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THE JOBS ACT AT FOUR: EXAMINING 

ITS IMPACT AND PROPOSALS TO 

FURTHER ENHANCE CAPITAL FORMATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

APRIL 14, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–82 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 14, 2016 ................................................................................................... 1 

Appendix: 

April 14, 2016 ................................................................................................... 43 

WITNESSES 

THURSDAY, APRIL 14, 2016 

Atkins, Hon. Paul S., Chief Executive Officer, Patomak Global Partners, 

LLC ........................................................................................................................ 5 

Beatty, William, Director, Division of Securities, Washington State Department of Financial Institutions, on behalf of the North American Securities 

Administrators Association, Inc. ......................................................................... 6 

Griggs, Nelson, Executive Vice President, NASDAQ ........................................... 8 

Keating, Raymond J., Chief Economist, Small Business & Entrepreneurship 

Council .................................................................................................................. 10 

Laws, Kevin, Chief Operating Officer and Chief Investment Officer, 

AngelList ............................................................................................................... 12 

APPENDIX 

Prepared statements: 

Atkins, Hon. Paul S. ......................................................................................... 44 

Beatty, William ................................................................................................. 55 

Griggs, Nelson ................................................................................................... 68 

Keating, Raymond J. ........................................................................................ 74 

Laws, Kevin ...................................................................................................... 89 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn: 

Written statement of the University of Denver Sturm College of Law ....... 100 

Royce, Hon. Ed: 

Written statement of the Credit Union National Association ...................... 107 

(1) 

THE JOBS ACT AT FOUR: EXAMINING 

ITS IMPACT AND PROPOSALS TO 

FURTHER ENHANCE CAPITAL FORMATION 

Thursday, April 14, 2016 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Hurt, Royce, Neugebauer, McHenry, Huizenga, Stivers, Hultgren, Ross, Wagner, 

Messer, Schweikert, Poliquin, Hill; Maloney, Sherman, Hinojosa, 

Lynch, Scott, Himes, Foster, Carney, and Murphy. 

Also present: Representative Emmer. 

Chairman GARRETT. Good morning. The Subcommittee on Capital Markets and Government Sponsored Enterprises will hereby 

come to order. Today’s hearing is entitled, ‘‘The JOBS Act at Four: 

Examining Its Impact and Proposals to Further Enhance Capital 

Formation.’’ 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

Also, without objection, members of the full Financial Services 

Committee who are not members of the subcommittee may sit on 

the dais and participate in today’s hearing. 

I welcome all the members on the panel today. 

And with that, I now recognize myself for 3 minutes for an opening statement. 

It is not often that Congress can look back at a major piece of 

legislation and be able to measure the tangible positive impact of 

it that it is having on people’s lives and our economy. Too often, 

we find ourselves, especially in this committee, counting up the 

costs of the many misguided Washington mandates and comparing 

them with the so-called phantom benefits promised by the bureaucratic class and the sponsors of those regulations. 

Fortunately, that is not the case today. The Jumpstart Our Business Startups, or the JOBS Act, signed into law literally 4 years 

ago this month, has, by I think most measures, been a resounding 

success for our economy and for the future of innovation here in 

the United States. 

2 

The JOBS Act did this not by creating new Federal mandates or 

spending taxpayers’ money on wasteful government programs, but 

instead by empowering entrepreneurs and innovators who were 

struggling under a regulatory regime that was better suited for 

1934 than it was for 2016. 

So, just consider some of these facts. 

First, the JOBS Act has led to a resurgence in the initial public 

offering, the IPO market, with some 85 percent—yes, 85 percent— 

of IPOs since April 2012 coming from emerging growth companies. 

Second, companies have raised some $50 billion under the new 

Reg D provisions that allow businesses to solicit an offering to the 

general public. 

Third, while the newly modernized Reg A-plus is only a year old, 

businesses are already beginning to issue securities under that exemption. 

And finally, recent reports indicates that the SEC has already received up to 30 applications for portals under the new 

crowdfunding rules, which are set to go into effect next month. 

So while it is clear that many parts of the JOBS Act are working 

as intended, the point of the hearing that we are having today is 

not to say how great we are for doing that, and job well done. For 

starters, because the Senate tried its best, you would say, back in 

2012 to neuter some of the provisions, especially in the 

crowdfunding title, and the SEC has also taken some liberties with 

other rulemakings, the JOBS Act obviously needs a little bit of fixing. 

So I want to thank the gentleman from North Carolina, Mr. 

McHenry, for putting forward the Fix the Crowdfunding Act. What 

does it do? It makes some necessary changes to help ensure that 

Title III reaches its full potential. 

And additionally, I have put forward a bill called the Private 

Placement Improvement Act, which will prohibit the SEC from implementing some burdensome new regulations on Reg D issuers 

that are uncalled for in the JOBS Act. 

We will also consider two other bills today. Mr. Emmer, who is 

here today with us, has introduced an innovative bill that would 

create a safe harbor, if you will, for so-called micro-offerings. And 

Mr. McHenry, again, has another bill, which would raise the 

threshold for when venture capital funds would have to register 

with the SEC. 

So finally, in addition to these targeted fixes, I am also interested in hearing from the witnesses about further areas that Congress should be addressing in order to maintain the competitiveness in our capital markets. For example, we should be exploring 

the cumulative burden that comes with being a public company, including, unfortunately, some of the ridiculous disclosure requirements of the Dodd-Frank Act, as well as the outside influence that 

proxy advisor firms have in the corporate government arena. 

It is also time, finally, to think more about the lack of research 

and liquidity that exists for some public companies and whether 

the Equity Research Global Settlement of 2003 swung the pendulum just too far and has led to a dearth of research for small cap 

funds. 

3 

So these are all very important questions, and I look forward to 

hearing from each one of our witnesses today. 

And with that, I now yield to the ranking member of the subcommittee, the gentlelady from New York, Mrs. Maloney, for 5 

minutes. 

Mrs. MALONEY. Thank you so much for calling this important 

hearing. 

I thank all of our panelists for attending, particularly Mr. Beatty 

and Mr. Griggs, who is from NASDAQ, which is located in the district I am privileged to represent. I look forward to all of your testimony today. 

This hearing will examine four legislative proposals that are intended to make it easier for companies to raise capital. While I am 

interested in hearing our witnesses’ thoughts on these proposals, I 

do have some serious concerns with some of the bills as they are 

written. 

H.R. 4850, the Micro Offering Safe Harbor Act, creates three entirely new exemptions from the requirement to register securities. 

First, the securities will be exempt from the registration requirement if the buyer has a ‘‘substantive preexisting relationship’’ with 

an officer of the company before he buys the securities. 

Second, the securities will be exempt as long as the company 

‘‘reasonably believes’’ that there are no more than 35 buyers who 

have relied on these new exemptions in the previous year. 

And finally, the securities will be exempt if the company hasn’t sold more than $500,000 of securities in the past year. 

Based on the title of the bill, I believe that is intended to apply 

only to very small offerings of securities, or ‘‘micro offerings’’ as 

they are so called. However, the way I read the bill, it actually applies to all offerings, no matter how large, as long as the buyer has 

a substantive preexisting relationship with an officer of the company before he buys the security. 

I am concerned that this would blow a hole in the securities law 

because a substantive preexisting relationship could even be developed during the company’s sales pitch to the investor. 

It is important to note that we are already seeing a trend toward 

the use of unregistered private securities rather than publicly registered securities. In fact, the private securities market is now larger than the public securities market in 2014. Companies raised 

$2.1 trillion through the private securities market, compared to 

only $1.3 trillion through the public securities market. 

I believe we need to take a step back and think about whether 

this trend is a good thing. Clearly, this means that more securities 

are being sold with fewer investor protections. 

Are investors in these securities being harmed or exposed to 

risks that they don’t fully understand? Or are investors capable of 

bearing these risks, which they fully understood before they purchased the securities? These are important questions that I think 

we need to ask 4 years after the JOBS Act. 

Finally, another bill we will consider today, H.R. 4854, would significantly expand the number of investors who can invest in venture capital funds that are exempt from SEC oversight. Under current law, a fund can be exempt from SEC oversight if it has less 

than 100 investors and its securities are not offered publicly. 

4 

A fund with fewer than 100 investors which is not marketed publicly poses fewer investor protection concerns than large funds that 

have lots of retail investors in them. This bill would raise that 

threshold from 100 investors to 500 investors, but only for venture 

capital funds. 

I would like to hear from our witnesses as to why this change 

to such a longstanding rule is necessary, and what problem we are 

trying to solve. 

So I would like to thank all of our witnesses for being here today, 

and I look forward to a robust discussion. 

Thank you so much, and I yield back the balance of my time. 

Chairman GARRETT. I thank the gentlelady, and for her questions that she raises there, as well. 

I now recognize the vice chairman of the subcommittee, Mr. 

Hurt, for 2 minutes. 

Mr. HURT. Thank you, Mr. Chairman. I thank you for holding today’s hearing. 

I am pleased that this subcommittee is continuing its efforts to 

enhance the strength and vitality of our domestic capital markets. 

Four years ago, this committee achieved bipartisan success with 

the JOBS Act, and I remain hopeful that we can continue to improve upon that work. 

Capital formation for small companies is critical to the success 

of our economy. And as I travel across Virginia’s 5th Congressional 

District, my district, I am regularly reminded of how our Nation’s 

small businesses and startups are in dire need of capital, how they 

have trouble accessing capital, and how their potential success is 

often thwarted by outdated and unnecessary policies imposed here 

in Washington. 

While small companies are at the forefront of innovation and job 

creation, these same companies often incur obstacles in obtaining 

funding in the capital markets. The JOBS Act sought to remove 

some of these burdens by recognizing that our securities regulations are often written for larger companies. 

Today, we have four additional legislative proposals that all seek 

to expand and improve access to capital for our small businesses 

and startups. These proposals are aimed at amending the JOBS 

Act to enhance capital formation for small companies and their investors. 

Small companies, as we all know, are the backbone of our economy and our Nation’s most dynamic job creators. We must do everything possible to help them succeed. And if we can do so without 

compromising investor protection and transparency, then we must 

embrace these ideas. 

The ideas we are discussing today are a step in the right direction, and I thank the sponsors for their work on this legislation. 

I look forward to the testimony of our distinguished witnesses, 

and I thank you for your appearance before our subcommittee 

today. 

Mr. Chairman, I thank you, and I yield back the balance of my 

time. 

Chairman GARRETT. I thank the gentleman. 

We now turn to our panel before us. 

5 

Some of you have been here before; some have not. You will each 

be recognized for 5 minutes, and without objection, your full written statements will be made a part of the record. 

We will begin with Mr. Atkins. 

Welcome to the panel once again. It is good to see you. And you 

are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE PAUL S. ATKINS, CHIEF 

EXECUTIVE OFFICER, PATOMAK GLOBAL PARTNERS, LLC 

Mr. ATKINS. Good morning. Thank you very much, Chairman 

Garrett, Ranking Member Maloney, and members of the subcommittee, for inviting me to testify today. 

My name is Paul Atkins. I am CEO of Patomak Global Partners 

here in Washington, D.C.; and for 6 years, ending in 2008, I served 

as SEC Commissioner. 

Small businesses are vital to our Nation’s economy. Startups and 

young companies are a primary driver of job creation. 

If we are serious about spurring real economic growth, creating 

more jobs outside of Washington, D.C., and breaking down our twotiered economy, we do not need higher taxes or more government 

spending. Instead, we need more entrepreneurs and small businesses and a sensible regulatory environment in which these individuals and firms can succeed. 

The bipartisan JOBS Act proves that you do not need hundreds 

or thousands of pages of complex legislation to help Main Street 

businesses and protect consumers and investors. At only 22 pages, 

the JOBS Act has already achieved significant results for small 

businesses seeking access to much-needed capital while at the 

same time maintaining important investor protections and providing more opportunities for Americans to put their hard-earned 

dollars to work investing in America’s future. 

Thanks in large part to the IPO On-Ramp, 2014 was the best 

year for IPOs since 2004, with emerging growth companies taking 

advantage of the on-ramp’s scale, disclosure, and reporting requirements, all of which make public offerings more attractive for smaller companies while preserving essential information for investors. 

More IPOs generally means more jobs. 

Thanks to Titles II and IV, we are also seeing issuers and investors starting to take advantage of offerings using general solicitation and the amended Reg A-plus exemption. Just 4 years after its 

enactment, the JOBS Act has helped rationalize and modernize the 

current regulatory environment to better serve small companies 

and investors alike, but the job is not done. 

The Obama Administration continues to bury small businesses 

under record amounts of red tape. I believe that a major cause of 

the uncertainty still handcuffing our economy is, in fact, government policy, particularly the sweeping Dodd-Frank Act. 

The real tragedy behind Dodd-Frank and the hundreds of other 

major rules flowing from Washington every year is that consumers, 

investors, and small businesses are harmed the most. It is no surprise, then, that major small business surveys recently have highlighted government regulation and access to credit as being among 

the most significant growth concerns currently facing small companies. 

6 

The SEC, which has a statutory mandate to facilitate capital formation, has also neglected small business or, worse, firmly placed 

itself in the way of positive reform. The SEC could have implemented the provisions of the JOBS Act on its own, but instead the 

agency did neither, burying its head in the sand while Congress 

went to work. In fact, instead of fulfilling its core mission, the SEC 

has misprioritized its resources by focusing first on Dodd-Frank 

rules that do not address the real causes of the financial crisis and 

only add to the regulatory burden already weighing on our economy. 

Finally, when faced with a clear JOBS Act mandate to simplify 

and lift the ban on general solicitation, the SEC chose on its own 

to slow the pace of reform by issuing an additional rule proposal 

to amend Reg D in ways that would fundamentally undermine the 

purpose of the JOBS Act. 

The proposal would add unnecessary costs and burdens on small 

issuers and investors seeking to take advantage of general solicitation under Section 506(c)—for example, first, by making issuers 

submit two additional Form D filings; second, by imposing a draconian 1-year ban on using Rule 506 for failing to comply with the 

Form D filing requirements even for a foot fault; and third, by forcing issuers to file all general solicitation materials with the SEC. 

Now, I have talked to lawyers, law professors, and venture capital investors in Silicon Valley and elsewhere, and they advise 

would-be issuers to shun—not use at all—506(c) offerings because 

of the uncertainty and the potential for ‘‘gotcha’’ enforcement actions by the SEC and, I think, by the States, as well. Indeed, because the nature of these nonpublic offerings means that it is hard 

to define a beginning and an end to the potential securities offering, the potential for ‘‘gotcha’’ enforcement actions with these offerings is real and a trap for the unwary. 

Chairman Garrett’s bill, the Private Placement Improvement 

Act, would go a long way towards allowing issuers to use 506(c) in 

the manner Congress intended. 

Over the last 51⁄2 years, this committee has been at the forefront 

of helping America’s small businesses grow and create jobs. I thank 

you for all your efforts and for the opportunity to testify here today. 

Thank you very much. 

[The prepared statement of Mr. Atkins can be found on page 44 

of the appendix.] 

Chairman GARRETT. And I thank you. 

Next, Mr. Beatty, welcome, and you are recognized for 5 minutes. 

STATEMENT OF WILLIAM BEATTY, DIRECTOR, DIVISION OF 

SECURITIES, WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS, ON BEHALF OF THE NORTH AMERICAN 

SECURITIES ADMINISTRATORS ASSOCIATION, INC. 

Mr. BEATTY. Thank you. 

Good morning, Chairman Garrett, Ranking Member Maloney, 

and members of the subcommittee. My name is Bill Beatty. For the 

past 30 years I have worked as an attorney in the securities division of the Washington State Department of Financial Institutions, 

and since 2010, I have served as the department’s securities director. 

7 

I am also a member of the North American Securities Administrators Association (NASAA), having served as the Association’s 

president from 2014 to 2015. Since October of 2015, I have served 

as Chair of NASAA’s Committee on Small Business Capital Formation. 

My many years in securities regulation have led me to the inescapable conclusion that successful capital formation must include 

robust investor protection. I am honored to testify before the subcommittee today on these four legislative proposals. 

The first bill, the Private Placement Improvement Act, limits the 

SEC’s authority to revise filing requirements for Regulation D. As 

we know, Title II repealed the longstanding prohibition on general 

solicitation and advertising under Rule 506. State securities regulators remain deeply concerned about the potential negative impact 

of these changes on investors. 

When the SEC adopted these rules to implement Title II in 2013, 

it also voted on proposed rules that would mitigate the risk to ordinary investors in 506 offerings. These included requiring a prefiling 

of Form D when issuers intended to advertise and imposing penalties on issuers who failed to file Form D. Form D is crucial to 

State securities regulators like me because it is often the only information we can use to determine if an issuer is conducting an offering in compliance with a lawful exemption. 

By prohibiting the SEC from adopting these commonsense investor reforms, the bill would tie the hands of the SEC to implement 

the few investor protections it has adopted or proposed in connection with Rule 506 and undercut the SEC’s most promising efforts 

to gather data and additional information about the 506 marketplace. NASAA is strongly opposed to any action by Congress to diminish the ability of the SEC to address the risks to investors resulting from lifting the ban on general solicitation. 

Finally, we take issue with the suggestions that filing of Form 

D is an onerous regulatory or compliance burden. Form D is a 

short form filed electronically. It captures 8 pages of information 

and is minimal, relative to the information in the issuer’s offering 

documents. 

Moving to the Micro Offering Safe Harbor Act, which would 

amend section four of the Securities Act and also preempt State securities offerings, we remain—we are deeply concerned about this 

bill as well. Notwithstanding the title, the new exemption would 

not be limited to micro offerings. In fact, it would permit the raising of unlimited amounts of money. 

The bill would not prohibit general solicitation, disqualify bad actors, limit offering amounts, or even permit notice filings to State 

or Federal regulators. It would not impose a holding period or other 

restrictions on resale of securities purchased under these new exemptions, making these offerings highly susceptible to price manipulation and pump-and-dump schemes. 

The bill would also make the task of policing the unregistered securities marketplace much more difficult for securities regulators. 

The new exemption established by the bill would likely supplant 

Rule 506, but without the basic information provided in Form D. 

Beyond these overarching concerns, each of the new safe harbors 

is discussed in my written comments. 

8 

Moving finally to the Fix Crowdfunding Act—proposing revisions 

to Title III, State securities regulators understand the theoretical 

basis for several of the proposed amendments and we do not necessarily oppose them. We also appreciate Congress’ frustration that 

Federal crowdfunding has yet to take effect. It has been 4 years 

since the passage of the JOBS Act, and during that time dozens of 

States have adopted and implemented intrastate crowdfunding exemptions. 

However, the critical point for Congress today is that there is no 

answer to the question of how to fix Federal crowdfunding because 

we do not yet know what will work, what won’t work, or what the 

new marketplace will look like. There is no data whatsoever about 

Federal crowdfunding, and only limited data about what is working 

at the State level. 

By contrast, several years from now there will be a wealth of 

data both from State and Federal crowdfunding regimes. 

State securities regulators urge Congress to refrain from amending Title III of the JOBS Act at this time. We believe that to enact 

legislation at this point would be counterproductive and premature. 

Instead, we urge Congress to closely monitor the implementation 

of Regulation CF, State crowdfunding exemptions, to conduct oversight and gather information about the new marketplace. With the 

coming implementation of Federal crowdfunding rules and with 

intrastate crowdfunding already available in the majority of States, 

we shall very soon learn whether and how these new capital-raising tools will be used. 

Thank you again, Chairman Garrett and Ranking Member Maloney, for the opportunity to testify before the subcommittee today. 

[The prepared statement of Mr. Beatty can be found on page 55 

of the appendix.] 

Chairman GARRETT. I thank you, Mr. Beatty. 

Next up, Mr. Griggs. Welcome, and you are recognized for 5 minutes. 

STATEMENT OF NELSON GRIGGS, EXECUTIVE VICE 

PRESIDENT, NASDAQ 

Mr. GRIGGS. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee, for the opportunity to 

testify on JOBS Act four. The work of this subcommittee to push 

forward the JOBS Act is a great achievement of Congress and a 

shining example of bipartisanship and statesmanship. However, 

there are issues that remain affecting private companies’ view of 

the public markets today. 

Capital formation and job creation are the NASDAQ’s DNA. We 

brought the capital markets a trusted listing venue and the 

changed view that companies can go public earlier in their growth 

cycle, dispelling a common Wall Street perception about when companies should go public. NASDAQ recognized that while most companies wanted access to capital, investors also want access to companies at earlier stages of the growth cycle. 

In the same vein, since the enactment of the JOBS Act, 

NASDAQ has created the NASDAQ Private Market (NPM). We established NPM to meet the unique needs and challenges of today’s 

top growth companies. 

9 

Thus, NASDAQ, we feel, is uniquely qualified to speak about 

both public and private markets. 

Four years have passed and the evidence is clear: The JOBS Act 

has successfully helped hundreds of companies to go public while 

generating new dynamics in the private space. In fact, 785 companies have gone public, leveraging the Emerging Growth Companies 

Act, and have raised over $103 billion to expand, hire, and compete 

on a global stage. And approximately 1,000 registration statements 

have been filed with the SEC confidentially. 

From our vantage point, the JOBS Act has not resulted in diminished investor protection, an important outcome as you consider 

moving forward with reforms. 

Without question, NASDAQ believes the most successful provision of the JOBS Act has been the ability for companies to file confidentially. This has been most evident in the increased number of 

IPOs in the biotech and life science sectors. Many quality companies have been able to work with the SEC to finalize their registration without public disclosure of their competitive proprietary information, and companies can better manage their decisions to go 

public as they evaluate market conditions. 

Because confidential filing has improved the IPO process without 

decreasing investor protection, we believe Congress should go one 

step further and allow companies of all sizes to file on a confidential basis and also allow other types of registration statements to 

be filed confidentially. 

So turning to some challenges that we see facing public companies today that I hear day in and day out from our listed companies, which create a negative light on entrepreneurship views of 

going public, for example, certain investors who accumulate long 

positions today are required to do public disclosures of their holdings, but there are no corresponding obligations for short-sellers to 

do so, even though the same policies of transparency, fairness, and 

efficiency apply. 

We believe that some enhanced disclosure of short positions that 

matches disclosure for long requirements is warranted. From a 

company perspective, this lack of transparency has a real negative 

impact because it deprives a company of insights into trading activity and limits their ability to manage and engage with investors. 

With respect to proxy advisory firms, we remain concerned that 

these firms do not always conduct their standard-setting in a fair 

and transparent manner. We are pleased that the SEC issued guidance regarding the use by investment advisories—advisors of proxy 

advisory firms, but it is apparent that much more work needs to 

be done here. 

Last year, NASDAQ partnered with the U.S. Chamber on a survey of public companies’ experience in the 2015 proxy season. Over 

155 companies responded, and it is apparent that companies continue to have difficulty providing input to advisory firms or even 

having errors corrected. 

Lastly, with respect to the PCAOB, public companies, especially 

smaller ones, face increasing auditing costs. While companies do 

not object to costs that provide equal investor benefit, the companies claim that some of these costs are the result of nonsensical, 

one-size-fits-all application of guidance and feel they are stuck beVerDate Nov 24 2008 19:13 Jun 22, 2017 Jkt 023890 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\23890.TXT TERI
10 

cause auditors claim that they must comply with the PCAOB. For 

these reasons, we believe the PCAOB should be required to establish an ombudsman’s office as a resource for companies to bring up 

issues that they have. 

So I want to commend the subcommittee for its continued work 

to help capital formation with the bipartisan passage of the last 15 

capital formation bills, including the RAISE Act, authored by Representative Patrick McHenry and strongly supported by NASDAQ. 

I also want to thank you, Mr. Chairman, for your leadership in 

offering an important bill, the Main Street Growth Act, to foster 

creation of venture exchanges. We certainly appreciate the discussion on this and we look forward to being a participant moving forward. 

The subcommittee has asked NASDAQ to comment on the four 

proposals aimed at fostering capital formation, and I have done so 

in my written testimony. We are in favor of the efforts here and 

look forward to supporting them as they move forward. 

Thanks very much for your time, and I appreciate the attention. 

[The prepared statement of Mr. Griggs can be found on page 68 

of the appendix.] 

Chairman GARRETT. Thanks for your testimony. 

Next up, Mr. Keating. Welcome, and you are recognized for 5 

minutes. 

STATEMENT OF RAYMOND J. KEATING, CHIEF ECONOMIST, 

SMALL BUSINESS & ENTREPRENEURSHIP COUNCIL 

Mr. KEATING. Chairman Garrett, Ranking Member Maloney, and 

members of the subcommittee, thank you very much for hosting 

this important hearing today on the JOBS Act and the need to enhance capital formation. And I appreciate the invitation. 

My name is Raymond Keating. I am chief economist with the 

Small Business and Entrepreneurship Council. We are a nonpartisan, nonprofit advocacy and research and training organization dedicated to protecting small business and promoting entrepreneurship. 

Access to capital has been a key issue, a central issue for SBE 

Council since our very founding. Indeed, access to financial capital, 

whether via equity or debt, is vital for entrepreneurs seeking to 

start up, operate, or expand their businesses. But at the same time, 

gaining access to capital has remained an enduring challenge for 

many, if not most, small businesses. 

Long after this last recession and the start of this recovery, the 

value of small business loans outstanding is still down notably 

from the recent high set in 2008. In fact, there has been really no 

growth over the last decade. When you look again at the small 

business share of business loans, the value has also declined markedly; also the number of small business loans. 

On the equity side, angel investment is a critical source of funding for startups and early-stage businesses. But here, again, the 

story has been one of underperformance and sluggishness in recent 

years. For all of 2014, the most recent year that we have full data 

for, those numbers are still down from the recent high hit in 2007. 

So based on these numbers, the struggle for entrepreneurs to 

gain access to the financial resources needed to start up, operate, 

11 

or grow continues to be difficult. There are many reasons for this, 

including the state of the economy; certainly the policy environment, including regulations, and not just regulation directly imposed on small businesses but also on financial institutions. After 

all, they are the source of capital. 

The bottom line is that small businesses need more avenues to 

expand access to financial capital. In the midst of these struggles, 

of course, the JOBS Act was passed by Congress’ bipartisan effort 

and signed by the President 4 years ago. And the focus here was 

on helping to stimulate the U.S. economy by promoting capital formation. 

There have been clear positives resulting from the JOBS Act. We 

have heard some of that already. 

I looked at an interesting summary analysis done by 

Locavesting.com, and it is outlined in my testimony. One point I 

would like to highlight from that is under Title II of the JOBS Act, 

allowing accredited investor crowdfunding, in effect, by letting private companies conducting private placement under Reg D Rule 

506 to publicly market the offering. Before that, of course, they 

couldn’t do that. 

And we saw the results. They note, Locavesting, that in the first 

2 years there have been more than 6,000 offerings conducted under 

Title II. 

Of course, Title II goes into effect on May 16th of this year, allowing for public, including non-accredited investors—crowd—investors—investment crowdfunding to take place on SEC-sanctioned 

funding portals. As I say, like Kickstarter for investing, 

crowdfunding promises to release an immense pool of capital that 

has been locked away from entrepreneurs—those entrepreneurs in 

search of start-up and growth capital. 

Even given the significant and positive changes being brought 

about for entrepreneurs and investors with the JOBS Act, there are 

areas in need of improvement. A serious concern persists regarding 

extra government regulation or placing too many limitations on the 

ability of entrepreneurs to gain access to capital and/or on investors’ abilities to make investments in entrepreneurial ventures. 

In terms of making headway toward reducing the costs for entrepreneurs, SBE Council supports the four legislative initiatives that 

we are considering here today. 

In terms of one of those, the Private Placement Improvement 

Act, that would amend Federal securities law to ensure that small 

businesses do not face complicated and unnecessary regulatory burdens when attempting to raise capital through private securities offerings under SEC Regulation D, we are certainly on board with 

that effort and the other pieces of legislation offered here today. 

To sum up, the effort behind the JOBS Act was to expand entrepreneurial opportunities in the financial area and in the broader 

economy. Those four legislative measures would make further 

headway in a positive, pro-entrepreneur direction. 

Thank you for your time and attention, and I look forward to answering any of your questions. 

[The prepared statement of Mr. Keating can be found on page 74 

of the appendix.] 

Chairman GARRETT. Thank you. 

12 

Last but not least, Mr. Laws, you are welcome and recognized 

now for 5 minutes. 

STATEMENT OF KEVIN LAWS, CHIEF OPERATING OFFICER 

AND CHIEF INVESTMENT OFFICER, ANGELLIST 

Mr. LAWS. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee, for this opportunity. 

I am here as the chief operating officer of AngelList, an online service that connects companies seeking funding with both angel investors and professional investors. 

Since the JOBS Act was passed 4 years ago, and the SEC issued 

several clarifying letters, AngelList launched what we call our syndicate service. A syndicate allows an experienced accredited investor who is putting his or her own money into an early-stage startup 

to make that investment available to other angels and professional 

investors online. 

Online investors are grouped into a single fund that follows along 

with the lead investors. Companies like this option because it allows them to deal with just one investor and to raise capital more 

quickly; and investors like it because they get the protection of an 

experienced lead investor with skin in the game. 

All of this was enabled by the JOBS Act and subsequent SEC 

rulings. 

Since launching syndicates in 2013, we have helped over a quarter-billion dollars in capital reach early-stage startups. And I know 

that number seems small by Wall Street standards, but these are 

the newest companies that just need a little money to get off the 

ground. That quarter-billion dollars went into almost 1,000 companies. 

And we are just one of many such platforms. For example, 

CircleUp focuses on helping consumer products companies the way 

we help technology companies, and there are many more. 

So first, I want to thank Congress—in particular, the leadership 

of this committee, Congressman McHenry, and the White House— 

for the changes brought about by the JOBS Act. It helped many 

new companies, ranging from those producing electric bicycles to 

Uber; from Spire Global, that launches and rents imaging satellites 

by the hour, to Cruise Automation, which General Motors just paid 

over $1 billion to acquire so they can compete in self-driving cars. 

All of these new companies raised early money on AngelList, all 

because of the JOBS Act. It not only helped these companies create 

jobs, but they are also producing innovations that help the American economy. 

Second, I want to discuss a few of the bills under consideration 

by this committee. As online fundraising becomes more common because of the JOBS Act, companies are bumping up against the 

limit of 99 investors acting as a group that can invest in a company. 

On our platform alone, we have hit that limit dozens of times, 

leaving tens of millions of dollars that didn’t go into good startups. 

And we are not alone. We represent a small portion of the capital 

invested in startups. 

13 

The Angel Capital Association includes many angel groups with 

more than 99 members. They need to reduce the amount given to 

growing companies sometimes to comply with this law. 

Raising the limit to 499 would help with capital formation at 

that early stage. H.R. 4854 updates the law for today’s technologies 

but maintains reasonable limits that keep it focused only on investment in small venture opportunities so that there aren’t unintended consequences. Anybody seeking to break this law can already do so by ignoring the 99-investor limit, so this law simply 

provides guidelines for legitimate players to help companies get 

capital that they need legally. 

Next up, crowdfunding. While AngelList has worked only with 

accredited investors for the last few years, some of the opportunities on AngelList have been targeted to larger groups of online investors, the so-called accredited crowdfunding. As a result, we devised methods that protect investors’ interests while still encouraging capital formation for good companies. 

Unfortunately, many of those innovations would not be legal for 

unaccredited investors under the crowdfunding rules. AngelList 

filed comments with the SEC on the rules and I have attached that 

letter as part of my written testimony. 

H.R. 4855 takes into account the experience AngelList and others 

have had in the real world with accredited investors over the last 

3 years. The investor protections of a lead investor and syndicate, 

for example, would be made legal for crowdfunding, also. 

Additional measures ensure that crowdfunding doesn’t become so 

onerous that only companies accredited investors don’t like would 

use it. I applaud the goal of preventing fraud, but we have to do 

it in ways that don’t simply guarantee low returns for the crowd 

while giving wealthy investors first look at the good opportunities. 

Finally, on H.R. 4852, the Private Placement Improvement Act, 

I have also included our letter to the SEC in my written testimony. 

We support the SEC’s stated goals of information-gathering and 

transparency. Unfortunately, the draft regulations currently under 

consideration wouldn’t just measure; they would adopt rules that 

startups would most certainly violate by accident. 

For example, startups don’t have the money to hire lawyers before they raise the money, but the proposed rules say they should 

already know they need to file 15 days before even mentioning 

their fundraising—something they would only learn from their lawyer. In our letter we proposed several ways the SEC could use technology to achieve the same transparency without impairing earlystage fundraising. These more modern methods would still be viable under H.R. 4852, which we support. 

In closing, I would like to thank you for this opportunity to share 

our experience with the JOBS Act. The start-up community deeply 

appreciates your continued attention to the issues affecting capital 

formation for very young companies. 

This is an unusual issue because most startups that will benefit 

from your work don’t exist yet. With your continued support, we 

hope thousands more of them can make use of the JOBS Act to do 

what Congress intended: raise capital more easily so they can 

grow, create more jobs, and innovate. 

Thank you. 

14 

[The prepared statement of Mr. Laws can be found on page 89 

of the appendix.] 

Chairman GARRETT. Thank you. 

This is fascinating. I appreciate all the members on the panel. 

I will now recognize myself for 5 minutes for questions. 

I will start with Mr. Atkins. You testified on this both in your 

testimony and just right now, as well, with regard to the proposed 

new restrictions of Reg D and including requirements as far as filing Form D, and before an offering is completed. You also just mentioned the fact as far as the 1-year ban on offerings. 

So I am going to give you one, two, three quick questions to recapsulize that. 

One, do these requirements that are out there do anything to enhance investor protection? Two, from your viewpoint, is the mere 

existence—and you sort of touched on this—of these proposals, 

even without the SEC implementing them, putting a lid on the 

506(c) market? And three, is this doing—and I will go back if you 

want me to—anything that is burdensome now to your colleague 

next to you, as far as the State regulators doing their jobs, if we 

don’t go in that direction? 

So the first thing is, is this doing anything to advance investor 

protection, what the SEC is doing? 

Mr. ATKINS. I think when you look at the SEC’s own statements 

from its economists and whatnot, they show that there really is no 

fraud coming out of the JOBS Act, and especially 506. So I think 

that is attributable to it. 

I don’t think that these things are advancing investor protection 

at all. I think that what—if anything, it is dampening— 

Chairman GARRETT. That is the second point. You said it is 

dampening, why? The attorneys are recommending to them— 

Mr. ATKINS. Right. Basically they are saying that you should not 

use 506(c) because of the uncertainty behind it and there are other 

ways to do it. And so it is really putting a damper on the ability 

of people to make use of the JOBS Act provisions. 

Chairman GARRETT. I will throw that same question over—Mr. 

Griggs, if you were listening, too, at the same time, in general, as 

we go down the three points as far—is there a dampening effect of 

the proposed rules? On the flipside, should we have it for investor 

protection? 

Mr. BEATTY. I think that from my conversations with the lawyers 

in my community—I’m sorry. 

Chairman GARRETT. I was going to Mr. Griggs actually on that 

one. 

Mr. BEATTY. I’m sorry. I misheard. 

Chairman GARRETT. That is okay. 

Mr. Griggs? 

Mr. GRIGGS. Yes. NASDAQ is not very involved in Reg D offering. We don’t feel that investor protection, though, as we have seen 

it, has been harmed in any way, so we are supportive. 

Chairman GARRETT. Okay. 

And I want to jump down to Mr. Laws on where you were going. 

Well, one flippant sort of answer—response to the problem of—you 

raise a really crucial aspect is how do these people get into the 

marketplace and how do they know what the rules are without the 

15 

lawyers there beforehand? How do they get the money to hire the 

lawyers? 

Should we have a legal aid society for these—I am just being facetious on— 

Mr. LAWS. There do exist such things that the startups, when 

they first do their fundraising, don’t even know those exist. It is 

the first thing they think of when they start. 

Chairman GARRETT. So, Mr. Keating, right now I—maybe right 

about now there are oral arguments in the challenge to the SEC’s 

final Reg A-plus set to begin this morning in the D.C. Circuit 

Court. And as you know, as the JOBS Act was being developed, 

many reports, including one from the GAO, pointed out that the 

maze of State registration requirements was a direct cause for the 

lack of Reg A offerings over the years, and that is basically what 

we have been sort of hearing this morning. 

In your testimony, you refer to Reg A-plus as the sleeper of the 

JOBS Act. Can you just delve in a little bit more as to what the 

effect on the Reg A market would be if the State challenges prevailed in the court arguments today? 

Mr. KEATING. Sure. The bottom line is, why has Reg A-plus 

worked, providing various relief from the regulations you mentioned? 

I am an economist. I like to look at the results. So when you see 

reports in terms of this being the sleeper and in terms of entrepreneurial ventures that have found funding where they wouldn’t have 

found funding before, for example, this is exciting stuff. 

This is exactly what we want to see done. Why would we want 

to backtrack on that for, from what I can see, no good reason from 

an investor protection standpoint or—you don’t want to get caught 

in that regulatory turf game that we see so much in government, 

which may be the reason we got into some of this. 

Chairman GARRETT. I will throw this out to a couple of you. 

Maybe I will start with you, Mr. Keating. 

You say you like to hear the data and what have you. Mr. Beatty 

was raising the argument that so would he, that he would like to 

have the data before we move forward on a number of these—certain ones of these provisions on the State level and see how it plays 

out first. 

So is that an argument? Maybe we should just be waiting on this 

and let the—just put a hold on it, let the SEC continue— 

Mr. KEATING. What we have seen in our results, as I mentioned 

in my testimony, the results of the various titles— 

Chairman GARRETT. So the results are in. 

Mr. KEATING. —and what is going on—right. So we see results; 

we see positive benefits. 

And not just here. There are examples internationally. I mentioned in my testimony the United Kingdom and what they have 

done there and the tremendous growth we have seen in 

crowdfunding, both debt and equity crowdfunding there, and they 

have done it very smart from a regulatory standpoint, relying very 

much on the crowd, if you will. 

So there are plenty of examples for us to understand. I, as an 

economist, fall back to Economics 101 and understanding incentives and how the private market works and are there incentives 

16 

to present a good, solid platform that provides great opportunities 

for investors. 

Chairman GARRETT. So the two takeaways is, is this working, 

and Congress needs to go back to Economics 101 class. 

Mr. KEATING. Yes. 

Chairman GARRETT. Okay. 

Mr. KEATING. Yes. 

Chairman GARRETT. With that—also a flippant comment—I will 

now recognize the ranking member of the subcommittee, the 

gentlelady from New York, Mrs. Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman. And I ask unanimous 

consent to place in the record testimony from the University of 

Denver. 

Chairman GARRETT. Without objection, it is so ordered. 

Mrs. MALONEY. Okay. 

Mr. Beatty, I would like to ask you about the Micro Offering Safe 

Harbor Act. In your testimony you said that this bill would expose 

retail investors to ‘‘literally unlimited investment risks.’’ 

Can you talk about why you think this bill is so broad? Is it because companies could sell unlimited amounts of securities to buyers that they have a preexisting relationship with? Is that the main 

challenge that you see with this bill? 

Mr. BEATTY. Yes, it is one—it is the main challenge I see. 

Creating a substantial preexisting relationship is not a hard 

task. Certainly, we have seen it down through the years through 

SEC interpretations where an issuer can create a relationship to 

investors by dealing with a broker-dealer who has established a relationship. 

More recently we have seen basically advice that seems to authorize the idea that a relationship could be established through an 

issuer questionnaire— 

Mrs. MALONEY. If I could follow up on that— 

Mr. BEATTY. Certainly. 

Mrs. MALONEY. —would your view of the Micro Offering Safe 

Harbor bill change if a company had to comply with all three of the 

requirements in the bill in order to take advantage of the relief? 

In other words, what if the bill was limited to $500,000-worth of 

securities a year, to no more than 35 investors, and they all had 

to have a preexisting relationship with an officer of a company? 

Would that— 

Mr. BEATTY. I think that makes it better. If the true purpose 

here is to create an offering for micro type of offerings, that already 

exists. Rule 504 has been around for decades, and allows offerings 

up to $1 million with a very simple filing. 

I would also note that many States—almost all States that I am 

aware of—have specific small offering exemptions for these types of 

very small capital-raising, usually with a very minimal notice filing 

and very low fees. 

Mrs. MALONEY. In your testimony you noted that you had serious 

concerns about the Private Placement Improvement Act because it 

would weaken the few existing investor protections in Rule 506. 

Can you elaborate on which investor protections this bill would 

weaken and which protections do you think are the most imporVerDate Nov 24 2008 19:13 Jun 22, 2017 Jkt 023890 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\23890.TXT TERI
17 

tant? Do you think these investor protections are particularly onerous for companies? 

In other words, are any of these protections really preventing 

any companies from raising capital? 

Mr. BEATTY. I think one of the main features of the Improvement 

Act would be to allow—would require only one filing of the Form 

D. Right now there is a requirement to file amendments, and of 

course, the proposed rules posited the idea of perhaps a prefiling 

in the case of a general solicitation. 

The only data we have available to us in the State on these types 

of offerings is the Form D. And unlike the SEC, we look at them. 

We run the officers through databases; we check on who might be 

selling them. 

We are concerned about these offerings, and many times they are 

conducted lawfully, but once in a while we will find something. And 

perhaps more importantly, if an investor is solicited and they are 

unaware of—have questions, they pick up the phone and they call 

us. And if the only thing that we can say is, ‘‘Well, we don’t have 

any information about this; you should be careful,’’ that is really 

not providing a very good service to our constituents. 

Mrs. MALONEY. Thank you. 

Mr. Keating, the SEC just recently completed its crowdfunding 

rules, which are set up to take effect next month, and I was a 

Democratic sponsor of the original bill. Should we wait until we 

have some experiences from crowdfunding before we move forward 

with the other significant changes in crowdfunding exemptions? 

And also, you mentioned you had studied what had happened in 

England. Has crowdfunding been used not only for the private sector but for public purposes, for good—not-for-profits? Have they 

used crowdfunding for public service endeavors also in England, or 

is it just limited to private sector investment opportunities? 

Mr. KEATING. I can’t speak to that. I know early on during this 

whole process, one of the examples that was mentioned for 

crowdfunding was the Statue of Liberty, the money being raised on 

that front. 

Mrs. MALONEY. Yes. 

Mr. KEATING. It was done in that manner. 

Mrs. MALONEY. I think it could be public-funded, too. 

Mr. KEATING. Right. 

Mrs. MALONEY. Don’t you think we should wait a little bit before 

we come forward with a little—all these changes that— 

Mr. KEATING. No, because I don’t— 

Mrs. MALONEY. The rules haven’t even gone into effect. 

Mr. KEATING. No, I don’t, and the reason is, like Mr. Laws mentioned, we are talking about the entrepreneurs here that drive our 

economy, that create jobs, things that we desperately need. We desperately need more growth and more jobs in this country, so why 

would we want to, for example, have any kind of—again, within 

the boundaries of what we laid out so far legally—but why not extend the opportunity to more people? Why would we want to leave 

money on the table, if you will, for those looking to raise funds to 

build businesses and create jobs? 

So if there is an opportunity, for example, in crowdfunding in 

Title III to raise the limit, yes, I think that is a great idea. My job 

18 

is to open more opportunity for small businesses by reducing their 

regulatory burdens, and I think that is a great idea. 

Mrs. MALONEY. My time has expired. Thank you. 

Chairman GARRETT. The gentlelady’s time has expired. Thank 

you. Thank you for the questions. 

We are joined now by the sponsor of the McHenry bill, Mr. 

McHenry. 

Mr. MCHENRY. Thank you, Chairman Garrett, and thank you for 

having this hearing, Mr. Chairman. 

And I thank you all for your testimony. 

I will begin by asking Mr. Keating a question. You say that angel 

investment is a critical source for startup and early-stage business 

capital, but you also note that angel investment is still sluggish. 

What are the dynamics at play? 

Mr. KEATING. Yes. It is sluggish. I have laid out some charts in 

my written testimony. 

I think there are all sorts of dynamics at work here. I mentioned 

the state of the overall economy, but you have to look at issues on 

the public policy front, and I think you have to look at regulation 

and how much uncertainty is created. What are the costs? 

From a small business perspective, you have to plug this whole 

debate into the overall regulatory picture, and that has been a very 

ugly picture from a small business perspective in recent years. 

So where we have—we either have uncertainty in so many areas, 

or where we don’t we have increased costs. The JOBS Act has been 

a wonderful exception to that, where it was a deregulatory effort, 

a reform effort that really expanded opportunity for small businesses to get access to capital. 

So yes, I think part of the question on the angel investor front 

comes from the regulatory aspect, absolutely. 

Mr. MCHENRY. So as an economist, you can perhaps state this 

more succinctly than I, but if you are capped at 99 investors you 

have to have 99 much larger investors than perhaps 150 smaller 

investors. And there is a cost associated with that, is there not? 

Mr. KEATING. Absolutely. As I said, you want to—you don’t want 

to—from a small business, pro-growth, pro-entrepreneurial perspective, you don’t want to be leaving anything—anybody out of this 

equation that obviously is—that understands what they are getting 

into. 

And it is important to mention—fraud is thrown around a lot, 

but fraud is not the same thing as risk in the marketplace; it is 

not the same thing as business failure; it is not the same thing as 

losses. Those things are all going to happen in the real world of 

business, so as long as people understand that— 

Mr. MCHENRY. Mr. Laws, for that point, in your experience, this 

99-investor cap, coordinating investment pools in conjunction with 

that—I had this example presented to me yesterday that one group 

decided they would only have 84 investors because the length of 

the hold they believed that there would be deaths and divorces, 

and as such, that number would rise and they didn’t want to imperil the longer-term hold of it. 

Are there examples like that, that you could mention to us 

today? 

19 

Mr. LAWS. Most certainly. I have mentioned that as a 99-investor 

limit we happen to, at the advice of our lawyers, use a 90-investor 

limit for that exact reason, because the courts will sometimes force 

you to add new investors when they split somebody’s holding because of a death or a divorce and an inheritance situation. So it is 

actually, for practical purposes, a 90-investor limit or 84-investor 

limit in this case. 

We are just hitting it more and more often—with sophisticated 

accredited investors, I should specify. This is still within the sophisticated accredited community. 

Mr. MCHENRY. Shifting to the Fixing Crowdfunding Act, we 

have—there has been discussion about the problems with Title III 

as enacted and the problems with the over 500 pages of regs that 

the SEC has written. And so, Mr. Laws, in your opinion, if Congress doesn’t amend Title III of the JOBS Act, will its intent actually be useful? 

Mr. LAWS. I think it is actually a little dangerous as it exists 

now, primarily because of this risk that what we will create is a 

kind of guaranteed set of bad investments. They won’t be fraud; 

they will just be bad investments because it will be used by companies that can’t raise using the Title II of the JOBS Act. 

And so I would want to make sure that the crowd gets an opportunity to get into the good investments, so it is something that the 

fixes will help balance the investor protections with making sure 

that the good investments will also use Title III. 

Mr. MCHENRY. So at the current pace you see this as a potential 

marketplace for major problems. 

Mr. LAWS. I think it is a danger. I think there are some good 

companies that will use it, primarily for publicity. But I don’t see 

it yet as something that is a true alternative to Title II for those 

companies that have access to Title II. 

Mr. MCHENRY. What is the most important thing or two that you 

would point out, in terms of our action here in Congress? 

Mr. LAWS. I think the most important for that side of it are, first 

of all, being able to bring in some investor protections, frankly. 

There is one section in the Fix Crowdfunding Act that adds the 

ability to create these syndicates, the funds where a lead investor 

looks out for the interests of the crowd. 

The other is this notion, the 12G problem, so called, where as 

soon as you cross $25 million in assets, if you have a large enough 

crowd then you have to start registering the same way a public 

company does—$25 million is the next financing round for a successful company. So if you are a high-growth company you would 

now avoid crowdfunding because of the danger of as soon as you 

raise your next round from a V.C., suddenly you are not private 

anymore. 

So I think those are two of the primary ones. 

Chairman GARRETT. The gentleman’s time has expired. I thank 

the gentleman. 

The gentleman from Massachusetts, Mr. Lynch, is recognized. 

Mr. LYNCH. Thank you, Mr. Chairman. 

And I want to thank the members of the panel. 

I would like to talk about H.R. 4852, the Private Placement Improvement Act, so-called. 

20 

Mr. Beatty, the Form D—is that required right—is there a penalty for not filing a Form D? 

Mr. BEATTY. There is currently no penalty for failure to file a 

Form D. 

Mr. LYNCH. So any talk that we have heard on the panel today 

about the problem of filing this and the encumbrance on companies—they don’t have to file this and there is no penalty if they 

don’t file it, right? 

Mr. BEATTY. No. I believe that the—I believe that there may 

have been one instance where the SEC might have taken action on 

the failure to file, but it is not—it is widely regarded as not an essential form to file, and I believe that in some places it is routinely 

not filed. 

Mr. LYNCH. Right. However, I do know from talking to some of 

the State Secretaries of State and Attorneys General that this exemption under Rule 506 is the—and I will quote here—it is reported as the most frequently reported fraudulent product or 

scheme involved in enforcement actions by State securities regulators. 

Mr. BEATTY. Yes, that is correct. In our surveys, in terms of what 

types of action States are taking, and what they are—what is being 

reported to us in particular, 506 comes up, I believe, is the secondmost popular thing that comes up. That is not surprising— 

Mr. LYNCH. Popular meaning what? The most frequent— 

Mr. BEATTY. More frequent, yes. 

Mr. LYNCH. —fraudulent product. 

Mr. BEATTY. Yes, right. And it is not— 

Mr. LYNCH. Second-most. Okay. 

Mr. BEATTY. Yes. It is not the most—it is not surprising, given 

that it is the vehicle of choice for raising capital in this country. 

Mr. LYNCH. All right. 

Form D is just four pages. It is not a whole lot of— 

Mr. BEATTY. It is actually eight pages with three pages— 

Mr. LYNCH. There are four pages of instructions. 

Mr. BEATTY. Three pages of instructions, eight pages of questions 

and answers that need to be filled out. 

Mr. LYNCH. Okay. Maybe I don’t have it all then. Still, it’s fairly 

brief and not very complicated, from what I can see. 

As far as enforcement of Rule 506 and the exemptions, what is 

the wisdom of preempting States to protect small investors? I don’t 

get that. 

I do think that, as Mr. Keating says, he has a job to do, but I 

think that protecting investors from fraud is also part of the job, 

as well. 

And, Mr. Laws, this is great, this new idea, crowdfunding. It is 

very exciting. But if we get into a situation where it is seen as an 

area that is rife with fraud and people are being taken, I think we 

might have a big disincentive of people getting involved, smaller investors especially, who are not sophisticated. 

Mr. Beatty, what about taking the State regulator off the street 

here and preempting them from conducting enforcement actions? 

Mr. BEATTY. I think that certainly enforcement is a big part of 

what States do, and anything that hinders our ability to bring enforcement actions in the appropriate cases is problematic. I think 

21 

that in the Rule 506 area we have long been preempted, since 

1996, from requiring any type of—doing anything except getting a 

notice filing. And we certainly have fraud authority. 

But the question is—to us is, we appreciate the fraud authority 

but enforcement actions take place when people have already lost 

money, have already been harmed, their retirement savings have 

taken a hit, maybe they can no longer send their children to— 

Mr. LYNCH. All right. 

Mr. BEATTY. —to college. 

Mr. LYNCH. I only have 38 seconds left, so the bill that is being 

offered today by Mr. McHenry would only require filing after. 

There would be no prefiling submission, so that investors wouldn’t 

be able to look at this until after the offering was made. Is that 

right? 

Mr. BEATTY. The current regime for 506 is a post-sale filing. If 

we are talking about the Micro Offering Act, that calls for no filings whatsoever with anybody. 

Mr. LYNCH. Wow. Okay. 

My time has expired. I yield back. Thank you. 

Chairman GARRETT. The gentleman yields back. 

The vice chairman of the subcommittee, Mr. Hurt, is recognized 

for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. Griggs, I was interested in your testimony and your support 

for the JOBS Act generally, talking about the resounding success, 

embraced by investors and companies, and especially interested in 

your statement that the JOBS Act has not resulted in any trend 

that diminishes investor protection, which I think is critical. 

Also, in your testimony you said that there are provisions, however, of the JOBS Act that are scarcely used because they run contrary to investor expectations. I was wondering if you could talk a 

little bit about that. 

Mr. GRIGGS. Sure. There were a handful of things in the JOBS 

Act, most notably the ability for companies to reduce the years of 

audited filings from 3 to 2. And I think market dynamics have 

taken over there and really the investment community has an expectation for 3 years, so companies—the overwhelming companies 

that we work with or talk to and the advice of their different parties who are taking them public have not taken advantage of that. 

Really, if I had to go back to repeat a point, it really is the confidential aspect of filings that has been overwhelmingly well received across the entire community. There were concerns about 

whether 21 days was enough for the investment community to really understand the investment, and I think from the perspective 

that we hear, clearly it is, so that has done no harm whatsoever. 

Mr. HURT. And then the other thing I noted in your testimony 

was talking about the beginning of 2016 so far, that it looks like 

IPOs are not coming online as quickly as we would like to see. Can 

you talk a little bit about that, and what are things that we can 

consider to help increase those? 

Mr. GRIGGS. Sure. That really started near the end of 2015, and 

I like to separate the market conditions versus companies’ desire 

to go public. 

22 

As a statistic for you, in the first quarter of 2016 we received just 

as many applications for companies to go public as we did in 2015 

first quarter. So there is still a very strong demand for companies 

to go public, but across all sectors right now, due to the overall 

public market volatility, I think it is very cyclical right now. 

You have public companies. Their evaluations have come down. 

So we have seen across all sectors a general—again, I would call 

it more a cyclical freeze and companies going public. But by no 

means should this indicate there is not a desire to go public or a 

company that is still leveraging those key components of the JOBS 

Act. 

So we do feel that there is going to be a bit of an opening here, 

hopefully in April, May, which will lead to a better second half of 

the year. But it is market conditions, not a regulatory issue. 

Mr. HURT. Excellent. 

And then I had a question for Mr. Atkins and Mr. Keating, sort 

of more of a general nature. But when you think back on the recession in 2008 and then you think about Washington’s response to 

that in the form of Dodd-Frank, can you talk a little bit more generally about how important the JOBS Act and having us in—having policymakers take a close look on how you streamline regulations, reduce unnecessary burdens from a regulatory standpoint— 

how important that is in light of what Dodd-Frank has given us? 

Because I represent a rural district, 23 counties and cities. We 

have a major university in Charlottesville that where we have 

small businesses that are eager and looking for capital, but because 

of Dodd-Frank have had tremendous difficulty in accessing capital. 

And so the kind of things that we are working on today, it seems 

to me, in a way acknowledge, I think, some of the significant shortcomings of the overregulation that came out of Dodd-Frank and 

how—and speak to the necessity of making it easier to hook up investors with small ventures. 

And I would love to hear from you, Mr. Atkins, and then Mr. 

Keating, from a economist standpoint. 

Mr. ATKINS. Yes. With 45 seconds, we could talk about that for 

a long time. The Dodd-Frank Act, with 2,319 pages, itself was only 

part of it. Then, it had mandates of up to 500 rules and studies 

from the different agencies. 

And a lot of that still has not been implemented yet at my old 

agency, the SEC. They still may be a little bit more than halfway 

finished. 

So the huge amount of work that still has to be done, the uncertainty on the industry—just the other day I was approached by an 

investment bank with a new offering of a fund to invest in that will 

basically take away from small banks, community banks, loans 

that they can’t carry on the books anymore because of the examiners from the Fed and elsewhere putting a lot of pressure on them 

not to make loans to small business anymore. Chair Yellen has basically said the same thing in testimony before Congress. 

So it is the uncertainty and the costs that Dodd-Frank has imposed on the industry that has had ripple effects, which is why, 

really, we need to look at things like the JOBS Act, new ideas that 

will help spur capital to small businesses. 

23 

Mr. HURT. Mr. Keating, I apologize. My time has expired, so we 

will— 

Mr. KEATING. I agree. 

Mr. HURT. Thank you. 

I yield back. 

Chairman GARRETT. The gentleman yields back with a short answer. 

The gentleman from Connecticut, Mr. Himes, is now recognized. 

Mr. HIMES. Thank you, Mr. Chairman. 

And let me thank all of you for being here to have this conversation. I want to just make a couple of observations and ask a few 

questions. 

To be clear, I actually voted for the JOBS Act. I had some misgivings, but in the end I thought it was a good compromise. 

I am always taken aback, though, when this topic is shoehorned 

into the debate that this institution has so often about where exactly the boundary line of government regulation, interference, 

presence should be. It doesn’t really fit. 

We can eliminate all regulation on the issuance of new securities. 

That will make it a much simpler process for businesses to do capital formation, unquestionably at the expense of the other half of 

our economy, which are the investors. 

So it seems to me that this is a problem of really balancing the 

interests of two absolutely essential elements of our economy: the 

people who need the capital; and the people who are offering the 

capital. 

I get so confused when the presentations are shoehorned into 

this world where, in this case, in this panel’s case, if we just do everything for those people who need capital at the cost of those people who provide—well, everything will be fine. 

We know that is not true. So I want to make that observation 

because it just drives me crazy when good work gets caught up in 

this deregulatory fervor. 

The question I want to ask, just to bring this point home: It is 

well-known that most instruments that are available to retail investors—mutual funds, equity mutual funds—most managers, professionals of equity mutual funds, don’t beat the market index. 

So I guess my question is, in particular for those who are so enthusiastic about pushing the boundaries of the JOBS Act, can anybody here tell me that they are sure that retail investors—because 

that is who we are talking about here—that retail investors—setting aside the issues of fraud and 404(b) and what companies are 

actually more prone to poor compliance; that is a whole other 

story—but are retail investors going to make a lot of money in 

crowdsourcing—crowdfunding? 

Can anybody here on the panel tell me that your average middleclass family out there with, let’s just say, I don’t know, $10,000, 

$20,000 to invest—would anybody here recommend that a middleclass retail unsophisticated investor ought to put $10,000, $20,000 

into a private placement or a crowdfunding deal? 

Mr. KEATING. If they do their homework, I see no reason why 

middle-income America cannot do their homework and make wise 

investment decisions. 

24 

Mr. HIMES. But do you think they would make money? Would 

you advise a— 

Mr. KEATING. I think some of— 

Mr. HIMES. Would you advise a retail investor to put money into 

an index fund or into some local crowdfunded— 

Mr. KEATING. I’m not a financial advisor, but I would say that 

if you have extra money for investment purposes and you think you 

want to support entrepreneurial ventures, perhaps some in your 

State or your district, your neighborhood, and you have that opportunity and you choose to do that and you do your homework, that 

is great. Go for it, and I hope you make a lot. 

Mr. HIMES. Okay. But that is not my question. My question is— 

and you have some economic background—is that individual likely 

to outperform an index with that as an investment strategy? 

Mr. KEATING. I don’t know if there is data available for me to 

answer that, but what I can say is on an individual basis, as an 

economist, that if you do your homework, you are going to—listen, 

investment—there is no guarantee here. I said very much at the 

outset that you have to recognize the risks. You have to— 

Mr. HIMES. No, no. I understand. You are not actually answering 

my—I appreciate what you are doing, but you are not actually answering my— 

Mr. KEATING. You asked me, would I advise somebody, and I said 

yes. Do your homework, be smart about it, and yes, go ahead and 

make the investment if you think that is wise. 

Mr. HIMES. Right. Okay. 

I have another important question here. But the fact is that the 

average professional mutual fund manager doesn’t beat the index, 

so I am going to preserve some skepticism about whether a retail 

investor, homework or no homework, is going to do better. 

I have one other question, though, which is—and I appreciate 

what the JOBS Act has done. We apparently are saving companies 

a lot of money. I did a lot of work on this and people assured me 

that full Sarbanes-Oxley disclosure was going to cost $1 million or 

$2 million absent the JOBS Act. 

I want to ask a question, which is that the average IPO gross 

spread, which the average IPO, let’s just say it is about $200 million—a little less than that, $200 million. Gross spread 7 percent, 

that is $14 million. 

Ninety-five percent of all IPOs in the United States since 2008 

have had a 7 percent gross spread, and $14 million has gone to the 

underwriters. Why is that? 

Mr. ATKINS. Congressman, I think that is why crowdfunding and 

other things are really exciting. It is a disruptive new technological 

way of trying to raise money that will then disintermediate investment banks and other banks and maybe save companies that are 

raising money and their investors a lot of money over time, which 

is kind of an exciting thing and so why not try it. I think that is 

one thing that we are talking about here. 

And I am as troubled as you by what you are citing. 

Mr. HIMES. If the chairman will indulge me just for a few more 

seconds here— 

Chairman GARRETT. We are just over time for everyone. We will 

circle back. 

25 

Mr. HIMES. All right. Thank you, Mr. Chairman. Thank you. 

Chairman GARRETT. I recognize the gentleman from Texas, Mr. 

Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I want to kind of pick up this line of reasoning because it is one 

of the things that I am very concerned about, and all across this 

government, is we have gotten into a mode now of the government 

telling people what is appropriate for them and what is not appropriate for them. 

We have a Consumer Financial Protection Bureau (CFPB) that 

is out determining what kind of financial products that it—ordinary consumers should have, and so now we are trying to tell people whether they are smart enough or not to be able to make certain kinds of investments. 

And one of the things that I think is very troubling to me is that 

the little guys have not had an opportunity in the past to get in 

on some of these wonderful companies that were started in a garage or in a dorm room or—and so I think one of the things that 

I wanted to mention, Mr. Laws, is in October the SEC finalized its 

rulemaking obligation under Title III of the JOBS Act but unfortunately imposed new restrictions on crowdfunding that Congress did 

not mandate, which could prevent Title III from reaching its full 

potential. 

And the issue there is that the SEC placed arbitrary caps on the 

amount that individuals can invest in companies based upon the 

lesser of their annual income or their net worth. The new 

crowdfunding rules are set to go live in 2016. 

As you know, Commissioner Piwowar dissented that decision and 

so I guess the question I have is, how do we determine what is appropriate for investors? Should the government just publish a list, 

‘‘These are things that we think are appropriate for people to invest in and these are amounts,’’ and just take that decision away 

from the individuals? 

Mr. LAWS. I will honestly say I don’t have an opinion on that. 

I do have an opinion mainly that because when accredited investors participate in a crowdfunding you can have some very wealthy 

investors who are also affected by the caps but would not be affected by the caps if they went directly. 

I believe the changes in the Fix Crowdfunding Act are aimed at 

allowing accredited sophisticated investors to do larger amounts of 

money, not necessarily allowing individuals who don’t have as 

much money to invest more. So I realize that doesn’t quite answer 

your question, but I do believe that the changes are productive. 

Mr. NEUGEBAUER. Mr. Keating, do you have an opinion on that? 

Mr. KEATING. I think by definition, they are arbitrary. I think 

you are better off leaving it to individuals to make their own decisions, and it is also important to understand that with 

crowdfunding, investors are warned of the risks on the portals, so 

they have to go through a test. So they are going to be made even 

more aware of the potential risks involved. 

But, yes, I default to the American people and the individuals 

over choices made by the government, yes. 

Mr. NEUGEBAUER. The observation from my perspective is we 

make it difficult for the little guys to get started, and we also make 

26 

it difficult for some of the little folks to get in on those kind of investments. And, quite honestly, mutual funds and exchange-traded 

funds and stuff, people lose money on that too, right? 

Mr. KEATING. Absolutely. And your point about the little guy on 

both sides of the equation is what we are talking about here. We 

are talking about not just the small business being—getting access 

to capital, but the small investor having that opportunity where 

they didn’t have it before, to be able to get in on the next great 

thing that is coming, as you said, out of somebody’s garage. 

Mr. NEUGEBAUER. Mr. Griggs, one of the things I was wondering, 

in looking at market activity right now, do—what—the private 

placement—do you still see a lot of companies, because of some of 

the barriers out there, still opting for trying to do private placement? 

Mr. GRIGGS. Yes. Absolutely. Especially with the dearth of availability to go public right now, we do see many, many companies 

take advantage of private placements as—it is a very large market, 

so it is very active right now. 

Mr. NEUGEBAUER. And so is there, do you think, and has anybody done an analysis, is there—does it raise the cost of that capital sometimes to be forced into a private placement as opposed to 

being able to look at a more market-based activity pricing based on 

the market being able to go public? Does that make sense to you? 

Mr. GRIGGS. We don’t have the specific data on that, but certainly any time you are going to raise money in a more liquid market the cost of capital is going to be lower, so private placements 

are not going to be as liquid, so that is the case. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. My time has expired. 

Chairman GARRETT. The gentleman’s time has expired. 

Mr. Carney is now recognized. 

Mr. CARNEY. Thank you, Mr. Chairman. 

I thank the gentleman from California because I do have to go. 

I am going to resist the urge to get pulled into this debate about 

what the government should or shouldn’t tell small investors, but 

I would like to associate myself with the comments by my friend 

from Connecticut, Mr. Himes. I voted for the JOBS Act, as well, 

and I worked hard with Mr. Fincher, my friend from Tennessee, on 

the IPO On-Ramp part of it. 

And there were a lot of folks in the industry and in my State 

who worked on it and expressed concern about it. Delaware, as you 

may know, is the place where most of these companies are incorporated. And my friends in the Division of Incorporation had alerted me to the—to what they were seeing a couple of years ago with 

the lack of companies going to an IPO, and we know that those 

public offerings have increased since the JOBS Act passed, and 

there was some testimony that each of you made with that respect. 

I thought that the 404(b) audit question would be one of the 

things that the IPO On-Ramp provided a 5-year phase-in and that 

would be the biggest thing that some of these emerging growth 

companies would look to in choosing to go do an IPO with—as an 

emerging growth company. But actually, as was mentioned earlier, 

I think by Mr. Griggs, it is the confidential filing piece that we 

27 

hear is the most important part of that IPO On-Ramp. Mr. Griggs 

said that we should allow all companies to file confidentially. 

Mr. Beatty, do you have a view of that? 

Mr. BEATTY. Certainly, that presents challenges, I think, from a 

regulatory aspect and a transparency access to allow all companies— 

Mr. CARNEY. What would those be, at a real practical level? The 

attractiveness of it from the other side is a company can do that, 

‘‘test the waters,’’ is the terminology that is used, and not have to 

give up concerns about their I.P. or whatever it might be. So what 

would the concern on the other side of the scale be with respect to 

that idea? 

Mr. BEATTY. Testing the waters, I think, is an idea that has been 

around for a long time and States have embraced it, many years 

ago in many respects. And if it is done properly, I don’t think it 

imposes much by way of concern in terms of investor protection. 

The things that we worry about in testing the waters is whether—is how open the communication will be in terms of will it be 

something that is, something that somebody says that is completely 

untrue? Is it not a good-faith effort to try and gauge interests but 

instead an effort to try and draw investors in a way that is inappropriate? 

Protections that are put in place in terms of requiring a filing— 

some type of filing first, having some type of waiting time between 

the testing the waters communication and the actual offering—I 

think those are all good measures that help solve some of those 

problems. 

Mr. CARNEY. Great. 

One of the provision in the JOBS Act that did concern me was 

the crowdfunding aspect for concern about fraud and the vulnerability of unsophisticated investors. And I would just like to ask 

Mr. Laws and Mr. Keating, we really don’t have, as Mr. Beatty 

said, any Federal experience here. Why should we change the rules 

now before doing that? 

Mr. LAWS. I actually would disagree with the premise, because 

the so-called accredited crowdfunding has been legal since the 

JOBS Act passed and some of the SEC rulings. So since the JOBS 

Act passed we do have a good 3 years of experience of some of the 

techniques that seem to work well in accredited— 

Mr. CARNEY. So do those apply to the investors that I am most 

concerned about, the unsophisticated investor who— 

Mr. LAWS. I believe so. One of the more important aspects, for 

example, of the Fix Crowdfunding Act allows this structure of following after a sophisticated investor, putting a larger check in and 

having them look out for the interests of the other investors, which 

would not be legal under the current Act. So I think we could apply 

some of those learnings with this bill to improve the crowdfunding 

for the unaccredited investors. 

Mr. CARNEY. Mr. Keating, I have 24 seconds. 

Mr. KEATING. I think it goes back to the crowd aspect of 

crowdfunding, right? The wisdom of the crowd here is critical, and 

technology allows that where it didn’t certainly in 1933 and 1934. 

So the fact that you have these communications and you have the 

crowd evaluating these investments is central to the whole effort. 

28 

Mr. CARNEY. Great. Thank you all for being here today. 

Chairman GARRETT. Thanks. The gentleman yields back. 

Mr. Hultgren is recognized for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

Thank you all so much for being here. I appreciate your time and 

expertise in this important discussion. 

I want to address my first questions to Mr. Atkins, if I may. 

Earlier this year you wrote an op-ed that ran in the Wall Street 

Journal that was titled, ‘‘Equity Policy Needs Surgery, Not BandAids.’’ Volatility, flash-crash risks, and bigger dark pools are the 

legacy of the SEC’s Regulation NMS. 

This, of course, was with respect to IEX’s application to be a registered national security exchange. I have commended IEX for putting forth ideas considered by some to be effective adjustments to 

our market, but I have also remained unsure about how the investor exchange would function in an already complicated market 

structure. 

In your op-ed, you remarked about a broken process at the SEC, 

and I will quote your op-ed where you said, ‘‘Will the agency address equity market structure concerns comprehensively, as many 

Members of Congress and SEC Commissioners say is necessary, or 

will it make these far-reaching policy decisions in an opaque exchange application approval process?’’ 

Over the last few months there have been some developments 

where your perspective would be valuable. One, the extended comment period for IEX’s exchange application, to which they have 

made some modifications, ends today. Also, the comment period on 

the notice of interpretation for whether 1,000-microsecond delay 

should be de minimis for the purpose of Rule 611, the order protection rule, ends today. 

So, Mr. Atkins, I have been frustrated with the Commission that 

it has been slow to act on changes to market structure, but do you 

think in general, changes to market rules through an exchange application process will result in good public policy? 

Mr. ATKINS. Thanks for the question. I stand by what I wrote in 

the journal there. 

I think what the SEC should do is take a total review of NMS. 

There were a lot of things that were put forth back there 10 years 

ago that did not make sense then and don’t make sense now. And 

I can see the impetus behind trying to let a new entrant into the 

marketplace, but still it needs to be done in a transparent way. 

Mr. HULTGREN. Following up on that, or continuing, the New 

York Stock Exchange recently filed with the SEC to use a replica 

of the Discretionary Pegged order that is included in IEX’s application, which was made public through an exchange application process. Does this raise intellectual property concerns? It would seem 

the New York Stock Exchange could potentially make use of the DPeg before IEX is granted exchange status, which would disadvantage IEX. 

Mr. ATKINS. Yes. That is part of the whole issue here, where if 

you treat people disparately and in a manner that doesn’t apply to 

everybody, you run into those issues. 

Mr. HULTGREN. Isn’t the use of the D-Peg and a notice of interpretation on the definition of ‘‘immediate evidence’’ that the exVerDate Nov 24 2008 19:13 Jun 22, 2017 Jkt 023890 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\23890.TXT TERI
29 

change application process is being used to rush consideration and 

changes to market rules, and would notice and comment rulemaking, not just an interpretation, be more appropriate? 

Mr. ATKINS. Yes. I don’t know that much about that particular 

issue, but I think in general, the Administrative Procedure Act 

really should apply in this area. 

Mr. HULTGREN. As a free market conservative who wants to see 

competition and innovation rewarded by the markets, what advice 

would you give to IEX and its supporters? 

Mr. ATKINS. I think they have created an innovative exchange 

where lots of investors and traders like to go, so hats off to them. 

What I really encourage the SEC to do is take a really robust view 

of NMS and the whole process and do it in an open manner and 

not just on a one-off exchange application basis. 

Mr. HULTGREN. Good. Thank you. 

Switching gears a little bit, I am going to address my next question to Mr. Keating. 

I have some questions about implementation of the JOBS Act. 

What are the most burdensome provisions of Title III in the JOBS 

Act? And do these burdens make crowdfunding useless to small 

businesses seeking equity financing? 

Mr. KEATING. I’m sorry? 

Mr. HULTGREN. What are the most burdensome provisions of 

Title III in the JOBS Act, and do these burdens make 

crowdfunding useless to small businesses seeking equity financing? 

Mr. KEATING. I don’t know if it makes it useless. Hopefully not. 

But certainly I think the limitation, but also on the portal end of 

things, clarity on their liability and the liability issue I think is 

crucial and I—it is addressed in the one piece of legislation here, 

and I think that is certainly a big issue in terms of competition on 

that front and a flourishing number of portals. 

And by the way, to really plug this very quickly, but 

Crowdfunding Demo Day on May 16th, SBE Council is part of a 

group that is going to be here in Washington giving demos on everything that we are dealing with today and I urge everyone to 

come. So there you go. 

Mr. HULTGREN. Great. 

My time has expired. I yield back. Thank you, Mr. Chairman. 

Chairman GARRETT. The gentleman’s time has expired. 

I now recognize the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I am very old. I was around when Reg D was the new thing. And 

we were so impressed to think that, well, we are not the accredited 

investors’ incomes of over $200,000. That was a tiny group of people who must be incredibly smart to be making that amount of 

money. Now it is an amount of money scarcely more than Congressmen and Federal Judges make. 

Now we are here—you—for the most part, relaxing standards, 

letting—providing less protection to investors so that we can provide an easier path to providing capital for business. 

If Reg D made sense back in, what was it, 1982, then it can’t 

make sense now, and vice-versa, because if it made sense to put 

the limit at $200,000 then, then the income level should be 

$600,000 to $700,000 now. 

30 

I know that there has been discussion of indexing going further, 

but, Mr. Beatty, have we opened the door too much by deciding 

that $200,000 or $1 million in assets, excluding a home, is the definition of an accredited investor who can afford to lose a lot of 

money? 

Mr. BEATTY. I think you have to start from the premise that the 

idea behind defining ‘‘accredited investor’’ and putting those limits 

in place was supposed to be a proxy for investor sophistication. Indeed, in many of the cases that we deal with nowadays, a fair percentage of the investors that we see who have been harmed are, 

indeed, accredited investors. So it is an imperfect proxy. 

NASAA has long advocated for indexing— 

Mr. SHERMAN. Mr. Beatty, was it more of a proxy for ability to 

absorb the loss without— 

Mr. BEATTY. That has been posited, as well. 

Mr. SHERMAN. —or a proxy for knowledge, or at least the ability 

to hire it? 

Mr. BEATTY. Yes, it has also been put forth that that was meant 

to be an amount of money that—an amount of assets that—or net 

worth that they could absorb a loss. 

Mr. SHERMAN. And does it make any sense—if it—if those were 

supposed to be the limits then, what should the limits be today? 

Mr. BEATTY. I think you need— 

Mr. SHERMAN. I realize that some people who make an awful lot 

more are unsophisticated, and some who make an awful lot less are 

very sophisticated. But we still have a rule based on income and 

assets. If we are going to have a rule that talks about accredited 

investor and looks at income and assets, where should we draw the 

line? 

Mr. BEATTY. I think that certainly from my organization’s standpoint, we have long advocated for indexing those amounts to inflation. If they had been indexed, I don’t have the numbers right in 

front of me, but I believe that it would be roughly two to two-anda-half times what they are now. 

Mr. SHERMAN. Oh, more than that, but go ahead. 

Mr. BEATTY. Okay. Other ideas that have been put forth questioning whether or not income or net worth is the appropriate 

standard also have been discussed, and I think there is some appeal to looking at things such as some type of liquidity factor that 

an investor might be held to, in terms of liquid assets, amounts in 

a portfolio, things like that. 

Mr. SHERMAN. Mr. Atkins, do you have any comment? And is it 

enough for us to just index these numbers from 2016 forward, or 

do we need to index them from 1982 forward? 

Mr. ATKINS. I wasn’t actually around when Reg D was adopted, 

but I was just beginning to practice law, or just about to get out 

of law school. So, things have changed a lot since 1982. We have 

a lot more communication, a lot more sophistication where people 

can actually go and get information. 

But if somebody can invest 100 percent of their net worth in 

Valeant and watch the stock crash overnight, in the single stock, 

that is one of the most risky things that one can do, versus some 

of the other alternatives. So one of the things that really impressed 

me back when I was a Commissioner when we were talking about 

31 

raising this limit, was a comment letter where an investor said, ‘‘I 

can invest in a hedge fund today, but tomorrow if you raise the 

limit, I won’t be able to.’’ 

Mr. SHERMAN. Let me just— 

Chairman GARRETT. The gentleman’s time has expired. 

I recognize the other gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

In California, as you know, we have a world-class network of 

startups from Silicon Valley to Orange County, and the issue of access to capital for startup businesses—this is critical. This is critical to our State’s economy, but also critical to ensuring that our 

country remains the best place for entrepreneurs—not only to get 

the entrepreneurs, but also to bring their products to market. 

And so I was going to ask Mr. Keating, because you noted in 

your testimony that the Micro Offerings Safe Harbor Act, which I 

am an original cosponsor of, appropriately scale Federal rules and 

regulatory compliance for small businesses pursuing capital. Mr. 

Keating, how will this legislation help these startups that are looking for the investment to hire and to grow to enter the market? 

Mr. KEATING. It all comes down to that cost, and that is why 

when we talk about scaling Federal rules, look at the data and 

there is data produced by the SBA and a whole host of other entities, if you will, that show that regulatory costs certainly fall much 

more heavily on small businesses. To take us the next step and 

consider the regulatory costs on startups and it becomes even more 

daunting. 

So when I mentioned before the issue on angel investing, that is 

certainly in the equation here, in terms of both on the supply and 

the demand side of the equation. So any time you can open up avenues here through reduced costs for entrepreneurs to gain access 

to capital, it is a positive development. 

And by the way, just understand that the SEC and certainly the 

State regulatory bodies have that ability to prosecute fraud no matter what. 

Mr. ROYCE. Right. 

Here is another question I am going to ask. I am an advocate for 

regulatory relief for our Nation’s community financial institutions 

when it comes to their ability to lend. And legislation I have authored, H.R. 1188, the Credit Union Small Business Jobs Creation 

Act, would free up smaller lenders when it comes to working with 

business startups. 

What role do community financial institutions play in capital formation for startups, and what are the problem areas since the financial crisis, and how could Congress help on that front? 

I will go to Mr. Keating, and then to anyone else who wants to 

jump in. 

Mr. KEATING. My immediate response is those small financial institutions are crucial for small businesses. That is the bottom line. 

When you look at their share of loans to small businesses, they 

are it. They are critical. 

So again, the regulatory cost—for example, Dodd-Frank and so 

on—for—fall more heavily on them, and small businesses get hurt 

as a result. 

Mr. ROYCE. Others on the panel? 

32 

Mr. ATKINS. Yes, sir. Well, one thing that Chairman Hensarling 

likes to talk about is that every day a community bank goes out 

of business. And it is not because of bad business; it is because of 

the burdens, not just overt regulations, but then also the informal 

silent regulations of bank examiners who basically have a lot of 

ambits with which to squeeze them and to question the loans that 

are being made. 

And as I referenced before, the private sector is trying to come 

into assistance here by taking off the books of some of the community banks some of the—through funds—some of the loans that 

they are making, but it is— 

Mr. ROYCE. Even on performing loans. That is the great surprise. 

Performing assets, and suddenly comes the regulator— 

Mr. ATKINS. Because the bank examiner will— 

Mr. ROYCE. —that that just be imploded. 

Mr. ATKINS. Right. It is a true crisis. I think we have to address 

it. And so I salute you for doing what you can. 

Mr. ROYCE. Other members of the panel on this subject? 

Mr. GRIGGS. I will comment that NASDAQ, for the publicly traded community banks, we list over 90 percent of them on our marketplace so we have regular dialogue, and I would echo the comments that they are in a very difficult situation right now when it 

comes to helping small businesses, particularly with all the regulations that are faced, and they do—that group in particular questions the reason why they would go public today, and we all know 

that when they do go public they do get more capital to support 

businesses. So I think it is a crisis situation. 

Mr. ROYCE. The other two panel members on the subject? 

Mr. LAWS. At my end of the market nobody has any assets 

against which to take out a loan, so it is all equity financing. 

Mr. ROYCE. Yes, yes. 

I yield back, Mr. Chairman. 

Thank you very much, to the panel. 

Chairman GARRETT. Thank you. The gentleman yields back. 

Mr. ROYCE. Thank you again, Mr. Chairman. 

Chairman GARRETT. Mr. Scott is recognized for 5 minutes. 

Mr. SCOTT. Let me ask you about something I have not heard before and so I want a little bit of clarity of information referencing 

House Resolution 4855. Could you all explain to me what 

crowdfunding is? How would the average investor out there—what 

does that mean? 

Mr. LAWS. Crowdfunding in general refers to something that is 

done online where there is broad participation by people in—I will 

use some examples like Kickstarter, or Indiegogo, or websites 

where people will fund a social cause or help a company get off the 

ground by buying their product ahead of time. 

What we are talking about here for securities law is allowing individuals to, when they do that, not just buy a product or support 

a cause but take ownership in the company that they are funding. 

So it would allow a small company to sell part ownership in it to 

the crowd. 

The regulation as it exists in law was set up to put a lot of protections in place to make sure it flows through certain websites and 

33 

with certain regulations to make sure all the disclosures are happening and it is very transparent. 

Mr. SCOTT. And so we are having all kinds of challenges with online lending, online investments, online payment transactions folks, 

online merchants. This machine that we have created, the Internet, 

the online services, sometimes appears to me to be like the machine that we created to serve us, but we are now having to become 

servants of that machine. And it puts us in Congress in a way of 

trying to navigate a situation that is constantly changing with our 

technology. 

So the Securities and Exchange Commission has just recently, as 

I understand it, completed its crowdfunding rules. Is that correct? 

Mr. LAWS. Yes, several months ago. They will come into effect in 

May. 

Mr. SCOTT. In May, next month. Now to me, shouldn’t we wait 

until we have some experience from crowdfunding before we make 

significant changes to the crowdfunding exemption? 

Mr. LAWS. I would answer yes, with the proviso that the kind of 

so-called online fundraising for accredited investors, the accredited 

crowdfunding, has been legal since the JOBS Act passed in 2012. 

There was, I believe, an earlier bill that had more extensive 

changes to crowdfunding. This bill, to my understanding, is narrowly taking some of the experiences that we have learned over the 

last 3 years and using that to improve the crowdfunding act, in 

some cases to include investor protections that were not available 

in the original one. 

So I actually believe it is a wise thing to do to make sure that 

some of those make it in place—some of those learnings over the 

last 3 years make it in place into this crowdfunding version. 

Mr. SCOTT. And now there is a grace period involved in this, 

right—a 5-year grace period? 

Mr. LAWS. I am not sure. 

Mr. SCOTT. From my understanding, there is a 5-year grace period during which the Securities and Exchange Commission would 

be prohibited from even enforcing the crowdfunding rules. Do you 

feel that is warranted? 

Mr. LAWS. That is not my understanding of the law. I don’t quite 

know how to answer that because I don’t believe that is the way 

it is written. 

I believe what is written into the law is there is a time period 

during which, when they find violations, they are supposed to give 

the portals a chance to address those rather than instantly shut it 

down, depending on the severity of the violation. 

Mr. SCOTT. Let me ask you, is it not in the bill? 

Mr. LAWS. I am not aware of that portion. 

Mr. ATKINS. Congressman, I believe there is a provision in the 

bill for a grace period, but that is for good-faith efforts to comply. 

So, it is clearly open to interpretation. But anyway, but I think the 

intent is to try to encourage the SEC to guide rather than to come 

with a hammer. 

Mr. SCOTT. It just seems to me that some problems— 

Chairman GARRETT. The gentleman’s time has expired on that 

one, and at the very end of the hearing, we always ask for members of the panel to answer any other additional questions, so at 

34 

that time, if the gentleman would like to have additional input 

from the panel, he can certainly get more into the weeds on the answer on that one. 

Mrs. Wagner is recognized for 5 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

And thank you all for joining us today as we look at the JOBS 

Act 4 years later and examine the benefits it has brought to small 

companies and their ability to raise capital and grow their businesses. 

As President Obama even said himself, this bill has been a 

game-changer for startups and for small businesses. We have seen 

this especially in my home district, where recent reports have said 

that St. Louis has the fastest-growing start-up scene in the country. This is exciting news. But as many of you have stated today, 

there is still more work that we can do to build on the success of 

the JOBS Act and in helping small businesses reach their full potential. 

So in that vein, Mr. Griggs, you mentioned that—and it has been 

mentioned before—in the 4 years since the JOBS Act, there have 

been 865 IPOs with 86 percent being emerging growth companies. 

Can you talk a little bit, in some specifics here, about the most important steps that should be taken to build on the success? 

Mr. GRIGGS. Sure. I think our viewpoint on the most important 

aspects would be to start considering what it means once you are 

public and focus on some aspects that we find continually come up 

with companies about what the challenges are once you do go public. Because there is certainly the brand of going public has, over 

the years, taken some hits based on what the ‘‘burdens’’ are to be 

a public company. 

So I did highlight in my testimony, I think, what we feel would 

be the most important ones would be to provide much more transparency on the proxy firms and what they are requiring companies 

to do. Companies looking at—are continually frustrated by the 

PCAOB and how they make ‘‘recommendations’’ to audit firms they 

are not really sure how to interpret, and so we do feel that much 

more clarity needs to be done in that aspect. 

And then you look at how a company helps—or goes understanding who their investors are. There are rules in place that 

are—the requirement is to report long positions but nothing on the 

short side. And that has become much more prevalent in terms of 

how investors use shorts. Companies continually ask us to advocate 

for that. 

So those three aspects, to us, would do a lot to help instill more 

confidence in the public market and going public. 

Mrs. WAGNER. Thank you very much. And my colleague, Mr. 

Hurt, kind of touched on things we were all looking at at the slowdown at the end of 2015, beginning of 2016, in the IPO period. 

Now, you talked about market conditions being really the driving 

force there, but there was still demand. And you have touched on 

it a little bit, but can you talk about some of the regulatory impediments that are perhaps chilling the IPO market? 

Mr. GRIGGS. Yes. I really would go back to we see a very—have 

a very robust pipeline of companies that would like to go. And typically sometimes you can point to various sectors that have certain 

35 

regulatory challenges. That is not the case today, so our view of it 

is much more a market condition than a regulatory condition because it is across all sectors right now where there just have not 

been IPOs. 

But we have seen this in the past and we do feel very strongly 

that the second half of 2016 is going to be strong. 

Mrs. WAGNER. Good. Let’s hope so. 

I would like now to turn to the market for private financing for 

those companies that haven’t gone public yet, which is a very important source of funding for startups and early-stage businesses. 

In following up, again, my colleague, Mr. McHenry, Mr. Keating, 

you stated that angel investors—investment is sluggish. And you 

pointed to regulation and the over-regulatory burden. 

Can you expand on some of the specifics of that? You mentioned 

it in a broad, overreaching sense, but what are those impediments, 

those regulatory impediments that exist regarding this kind of investment? 

Mr. KEATING. Actually, the best way to answer that, it is a 

broad, overarching issue. I think it is a broad overarching issue for 

the entire economy. 

When Mr. Griggs talks about the IPO market, when we are talking about angel investment, when we are talking about the decline 

in business loans to small businesses, that is all—there are a whole 

host of issues in there, but overarching is the state of this economy, 

a recovery that is growing at 2.1 percent when we should be growing, if you base it on history, at almost 4.5 percent. 

So it all goes—but then the question becomes, why is that? And 

I will go back to, it is pointing policy in the wrong direction in 

every possible area you can think of in the last several years, especially on regulation. We have been in a hyper-regulatory market on 

a whole host of fronts. But taxes, as well. No leadership on trade. 

I will even pick on the Federal Reserve while I am here, in the 

sense that they have been saying that they are saving the economy, 

but in terms of the monetary policy that has been run, it is without 

precedent and I have never heard so many small business owners 

say, ‘‘What is going to happen with what the Fed has been doing?’’ 

And they have never talked to me about the Fed every before because it is uncertainty now. Nobody knows how this is all going to 

come out. 

So I would say it is an overarching environment, and then you 

can go down and drill down into all sorts of individual regulations 

and taxes. 

Mrs. WAGNER. Thank you, Mr. Keating. I have run out of time 

here, and I would say that fourth branch of government, that overregulatory nature that we have that has been created here, which 

are the regulators, the agencies, the departments, is not just here 

in financial services; it is overarching in many different areas 

across our jurisdiction. So I thank you very much. 

I yield back. 

Chairman GARRETT. The gentlelady yields back. 

Mr. Hill is recognized for 5 minutes. 

Mr. HILL. Thanks, Mr. Chairman. Thank you for hosting this 

panel. It is useful, and it is also great to be talking about kind of 

a positive topic for the economy because clearly, over the past 4 

36 

years, this was a bright spot in the Obama Administration and congressional collaboration on the economy, so it is nice to be talking 

about ways to enhance something that is generally working well. 

Before I ask questions, I will make a note that I recently introduced a bill that is related to this topic that will head over to the 

Ways and Means Committee, H.R. 4831, which will allow people 

who are using crowdfunding and a Subchapter S company to not 

have that crowdfunding count as one of the 100 shareholder limitations. 

Since pass-through ownership has gotten so popular, I am not 

sure S Corps are as popular as they once were because of State 

LLC encouragements. We all recognize that. But in the small community bank arena, and in some niches in the economy, Subchapter S is still popular, and so this is a way, I think, to combine 

the benefits of the JOBS Act with that Subchapter S form of incorporation. 

Mr. Keating, I want to start with you, and you raised a question 

that we talk a lot about in here, and that is the AML, the moneylaundering laws. And you made a reference in your testimony 

about portals and how they might be treated under AML. Could 

you elaborate just for a second on that? 

Mr. KEATING. Sure. We are concerned with applying those to portals. It doesn’t make any sense when you think about what the 

anti-money-laundering laws— 

Mr. HILL. They are being applied. It is currently applied to portals— 

Mr. KEATING. Yes. My understanding is that it is under consideration, that it has been kicked around, if you will. And I believe 

FINRA said no, but now, from what I understand, Treasury is— 

it is at least being kicked around there and we are concerned about 

that because it is tremendous regulatory costs. There are examples 

of foreign banks not wanting to deal with American depositors, and 

so on and so on, because of the tremendous regulatory costs. 

So if you apply that to portals, that would be catastrophic, I 

think, in many ways. 

Mr. HILL. Thank you. 

Mr. Beatty, a question for you from a State perspective: Since we 

have had this experience on general solicitation for a private placement, has it generally been successful that there haven’t been 

noted through the State securities Commissioners anything kind of 

catastrophic happen by having this general solicitation of certain 

private placements covered by the act? Has it gone pretty well, in 

other words? 

Mr. BEATTY. I think that a relatively small percentage of the Reg 

D filings that we see are utilizing general solicitation, and in the 

early history, no, there have not been much by way of reported 

complaints with regard to them. 

Mr. HILL. Yes. 

And, Mr. Griggs, you talked in your—you had two interesting 

comments in your testimony. One was on the short positions disclosure. Would you elaborate on that for a moment? 

Mr. GRIGGS. Sure. If you look at a— 

37 

Mr. HILL. Explain to the committee why that is important. What 

is going on out there in the capital markets of people shorting 

stocks that is concerning right now? 

Mr. GRIGGS. Yes. So a very large part of being a public company 

is how you are going to communicate with your investors, and senior management dedicates quite a bit of time to doing that because 

it does help represent in the capital markets those who are either 

currently stock to raise, but also they want to raise more capital. 

So today investors are required at certain levels to report that 

they are a long holder in the stock, and that dates back to the 

1970s. If you look at a short position, companies by no means are 

saying that shorts are not valuable. They do provide liquidity to 

the marketplace and they are an important part of the investment 

community strategies, but there is no insight to a company about 

who those investors are that are short in the stock the same way 

there are for long positions. 

So in the interest of transparency, companies feel to really communicate effectively to their shareholders, knowing who those investors are at certain levels the same way they know longs would 

be very valuable. 

Mr. HILL. Have you seen anything recently in the market that 

concerns you more particularly, like this IVR patent troll issue and 

short positions? Are you familiar with that? That seems to strike 

at the heart of emerging companies. 

Mr. GRIGGS. I can’t speak to that, but this is not a new issue 

with short—not knowing who your short positions are. This has 

been ongoing for quite some time. 

But I think as you look at the rise of activist investors it has 

really come to fruition in the last several years. It has become 

much more common conversations we have with our companies. 

Mr. HILL. Thank you. 

And thanks, Mr. Chairman. My time has expired. 

Chairman GARRETT. Mr. Emmer is now recognized for 5 minutes. 

Mr. EMMER. Thank you, Mr. Chairman. 

And thanks to the panelists for being here today. 

As we all know, small businesses are vital to our economy. If you 

define a small business as a firm with fewer than 500 employees, 

like the Small Business Administration does, then there are more 

than 28 million small businesses in the United States, and over 

half of the 120 million American workforce is employed by one of 

them. Small businesses have also created more than 64 percent of 

the net new jobs over the past 15 years, and today that number 

is north of 70 percent. 

Despite the overwhelmingly positive impact small business has 

on our economy, traditional bank lending to small business is still 

at pre-recession lows. Furthermore, if a firm would like to sell 

stock to raise money, often it must register with the Securities and 

Exchange Commission. According to the SEC, registration costs 

$2.5 million on average, which many small businesses simply can’t 

afford. 

Fortunately, certain security offerings are exempt from SEC registration, including a private offering exemption under Section 482 

of the Securities Act of 1933. 

38 

There is a problem, however. The problem is the ability of small 

businesses to effectively use this exemption is—the term ‘‘private 

offering’’ is not defined in law. Not only does this prevent small 

business from using the exemption, it leaves businesses who try to 

use the exemption and can’t afford a team of expensive lawyers— 

which, again, most small businesses cannot—exposed to potential 

lawsuits and future liability. 

That is why I introduced the Micro Lending Safe Harbor Act 

with seven of my colleagues. This legislation will create a bright 

line safe harbor for small private offerings. It will help entrepreneurs open new businesses and expand existing ones. 

It does this by clarifying the safe harbor exemption—not by creating something new, but by clarifying something that exists for 

any offering that meets one or more of the following criteria: one, 

each purchaser has a substantive preexisting relationship with an 

owner; two, there are no more than 35 purchasers of securities 

from the issuer that are sold in reliance on the exemption during 

the 12-month period; or three, and this may be the most important, 

the aggregate amount of all securities sold by the issuers does not 

exceed $500,000 during the 12-month period preceding. 

The bill also exempts any of the aforementioned security offerings from blue sky laws while maintaining anti-fraud provisions at 

the Federal and State level. Again, I want to make it clear, all Federal and State anti-fraud laws will remain fully applicable to these 

offerings. 

On March 27, 2015, former SEC Commissioner Daniel Gallagher 

gave a speech at the Vanderbilt Law School where he noted: ‘‘Given 

the substantial changes in technology and the markets since this 

law was enacted, it may be time to see if there are other ways to 

balance access to capital and investor protection, giving the issuers 

other choices when raising capital.’’ 

He went on to say, ‘‘Advancing a micro offering safe harbor, 

which would deem certain extremely small or limited offerings is 

not involving a public offering under Section 4(a)(2) of the Securities Act, worth exploring.’’ 

As our economy continues to evolve, it is imperative that our 

laws and regulations also evolve to keep up with new business opportunities and demands. The Micro Offering Safe Harbor Act, 

which is endorsed by the National Small Business Association and 

the Small Business and Entrepreneurship Council, is a next-generation vehicle for capital formation. 

The time has come for Congress to come together and help small 

business help themselves by making this important update and improvement to the Securities Act of 1933. 

And in the short time I have left, I wanted to start with Mr. Atkins. It is interesting because I heard testimony earlier that I believe it is Section 504 of Regulation D already exists, so this would 

solve this problem. But that would require you to sell up to $1 million in securities in, I think, any 12-month period preceding. 

How would that impact the discussion that we had earlier about 

the small businesses? I had one in Minnesota: Medtronic. We have 

several of them. The Disney Corporation, just name them, Amazon. 

If you wanted to buy—or borrow $30,000 from a family member, 

for instance, how would this impact that? 

39 

Mr. ATKINS. Yes, well, I think your bill really helps to clarify 

what already exists under 506 and I think gives a good amount of 

certainty. For that, I think it is a very good effort. 

I don’t really see huge companies making use of anything like 

that. It doesn’t make sense in the grand scheme of things. 

Mr. EMMER. Thank you. 

I see my time has expired. 

Chairman GARRETT. Mr. Messer is now recognized. 

Mr. MESSER. Thank you, Mr. Chairman. 

And I thank the panel today for being here for this important 

topic. 

I want to direct my question to Mr. Atkins to start. You note in 

your testimony that there is more work to be done with respect to 

modernizing the Federal regulatory environment, and you also importantly note that Federal agencies have issued a record 392 

major rules with economic impact of over $100 million annually on 

the economy. And many of us are supporters of the REINS Act, 

which would have Congress approve any regulation that had that 

kind of impact on the broader economy. 

Could you just talk a little bit about how the regulatory burden 

impacts small businesses in America in search of capital? 

Mr. ATKINS. Yes. We talked a little bit before about how community banks are being squeezed not just by the market in general, 

but also by formal and informal regulations. So by information regulations, I mean the great latitude that bank examiners have. 

Going all the way back to when I was working for Chairman 

Breeden at the SEC back in the early 1990s in the wake of the 

S&L crisis, you could see how the effect of the bank examiners, 

what they had on the decrease of commercial investor loans and 

the increase of what banks are holding in treasury securities. You 

are seeing a similar thing right now, but even worse, we are seeing 

community banks going out of business. And so there is a real, palpable effect. 

Mr. MESSER. And you mentioned community banks, but I would 

ask you a question: Who do you believe receives the most harm or 

bears the greatest compliance cost of today’s current regulatory regime? 

Mr. ATKINS. It comes down to investors and to Main Street businesses, frankly, ultimately. They bear the burden just like on any 

sort of imposition on the economy. 

Mr. MESSER. Yes, the back-end consumer. 

I want to turn now a little bit to the JOBS Act, which increased 

the cumulative Reg A offerings by an issuer from $5 million to $50 

million—again, something this panel would understand well. Despite the significant delays in finalizing the rule, has the new 

threshold been enough to entice companies to use Reg A offerings? 

Mr. Keating or Mr. Atkins, if you could— 

Mr. KEATING. My quick response is that we have seen positive 

results with Reg-plus. I noted those in my testimony. But certainly, 

again, limiting—I think that limitation, if you will, leaves money 

on the table, and why would we want to do that, as I said earlier. 

Mr. MESSER. Yes. What does increasing access to Reg A offerings 

mean for U.S. businesses looking to raise capital and grow? 

Mr. KEATING. Again? I’m sorry— 

40 

Mr. MESSER. What does increasing access to those offerings mean 

for U.S. business? 

Mr. KEATING. Oh, this, again, goes back to the engine of the 

economy. When we are talking about—we have heard wonderful 

things today about small businesses and how vital they are. Well, 

they have to get capital to make it all happen, whether it is 

through debt or equity. 

So when you are looking at these regulations, they very much 

have a direct impact on small business and therefore the economy, 

without a doubt. 

Mr. ATKINS. And one thing, just to add to— 

Mr. MESSER. Yes. 

Mr. ATKINS. —my former answer to your question. The main effect of all these regulations and the cost is ultimately on the consumers and the employees of the United States. And in this economy, where we have—to call it a tepid economy or recovery is— 

from 2008 and 2009—I think is a real misnomer; it is kind of a 

false recovery. 

And so in order to try to get people back to work and have consumers enjoy a better lifestyle, I think we have to make it possible 

for small businesses, which are the engine of the economy, to get 

back to work. 

Mr. MESSER. Yes. Most new jobs in any recovery come from small 

business, and so if small businesses can’t operation and function in 

our economy it is very difficult to create jobs. Folks want jobs. We 

need to have healthy small businesses, and that requires access to 

capital, really. 

One last point, maybe Mr. Atkins or Mr. Keating, in the limited 

time we have, I understand that the SEC is statutorily required to 

review the Reg A-plus threshold every 2 years, meaning that such 

a review is due this month. What do you think is the most appropriate threshold and how would increasing it to that amount further aid small business? 

Mr. ATKINS. It would be interesting to see what the report looks 

like, but Chair White talked about Reg A-plus a little bit at the end 

of last year, I believe, and talking about how there have been a lot 

of—it has an increasing number of registrations under it. But it 

seemed to me that there is a long way to go, and reading between 

the lines, I think even the people at the SEC recognize that. 

Mr. MESSER. Okay. Thank you very much. 

I yield back to the Chair. 

Chairman GARRETT. The gentleman yields back. 

And seeing no other Members with questions, I will end where 

I began, by saying thank you to the entire panel for being here, for 

I think a fairly good discussion on where we are looking to go in 

this area: not a position of no regulation, but basically a position 

of the appropriate level of regulation; not a repeal of everything, 

but actually just making sure that we have the right level of regulation to ensure investor confidence on the one hand, and at the 

same time, capital formation on the other hand. 

I thank all the members of the panel for all their views here 

today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

41 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

Without objection, this hearing is adjourned. And again, thank 

you. 

[Whereupon, at 12:08 p.m., the hearing was adjourned.] 

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104 


23890.061
105 


23890.062
106 


23890.063
107 


23890.064
108 


23890.065