward to receiving and considering public 

comment on all aspects of this proposal. 

Title IV 

Title IV of the JOBS Act required Commission rulemaking to create a new exemption from Securities Act registration, similar to existing Regulation A, 24 which 

would allow certain ‘‘small issue’’ offerings of up to $50 million in a 12-month period. 25 Title IV specified that the exemption include certain terms and conditions, 

including, among others, that the securities may be offered and sold publicly, the 

securities sold under the exemption will not be restricted securities and issuers of 

the securities will be required to file audited financial statements annually with the 

Commission. The Commission may add other terms, conditions and requirements 

that it determines necessary in the public interest and for the protection of investors, which may include electronic filing of the offering documents, periodic disclosures by the issuer or disqualification provisions. Title IV also required the Commission to review the offering limit under the new exemption not later than 2 years 

after enactment of the JOBS Act and every 2 years thereafter. Staff have met with 

market participants, industry groups, State securities regulators and other interested parties about the implementation of Title IV. 26 Staff in the Division of Corporation Finance and DERA are finalizing rule recommendations under Title IV for 

the Commission’s consideration. 

39 

27See, http://www.sec.gov/comments/jobs-title-v/jobs-title-v.shtml and http://www.sec.gov/ 

comments/jobs-title-vi/jobs-title-vi.shtml for comments on Titles V and VI, respectively. 28See, 15 U.S.C. §78l(g) and 17 CFR 240.12g-1. 29This reflects filings made with the Commission, which does not include deregistrations by 

banks that report to banking regulators. 30 17 CFR 240.12g5-1. 31See, http://www.sec.gov/news/studies/2012/authority-to-enforce-rule-12g5-1.pdf. 32See, http://www.sec.gov/comments/jobs-title-vii/jobs-title-vii.shtml for comments on Title 

VII. 

Titles V and VI 

Titles V and VI of the JOBS Act amended Section 12(g) of the Exchange Act, 

which sets forth certain registration requirements for classes of securities. 27 Prior 

to enactment of the JOBS Act, Section 12(g) and the rules issued thereunder required a company to register its securities with the Commission within 120 days 

after the last day of its fiscal year, if, at the end of the fiscal year, the securities 

were held of record by 500 or more persons and the company had total assets exceeding $10 million. 28

Title V amended Section 12(g) to raise the threshold for registration from 500 

holders of record to 2,000 holders of record, of which no more than 500 holders of 

record can be investors who are not accredited investors. Title V also excluded from 

the calculation of the number of holders of record shares held by persons who received the shares pursuant to employee compensation plans, and required Commission rulemaking to provide a safe harbor for the determination of whether such a 

holder is to be excluded. 

Title VI applied only to banks and bank holding companies. It amended Section 

12(g) to raise the registration threshold from 500 holders of record to 2,000 holders 

of record, and also changed the threshold for exiting the reporting system from 300 

holders of record to 1,200 holders of record. Title VI required the Commission to 

write rules to implement this provision within one year of enactment of the JOBS 

Act. 

Titles V and VI were effective immediately upon the enactment of the JOBS Act. 

In the days following enactment, the staff prepared and posted guidance on the 

Commission’s Web site addressing anticipated questions related to the JOBS Act 

changes to the requirements for Section 12(g) registration and deregistration. To 

date, approximately 90 bank holding companies have deregistered. 29 The staff is 

preparing recommendations for rule proposals for the Commission’s consideration to 

address the new requirements of Titles V and VI. 

Title V also required the Commission to examine its authority to enforce the antievasion provisions of Exchange Act Rule 12g5-1 30 and submit recommendations to 

Congress within 120 days following enactment of the JOBS Act. Staff from the Division of Corporation Finance worked with staff from the Divisions of Enforcement, 

DERA and Trading and Markets to review the anti-evasion provision in Rule 12g5- 

1(b)(3) and the Commission’s related enforcement authority and tools, and, on October 15, 2012, submitted their report to Congress. 31 The staff concluded that the current enforcement tools available to the Commission are adequate to enforce the antievasion provision of Rule 12g5-1 and determined not to make any legislative recommendations regarding enforcement tools relating to Rule 12g5-1(b)(3). 

Title VII 

Effective upon enactment, Title VII required the Commission to provide online information and conduct outreach to inform small and medium-sized businesses, as 

well as businesses owned by women, veterans and minorities, of the changes made 

by the JOBS Act. 32 Staff from the Division of Corporation Finance and the Office 

of Minority and Women Inclusion (OMWI), in collaboration with other Divisions and 

Offices, is leading the Commission’s efforts in developing and implementing an outreach plan tailored to these business communities. For example, OMWI has expanded the content of existing programs for small, minority-owned and womenowned businesses to provide information about the JOBS Act and its potential benefits for businesses. This content will continue to be updated as the Commission proposes and adopts further JOBS Act rules. 

Conclusion 

While there is still much to be accomplished, the Commission and the staff have 

made significant progress on, and continue to work diligently in, implementing the 

JOBS Act mandates. It is a high priority to do so. The staff has either completed 

or is in the process of completing the studies mandated by the JOBS Act. The Commission and staff also have either completed or are moving forward expeditiously 

40 

on the various rulemakings required by the JOBS Act. We look forward to completing the remaining provisions as soon as practicable. 

Thank you again for inviting me to testify today, and I am happy to answer any 

questions you may have. 

PREPARED STATEMENT OF ALAN LEWIS 

DIRECTOR OF SPECIAL PROJECTS, NATURAL GROCERS BY VITAMIN COTTAGE, INC. 

OCTOBER 30, 2013 

Chairman Tester, Ranking Member Johanns, Members of the Subcommittee, 

thank you for the opportunity to testify about the impact of the Jumpstart our Business Startups Act (the ‘‘JOBS Act’’) on Natural Grocers by Vitamin Cottage, Inc. 

(Natural Grocers) and its ability to raise capital to support job creation and contribute to the economic growth of the Nation. As Director of Special Projects at Natural Grocers and an active member of our IPO team, I participated in drafting the 

Registration Statement on Form S-1 and in making decisions about using certain 

beneficial provisions found in the Jobs Act. I am also an active member of NIRI, 

the National Investor Relations Institute, and I provide ongoing investor relations 

support within Natural Grocers. I welcome this opportunity to answer your questions and provide you with additional information on how the JOBS Act affected our 

company’s growth prospects during and after our Initial Public Offering in July 

2012. 

Natural Grocers is in many ways the quintessential American business success 

story. Starting from humble mom-and-pop beginnings in the 1950s, we have grown 

to operate over 70 grocery stores employing over 2,000 people in 13 States while 

staying true to our original founding mission: helping people stay healthy through 

better food and nutrition. To support this mission, we scrupulously review every 

product before we agree to sell it. Our standards for natural groceries do not allow 

artificial ingredients such as colors, flavors, preservatives, or sweeteners or dangerous ingredients like hydrogenated fats. We are also committed to sustainable agriculture using minimal chemical inputs, so we only sell USDA certified organic 

produce in our stores. 

Beyond providing only clean healthy food, however, we are committed to help consumers become better informed about how nutrition directly impacts their health 

and wellness. To this end we staff our stores with full time credentialed nutritionists and offer classes, advice, and reference materials on various health topics. We 

present complex scientific information using accessible language to give people a 

basic understanding of the principles of good nutrition so they feel empowered to 

make proactive decisions. It is probably not an overstatement to say that Natural 

Grocers endeavors to support the American healthcare system by improving our customers’ diets so they can better avoid expensive chronic diseases as well as achieve 

better outcomes from medical treatment. 

In 1998, Natural Grocers was acquired from its founders by their four children. 

Over the following 10 years they grew the business through long hours and hard 

work, depending on internal cash flow and bank loans for capital. Subsequently, 

they carefully hired additional professional staff and began putting in place the sophisticated accounting, technology and operational infrastructure needed to support 

a robust expansion strategy. 

Beginning in 2009, in the midst of the recent economic downturn, our leadership 

team began laying the groundwork to raise outside capital through an initial public 

offering. The grocery business is highly fragmented and competitive, and success in 

the industry partially depends on maintaining economies of scale, controlling administrative costs, and securing volume purchasing discounts. Our decision to seek additional capital was partly based on the need to increase our ability to capture these 

competitive advantages by expanding our store base. 

Concurrent to our own internal strategic planning process, in 2009 (and before) 

Congress began addressing the need for economic stimulus by proposing a number 

of bills designed to prompt public and private investment to generate new jobs. A 

number of these initiatives were eventually passed into law in the form of the JOBS 

Act, which was signed into law just when Natural Grocers was preparing to submit 

its Registration Statement on Form S-1 to the SEC in anticipation of an IPO during 

the summer of 2012. 

Many of the key provisions of the JOBS Act were anticipated and welcomed by 

our legal, accounting, and investment banking advisors. We clearly qualified as an 

‘‘emerging growth company.’’ As a group, we paused to consider which opportunities 

we would take advantage of, keeping in mind we would likely be among the first 

41 

companies to launch an IPO under this new regulatory regime, and that investors 

might be skeptical of some of the new relaxed rules. We decided to take advantage 

of the confidential filing provision and, temporarily, some of the reduced financial 

reporting requirements. We decided not to ‘‘opt out’’ of maintaining compliance with 

new or revised accounting standards. We will discuss our experience with each of 

these decisions below. We did not contemplate utilizing any methods to ‘‘Test the 

Waters’’ for the offering because the provision was simply too new. 

The IPO Market Environment in 2012 

Before we start, let me remind you that all statements made in this testimony 

other than statements of historical fact are forward-looking statements. All forwardlooking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors such as industry, business strategy, goals and expectations concerning our market position, the economy, 

future operations, margins, profitability, capital expenditures, liquidity and capital 

resources, other financial and operating information, and other risks detailed in the 

Form 10-K filed by Natural Grocers for the year-ended September 30, 2012. The information we present is accurate as of the date of this testimony. Natural Grocers 

undertakes no obligation to update forward-looking statements. 

Chairman Tester has asked me to describe our experience filing confidentially and 

using some of the reduced compliance provisions under the JOBS Act. My testimony 

today will explain why we chose to do so and how these measures helped us in our 

efforts to raise capital. 

To begin, it is worth remembering that the summer of 2012 saw the first substantial thawing of the financial markets after four very difficult years. IPOs were few 

and far between and not always successful. Some registration statements had been 

filed publicly on EDGAR but later postponed indefinitely. Facebook’s difficult IPO 

in May 2012—just before our road show was to begin—weighed heavily on the markets. Still, interest rates on cash continued to be at or near zero, so investors were 

looking for quality companies to buy into. 

Confidential Filing 

Within this unsure market environment, the ability to file our Form S-1 confidentially and proceed with the SEC staff’s comment process before ever making our filing public was extraordinarily helpful. We continued to survey the strength of the 

market while simultaneously preparing our registration statement for public 

EDGAR filing. Because we were able to file confidentially, our trade practice and 

financial statement disclosures contained within the S-1 were not telegraphed to our 

competitors unnecessarily or unnecessarily early. Had the Form S-1 not been treated confidentially, Natural Grocers could have decreased its competitive advantage 

due to a lengthy delay in our IPO because of a soft market. Confidential filing allowed us to better orchestrate the timing of the road show and IPO successfully, 

despite unpredictable and skittish financial markets. 

For our company, confidential submission greatly reduced the complexity, stress 

and risk of undertaking a public offering. 

Two Years Minimum Required Audited Financial Statements 

The second opportunity provided us by the JOBS Act was to reduce the number 

of years of audited financial statements from 5 years to 2. After much deliberation, 

our team decided to disclose audited financial statements for fiscal years 2009, 2010, 

and 2011, plus interim unaudited financial statements for the first 9 months of fiscal year 2012. (Our IPO took place during the last quarter of our fiscal year 2012, 

which ended on September 30th, so audited year-to-date financials were not yet 

available.) After consulting with our investment bankers, we felt that the 2007 and 

2008 financial statements did not add significant context, color or detail to our company growth story. Nor did they help communicate the viability of our future growth 

strategy. Furthermore, there were complexities around presenting the 2007 and 

2008 financial statements due to a change in fiscal year and a change in audit firm. 

Audited 2007 and 2008 financial statements could have been included in our S-1, 

but only with significant delays and additional costs. 

We had some concern that analysts and investors might be wary of the reduced 

reporting requirement, There were a number of inquiries by analysts and investors 

about the potential significance of the missing 2007 and 2008 fiscal year reporting. 

However, the absence of those historical financial statements did not seem to impact 

the ultimate success of our offering. 

The following sections describe certain other optional, reduced, or delayed disclosure and accounting requirements offered by the Job Act that Natural Grocers did 

not implement during its IPO. 

42 

1http://www.smallcapnetwork.com/The-Greedy-Sit-Out-an-IPO-How-Refreshing-NYSENGVC/s/via/14/article/view/p/mid/1/id/917/ 

Exemption From Certain Sarbanes-Oxley Requirements 

The Sarbanes-Oxley Act of 2002 addressed numerous additional regulations in 

corporate auditing, internal controls and accountability. SOX Section 103 created 

new requirements for audits and auditors, and SOX Section 404 set new standards 

for assessment of internal controls. Both sections were considered controversial 

among some because of the high cost of compliance, and, in turn, the greater burden 

those costs place on smaller companies relative to their revenue. The JOBS Act 

granted an exemption to qualified emerging growth companies from potential future 

requirements to rotate audit firms and for audit firms to provide supplemental information about how the audit was conducted, among other requirements. The 

JOBS Act also exempted emerging growth companies from compliance with internal 

control, evaluation, and reporting requirements in Section 404 of Sarbanes-Oxley. 

Natural Grocers determined it would continue to maintain compliance with Sections 

103 and 404 of Sarbanes-Oxley. 

Opting Out of New or Revised Accounting Standards 

Section 107 of the Jobs Act allows emerging growth companies to make a one-time 

decision to comply with all new or revised accounting standards or to temporarily 

opt out of keeping up with new and revised rules. The intent of this provision appears to be to reduce the cost and burden associated with complex accounting rule 

changes. We acknowledge that ongoing compliance with the myriad rule changes 

can be costly. It may also present a significant distraction to company management 

of an emerging growth company that is focused on key growth drivers rather than 

finicky accounting rules. Natural Grocers opted to not elect into this provision upon 

its initial filing. 

Dodd-Frank Executive Pay Disclosures 

The JOBS Act also amended the Investor Protection and Securities Reform Act 

of 2010, commonly referred to as Dodd-Frank, by exempting emerging growth companies from the executive compensation disclosures required under Section 953 of 

Dodd-Frank. Natural Grocers did not take advantage of this exemption because we 

did not see any advantage to doing so. On the contrary, we believe our executives 

are paid fairly relative to our industry benchmarks and their individual roles and 

responsibilities. An extensive disclosure regarding compensation for our executives 

begins on page 93 of the prospectus contained in our Registration Statement on 

Form S-1. 

A Successful IPO for Natural Grocers and Its Investors 

Our IPO was a success on many levels. Our IPO priced at the high end of our 

range and the stock price held a healthy but reasonable premium on the first day 

of trading and thereafter. As one financial commentator stated in an article titled 

‘‘The Greedy Sit Out an IPO’’, ‘‘[Natural Grocers] has begun its publicly traded life 

in an environment of fair and balanced trading [ . . . ] How refreshing.’’ 1

The company used the proceeds from its IPO to pay off its outstanding term loan 

and pay down its credit facility while retaining some cash reserves to fund additional new store growth. During our last quarterly earnings announcement on August 7, 2013, we noted the Company had a total 70 Natural Grocers stores operating 

in 13 States, two additional stores planned for the fourth quarter of fiscal 2013, and 

15 new stores planned for fiscal 2014. Our revenue and unit growth, supported by 

capital provided by public shareholders, has created hundreds of new, well paid, 

full-time jobs—all which qualify for our 401k plan and affordable health care benefits. 

There were other benefits to being a publicly traded company. As a company traded on the New York Stock Exchange, our stature in the national financial press was 

elevated the moment we rang The Opening BellTM above the floor of the Exchange. 

We now appear in news coverage on an equal footing with many of our larger peer 

competitors. Our company news is more widely circulated and referenced as a 

benchmark for the natural foods industry. Our higher profile has allowed us to take 

part in significant public policy debates at a level where our views and perspectives 

are better heard and acknowledged. We believe this national recognition of Natural 

Grocers’ approach to product standards and dedication to consumer education and 

community outreach has provided welcome public awareness of, and affinity for, our 

brand as we enter new markets. 

43 

Success of the JOBS Act of 2012 

In conclusion, we believe that the JOBS Act is a successful piece of legislation. 

Key provisions of the JOBS Act enabled Natural Grocers to successfully navigate 

the financial markets and do exactly what the JOBS Act intended: grow our company and add jobs to the American economy. 

Thank you, again, for your support of American business and job growth, and for 

allowing me to be here today to present the perspective of Natural Grocers on the 

JOBS Act. I am happy to answer any questions that you might have. 

Background Information 

About Natural Grocers 

Natural Grocers by Vitamin Cottage (NYSE:NGVC), founded in Colorado by Margaret and Philip Isely in 1955, was built on the premise that consumers should have 

access to affordable, high-quality foods and dietary supplements, along with nutrition knowledge to help them support their own health. The family-run store has 

since grown into a successful national chain with locations across Colorado, Texas, 

Utah, Wyoming, Oklahoma, Missouri, New Mexico, Montana, Kansas, Idaho, Nebraska, Arizona, and Oregon—employing over 2,000 people. The company went public in July 2012; however, Isely family members continue to manage the company, 

building on the foundation of their parents’ business. Natural Grocers’ popularity 

and success can be traced back to its founding principles: providing customers with 

high quality products at every day affordable prices. 

Our Competitive Strengths 

We believe we are well-positioned to capitalize on favorable natural and organic 

grocery and dietary supplement industry dynamics as a result of the following competitive strengths: 

Strict focus on high-quality natural and organic grocery products and dietary supplements. We offer high-quality products and brands, including an extensive selection of widely recognized natural and organic food, dietary supplements, body care 

products, pet care products and books. We offer our customers an average of approximately 19,500 SKUs of natural and organic products per store, including an 

average of approximately 7,000 SKUs of dietary supplements. We believe this product offering enables our customers to utilize our stores for all of their grocery and 

dietary supplement purchases. In our grocery departments, we only sell USDA certified organic produce and do not approve for sale products that are known to contain artificial colors, flavors, preservatives, sweeteners, or partially hydrogenated or 

hydrogenated oils. Consistent with this strategy, our merchandise selection does not 

include conventional products or merchandise that does not meet our strict quality 

guidelines. Our store managers enhance our robust product offering by customizing 

their stores’ selections to address the preferences of local customers. All products 

undergo a stringent review process to ensure the products we sell meet our strict 

quality guidelines, which helps us generate long-term relationships with our customers based on transparency and trust. 

Engaging customer service experience based on education and empowerment. We 

strive to consistently offer exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience and generates repeat visits from our loyal customer base. Our customer service model is focused on providing free nutrition education to our customers. This focus provides an 

engaging retail experience while also empowering our customers to make informed 

decisions about their health. We offer our science-based nutrition education through 

our trained associates, Health Hotline® newsletter and sales flyer, one-on-one nutrition health coaching and nutrition classes. Our commitment to nutrition education 

and customer empowerment is emphasized throughout our entire organization, from 

executive management to store associates. Every store also maintains a Nutritional 

Health Coach SM position. The Nutritional Health Coach is responsible for training 

our store associates and educating our customers in accordance with applicable 

local, State, and Federal regulations. Each Nutritional Health Coach must have 

earned a degree or certificate in nutrition, human sciences or a related field from 

an accredited school, complete continuing education in nutrition, and be thoroughly 

committed to fulfilling our mission. Substantially all of our Nutritional Health 

Coaches are full-time employees. We believe our Nutritional Health Coach position 

is unique within our industry and represents a key element of our customer service 

model. 

Scalable operations and replicable, cost-effective store model. We believe our scalable operating structure, attractive new store model, flexible real estate strategy 

and disciplined approach to new store development allow us to maximize store performance and quickly grow our store base. Our store model is successful in highly 

44 

competitive markets and has supported significant growth outside of our original 

Colorado geography. We believe our supply chain and infrastructure are scalable 

and will accommodate significant growth based on the ability of our primary distribution relationships to effectively service our planned store locations. Our investments in overhead and information technology infrastructure, including purchasing, 

receiving, inventory, point of sale, warehousing, distribution, accounting, reporting, 

and financial systems support this growth. In addition, we have established effective 

site selection guidelines, as well as scalable procedures, to enable us to open a new 

store within approximately 9 months from the time of site selection. Our limited offering of prepared foods also reduces real estate costs, labor costs, and perishable 

inventory shrink and allows us to quickly leverage our new store opening costs. 

Experienced and committed team with proven track record. Our executive management team has an average of 35 years of experience in the natural grocery industry, while our entire management team has an average of over 27 years of relevant experience. Since the second generation of the Isely family assumed control 

of the business in 1998, we have grown our store count from 11 to 59 stores as of 

September 30, 2012, while remaining dedicated to our founding principles. Over 

their tenure, members of our executive management team have been instrumental 

in establishing a successful, scalable operating model, generating consistently strong 

financial results, and developing an effective site selection and store opening process. The depth of our management experience extends beyond our home office. As 

of September 30, 2012, 42 percent of our store managers at comparable stores 

(stores open for 13 months or longer) have tenures of over 4 years with us, and our 

store and department managers at these stores have average tenures of 3 to 4 years 

with us. In addition, we have a track record of promoting store management personnel from within. We believe our management’s experience at all levels will allow 

us to continue to grow our store base while improving operations and driving efficiencies. 

Our Growth Strategies 

We are pursuing several strategies to continue our profitable growth, including: 

Expand our store base. We intend to continue expanding our store base through 

new store openings in existing markets, as well as penetrating new markets, by 

leveraging our core competencies of site selection and efficient store openings. Based 

upon our operating experience and research conducted for us by customer analytics 

firm The Buxton Company, we believe the entire U.S. market can support at least 

1,100 Natural Grocers stores, including approximately 200 additional Natural Grocers stores in the 13 States in which we currently operate or have signed leases. 

Increase sales from existing customers. We have achieved positive comparable 

store sales growth for over 40 consecutive quarters. In order to increase our average 

ticket and the number of customer transactions, we plan to continue offering an engaging customer experience through science-based nutrition education and a differentiated merchandising strategy of delivering affordable, high-quality natural 

and organic grocery products and dietary supplements. We also plan to utilize targeted marketing efforts to our existing customers, which we anticipate will drive 

customer transactions and convert occasional, single-category customers into core, 

multicategory customers. 

Grow our customer base. We plan to continue building our brand awareness, 

which we anticipate will grow our customer base. We believe offering nutrition education has historically been one of our most effective marketing efforts to reach new 

customers and increase the demand for natural and organic groceries and dietary 

supplements in our markets. We intend to enhance potential customers’ nutrition 

knowledge through targeted marketing efforts, including the distribution of our 

Health Hotline newsletter and sales flyer, the Internet and social media, as well as 

an expansion of our educational outreach efforts in schools, businesses and communities, offering lectures, classes, printed and online educational resources and publications, health fairs, and community wellness events. In addition to offering nutrition education, we intend to attract new customers with our everyday affordable 

pricing and to build community awareness through our support of local vendors and 

charities. 

Improve operating margins. We expect to continue to improve our operating margins as we benefit from investments we have made in fixed overhead and information technology, including the implementation of an SAP enterprise resource planning system in fiscal year 2010. We anticipate these investments will support our 

long-term growth strategy with only a modest amount of additional capital. We expect to achieve economies of scale through sourcing and distribution as we add more 

stores, and we intend to optimize performance, maintain appropriate store labor levVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
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1 U.S. Dept. of Labor, Bureau of Labor Statistics, ‘‘Business Employment Dynamics’’; Advocacy-funded research by Zoltan Acs, William Parsons, and Spencer Tracy, 2008 (archive.sba.gov/ 

advo/research/rs328tot.pdf). 

els, and effectively manage product selection and pricing to achieve additional margin expansion. 

Forward-Looking Statements 

Except for the historical information contained herein, statements in this document are ‘‘forward-looking statements’’ and are based on current expectations and 

assumptions that are subject to risks and uncertainties. All statements that are not 

statements of historical facts are forward-looking statements. Actual results could 

differ materially from those described in the forward-looking statements because of 

factors such as our industry, business strategy, goals and expectations concerning 

our market position, the economy, future operations, margins, profitability, capital 

expenditures, liquidity and capital resources, other financial and operating information and other risks detailed in the Company’s Form 10-K for the year-ended September 30, 2012, as amended by Form 10-K/A (Form 10-K) and our subsequent 

quarterly reports on Form 10-Q. The information contained herein speaks only as 

of its date and the Company undertakes no obligation to update forward-looking 

statements. 

For further information regarding risks and uncertainties associated with our 

business, please refer to the ‘‘Management’s Discussion and Analysis of Financial 

Condition and Results of Operations’’ and ‘‘Risk Factors’’ sections of our SEC filings, 

including, but not limited to, our Form 10-K and our subsequent quarterly reports 

on Form 10-Q, copies of which may be obtained by contacting investor relations or 

by visiting our Web site at http://Investors.NaturalGrocers.com. 

PREPARED STATEMENT OF ROBERT R. KAPLAN, JR. 

MANAGING PARTNER, PRACTICES, KAPLAN VOEKLER CUNNINGHAM AND FRANK, PLC 

OCTOBER 30, 2013 

Mr. Chairman and honorable Members, thank you for your kind invitation to 

speak before you today. I am Managing Partner for Practices at the law Firm of 

Kaplan Voekler Cunningham and Frank, PLC, headquartered in Richmond, Virginia. I am also the Firm’s founder. As such, I am at heart an entrepreneur, and 

uniquely positioned to relate to the concerns, challenges and issues I hear communicated by members of the private business community related to current state of 

their access to the capital markets. 

We are a boutique firm with one of our focuses being on securities and capital 

formation. Most of our attorneys, including myself, come originally from some of the 

largest law firms in the Nation. Our practice includes public and private securities, 

and we represent clients in various capacities of all sizes from multi-billion-dollar 

enterprises to fledgling start-ups, but the bulk of our practice resides amongst companies in the lower mid-market or smaller (clients with $5MM to $150MM of revenue), ‘‘Main Street’’ businesses. 

According to the Department of Labor, Bureau of Statistics, 65 percent of all net 

new jobs in the U.S. created between 1993 and 2009 were created by businesses 

such as my firm represents. 1 It is VITAL that action be taken now to implement 

fully the JOBs Act. 

The current situation can be reduced to the following: 

1. To date, little movement has occurred to implement those aspects of JOBS Act 

that address the needs of the lower middle market and smaller ‘‘Main Street’’ 

businesses. 

2. That lack of progress has resulted in a relative stagnation in the ability of 

smaller businesses in this country to raise capital and has placed further uncertainty into the broader economy. 

3. ‘‘Main Street’’ suffers presently from a lack of viable options for capital raising. 

4. Title IV of the Act, euphemistically referred to as ‘‘Regulation A+’’, presents the 

most potentially impactful legislation to aid ‘‘Main Street’’ and provides a rational balance between regulatory oversight and access to publicly formed capital. 

5. The forms and procedures currently existing under Regulation A can be readily 

applied to A+, thus obviating the need for further delay in implementing Regulation A+. 

46 

2Median deal size for initial public offerings (IPO) in 2012 was $124MM. See, ‘‘2012 IPO Market Annual Review’’, Renaissance Capital, January 2, 2013. Median deal size for IPO’s through 

3rd quarter of 2013 is $101MM. See, ‘‘United States: 03 2013 IPO Report’’, Wilmer Hale, October 

24, 2013. We consistently see issuer’s legal fees in these transactions disclosed at greater than 

$1,000,000, and accounting between $500,000 and $1,000,000. According to a 2012 report of 

PwC, an issuer can expect on average to spend $1MM in legal and $600K in auditors for an 

offering of $50MM or less. See, ‘‘Considering an IPO?: The Costs of Going and Being Public May 

Surprise You’’, PwC, September 2012. 3 ‘‘Alternative Criteria for Qualifying as an Accredited Investor Should Be Considered’’, GAO 

9-10 (July 2013), http://www.gao.gov/assets/660/655963.pdf. 4 Id. 

5 Id. 

6. The Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Commission’’) should 

adopt a workable definition of ‘‘qualified purchaser’’ which affords investor protection but eliminates unnecessary and obstructive layers of regulatory procedure. 

7. SEC’s rulemaking in this context should be balanced so as not to make Regulation A+ overly burdensome but foster issuer transparency and efficient dissemination of information to support a market for these securities. 

8. Regulation A+, in turn, should provide greater investment options to the American public than what can be found now—with retail investors largely relegated to mutual or hedge funds or investment in private securities under Regulation D, which carry risks associated with being restricted and relatively 

nontransparent. 

For lower mid-market and smaller businesses, options to capital are limited at 

best. Public registration is not a viable option in light of the enormous costs associated with an initial public registration and the ongoing regulatory burdens associated with reporting requirements, Sarbanes-Oxley and Dodd-Frank. These cost and 

regulatory factors have played a considerable role in narrowing the opportunity of 

utilizing public registration to companies well beyond the size of the mid-market 

and at deal sizes far past the needs of most ‘‘Main Street’’ firms. 2 That has, in turn, 

limited drastically opportunities for smaller investment banking, brokerage, legal, 

and accounting firms to participate in public securities offerings, which creates an 

insulated market where expense associated with public offerings will remain inflated. 

Alternatively, the viable audience for private securities of lower mid-market and 

smaller businesses is severely constrained presently. Changes to the accredited investor definition found in Rule 501 of Regulation D, have further narrowed the 

number of potential accredited investors available to invest in such offerings. Some 

estimates have put the reduction of the accredited investor audience as a result by 

at least twenty percent (20 percent). 3 Currently, the Commission is considering in- creasing the $1,000,000 requirement currently found under the net worth test for 

accredited investor status for individuals. GAO recently suggested that this number 

could be revised upwards to $2,300,000 to account for inflation since establishment 

of the test. 4 This is estimated to reduce the accredited investor pool by another 60 

percent. 5

Since 2008, the accredited investor market has dramatically reduced in size and 

activity. Many accredited investors have eschewed illiquid, restricted securities after 

being unable to exit failing investments during the recession. That same phenomenon resulted in an influx of FINRA arbitration related to failed investments. 

Many broker-dealers and investment banks who would potentially work with lower 

mid-market and smaller businesses have ceased handling private placements beyond institutional investments as a result. Others are precluded entirely from placing private securities due to the unwillingness of Errors and Omissions insurance 

carriers to insure them for such activities. 

Rules promulgated by the Commission related to general solicitation under Rule 

506(c), pursuant to Title II of the Act, and new ‘‘bad boy’’ prohibitions from use of 

Regulations D promulgated pursuant to Dodd-Frank have further ‘‘chilled’’ any potential market beyond institutional investment in professionally distributed private 

placements. Instituting Title II’s requirement that reasonable steps be taken to ensure accredited status of all investors, Rule 506(c) creates an uncertain ‘‘facts and 

circumstances’’ test as to the reasonableness of the method undertaken to assure accreditation, subject to limited SEC prescribed safe harbors. We believe, and have 

seen borne out in our market experience, that the uncertain nature of a ‘‘facts and 

circumstances’’ test will push issuers and their distributors towards the prescribed 

safe harbors which predominantly involve intrusive requests for the financial and 

tax records of potential investors. These information gathering requirements inVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00050 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
47 

crease the regulatory burdens on issuers and their distributors, frustrate potential 

investors and, consequentially, reduce the appeal of publicly solicited Regulation D 

offerings. Further, the Commission has proposed rules regarding pre-filing the Form 

D and general solicitation materials for an offering relying on Rule 506(c) and instituting draconian punishment of failures in administrative notice filings for all Rule 

506 offerings. While these proposals have been met with significant negative commentary and our (and our clients) hope is that they will ultimately not be adopted, 

they have nonetheless created an environment of uncertainty surrounding public solicitation and the professionally distributed Regulation D market as a whole. 

Added to these regulatory obstacles are the new ‘‘bad actor’’ rules instituted as 

required by Dodd-Frank. While we certainly agree with the intent of the ‘‘bad actor’’ 

rules, no one wants people previously convicted of securities fraud selling unregistered securities, it also cannot be argued that these rules add risk and uncertainty 

to the usage of Rule 506, especially in the context of an offering distributed through 

retail broker-dealers to multiple individual accredited investors. By visiting the sins 

of a single participant in an issuer’s distribution network, or even potentially a single investor, upon the offering as a whole, the application of the ‘‘bad actor’’ rules 

can result in the loss of the Rule 506 exemption and severe consequences for the 

sale of unregistered securities by the issuer, its management and its distribution 

network. As a result, issuers and their distributors are forced to institute expensive 

and uncertain compliance procedures, or narrow the scope of their capital raising 

to limit risk. This leads to a greater emphasis on institutional or very high net 

worth capital. Institutional investment generally comes with demands for large returns on invested capital to offset risk associated with longer holds in restricted securities and exacerbated by a the volume of competition seeking the same dollars. 

As a result, innumerable companies which might present solid investments, but cannot credibly show double-digit returns or exponential growth on a short term basis 

are ignored. 

Regulation A+ can give much broader variety of issuers and businesses the ability 

to offer their securities to a much broader segment of the population. Regulation A+ 

can provide the opportunity for many issuers who, for example, have solid fundamentals and can reliably produce dividends, but perhaps not the ability to achieve 

the prodigious return rates sought by institutional capital, to reach a much broader 

segment of the population with performance goals that are realistic and achievable. 

At the same time, however—and I should emphasize that this really goes to the 

cruxt of the opportunity under Title IV that has been overlooked for so long—Regulation A+ combines that opportunity for the issuer with a requirement that the 

issuer submit to a ‘‘right-sized’’ disclosure and reporting regime that is designed to 

insure standards for complete and illustrative disclosure and a current picture of 

the status of that issuer. Thus, the issuer is provided access to a broader investing 

audience with a more diverse set of investment priorities in exchange for compliance 

with the same conceptual regulatory discipline as registration, but streamlined to 

account for the relative size of the issuer and offering. This has a number of salutary effects for the investing public, as well as the issuers: 

1. Transparency—standardized disclosure and reporting can insure that investors 

and shareholders enjoy efficient dissemination of material information concerning offerings and issuer performance. 

2. Liquidity—Regulation A+ securities are freely tradeable, which presents a 

major advantage of restricted securities where no market exists for most of 

these securities. As such, investors who can no longer tolerate risk associated 

with their investments or otherwise find themselves in a situation where they 

need to exit the investment can. With standardized disclosure and reporting, 

pricing can be arrived at with confidence. To be clear, for the foreseeable future, we believe the vast amount of any trading activity in these securities will 

be episodic at best, given the size of most issuers and deals, with the bulk occurring as trades by appointment. But the critical piece will be that investors, 

brokers and investment advisors will have information at hand to use to discern amongst investments and to establish a price as required, and have confidence in the same. This presents an enormous leap forward from the restricted nature of most Regulation D securities with no information disseminated publicly and, thus, no market. 

3. Investment Options—The average investor is relegated to public fund products 

(hedge, mutual, money market). Regulation A+ can give an investor the opportunity to invest in enterprises (such as those we typically represent) with confidence based on the information they can access and review with their broker 

or investment advisors. Because of the size of the issuers that we believe will 

utilize Regulation A+ consistently, we believe most deals will be distributed reVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00051 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
48 

6See, Section 402 of the JOBS Act requiring a study of the impact of State blue sky laws 

on offerings made under Regulation A. 

gionally, and the investor will see options presented in their own ‘‘backyard’’ 

by local and regional investment banks and brokerages, providing a further 

element of transparency as a result of local ‘‘word of mouth,’’ but also those 

investment banks and brokerages being able to maintain contact with management and monitor status with relative ease. 

We urge the Commission to implement Regulation A+ as soon as possible. The 

delay associated to date with its implementation has been somewhat baffling to us, 

as Form 1-A provides a readily useable framework for disclosure under Regulation 

A+. As to ongoing reporting, we believe a straightforward regime of simple disclosure associated with the annual audited financial statements to be filed with SEC, 

supplemental provision of unaudited, GAAP-compliant quarterly financials and requirements to report material events (analogous to a stripped down 8-k) make 

sense. Beyond this, until there is sufficient volume of deals created to understand 

the scope and activities of this marketplace have the real potential to become overly 

burdensome and counter the intent of Title IV. 

The largest issues in our mind is updating some of the mechanics of the offering 

process and the interplay between the feds and the States. That said, we do not believe those issues would be cause for the implementation of Regulation A+ to have 

been delayed as it has. 

Offering Mechanics 

Electronic filing through EDGAR is mandated by Title IV and will be a logical 

and effective means to ensure dissemination of material information concerning Reg 

A+ issuers. That said, revisions to current Regulation A, if the same general framework is to be used in the context of Reg A+, need to be made to account for public 

access to all reporting through EDGAR. Currently, Rule 251(d)(2) requires physical 

delivery of the offering circular to the prospective investor, the need for which is 

obviated by having all disclosure related to an issuer generally available with the 

click of a button through EDGAR. In short, a Reg A+ analog to Rule 172 will be 

critical to furthering the JOBS Act’s congressional intent. 

Furthermore, it is our expectation that the vast majority of Reg A+ deals will be 

done on a continuous, best efforts basis. This will result in necessary updates to offering circulars. Currently Rule 253(e) requires any updated or revised Offering Circular to be filed with an amended Offering Statement and requalified with the Commission. This requalification requirement places an unnecessary burden on issuers 

engaged in such offerings, and one not seen in the context of a public registration 

where only information tripping the requirements of Item 512 of Reg S-K requires 

a post-effective registration statement amendment and other updates to the prospectus may be filed under Rule 424. For instance, in a recent offering filed by our 

firm the issuer simply desired to add another jurisdiction and update some ancillary 

business information—disclosures which would, arguably, require requalification 

with significant offering disruption but with little or no investor protective impact. 

Again, an analog for Reg A+ needs to be adopted. 

Blue Sky and the Definition of ‘‘Qualified Purchaser’’ 

In enacting Title IV, Congress did express plainly its concern that 50 different 

regulatory schemes presently imposed on Regulation A would have a negative impact on the ability of small and midsize businesses to raise capital in the future 

under Regulation A+ or otherwise. 6 It has been our firm’s experience with current 

Regulation A to be EXACTLY THE CASE. 

First, just conceptually speaking, the notion of up to 50 different regulatory regimes being applied to an offering which has just gone through a thorough process 

of review by the Commission seems excessive and fraught with opportunities for 

delay or missteps. 

Our experiences with State regulators in conducting these offerings have been diverse to say the least, ranging from the cooperative and efficient to the downright 

abusive, or even nonexistent. Of course, if the goal is to create an efficient system 

for ‘‘Main Street’’ firms to form necessary capital, then the involvement of the States 

in the offering process must be assessed by their weakest performances. 

For example, we have had multiple occasions where States have just simply failed 

to respond to filings. In one instance, a filing was made with the Commonwealth 

of Massachusetts in December of last year, and, to date, we have yet to hear any 

response. In another, an initial filing was made with the State of Ohio in June of 

this year—we have still heard nothing. 

49 

7See, 21 VAC5-45-20. 8 15 U.S.C. §77r(b)(4)(D). 9The GAO completed its required study in July 2012 entitled ‘‘SECURITIES REGULATION 

Factors That May Affect Trends in Regulation A Offerings’’, (the ‘‘GAO Study’’) and found that 

in fiscal 2010 and 2011 there were 8 qualified Regulation A offerings versus over 15,500 Regulation D offerings for $5 million or under, the vast majority of which were under Rule 506 with 

very limited oversight of disclosure. The GAO identified State securities law compliance as a 

factor in pushing issuers towards Regulation D and indicated that the GAO’s research and conversations with securities attorneys and a small business advocate identified State securities 

registration requirements as time consuming and costly for small businesses. See, p. 17 of the 

GAO Study. 

And in probably the most egregious example to date, we filed this summer a registration in the Commonwealth of Virginia. As part of the filing, we submitted a 

copy of the Form 1-A we filed with the SEC, as required by Virginia law. Form 1- 

A requires the registrant to list all affiliates of the registrant as well as any securities offerings of affiliates in the past 12 months. It is important to note that any 

securities transactions conducted by these affiliates were conducted amongst all accredited investors outside of the Commonwealth under Rule 506 of Regulation D, 

and, thus, specifically under applicable regulations, are exempt from any filing requirement in Virginia. 7 There has been no allegation or any intimation of suspected 

wrongdoing in any offering by any of these entities. Nevertheless, the result of attempting to comply with Virginia’s registration requirements in the context of a 

Regulation A offering has been for the Virginia State Corporation Commission to institute an investigation into a number of entities affiliated with the registrant 

through its parent and ‘‘any other affiliates [undefined],’’ making vague and extremely broad requests for information related to the entities, while at the same 

time, making no visible effort to proceed with the registration of the securities of 

the registrant. I have attached a redacted copy of the letter notifying of the investigation and making the informational requests (Exhibit A-redacted). This process 

will likely cost my client tens of thousands of dollars to comply with the Commonwealth’s demands all because of my client’s attempt to comply with the law and also 

use an offering method which subjects it to greater transparency for the good of the 

investing public. 

With the possibilities of such delays or the danger of arbitrary investigations 

which can be costly to an issuer, the State blue sky process stands right now as 

an enormous obstacle to the reliability of Regulation A+ as a credible channel for 

forming capital. Ironic, given that this fact could have the potential for issuers to 

remain focused on Regulation D, which is a largely unsupervised offering process 

presently at the State and Federal level. 

Nevertheless, I understand legislative reticence to completely preempt the States 

for a method of offering that has been largely underutilized in recent memory. Congress, therefore, struck a reasonable balance for the interim—by creating an additional class of ‘‘covered security,’’ under NSMIA for Regulation A+ in situations 

where the securities are either listed on a National Exchange or sold exclusively to 

‘‘qualified purchasers.’’ In the latter instance, Congress specifically delegated to the 

Commission the authority to define ‘‘qualified purchasers’’ recognizing the Commission’s expertise in balancing oversight and efficiency in capital formation. 8 To date, 

the Commission has not done so, nor have they provided the public any guidance 

as to their thinking on this. 

We believe the ‘‘qualified purchaser’’ exemption, if defined appropriately, will be 

a reasonable and workable option to any number of small and midsize issuers over 

other options that might not provide the regulatory oversight of disclosure, transparency, and the potential liquidity for investors that Regulation A and A+ can provide. 9 At the same time, such definition would not only provide a balanced approach 

to State investor protection issues, but also allow the Commission to observe a ‘‘critical mass’’ of activity within the Regulation A and A+ so that the Commission can 

have the ability to determine what further regulation (or changes to present regulations) might be necessary to accomplish Congress’ intent without excessive risk to 

the investing public. 

I believe that a definition can easily be tailored that can address State concerns 

related to investor protection, while having the intended effect of providing a meaningfully broader audience for businesses to go to for capital. Specifically, we have 

proposed to the Commission a definition of ‘‘qualified purchaser’’ which combines a 

net worth/income test with a cap on the amount of investment by an investor in 

any one issuance. A qualified purchaser would be defined as a purchaser having, 

excluding (in the instance of natural persons) the value of a purchaser’s primary 

residence, either: 

50 

10 Certain commentators have proposed the use of the ‘‘accredited investor’’ definition found 

in Rule 502 of Regulation D, if a net worth test for a qualified purchaser is to be adopted. We 

disagree adamantly with this suggestion. Given the need for audits, mandated forms of disclosure, and periodic reporting under Reg A+, adopting such a definition would only have the result 

of causing issuers to default to Rule 506(c) of Regulation D, rather than adopting Reg A+, which 

provides for greater transparency and regulatory oversight, for the formation of capital. 

• a net worth of at least $500,000; or 

• a gross annual income of at least $150,000 and a net worth of at least $250,000. 

Further, the amount of investment by a natural person(s) who would be a qualified purchaser may not exceed 20 percent of the net worth of such natural person(s). 

We would note that this definition is well in excess of NASAA’s standard guidelines for minimum investor suitability and is designed to permit small issuers to 

reach a broader investor audience while addressing investor protection concerns— 

demanding a requisite amount of sophistication from the investor to review and digest disclosure drafted to requirements of the Commission designed to be accessible 

to investors in the public marketplace and that has been reviewed and qualified previously by the Commission, at the same time, it limits the exposure that an individual could have to a potential loss in any given instance. 10

Without a measured exemption here, we believe the current approach by the 

States, coupled with the current realities of our economy, could combine to subvert 

Congress’ intent here to provide a meaningful apparatus for capital formation and 

job creation that is subject to the light of public disclosure. 

To date, the regulation of capital formation under our securities laws has been 

premised on the stark dichotomy between private offerings, typically made available 

to a very narrow audience of investors, and public registration with its attendant 

costs and regulatory burdens. The genesis of the JOBS Act was the notion of finding 

reasoned approaches for businesses to form capital, balanced against the need to 

protect the investing public. Title IV presents the most impactful of the approaches 

presented in this legislation, supported by an existing mechanism to make these securities available to the marketplace. The Commission needs to act NOW. Thank 

you. 

51 

EXHIBIT A 


10301301.eps
52 


10301302.eps
53 


10301303.eps
54 


10301304.eps
55 

1The oldest international organization devoted to investor protection, the North American Securities Administrators Association, Inc. (NASAA) was organized in 1919. Its membership consists of the securities administrators in the 50 States, the District of Columbia, Canada, Mexico, 

Puerto Rico, and the U.S. Virgin Islands. NASAA is the voice of securities agencies responsible 

for grass-roots investor protection and efficient capital formation. 

PREPARED STATEMENT OF RICK FLEMING 

DEPUTY GENERAL COUNSEL, NORTH AMERICAN SECURITIES ADMINISTRATORS

ASSOCIATION, INC. 

OCTOBER 30, 2013 

Introduction 

Good morning Chairman Tester, Ranking Member Johanns, and Members of the 

Subcommittee. I am Rick Fleming, Deputy General Counsel for the North American 

Securities Administrators Association, Inc. (NASAA), 1 the association of State and 

provincial securities regulators. One of my roles at NASAA is to coordinate the activities of the NASAA Corporation Finance Section Committee. Prior to joining 

NASAA in 2011, I served as General Counsel for the Office of the Kansas Securities 

Commissioner. In that role, I frequently represented the State in disciplinary and 

enforcement cases, including criminal prosecutions and related appeals. 

I am honored to testify before this Subcommittee about the Jumpstart Our Business Startups Act, or JOBS Act, a year and a half after its enactment. 

Securities regulation is a complementary regime of both State and Federal securities laws. NASAA has had a long history of working closely with the Securities and 

Exchange Commission (SEC) to affect greater uniformity in Federal–State securities 

matters, including meeting annually as required by section 19(d) of the Securities 

Act of 1933. The States also work closely together to uncover and prosecute securities law violators. 

State securities regulators have protected Main Street investors for the past 100 

years, longer than any other securities regulator. They are responsible for enforcing 

State securities laws by pursuing cases of suspected investment fraud, conducting 

investigations of unlawful conduct, licensing firms and investment professionals, 

registering certain securities offerings, examining broker-dealers and investment advisers, and providing investor education programs and materials to your constituents. 

States are also the undisputed leaders in criminal prosecutions of securities violators. In 2012 alone, State securities regulators conducted nearly 6,000 investigations, leading to nearly 2,500 enforcement actions, including 339 criminal actions. 

Moreover, in 2012, 4,300 licenses of brokers and investment advisers were withdrawn, denied, revoked, suspended, or conditioned due to State action, up 27 percent from the previous year. 

State securities regulators continue to focus on protecting retail investors, especially those who lack the expertise, experience, and resources to protect their own 

interests. In addition to serving as the ‘‘cops on the beat’’ and the first line of defense against fraud for ‘‘mom and pop’’ investors, State securities regulators serve 

as the primary regulators of most small size offerings. As such, State securities regulators regularly work with and assist small and local businesses seeking investment capital. 

NASAA shares Congress’ desire to improve the United States economy by, in part, 

spurring private investment in small business. However, we believe this goal is best 

achieved through restoring investor confidence, and it is our hope that the JOBS 

Act will be implemented with a balanced approach that reflects smarter regulation. 

My testimony today will provide an overview of the current status of NASAA’s 

work in designing a new multistate review process for offerings conducted under 

Title IV of the JOBS Act, including a one-stop, filing process for ‘‘Regulation A+’’. 

I will also present NASAA’s views on Title II of the JOBS Act, which lifted the longstanding ban on general solicitation, and summarize the most important of our recommendations to the SEC in association with the rulemakings under this title. Finally, my testimony will consider Title III’s crowdfunding provisions and NASAA’s 

views of the SEC’s proposed rules. Although preempted from regulating 

crowdfunding offerings, the States have been committed to working with the SEC 

and the Financial Industry Regulatory Authority (FINRA) to develop a responsible 

regulatory framework for implementation of the Act. 

My testimony will conclude with a discussion of sensible efforts to improve the 

ability of small businesses to obtain capital, along with a brief discussion of further 

deregulatory legislation in the House that is referred to as ‘‘JOBS Act 2.0’’. NASAA’s 

view is that the JOBS Act imposed changes to the securities laws that were neither 

56 

2For a full list of NASAA Statements of Policy, see, http://www.nasaa.org/regulatory-activity/statements-of-policy/. 3 Andrea L. Seidt, President, North American Securities Administrators Association, Inc., 

2013 Presidential Speech, NASAA 96th Annual Conference, Salt Lake City, Utah (Oct. 8, 2013), 

available at http://www.nasaa.org/26900/2013-presidential-address-andrea-seidt-ohio-securities-commissioner/. 

simple nor straightforward, and which required the SEC to grapple with very complex issues in its rulemaking. We would encourage Congress to observe and evaluate 

the full impact of the JOBS Act before proposing further legislation purportedly designed to spur economic growth. 

Title IV: Regulation A+ 

When a company wants to raise capital by selling securities, the company must 

first register those securities with the Government unless the securities are sold in 

a way that qualifies for an exemption from the registration process. Title IV of the 

JOBS Act requires the SEC to adopt a rule to provide an exemption for certain offerings up to $50 million. 

Because of its similarity to the current exemption under Regulation A, which is 

capped at only $5 million, this new exemption is commonly referred to as Regulation 

A+. These offerings will be exempt from SEC registration under the new Section 

3(b)(2) of the Securities Act of 1933, but they will be subject to registration at the 

State level unless the securities are listed on a national securities exchange or sold 

to a qualified purchaser as defined by the SEC. 

Given the inherently risky nature of these offerings, and the primacy of the 

States’ role in policing small size offerings, NASAA believes State oversight is critically important for investor protection and responsible capital formation. However, 

we also recognize that in some instances this process can be costly and particularly 

burdensome upon small companies. 

When a company applies for registration of securities at the State level, the company must ensure that the terms of the offering and the content of the disclosure 

document satisfy the legal requirements that apply to that particular type of offering. These legal requirements are found in State law but are usually derived from 

NASAA Statements of Policy that are approved by a majority of the NASAA members. A typical equity offering would be subject to a general set of rules, including 

things like limitations on underwriting expenses and a requirement to specify the 

anticipated use of proceeds. 2 More specialized securities, such as church bonds, oil 

and gas interests, and real estate investment trusts (REITs), are subject to specific 

rules for those types of offerings. All States conduct a ‘‘disclosure’’ review to ensure 

that all material risks are disclosed to investors, and some States conduct a further 

‘‘merit’’ review of the offering to prevent offerings that are inherently unfair to investors. If an application for registration does not satisfy all of the legal standards 

applicable to that type of offering, the State securities regulator will issue a deficiency letter and communicate with the company until the deficiencies are resolved. 

On behalf of NASAA President and Ohio Securities Commissioner Andrea Seidt, 

I want to assure this subcommittee that one of NASAA’s priorities is the creation 

of an efficient filing and review process for multistate securities offerings, including 

but not limited to, Regulation A+. In fact, in her inaugural speech to NASAA’s membership earlier this month, President Seidt outlined her goal for this type of system 

as follows: 

The corporation finance world needs the equivalent of a CRD/IARD system 

for multistate offerings. My vision is for there to be a one-stop, automated 

filing system for every type of corporation finance offering filed in multiple 

States. A system that has NASAA guidelines, forms, and core State requirements embedded in its design, a system in which all regulatory and industry users can track the filing status of an offering in all States in real 

time. 3

For now, NASAA is focused particularly on Regulation A+ and is actively engaged 

in the design of a new multistate review process for those offerings. As currently 

contemplated, one State would be designated the lead ‘‘disclosure’’ State and another would be designated the lead ‘‘merit’’ State, and those two States would coordinate the multistate review of the offering to minimize the possibility of duplicative or inconsistent comments from multiple States. Of course, this means that the 

States would have to agree to a set of uniform standards that would apply to the 

particular type of offering. We are also working on a multistate electronic filing platform that will allow one-stop filing with automatic distribution to all States, and 

we intend to build out that system to accommodate Regulation A+ filings. 

57 

4Title IV of the JOBS Act called for a GAO study to determine the reasons that Regulation 

A is underutilized. The study concluded that a variety of factors have influenced the use of Regulation A, including the time and cost of the SEC review process and the attractiveness of other 

available exemptions. To be sure, State regulation was identified as one of the factors that led 

issuers to avoid Regulation A, but it was not the only factor and its importance could be greatly 

diminished if the States adopt uniform review standards and an efficient multistate review system. 5See, ‘‘Laws Provide Con Artists With Personal Economic Growth Plan: NASAA Identifies 

Emerging and Persistent Investor Threats’’ (August 21, 2012), available at http:// 

www.nasaa.org/14679/laws-provide-con-artists-with-personal-economic-growth-plan/. 6The enforcement statistics published by the SEC do not specifically identify the number of 

enforcement actions involving private placements. However, under the broader category of actions involving ‘‘Securities Offerings,’’ which presumably includes private placement offerings, 

the Commission reports that it took a total of 213 enforcement actions in 2011 and 2012. See, 

http://www.sec.gov/news/newsroom/images/enfstats.pdf. 

In designing the system and developing a uniform set of standards, NASAA has 

consulted with a task force of the American Bar Association (ABA) to determine 

whether existing standards could be applied in the context of offerings under Regulation A+. The task force expressed concern about certain existing NASAA guidelines that are difficult for start-ups to satisfy, including the required amount of promoters’ equity investment and the limitation on using investor funds to repay loans 

from officers of the company. In response to these concerns, a NASAA project group 

has proposed a review process that lowers some of our long-standing guidelines. 

The proposed multistate review program was submitted to NASAA members for 

‘‘internal’’ comment, and the comment period expired on September 30, 2013. In addition, the members of NASAA engaged in a face-to-face discussion of this proposal 

at our annual meeting in Salt Lake City on October 6, 2013. From the comments 

and discussion, the NASAA membership appears willing to embrace this new review 

system. 

I am pleased to report that the NASAA Board of Directors met 2 days ago and 

approved the distribution of the proposal for public comment. 

NASAA is also communicating with the SEC in an effort to ensure that the requirements the Commission adopts for the Federal exemption are consistent with 

the requirements we adopt for the State-level review of these offerings. As we continue to move forward in this process, we intend to keep Chairman Tester and the 

Subcommittee apprised of our progress. 

It remains to be seen whether Regulation A+ will be used with any greater frequency than the existing Regulation A, especially considering the new alternative 

of crowdfunding and the use of general advertising under Rule 506. 4 For NASAA’s 

part, however, State securities regulators are committed to helping Regulation A+ 

achieve its fullest potential. NASAA realizes that the increase in the cap from $5 

million to $50 million will mean that the offerings are more broadly disbursed and 

that uniformity and efficiency are critical. NASAA also understands that investor 

protections must be maintained so that investors have confidence to enter this new 

marketplace. By working with the ABA and other interested parties, NASAA is attempting to strike the best possible balance so that Regulation A+ will be an attractive option for both the small business that needs capital and the investor who is 

asked to provide it. If we are successful in striking such a balance, we believe that 

shrewd investors and securities professionals will soon see that State review of 

these offerings generally yields safer opportunities than are available in the ‘‘Wild 

West’’ of Rule 506, and small businesses will find that smart, efficient, twenty-first 

century regulation can be beneficial for their capital formation efforts. 

Title II: General Solicitation 

Even though securities sold in compliance with Rule 506 are ‘‘covered securities,’’ 

which results in preemption of State-level registration requirements, the States retain antifraud jurisdiction and, for all practical purposes, are responsible for policing 

this market. As the regulators closest to small investors throughout the United 

States, State securities regulators frequently receive complaints from those who are 

victimized in offerings conducted under Rule 506, and private placements are commonly listed on NASAA’s annual list of top investor traps. 5 In 2011 and 2012, 

NASAA members recorded 340 enforcement actions involving Rule 506 offerings, 6

making Rule 506 offerings the most common product or scheme leading to enforcement actions by State securities regulators during that period. As a result, the 

States have a very large stake in the SEC’s rulemaking in this area. 

In addition to protecting Main Street investors through enforcement actions, State 

regulators educate Main Street businesses about alternatives for raising capital 

under State and Federal law, including Rule 506. States want to see those businesses succeed in their capital raising efforts so they can thrive and create jobs in 

58 

our local communities. No NASAA member is interested in creating excessive or inefficient rules, but States have learned that efforts to spur successful capital formation must reflect a balanced regulatory approach that minimizes unnecessary costs 

and burdens on small businesses while protecting investors from fraud and abuse. 

Without adequate investor protections to safeguard the integrity of the private 

placement marketplace, investors may flee from the market, depriving small businesses of an important source of capital. 

The recent lifting of the ban on general solicitation in Rule 506 will have an enormous impact on the securities markets in the United States. While some of this impact will be positive, NASAA members can anticipate that a greater number of investors will be defrauded, sold unsuitable investment products, or otherwise victimized in offerings conducted under Rule 506. NASAA believes that it is imperative 

for the SEC to adopt reasonable rules to protect investors in this market and that 

improvements to Rule 506 will facilitate the investor trust that is necessary to promote the capital formation goals embodied in the JOBS Act. 

NASAA believes that modest changes can be made to Rule 506 and Form D that 

will enhance the ability of the Commission and NASAA members to protect investors while minimizing the burdens to the small businesses who utilize the rule to 

raise capital. These changes need to be adopted quickly, before unmonitored general 

solicitations begin to erode investor confidence in private placements and make it 

harder for businesses to find investors who are willing to enter this marketplace. 

NASAA supported the adoption of the final rules prohibiting bad actors from 

using Rule 506 and requiring verification of accredited investor status. In general, 

we also support the proposed rules that would require the filing of Form D prior 

to advertising and make several improvements to the Form. However, we have suggested modest changes to the proposed rules that we believe will yield important 

protections for investors at the lowest possible cost to issuers, and we have pointed 

out places where we believe the proposed rules could be scaled back to save costs 

without unduly harming investors. It is our hope that our balanced approach will 

help the Commissioners reach consensus on these issues so that the final rules will 

be adopted as rapidly as possible. 

Advance Filing of Form D 

From the perspective of State securities regulators, the most important item in 

the proposed rules is the requirement to file a Form D prior to the use of general 

solicitation. As part of NASAA’s investor education efforts, State regulators implore 

investors to ‘‘investigate before you invest,’’ and encourage investors to contact the 

securities regulators in their States if they have questions about an offering. Frequently asked questions include whether the offering is registered or exempt, 

whether there have been any complaints against the issuer or placement agents, 

and whether the issuer, control persons, or placement agents have any regulatory 

history. With the Commission’s recent lifting of the ban on general solicitation, 

States anticipate a substantial increase in the number of investors who will want 

this type of information as part of their due diligence. However, without a requirement that the Form D be filed prior to the use of general solicitation, there is no 

way for State securities regulators to respond to these basic questions. 

In addition, the lack of a pre-solicitation filing makes it impossible for State enforcement personnel to easily determine whether an offering is being conducted in 

accordance with the securities laws. Under the current rules, Form D need not be 

filed until 15 days after the first sale, so an issuer can advertise for investors without filing the form. An investigator who sees an advertised offering will not be able 

to check the Commission’s records to quickly determine whether the issuer is attempting to engage in a compliant Rule 506(c) offering or is merely advertising an 

unregistered, nonexempt public offering with no intention of complying with any 

legal requirements. Regulators may have no alternative except to contact issuers— 

with subpoenas, if necessary—to determine whether their offerings are being conducted in compliance with Rule 506(c). This will increase the number of investigative inquiries directed to legitimate issuers and lengthen the process for stopping 

illegitimate offerings. Ultimately, investors will be put at greater risk because it will 

be more difficult for regulators to prevent or stop investor losses. 

The proposed rule would require the filing of the Form D at least 15 days before 

the issuer engages in general solicitation. For NASAA’s purposes, it would be sufficient to simply require the filing at any time prior to the use of general advertising. 

The critical issue is that the Form D should be publicly accessible before an issuer 

begins to publicly solicit investors. 

59 

7SEC Inspector General Report No. 459, ‘‘Regulation D Exemption Process’’ (March 31, 2009), 

at 10, available at http://www.sec-oig.gov/Reports/AuditsInspections/2009/459.pdf. When Rule 

506 was originally adopted in 1982, it required compliance with Rules 501 through 503, including the timely filing of a Form D, in order to qualify for the exemption. 47 Fed. Reg. 11251, 

11267 (Mar. 16, 1982). In 1989, Regulation D was amended to remove the requirement of compliance with Rule 503 as a condition of the Rule 506 exemption. 54 Fed. Reg. 11369, 11373 (Mar. 

20, 1989). The Commission’s summary of the rule change stated, ‘‘While the filing of Form D 

has been retained, it will no longer be a condition to any exemption under Regulation D. New 

Rule 507 will disqualify any issuer found to have violated the Form D filing requirement from 

future use of Regulation D.’’ SEC Release No. 6,825 (Mar. 14, 1989). 8 A study by the SEC’s chief economist in 2011 found that private offerings grew by nearly 

50 percent from 2009 to 2010; from about $950 billion to about $1.4 trillion, and that private 

stock issuances surpassed debt issuances in 2010 and the first quarter of 2011. See, Craig Lewis, 

‘‘Unregistered Offerings and the Regulation D Exemption’’, November 2, 2011, available at 

http://www.sec.gov/info/smallbus/acsec/acsec103111presentation-regd.pdf. 

Consequences for Failure To File 

For far too long, the Commission has failed to address a glaring problem in Rule 

506 offerings. As reported by the SEC Inspector General in 2009, ‘‘there are simply 

no tangible consequences when a company fails to file a Form D.’’ 7 The proposing 

release cites only one case in which the Commission has ever brought an action 

under Rule 507 to enjoin an issuer from future use of Regulation D. 

The voluntary nature of Form D has significant repercussions for State regulators. 

Pursuant to Section 18 of the Securities Act of 1933, States are preempted from requiring registration of securities that are sold in compliance with Rule 506. However, State regulators routinely review Form D filings to ensure that the offerings 

actually qualify for an exemption under Rule 506 and look for ‘‘red flags’’ that may 

indicate a fraudulent offering. The absence of a Form D filing complicates State efforts to protect the investing public. In addition, a promoter who has no intention 

of complying with Rule 506 may attempt to assert it as a defense to a State-level 

enforcement action by filing a Form D long after the fact. 

Apart from bad actors, it is likely that many legitimate issuers never file a Form 

D because they simply have no incentive to file one. As the proposing release illustrates, this makes it nearly impossible to accurately gauge the size of the private 

placement market. 8 From what we do know, the market rivals the size of public 

offerings, but policy makers are left to guess at the implications of loosening the 

rules for private placements. The information captured in Form D, as enhanced in 

the proposing release, will provide important data that can be used to determine 

future economic impacts for businesses and investors. A lack of a true and complete 

understanding of the private placement market hampers States’ ability to foster 

growth in that market and police bad actors. 

For these reasons, it is imperative for the Commission to act quickly to establish 

meaningful consequences for issuers who fail to file a Form D. Because the filing 

is such a critical part of the exemption, and because it is such a simple condition 

to satisfy, NASAA believes that the loss of the exemption is a reasonable consequence for failure to file the form. 

Other Changes to Rule 506 

NASAA supports the addition of several data points to Form D. For example, we 

believe the disclosure of certain uses of proceeds will provide clear, material information that is necessary for investors to make informed decisions and will deter 

abusive practices in which promoters pay themselves with investor funds. We believe that additional information on Form D will be beneficial to investors, and it 

will capture data that will help policy makers evaluate the use of the exemption. 

In particular, the proposed closing amendment will provide important data about offerings that were unsuccessful and the types of issuers who have difficulty raising 

capital. This information can be used to determine whether the changes to Regulation D were effective in achieving the JOBS Act goals of economic growth and job 

creation or whether investors are reluctant to invest in these offerings. 

In NASAA’s view, it is not necessary for the Commission to require the long advertising legend as proposed in Rule 509. We agree that the issuer should be required to disclose the information that is contained in the proposed legend, but believe that it would be better for the Commission to require some indication that the 

issuer has read the material. This could be done by requiring the information to be 

contained in the subscription agreement or by requiring the investor to click 

through the information on the issuer’s chosen Internet platform. Then, instead of 

the lengthy legend as proposed, the Commission should require a very brief legend 

on all Internet-based advertising. A brief legend containing a unique short phrase 

will readily identify the offering as one being conducted under Rule 506. The ComVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00063 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
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9See, http://www.bls.gov/data/inflationlcalculator.htm as of September 18, 2013. 10 Id. 11Two States—Kansas and Georgia—adopted exemptions before the JOBS Act was even introduced. See the ‘‘Invest Kansas Exemption’’, Kan. Admin. Reg. 81-5-21 (adopted Aug. 12, 2011) 

and the nearly identical ‘‘Invest Georgia Exemption’’, Ga. Rule 590-4-2-.08 (adopted Dec. 2012). 

Idaho adopted an exemption by order on January 20, 2012, which imposes similar conditions 

upon crowdfunding as the Kansas and Georgia regulation. 

mission could then monitor online advertising without requiring it to be filed as proposed in Rule 510T. 

NASAA has long encouraged the Commission to revisit the monetary thresholds 

set forth in the ‘‘accredited investor’’ definition in Rule 501 to account for inflation 

that has occurred since the rule’s adoption. According to the U.S. Bureau of Labor 

Statistics, $200,000 had the same buying power in 1982 as $484,719 has in 2013, 9

but the annual income threshold for accredited investors remains unchanged. Similarly, $1,000,000 had the same buying power in 1982 as $2,423,595.85 today, 10 yet 

the net worth threshold has only been changed during that time period to remove 

the value of a potential investor’s primary residence from the calculation. NASAA 

also believes that the Commission should update the definition of accredited investor to ensure that it more accurately reflects investor sophistication. However, given 

the importance of the other rules that have been proposed in the current release, 

we urged the Commission to move forward with the other rule proposals and to address the accredited investor definition in a separate rulemaking. 

Title III: Crowdfunding 

As the voice of State securities regulators, NASAA has a special interest in the 

rules governing crowdfunding issuers and intermediaries. State securities regulators 

work closely with small businesses in their capital formation efforts and want those 

businesses to be successful in raising money through crowdfunding or other methods 

so they can thrive and produce jobs. However, State securities regulators are keenly 

aware that capital formation requires confident investors who are adequately protected. Thus, NASAA believes that crowdfunding, to be successful, requires a balanced regulatory approach that minimizes unnecessary costs and burdens on small 

businesses while protecting their investors from fraud and abuse. 

Given the length of the proposed rules that were issued by the SEC last Wednesday, October 23, 2013, NASAA has not yet formulated an official response to the 

proposing release. From our initial observations, it appears that the SEC has attempted to stay relatively close to the statutory mandates, but we will be taking 

a closer look at the proposed rules and we expect the SEC to consult further with 

State regulators as required by Section 302(c) of the JOBS Act. 

NASAA’s largest concern about Title III of the JOBS Act is that it removed much 

of the States’ authority over equity-based crowdfunding. Congress chose to preempt 

the States from regulating crowdfunding issuers, thus retaining only the States’ 

antifraud, post-sale enforcement authority. Furthermore, although Section 305 of 

the JOBS Act preserves the authority of a crowdfunding intermediary’s home State 

to conduct examinations of resident intermediaries, State rules cannot exceed the 

Federal requirements. In effect, this puts State governments in the position of enforcing Federal laws from which they may not deviate. 

NASAA firmly believes due to the localized nature of smaller offerings, the States 

should be the primary regulator of small business capital formation efforts, including crowdfunding offerings. Based on the small size of the offering, the small size 

of the issuer, and the relatively small investment amounts, it is clear that the 

States have a more direct interest in these offerings. The States are in a better position to communicate with both the issuer and the investor to ensure that this exemption is an effective means of small business capital formation. The States will 

be most familiar with the local economic factors that affect small business and have 

a strong interest in protecting the particular investors in these types of offerings. 

Further, requiring the SEC to regulate these small, localized securities offerings is 

not an effective use of the agency’s limited resources. 

During the debate surrounding the JOBS Act, NASAA asked Congress to leave 

the regulation of small investments in small companies to the States because the 

Federal Government has neither the inclination nor the resources to regulate effectively in this area. Before the JOBS Act was even introduced, three States allowed 

crowdfunding in intrastate offerings, 11 and during the debate on the Act, NASAA 

was working on a model exemption that would apply to multistate offerings. The 

model rule envisioned a one-stop filing mechanism and the application of uniform 

review standards. However, those efforts were halted when Congress enacted a Federal exemption for crowdfunding that preempted State authority. 

61 

12Maine L.D. 1512, Michigan H.B. 4996, New Jersey S. 3008, North Carolina H.B. 680, 

Washington H.B. 2023, Wisconsin A.B. 350. 13When asked to pick the best way to invest money that would not be needed for the next 

10 years, investors picked cash, real estate, and even precious metals over the stock market. 

The findings of the Bankrate survey are available at http://www.bankrate.com/finance/consumer-index/financial-security-charts-0713.aspx. 14See, http://www.gallup.com/poll/147206/stock-market-investments-lowest-1999.aspx. 15The legislative history of the Securities Act of 1933 reveals that ‘‘smart’’ regulation can be 

successful in encouraging investors to reenter the capital markets. As one of the principal drafters of the Act noted, ‘‘[t]he great and buoyant faith in capitalism, in the competitive system, 

is largely deflated, and . . . it is not only a question of whether the system is just, but whether 

it works.’’ L. Baker, Felix Frankfurter 146 (1969) (taken from a Frankfurter speech delivered 

at Smith College, Feb. 22, 1933). Smart and robust regulation embodied in the Securities Act 

of 1933 led to a substantial increase in new corporate offerings of over $2.5 billion in 1935 and 

over $4.3 billion in 1936 (from a low of $644 million in 1932 and $380 million in 1933). 

Goldschmidt, Registration Under the Securities Act of 1933, 4 Law and Contemp. Probs. 19, 28 

(1937); see also, Bureau of the Census, ‘‘Historical Statistics of the United States: Colonial Times 

to 1970’’ 1006 (1975). As history reveals, smart regulation does not always equate to deregulation, and we encourage Congress to study the outcome of the JOBS Act in the coming year. 16 Charles Schwab and Walt Bettinger, ‘‘Why Individual Investors Are Fleeing Stocks’’, Wall 

Street Journal Editorial, July 10, 2013, available at http://online.wsj.com/news/articles/ 

SB10001424127887323582904578484810838726222?mod=distlsmartbrief. 17 Id. 18 Eric Onstad, ‘‘Analysis: ‘Slow Frequency’ Technology Faces Tough Shift From FX to Stock 

Markets’’, Reuters, October 2, 2013, available at http://www.reuters.com/article/2013/10/02/ 

us-hft-curbs-analysisidUSBRE9910PJ20131002. 

Ironically, many crowdfunding advocates have grown frustrated with the pace of 

Federal rulemaking that they are again seeking State-level crowdfunding exemptions. Earlier this year, bills were introduced in six States to allow intrastate offerings that involve equity crowdfunding. 12 We believe this underscores why Congress 

should let the States innovate and be creative in striking a reasonable balance between investor protection and capital formation for smaller offerings. 

New and Unmet Opportunities and JOBS Act 2.0 

Successful regulation requires balancing the legitimate interests of investors with 

the legitimate goals of business owners through tailored regulation, and pursuing 

policies that are fair to both. One of the fundamental problems that the JOBS Act 

failed to adequately address was investor retreat from the markets. Investor confidence in the U.S. securities markets remains low, as reflected by a recent 

Bankrate survey. 13 A Gallup survey in June 2002 found that 67 percent of Americans owned a 401(k) or otherwise invested in individual stocks, bonds, or mutual 

funds. Earlier this year, that number was down to 54 percent. 14 To have an impact 

on investor participation, and, by extension, job creation, Congress must focus on 

giving those 13 percent the confidence to re-enter the marketplace. 15

One way to increase investor confidence is to carefully craft the rules implementing Titles II, III, and IV of the JOBS Act so they do not have the undesired 

effect of decreasing investor confidence, thus subverting the overall intent of the 

Act. Further, if the rules lack clarity, they will lead to litigation between State regulators and issuers, and judges will ultimately be required to provide greater clarity. 

We also encourage the SEC to finalize its investor protection mandates under the 

Dodd-Frank Wall Street Reform and Consumer Protection Act. 

Although NASAA has not yet come to firm conclusions about new, and unmet opportunities that would decrease investor cynicism and encourage capital formation, 

we are interested in a few proposals, discussed below, that would be worthy of further study and consideration by this Subcommittee. 

First, NASAA believes that Congress should study the impact of high frequency 

trading and take steps to ameliorate any associated risk of harm to retail investors. 

According to Charles Schwab, high frequency traders flood the market with orders 

to evaluate the market, then cancel 90 percent or more of the orders and retain only 

the advantageous trades. 16 To curb these abuses, some European Governments 

have proposed transaction taxes on all orders that are placed in the markets, but 

Mr. Schwab has suggested a narrower approach that would probably be less controversial and more effective—a penalty on excessive cancelations. 17

Another innovative effort to combat high frequency trading has been undertaken 

by ParFX and EBS, two international currency trading platforms. They use a randomized pause so that the first order placed in the system queue is not necessarily 

the first to be executed. 18 According to Larry Tabb, founder of the TABB Group, 

‘‘In the equities market, it’s going to be pretty tough for an exchange to introduce 

randomization because the regulations have been interpreted to be very time-price 

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19 Id. 

specific.’’ 19 Therefore, Congress might consider amending the laws to allow this type 

of reform in the United States equities marketplace. 

Congress could also study the numerous electronic ‘‘glitches’’ that have plagued 

the markets with market shutdowns and price instability. Many have called for 

mandatory ‘‘kill switches’’ to stop trading when problems occur, but we believe more 

aggressive steps should be taken to ensure that our markets are protected. If such 

havoc can be wrought from innocent errors by companies who have every incentive 

to get things right, then we worry what could be done by someone with a malicious 

intent to harm the markets or the country. 

State securities regulators support efforts to seek legislation that would authorize 

the SEC to collect ‘‘user fees’’ from federally registered investment advisers (an idea 

proposed in the Dodd-Frank mandated Section 914 study), and to use the revenue 

derived from these fees to fund more frequent examinations of such advisers. 

NASAA also supports legislation that would preserve an investor’s right to access 

the court system if they have a dispute against their broker-dealer or investment 

adviser. As noted above, NASAA President Andrea Seidt has advocated for the 

equivalent of a CRD/IARD system (the centralized, Web-based system for processing 

of Federal and State licensing applications for broker-dealers and investment advisers) for multistate securities offerings. In fact, NASAA has already taken the first 

major step in that direction by setting up the EFD, an electronic filing depository 

for Form D notice filings, which is set to launch in the coming year. 

The House of Representatives has been circulating additional deregulatory proposals for a sequel to the JOBS Act referred to as ‘‘JOBS Act 2.0.’’ NASAA would 

encourage this Subcommittee to reject further changes to the securities laws until 

at least after the full impact of the JOBS Act on investors and securities markets 

can be determined. Until that time, the potential costs and benefits of further expanding the JOBS Act is impossible to determine. 

Conclusion 

NASAA has been working expeditiously and diligently to update applicable statements of policy and coordinate a new multistate review program for Regulation A+ 

offerings. We have also been working to provide investor-friendly, yet sensible and 

realistic comments to the SEC as it finalizes the rules implementing Title II of the 

JOBS Act and Form D changes. We are optimistic that the new rules will lead to 

investor confidence and renewed participations in the markets. NASAA and State 

securities regulators look forward to working with this Subcommittee on new and 

unmet opportunities to strengthen our securities markets. 

Thank you again, Chairman Tester and Ranking Member Johanns, for the opportunity to appear before the Subcommittee today. I would be pleased to answer any 

questions that you may have. 

PREPARED STATEMENT OF SHERWOOD NEISS 

PRINCIPAL, CROWDFUND CAPITAL ADVISORS LLC 

OCTOBER 30, 2013 

Introduction 

Chairman Tester, Ranking Member Johanns and distinguished Members of the 

Committee, thank you for holding this hearing on the status of the JOBS Act in 

relation to Title III, Crowdfunding. My name is Sherwood Neiss. I am a Principal 

at Crowdfund Capital Advisors, LLC (CCA). CCA works with Governments, multilateral organizations, investors, and entrepreneurs on creating crowdfunding ecosystems. I am also an entrepreneur and one of the cocreators of the Startup Exemption, the framework used by Congress to create Title III. I was honored to be with 

my partners Jason Best and Zak Cassady-Dorion at the White House on April 5, 

2012, as President Obama signed our idea into law. This law allows entrepreneurs 

to use their social networks and regulated Web sites to raise capital for their endeavors from people who believe in them. It addresses the funding void faced by 

startups and small businesses and, if implemented according to the intent of the 

law, may result in much needed economic growth, innovation, and jobs. 

At a period of time when there are such polarized interests in Washington, DC, 

I continually point to the fact that when it comes to jobs, everyone here agrees, 

more are better. Washington understood this when the House voted in favor of our 

bill 407–17 and the Senate passed it, as part of the JOBS Act, 73–26. We can now 

include the Securities and Exchange Commission in that rank. On October 23, 2013, 

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they voted unanimously, 5–0 in favor of the proposed rules related to Title III. This 

represents a huge step forward as this vote included skeptics among the Commissioners. 

Jason and I worked hard as cofounders of the Crowdfund Intermediary Regulatory Advocates (CFIRA) and the Crowdfunding Professional Association (CFPA) to 

pull the industry together behind two unified voices to make sure the SEC had as 

much guidance to craft rules that followed the intent and spirit of the legislation. 

We think, while not perfect, the proposed rules go far to strike a fair balance. The 

intent of the legislation was to take what currently exists and efficiently operates 

in the crowdfunding space and layer on securities regulation in a way that provides 

oversight without undue burden. We believe there is still work to be done on the 

‘‘undue burden’’ part. In the end, we believe Washington understands that technology is something to get in front of and not behind and if we do it right we can 

help fund our Nation’s innovators and job creators. 

The Challenging Entrepreneurial Environment 

There is plenty of research that indicates the important role that startups and 

small businesses play in an economy. For one, they are the breeding ground for new 

ideas. Such innovation used to cost a lot but is rapidly decreasing. According to Don 

Tapscott, author of Wikinomics, ‘‘readily available resources such as open source 

software, cloud computing, and the rise of the virtual office infrastructure has driven the cost to launch an Internet venture down from $5 million in 1997 to less than 

$500,000 today.’’ The decreased startup costs allow for more market entrants, which 

can lead to greater innovation. This innovation can spur the M&A market as larger 

companies who often find it challenging to innovate, buy these smaller companies. 

These young companies can also be job creators. As noted in a Kauffman Foundation study, 65 percent of net new jobs come from startups and small businesses. 

These jobs can address a problem that persists not only in the USA but globally, 

youth unemployment. As we note in our World Bank report ‘‘Crowdfunding’s Potential for the Developing World’’, startups and small businesses may have the greatest 

potential to fill this void. From a personal experience, I cofounded and acted as 

Chief Financial Officer of a company called FLAVORx. We flavored medicine so children were more compliant. We sold our system to pharmacies and grew it from one 

pharmacy to over 40,000. To help us grow we hired along the way. Prior to selling 

the company in 2007, we had up to 50 direct employees and over 100 indirect (contractors, subcontractors, etc.) employees. The average age of our staff was 27, which 

falls right in line with the youth unemployment gap. Companies like ours played 

an important role in hiring youth. 

But you cannot have businesses nor jobs without capital or properly functioning 

capital markets. The capital crunch was exacerbated with the Global Financial Crisis (GFC) in 2008. Prior to the GFC startups and small businesses had similar 

choices for access to capital; savings, home equity, friends and family, bank credit, 

bank loans, Angels or Venture Capital (VC). With the collapse of the financial markets this funding dried up. The banks stopped lending. Interest rates rose and limits 

were cut on credit cards such that credit card financing was no longer an option. 

Home equity values dropped and HELOCs shrunk or disappeared as a funding option. And Venture Capital saw more opportunity upstream and shifted their focus 

on bigger deals as the Investment Banks braced. The net result was a negative impact on startups and small business financing that is still struggling to recover. 

It was at this time that we showed up in Washington with a solution to the funding void called the Startup Exemption. It was a 10-point framework to use the principles of crowdfunding—raising many small amounts of money from a large group 

of people via the Internet and merge it with startup and small business financing. 

Title III—Crowdfunding Framework 

What ended up being signed into law was strikingly similar to the Startup Exemption even though it went through several iterations in Congress. The net result 

is an exemption from registration with the SEC provided that rules and procedures 

are followed. To this effect, the SEC released on October 25, 2013, a 585-page report 

detailing the proposed rules for Title III. 

Under ‘‘Regulation Crowdfunding’’ an entrepreneur otherwise known as an issuer 

can raise up to $1 million per year on Web sites (also known as intermediaries, platform, or portals) that are registered with the SEC and overseen by FINRA. 

Issuers and those holding more than 20 percent equity in the business must submit to a fraud/background check to weed out any bad actors. Issuers must upload 

disclosures to the SEC and the intermediaries that include the following: 

• the name, legal status, physical address, and Web site address of the issuer; 

64 

• the names of the directors and officers (and any persons occupying a similar 

status or performing a similar function), and each person holding more than 20 

percent of the shares of the issuer; 

• a description of the business of the issuer and the anticipated business plan of 

the issuer; 

• a description of the financial condition of the issuer; 

• a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount; 

• the target offering amount, the deadline to reach the target offering amount 

and regular updates regarding the progress of the issuer in meeting the target 

offering amount; 

• the price to the public of the securities or the method for determining the price; 

and 

• a description of the ownership and capital structure of the issuer. 

The disclosures, as well as other identifying information about the issuer, including in many cases a video about the entrepreneur(s) and the company will appear 

on the Web site as a campaign. 

Once uploaded, issuers can use their social networks to reach out to a community 

of individuals they have an established relationship with to learn more about the 

investment by pointing them to the crowdfunding Web site. While most solicitations 

are expected to happen online, issuers are allowed to use other means of solicitation 

(in-store placards, newspapers, etc.) provided that the notice point the potential investor to the crowdfunding Web site. The intent of this is to make sure that all investment activity take place on Web sites that are registered and overseen by the 

SEC and FINRA and prevent unscrupulous actors from claiming to crowdfund when 

they are not. 

Investors who come to the site must register and take an education series and 

certify they understand the risk. The proposed rules include education on: 

• the process for the offer, purchase and issuance of securities through the intermediary; 

• the risks associated with investing in crowdfunded securities; 

• the types of securities that may be offered on the intermediary’s platform and 

the risks associated with each type of security, including the risk of having limited voting power as a result of dilution; 

• the restrictions on the resale of crowdfunded securities offered and sold in reliance on this exemption; 

• the types of information that an issuer is required to provide in annual reports, 

the frequency of the delivery of that information, and the possibility that the 

issuer’s obligation to file annual reports may terminate in the future; 

• the limitations on the amounts investors may invest, as set forth in the legislation; 

• the circumstances in which the issuer may cancel an investment commitment; 

• the limitations on an investor’s right to cancel an investment commitment; 

• the need for the investor to consider whether investing in a security offered and 

sold in reliance on this exemption is appropriate for him or her; and 

• that following completion of an offering, there may or may not be any ongoing 

relationship between the issuer and intermediary. 

Investors could make commitments provided they are limited to the greater of: 

• $2,000 or 5 percent of annual income or net worth, if annual income or net 

worth of the investor is less than $100,000; and 

• 10 percent of annual income or net worth (not to exceed an amount sold of 

$100,000), if annual income or net worth of the investor is $100,000 or more 

(these amounts are to be adjusted for inflation at least every 5 years); 

Issuers must hit 100 percent of their funding target within the deadline to reach 

the target-offering amount or the money is returned from escrow to the investors. 

Investors would have the ability to communicate with issuers on the intermediary 

and ask questions. 

Intermediaries are defined as either funding portals or broker-dealers. Funding 

portals are a new entity created by Title III and regulated by FINRA. Funding portals were created to act in the limited capacity that current crowdfunding Web sites 

65 

do. In order to create funding portals, it was necessary to determine activities they 

cannot perform. These include: 

• offer investment advice or recommendations; 

• solicit purchases, sales or offers to buy the securities offered or displayed on its 

platform or portal; 

• compensate employees, agents, or other person for such solicitation or based on 

the sale of securities displayed or referenced on its platform or portal; 

• hold, manage, possess, or otherwise handle investor funds or securities; or 

• engage in such other activities as the Commission, by rule, determines appropriate 

The intent of this was to create a ‘‘broker-dealer light’’ regulatory scheme for 

funding portals that do not perform the wide array of activities (including promoting 

and selling) and hence the costs and compliance of a broker-dealer. It would allow 

these intermediaries to list crowdfund opportunities and allow the crowd to do the 

diligence, vetting, and funding very much like what currently happens on donation 

and perks-based crowdfunding Web sites. 

Addressing Pumping, Dumping, and Fraud 

The legislation effectively addresses earlier attempts at easing regulations to 

stimulate capital formation. It deters the ‘‘pumping’’ of securities by disallowing 

compensation tied to the success of an offering unless this duty is performed by an 

individual who is registered as a broker-dealer, expressly disclosed to investors and 

regulated as a broker-dealer activity. It deters the ‘‘dumping’’ of securities by requiring them to be held for a 1-year period. It deters potential scam artists from entering the market by performing background checks, mandating disclosures, forcing the 

transactions to take place on regulated intermediaries, and requires issuers to hit 

100 percent of their funding target or no money is exchanged. 

When speaking at an event in Scottsdale, Arizona, I had the opportunity to talk 

with a skeptical FBI Securities fraud agent about the JOBS Act and crowdfunding. 

He has spent the better part of 20 years trying to find and hold accountable securities fraud scam artists. When I explain the background check requirements within 

the legislation he responded, ‘‘Then I’m not that concerned with fraud.’’ Apparently, 

the biggest challenge enforcement officials face is identifying the fraudster postfraud and the trail leading up to that fraud. With a mandated background check 

before funding required, potential fraudsters will be self-identifying making for easier accountability. With this entire process happening online, it creates a digital footprint that is recorded in history and easily referenced if needed. 

If we look at data from the major existing platforms, they show no successful 

fraud has been perpetrated through pledge-based crowdfunding. Attempts at fraud 

have been made but were thwarted by the transparency inherent in crowdfunding: 

would-be investors asked questions and challenged the fraudulent postings, revealing the frauds and resulting in their removal from funding platforms within 24 

hours. 

Fraud is a legitimate concern. However, successful fraud with crowdfunding has 

been relatively rare. While most fraud is perpetrated on a one-to-one basis (for example, an identity scheme solicits personal information via email), fraud in the context of the social media and crowdfund investing in particular would have to occur 

on a many-to-many basis: a potential fraudster would have to stand up to the wisdom, queries, and insights of the entire crowd. For this reason the most likely scenario for successful fraud involves criminals creating fake crowdfunding platforms 

and fake companies to attract investors’ money. 

Of the nearly 50,000 projects funded through Kickstarter to the tune of $815 million, there are four documented cases of attempted fraud. One was a campaign to 

raise capital for a video game. The campaign received numerous questions and accusations on the Kickstarter comments page that the game developer was unable to 

address. This response, combined with the revelation that many of the images and 

content in their pitch were taken from other companies, was seen as an indicator 

of potentially fraudulent activity and the campaign was quickly shut down without 

any donor losing money. 

Because no case has been filed, it can be hard to tell the difference between a 

fraud and a well-intentioned project whose creators failed to fulfill on their promise. 

The most notorious example was a Kickstarter project called ZionEyez, which 

claimed to stream video directly from a pair of eyeglasses to a person’s Facebook 

stream. The project netted US$343,415 in 2011, and the creators have yet to deliver 

its product. The company, which has since changed its name, still claims it intends 

to deliver and is seeking outside capital. 

66 

The primary risk to consumers from donation-based crowdfunding is fulfillment 

risk. Some companies raise funds through crowdfunding without having thought 

through production, shipping, tax issues, and other essentials of their business 

model. There have also been examples of technical failure risk, usually involving the 

presale of software. In these cases companies received funds for products they intended to build, but technical problems prevented them from shipping the product. 

These same types of risks appear in debt and equity crowdfunding. 

The Benefits of Crowdfund Investing 

There are many benefits to crowdfunding outside of access to capital. In our World 

Bank report we identify 8 main benefits to crowdfund investing: 

1. It fills a void left by traditional financing and creates an efficient mechanism 

for raising money by standardizing and centralizing the process of private capital formation. 

2. It is an efficient mechanism for investors to analyze if a company fits their 

portfolio strategy. 

3. It disrupts the reliance on business angels and venture capitalist so that enterprising entrepreneurs can leapfrog the venture investor boardroom to their social network. It also provides validation from other investors, which may lower 

the risk for follow on investment. 

4. It expands the geographic range of angel investment. Social networks demonstrate that investments need not be tied to geography, as are many VC investments. Crowdfunding allows entrepreneurs all over the country to have 

equal access to capital. 

5. It provides product validation, support networks and partnerships. Companies 

can use crowdfunding to explore a product’s viability and to engage early 

adopters at lower costs. This also provides campaigns and the companies 

hosting them exposure. 

6. It provides market testing and demand measurement. Successfully funded 

projects show crowd validation. This validation, or lack thereof, can help determine if enough of a market exists to fund an idea or not. 

7. It provides access to support networks. Crowdfund supporters that become investors are a highly motivated group that acts as product evangelists and feedback providers. These investors have skills and experience from which entrepreneurs can benefit. 

8. It provides feedback on the market and how to move forward. Active investors 

may help enhance an issuer’s business plan with ideas and suggestions for 

moving forward. 

Issuers interested in choosing Regulation Crowdfunding over Regulation D would 

do so for several reasons: 

1. Companies that use Regulation D are usually more established and can incur 

the costs associated with putting together a full private placement memorandum that is usually associated with such offerings. Companies using Regulation Crowdfunding can use technology and software programs to create a 

business plan and financials necessary for this offering at much lower costs. 

2. Companies that use Regulation Crowdfunding are seeking less than $1 million. 

Companies using Regulation D may be seeking more than $1 million. 

3. Companies using Regulation Crowdfunding would benefit from the standardized forms used on crowdfunding platforms and the tools to keep the issuer 

compliant. 

4. Companies using Regulation Crowdfunding want to leverage their social network that includes both accredited and unaccredited investors for which companies using Regulation D are only limited to up to 35 unaccredited investors. 

5. Companies using Regulation Crowdfunding do not have to worry about hitting 

the investor cap of 2,000 before filing with the SEC that a Regulation D offering would subject them to. 

6. However companies using Regulation Crowdfunding will be subject to mandated annual reporting that issuers using Regulation D might not. This may 

increase the burden on Regulation Crowdfunding companies. 

Firms That Might Be Interested in Utilizing Crowdfunding 

Given the $1 million cap per year that entrepreneurs can seek from the crowd 

and the all-or-nothing financing mechanism, Regulation CF is geared towards small 

businesses. 

67 

There are many business types that could benefit from crowdfunding. I list some 

of them below and why: 

• High-growth/technology businesses are uniquely suited to crowdfund investing 

because they find general market understanding and acceptance. 

• Research institutions can enable researchers and students to demonstrate 

broader interest in their research topics. 

• Main Street USA businesses may not have access to bank loans since the financial crisis and crowdfunding may serve as a way to convert customers into investors and lenders. 

• Franchisees may gain because there has been an absence of financing available 

to individuals who want to start a business franchise. Individuals well suited 

for this may be retirees looking for additional financial security or a military 

veteran who can leverage the franchise support system to transition to business 

ownership. 

• Real estate companies can use crowdfunding as a means to rehabilitate communities ravished by the economic crisis and allow these same communities to benefit from the rehabilitation both physically and financially. 

• Women and minorities who have historically been both underfunded and left 

out of the startup and small business financing realm can now access capital 

from other women and minorities who until now haven’t had either the way or 

an efficient means to support their peers. 

Because Regulation Crowdfunding has yet to go into effect it is difficult to gauge 

the impact it will have on the economy and jobs. However, on September 24, 2013, 

Title II, another provision of the JOBS Act went into affect and this might be a 

leading indicator. Title II lifted the ban on general solicitation. For the first time 

in 80 years issuers can raise an unlimited amount of money from investors provided 

that they only take money from accredited investors. Such a change essentially allows issuers to use crowdfunding Web sites to market their offering to accredited 

investors. 

This opened the door for platforms like AngelList, an online accredited investor 

platform, to expand their reach. Based on conversations with Kevin Laws at 

AngelList, over 2,959 companies have listed since Title II went into effect. At a 

crowdfunding event last week in New York City it was remarked that over $50 million of capital has already been committed to those companies. To put this into perspective, last year Venture Capitalist funded only 3,800 deals. While VC deployed 

over $26 billion we can see that increasing both deal flow and reach may lead to 

more business funding outside of what VC’s deploy. Initial estimates from the Program for Innovation in Entrepreneurial and Social Finance, a crowdfunding think 

tank at the University of California, Berkeley, estimates that within its first few 

years the crowdfund investing market size could be as high at $4 billion. 

One trend we expect to develop is more and more businesses circumventing the 

traditional means of finance and seeking funds from the crowd. Successful companies at crowdfunding may use their vested customers to help fine tune product offerings. They will leverage the crowd’s marketing power to promote the business, 

which may in turn lead more sales, visibility and Angels getting involved. Angels 

who have an interest in the business can play a lead investor role in a Title II offering or as a syndicate, meaning they come in with say the first $100,000 and syndicate the other $150,000 to accredited investors. Continued growth and success 

may raise the interest of Venture Capitalists who can come in at a later stage when 

a business is developed, product tested and market validated. They can provide the 

stronger hands and deeper pockets to take the company to the next level. All along 

the way, the crowd investors can either be bought out in successive rounds at the 

current price thus experiencing liquidation and cash flow or stay along for the ride 

with the knowledge that they own less (due to dilution) of a more valuable company 

for which they may experience greater benefit down the road. 

When this industry is up and running we should have answers to questions we 

never could answer before like what is the valuation of dry cleaner, hair salon, or 

small farm. As investors come in and invest in these businesses, valuations at different company sizes will be determined. These valuations will be stored online for 

all to see and may shed light on what has historically been a challenging exercise; 

how to value your company? 

The disclosure requirements could also improve informational efficiency in the 

market. Specifically, the required disclosures would provide investors with a useful 

benchmark to evaluate other private issuers both within and outside of the securities-based crowdfunding market. Companies like Crowdnetic, a New York-based 

company, are already stepping into the space by providing an in-depth view into the 

68 

private capital markets, who is getting funded, what sectors see the most funding, 

where trends are developing and more. 

Rulemaking Overview 

I would like to commend the Securities and Exchange Commission for the detailed 

and thorough analysis of Regulation Crowdfunding. I personally would like to acknowledge the incredibly hard work performed by the staff at the SEC. Since the 

bill was signed into law we as an industry have requested and been granted meetings with key stakeholders in the SEC to share our knowledge, experience, and concerns. All our meetings were accepted and we are gracious for the staff’s time and 

consideration. We note that the 13 letters from CFIRA, the organization we helped 

cofound to work with the SEC and FINRA on the rules, was referenced 57 times 

in the proposed rules. 

When considering the 585-page report on the proposed rules put out by the SEC 

the following thoughts come to mind: 

1. The SEC worked really hard to follow the majority of the spirit and intent of 

the legislation. However they missed the ball on funding portals and need to 

make some enabling changes. 

2. Compliance is the key word to come out of these 585 pages. Issuers will have 

to files forms with the SEC periodically and these forms are attached to either 

dates or milestones. It is critically important for a small issuer who is new to 

running a business, raising capital or being compliant with regulation to either 

find an individual, technology or a portal that can keep them compliant. 

3. Education is key. Probably the most important thing potential issuers can do 

is to learn as much about crowdfunding and these rules as possible. Issuers 

will need to learn about types of securities, valuation, and investor relations. 

If they want to be successful they should study prior to crowdfunding. This is 

one of the reasons we started an online education training series called ‘‘Success With Crowdfunding’’. Investors too need to be educated and we are 

pleased to see that the SEC expanded upon what they believe investors should 

know prior to putting their money behind a crowdfund offering. We were surprised though that there was no mention of the importance of diversification. 

The Good 

There are parts of the rulemaking that could make this offering more appealing 

to prospective issuers. 

First, the SEC did not create rules that would kill crowdfunding before it had a 

chance to start. By this I mean, while there is a 2,000 limit on the number of investors before a company needs to essentially be a public reporting company, the SEC 

understood that since there can be many crowdfund investors, they needed to be 

grouped together and exempted from that ceiling. Doing so will allow successful 

crowdfund companies to continue on the funding lifecycle without having to worry 

about the costs of becoming a reporting company prior to their desire or opportunity 

to do so. 

Second, issuers don’t have to decide whether to do a Title III or Title II offering. 

The proposed rules seem to understand that the type of investors in each Title may 

be different and not to preclude issuers from choosing one over the other. The proposed rules allow for concurrent offerings without integration, so if an issuer wishes 

to do parallel offerings, the issuer would be able to exceed the $1 million cap in Title 

III without losing his exemption. 

Third, as mentioned earlier Title II of the JOBS Act lifted the ban on general solicitation provided that investments only come from accredited investors. Title II requires that issuers affirm the status of an accredited investor. In Title III this burden is left with the investor. This will ease the compliance burden of verifying income or net worth of individual investors, allow them to self-disclose these amounts 

and allow them to represent and certify that they have not gone over their individual investment limits. 

Fourth, while there are disclosures mandated the SEC did not define set disclosures for a business plan or use of proceeds. This will help new entrepreneurs who 

are otherwise unsure of what is in a business plan to try crowdfunding. It would 

be highly recommended though that these entrepreneurs use technology, business 

planning software, or advisors to generate the reports necessary for disclosure. 

Fifth, you can exceed your offering amount as long as you disclose what you would 

do with the extra money in your use of proceeds. This is actually very good. It allows issuers to set a minimum amount they need to achieve and allows others who 

come in toward the end to still have an opportunity to participate even if the company hits its minimum funding target. I believe that companies that exceed their 

69 

funding targets will be the first point of contact and follow on deal flow for Angels 

and VCs. 

Sixth, while not expressly stated in the legislation, it was good of the SEC to understand that crowdfunding operates in conjunction with the social network and 

that issuers should use their social networks to drive people to the intermediaries 

Web site provided they don’t talk about specifics of the offering. 

And, seventh, the SEC added the flexibility of dynamic pricing without limiting 

the types of securities. This may allow issuers to offer different types of shares at 

different prices to investors. While this may not benefit the untrained issuer, it allows more sophisticated issuers to raise money from more sophisticated investors, 

reward early supporters and increase the likelihood that the offering would be successful. 

The Bad 

There are parts of the rulemaking that could make this offering less appealing 

to prospective issuers. 

As mentioned above, the biggest hurdle issuers face will be compliance. There is 

a lot of reporting required in the system. While such reporting will promote transparency and deter fraud, it may also deter the honest yet new issuer from deciding 

to crowdfund. It may also force issuers to raise more money to either pay for a compliance officer or an alternative solution. While this may promote jobs, this was not 

the intent of the legislation. 

Second while the legislation does allow for both accredited and unaccredited investors to support issuers, accredited investors are not usually capped in their investment, within Regulation Crowdfunding, they are capped at $100,000. 

Third there are disclosure requirements for directors and officers that include disclosing 3 years of business experience. While such disclosures may help investors 

understand who is running the company, depending on the number of owners, their 

backgrounds and the system used for gathering this information it might be challenging to disclose all this information. 

Fourth, while the legislation mandates it, we were still hopeful that the SEC 

would understand the almost impracticality of audited financials for offerings in excess of $500,000. Audited financials are beneficial for large corporations to uncover 

nuances. Smaller corporations are more transparent by nature. According to the 

SEC’s figures an audit would cost about $28,700. Given the 2 year required disclosures in the proposed rules, this figure could be well over $50,000 or 10 percent of 

the raise. This might deter some issuers. We would hope in future amendments; this 

figure would be scaled up or just switched to CPA review. 

Fifth, while FINRA is the only National Securities Association in the United 

States and hence assigned to be the oversight authority of the crowdfunding portals, 

I believe that the industry might be better served if it were overseen by the industry 

participants itself who are more concerned about developing an efficient, credible, 

transparent marketplace and building this credible crowdfunding marketplace is 

their only priority and core competence. Not knowing whether the SEC and FINRA 

are making rules to benefit brokers over funding portals might deter both intermediaries and issuers from getting into crowdfunding. 

The Really Bad 

The proposed rules don’t allow funding portals much flexibility when determining 

who can list on their sites. Not giving them the flexibility to deny a business they 

believe isn’t ready for crowdfunding or won’t be successful may decrease efficiencies 

and increase failure. 

The proposed rules leave liability with the funding portals for material 

misstatements by the issuers. While it would seem obvious that material 

misstatements should be a reason for liability, a portal is not in the same business 

as the issuer and hence might not know a statement is material. In addition, the 

roles and responsibilities of a funding portal are much less than that of a broker 

and while brokers may be paid to provide detailed vetting, portals are not. In reality, under the proposed rules, funding portals have greater liability because the 

Due Diligence defense afforded to brokers is not afforded to them. When it comes 

to funding portals, it is the role of the crowd to do the diligence on the issuer and 

question the disclosures on the comment pages of the campaign. Funding portals 

should not be held accountable for misstatements. As a matter of fact, funding portals should explicitly state on their Web sites that it is the job of the issuers to review the disclosures for nonfactual statements and that the portal is just providing 

the matching service. This was the intent of the legislation. 

It is unclear from the proposed rules of funding portals can receive payment for 

a successful campaign in terms of a percent of the raise. This is how current donaVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00073 Fmt 6621 Sfmt 6621 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
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tion and perks crowdfunding platforms operate and the intent of the legislation. One 

part of the proposed rules talks about disclosing the amount of compensation paid 

to the intermediary for conducting the offering. Another part states the funding portal cannot compensate employees, agents or other person for such solicitation or 

based on the sale of securities displayed or referenced on its platform or portal. And 

a third part goes on to state the proposed rules would define ‘‘funding portal’’ consistent with the statutory definition of ‘‘funding portal,’’ substituting the word 

‘‘broker’’ for the word ‘‘person,’’ seemingly implying that the intermediary cannot be 

paid a success fee. This would effectively remove the economic model for the intermediary. 

The proposed rules also require the escrow agent for a funding portal to be a 

bank. While escrow services are part of a bank’s duties it is not their primary focus 

of activity. By not allowing other escrow agents into the process, this makes it not 

only challenging for funding portals to develop and flourish but increases the cost 

of capital for the issuer. 

The reality of these four items, I believe, will make it very hard for funding portals to succeed in the space. Anyone that wants to be a funding portal will have 

to form a strategic relationship with a broker. Doing so might allow them to perform 

more activities but the funding portals will probably have to give up an excessive 

amount of their fees with the broker. Unfortunately the additional costs of capital 

will come out of what issuers raise and not where investors want their investment 

going. 

The reality for an issuer is also fairly stark. In my calculations and conversations 

with Kevin Laws at AngelList we both came to the same conclusion, crowdfunding 

might be too expensive from a prepare and comply point of view to event get in the 

game at the low end. Karen Kerrigan, President and CEO of the Small Business 

and Entrepreneurship Council (SBE Council) stated it another way, ‘‘the rules as 

proposed will prevent or turn off many small businesses and entrepreneurs with 

limited resources from tapping into this new financing opportunity.’’ Quite simply, 

at least at present, SBE Council believes the regulations work against the efficiency 

and transparency of technology in this space. 

‘‘The complexity and burden of the SEC’s proposed regulations, FINRA requirements, and the potential threat to regulate even more will act as a barrier to entry 

to new funding portals, which means less innovation and competition,’’ says 

Kerrigan. ‘‘We are not opposed to regulation and accountability, but SEC Title III 

rules tip the scales, which create immediate barriers to funding portal competition 

and choice for entrepreneurs in this new space.’’ 

In sum, the potential for equity and debt-based crowdfunding will be constrained 

by the proposed regulations (as they now stand) to implement Title III of the JOBS 

Act. Entrepreneurs who have the resources to comply with the various requirements 

at each step of their funding (pre-, during, and post raise) will be fine. Small business owners and entrepreneurs with limited resources will have more difficulty tapping into this opportunity. 

What Can We Learn From Crowdfunding Internationally? 

In our World Bank report we have a section titled Early Data from the Developed 

World. In there we state, ‘‘Currently there is limited data to report on equity and 

debt-based crowdfunding, but Australia and the United Kingdom are demonstrating 

interesting results. After 7 years of crowdfunding companies, the Australian Small 

Stock Offering Board (ASSOB) shows that 86 percent of companies crowdfunded on 

its platform were still operating in 2012. This contrasts with a figure of 40 percent 

of noncrowdfunded (non-ASSOB) companies that fail after 3 years. 

An engaged base of both customer and investors in the business is cited as one 

of the main reasons for longevity by ASSOB. ASSOB also vets deals prior to posting 

on their platform. Equity-based crowdfunding platforms have also launched in the 

Netherlands and Italy. No affirmative data yet exists to show investor returns from 

these platforms, though projected market size analysis has been completed by the 

University of California, Berkeley, and well-regarded venture capitalist, Fred Wilson. 

Debt crowdfunding in the United Kingdom has had some early successes in providing returns to investors. Since 2007 investors in companies listed on U.K.-based 

Funding Circle have completed financing totaling over £156 million (about US$250 

million), receiving an annualized return of 5.8 percent (after expenses and bad debt 

expense, but before taxes) with a 1.6 percent default rate.’’ This represents much 

better performance for both investors looking to earn a yield and issuers seeking to 

borrow at competitive rates. 

There have been no successful cases of fraud on any debt or equity-crowdfunding 

platform globally. 

71 

Conclusion and Recommendations 

With the global financial crisis the funding void for startups and small businesses 

got bigger. Crowdfunding has emerged as a unique solution and now Congress, the 

President, and the Securities and Exchange Commission see its potential in addressing this problem but there is still work to do. 

Youth unemployment in the United States according to one study is more than 

twice the national average. College graduates are competing for unpaid internships 

and not experiencing the benefit of having worked toward a degree. As stated by 

Judith Rodin in Innovations Journal, ‘‘Young people who are not on track to secure 

employment are often stuck in a self-perpetuating cycle of poverty and instability. 

Their future earning potential is stilted, and they are likely to settle for part-time 

jobs or temporary work. As a result, today’s youth many of whom are concentrated 

in urban areas, face high levels of social exclusion and lack clear access to the safety 

nets that employment can provide: health benefits, retirement accounts and pensions.’’ In other parts of the world we’ve seen civil unrest as dispirited youth take 

to the streets in anger. This was even evident during the Occupy movement in the 

United States. 

We may stand at a unique time in history to address both the funding void and 

unemployment by allowing individuals with aspiring ideas to take them to regulated 

platforms and let the crowd decide if they are worthy of funding. However, entrepreneurs need to approach this opportunity with eyes wide open. There is a great 

deal of disclosure and compliance required in this opportunity and it is advised that 

they take the time to study and learn everything they can about crowdfunding and 

the proposed rules before moving forward. 

For crowdfunding to really flourish under Title III, and be in line with the way 

crowdfunding currently operates, I would encourage Congress to have the SEC 

make the following changes to the proposed rules. Doing so will allow funding portals, which were intended to be stand alone entities from brokers in the first place, 

to survive: 

1. Funding portals that are not broker dealers or partnered with a broker be allowed to be paid in the form of a success fee in the form of a commission on 

deals closed. Without this economic model, portals will not survive. 

2. Funding portals be allowed to curate deals other than what type of offerings 

they allow on their portal so that they have the flexibility to keep deals off 

their platform that they do not deem worthy. This type of curation can only 

stand to benefit investors because it is not providing investment advice on a 

specific deal already listed on a platform but in essence keeping out deals that 

are not ready to raise capital, not fundable or not worthy from the portal’s perspective for listing. 

3. Funding portals not be liable for any material omissions or misstatements of 

the issuer. If the legislation approved by Congress and signed into law by the 

President meant to include funding portals in the liability it would have directly named ‘‘funding portals’’ in the list of those liable, forcing funding portals to diligence deals and be paid for that service like a broker. Funding portals play a limited role and shouldn’t be held to the same liability standards 

as brokers. 

With these proposed chances I believe a robust and efficient crowdfund investing 

market may develop in the United States. I look forward to your questions. 

72 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM KEITH HIGGINS 

Q.1. In an address to the Security Traders Association on 10/2/13, 

Chairman White discussed one-size-fits-all markets. Could you 

please elaborate on why a one-size-fits-all market structure may 

not effectively serve smaller public companies? 

A.1. In the speech you mention, Chair White discussed how, for the 

most part, market rules and trading mechanisms are today the 

same regardless of wide variations in the size of public companies. 

According to Commission staff in the Division of Trading and Markets, by its nature, such a one-size-fits-all market structure will be 

designed primarily to address stocks with the majority of trading 

volume, and the great majority of trading volume in the U.S. equity 

markets is attributable to larger company stocks. For example, the 

SEC Advisory Committee on Small and Emerging Companies received data indicating that the average daily dollar volume for 

NASDAQ-listed companies with $1 billion or more in market capitalization is vastly greater than for companies with less than $100 

million in market capitalization. See, Presentation of Jeffrey M. 

Solomon, CEO, Cowen and Company (Sept. 17, 2013) (available at 

http://www.sec.gov/info/smallbus/acsec.shtml). 

At the same time, the level of trading volume in smaller companies may not appropriately reflect the economic significance of the 

smaller company segment of the market in terms of capital formation and economic growth. To address this potential disconnect, 

Chair White highlighted the need to focus particularly on the market structure needs of smaller companies, rather than simply assuming that their needs are the same as larger companies. For example, smaller company stocks generally do not have the same 

sources of liquidity as larger company stocks, and an efficient market structure specifically designed for smaller company stocks that 

generates additional liquidity and protects investors may have 

greater marginal benefits for smaller companies than a one-sizefits-all structure. 

Q.2. Chairman White also shared that staff has been working with 

exchanges to develop a plan to implement a pilot program allowing 

smaller companies to use wider tick sizes. 

Could you provide an update on the progress the SEC has made 

in developing a pilot program and when I might expect the implementation of the pilot program? 

A.2. At Chair White’s instruction, SEC staff in the Divisions of 

Trading and Markets and Economic and Risk Analysis are continuing to work with the exchanges as they develop and, if possible, 

present to the Commission for its consideration a plan to implement a pilot program regarding tick sizes as soon as practicably 

possible. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM KEITH HIGGINS 

Q.1. Some small businesses and investors have noted that the current definition of ‘‘general solicitation’’ is very broad. Does the 

Commission plan to provide additional clarification on what ‘‘genVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00076 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
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eral solicitation’’ means and how the concept can be applied to a 

number of common capital raising activities? If so, what are some 

key issues the SEC will address in the definition? If not, why not? 

A.1. Title II of the JOBS Act mandated that the Commission 

amend Rule 506 of Regulation D to permit general solicitation and 

advertising in Rule 506 offerings, provided that all purchasers of 

the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors. 

The Commission adopted Rule 506(c), which permits the use of 

general solicitation and advertising in offerings relying on the exemption. In connection with the issuance of the new exemption, 

some have raised questions about what activities may be considered to be a general solicitation. 

As you may know, the concept of general solicitation in connection with private offerings has been in existence for many years. 

Although the Commission’s rules, including new Rule 506(c), do not 

provide a definition of general solicitation, the Commission has 

over the years provided guidance with respect to general solicitation and the analysis for determining whether a specific communication or activity constitutes a general solicitation for the offer or 

sale of securities. That guidance did not change with the adoption 

of Rule 506(c). As a general matter, since the determination of 

whether a specific communication or activity constitutes a general 

solicitation is dependent on the particular facts and circumstances, 

it is difficult to provide additional generally applicable guidance 

that would be helpful in this area beyond what is already provided. 

I anticipate that some of the concerns about what may constitute 

a general solicitation may diminish as companies and their advisers become increasingly familiar with new Rule 506(c). Commission 

staff will continue to carefully monitor developments and consider 

whether there is any more specific guidance we could issue that 

may be useful. As always, the Commission staff is available to consult with companies and their advisers about questions that may 

arise in connection with the use of the new rule. 

Q.2. Regarding the verification of accredited investors in generally 

solicited offerings, will the Commission provide written clarification 

on application of the principles-based approach in common situations? For instance, if the investors are members of established 

angel groups, accredited investor platforms, or have made previous 

investments in Rule 506 offerings, could the issuers confirm their 

participation and reasonably believe these investors are accredited? 

A.2. As you know, Title II of the JOBS Act mandated that the 

Commission amend Rule 506 of Regulation D to permit general solicitation and advertising in Rule 506 offerings, provided that all 

purchasers of the securities are accredited investors and the issuer 

takes reasonable steps to verify that such purchasers are accredited investors. In adopting Rule 506(c) to implement Title II, the 

Commission considered a number of approaches and the comments 

received, ultimately adopting a principles-based method of 

verification along with four nonexclusive methods of verifying the 

accredited investor status of natural persons. In so doing, the Commission concluded that a general requirement that issuers take 

‘‘reasonable steps to verify’’ that the purchasers are accredited inVerDate Nov 24 2008 15:46 Oct 17, 2014 Jkt 046629 PO 00000 Frm 00077 Fmt 6602 Sfmt 6602 L:\HEARINGS 2013\10-30 ZDISTILL\103013.TXT JASON
74 

vestors combined with a nonexclusive list of verification methods 

deemed to meet this requirement would maintain the flexibility of 

the verification standard while providing additional clarity and certainty to issuers if one of the specified methods is used. The adopting release provides guidance with respect to the methods for 

verifying accredited investor status. 

Under the principles-based method, an issuer would look at the 

particular facts and circumstances of each purchaser and transaction to determine the steps that would be reasonable for verifying 

the purchaser’s accredited investor status. In the adopting release, 

the Commission identified a number of factors that should be considered under this analysis, such as: 

• the nature of the purchaser and the type of accredited investor 

that the purchaser claims to be; 

• the amount and type of information that the issuer has about 

the purchaser; and 

• the nature of the offering, such as the manner in which the 

purchaser was solicited to participate in the offering, and the 

terms of the offering. 

After considering the facts and circumstances of the purchaser 

and the transaction, the more information an issuer has indicating 

that a prospective purchaser is an accredited investor, the fewer 

steps the issuer may have to take to verify accredited investor status, and vice versa. The Commission adopted this method to provide issuers and market participants with the flexibility to use 

verification methods tailored to their specific circumstances, to 

adapt to changing market practices, and to encourage innovative 

approaches for meeting the verification requirement, such as thirdparty databases of accredited investors and verification services. 

The principles-based verification method allows issuers to consider the factors you identified, specifically, membership in established angel groups, the use of accredited investor platforms, and 

investments in previous Rule 506 offerings. A person’s investments 

in previous Rule 506 offerings or membership in an established 

angel group is information about the person that may affect the 

likelihood of the person being an accredited investor and therefore 

may be useful in determining the steps that would be reasonable 

for an issuer to verify the person’s accredited investor status. The 

issuer would, of course, still need to consider any other relevant 

facts in making its final determination about the person’s accredited investor status. 

In addition to the principles-based verification method, to provide 

greater certainty to those issuers seeking it, the Commission provided a nonexclusive list of methods an issuer may use to satisfy 

the verification requirement. These methods include, among other 

things: reviewing copies of any IRS form that reports the income 

of the purchaser and obtaining a written representation that the 

purchaser will likely continue to earn the necessary income in the 

current year; or receiving a written confirmation from a registered 

broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has 

taken reasonable steps to verify the purchaser’s accredited status. 

75 

Of course, as questions arise in connection with the use of the 

new rule, Commission staff will be available to consult with companies and their advisers.