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98–155 PDF 2004

ENCOURAGING SMALL BUSINESS

GROWTH AND ACCESS TO CAPITAL

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

SEPTEMBER 23, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–113

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman 

STEVEN C. LATOURETTE, Ohio 

MARK GREEN, Wisconsin 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

LUIS V. GUTIERREZ, Illinois 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

JOSEPH CROWLEY, New York 

CAROLYN B. MALONEY, New York 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

(V)

C O N T E N T S 

Page 

Hearing held on: 

September 23, 2004 .......................................................................................... 1

Appendix: 

September 23, 2004 .......................................................................................... 29

WITNESSES 

THURSDAY, SEPTEMBER 23, 2004

Beller, Alan L., Director, Division of Corporation Finance, Securities and 

Exchange Commission ......................................................................................... 3

Connolly, James A. III, President, IBA Capital Funding, on behalf of the 

CEO Council ......................................................................................................... 17

Schneider, Thomas, President and Chief Executive Officer, Pathfinder Bank 

on behalf of America’s Community Bankers ...................................................... 22

Speight, Frank, Chairman and Chief Executive Officer, American Capital 

Partners, Ltd., Co-Chairman, National Small Public Company Leadership 

Council .................................................................................................................. 20

Sweeney, Joan M., Managing Director and Chief Operating Officer, Allied 

Capital ................................................................................................................... 15

APPENDIX 

Prepared statements: 

Kelly, Hon. Sue W. ........................................................................................... 30

Beller, Alan L. ................................................................................................... 32

Connolly, James A. III ..................................................................................... 47

Schneider, Thomas ........................................................................................... 50

Speight, Frank .................................................................................................. 55

Sweeney, Joan M. ............................................................................................. 58

(1)

ENCOURAGING SMALL BUSINESS 

GROWTH AND ACCESS TO CAPITAL 

Thursday, September 23, 2004

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to call, at 11:23 a.m., in Room 

2128, Rayburn House Office Building, Hon. Sue Kelly [chairman of 

the subcommittee] presiding. 

Present: Representatives Kelly, Paul, Inslee, Moore, Maloney, 

Crowley and Davis. 

Chairman KELLY. [Presiding.] This hearing of the Subcommittee 

on Oversight and Investigations will come to order. 

This morning, the Subcommittee on Oversight and Investigations 

convenes to continue its review of efforts to encourage small business growth and access to capital. Small business drives our economy and creates jobs for millions of Americans. In fact, small businesses currently generate nearly three-quarters of the net new jobs 

per year and employ approximately one-half of the private-sector 

workforce. 

Capital is the lifeblood of small businesses and the efficient access to capital is a crucial ingredient to a strong, growing economy. 

We must ensure that our small businesses have access to capital 

and that the current regulatory scheme encourages future growth 

and development. 

Available data shows that small businesses are recovering from 

the downturn in the economy begun in 2001 in no small part due 

to the easing of their access to capital. Banks began relaxing lending standards in late 2003 for the first time since 1998. In turn, 

demand for small business loans has recently increased. 

In terms of our equities markets, over 100 companies have undertaken initial public offerings so far this year, making it the best 

year for new offerings since 2000. Despite these promising numbers, there are still significant regulatory hurdles discouraging 

small business capital formation. 

Last Congress, the Subcommittee on Oversight and Investigations held a hearing entitled ‘‘The SEC’s Role in Capital Formation: 

Help or Hindrance?’’ In this hearing, the subcommittee heard from 

a number of witnesses who contended that the SEC has simply not 

kept pace with the needs of small businesses despite their best effort. Since that time, Congress has passed and the President has 

signed important legislation known as Sarbanes-Oxley to improve 

auditing standards, disclosure rules and corporate governance. 

2

While investors in small companies expect and deserve the same 

protections as those in larger companies, this law places a renewed 

focus on the need to review the current regulatory framework to 

ensure that small businesses are able to develop and access capital. 

There must be concentrated effort to modernize our federal securities regulatory framework to ensure that we are protecting investors, but allowing small businesses to grow. 

Today, we will review the steps that our government is taking 

to address the specific needs of small businesses. In 1996, under 

the National Securities Markets Improvement Act, Congress was 

very clear that the SEC ensure competition, efficiency and capital 

formation in its rulemaking. 

This law also granted the SEC general exemptive authority to 

ease regulatory burdens and to meet the needs of all businesses, 

large and small, trying to access the capital markets. Regrettably, 

the commission has not been as proactive in exercising this authority to support the needs of small businesses. 

It is time to embrace the advantages that new technology and 

the Internet have brought to our society and could bring to our government agencies. While the SEC has tried to simplify registration 

and other regulations for small businesses, these tasks remain extremely daunting for the average small business owner. 

There is a tremendous amount of cost and effort that a public 

company must incur to access the capital markets and comply with 

federal securities laws. In their pursuit to protect investors, the 

SEC must also make it a priority to strive for more efficient regulations. The current regulatory regime must keep pace with the market and the needs of small businesses. Otherwise, investor protections are also going to be undermined. 

The commission’s inaction has motivated me to draft with my 

colleague from New York, Representative Nydia Velazquez, the Increased Capital Access for Growing Business Act, H.R. 3170. This 

legislation removes certain obsolete investment limitations on business development companies which were created in 1980 by Congress to encourage investment in small developing and financially 

troubled businesses. 

By simply modernizing securities laws, this legislation would 

allow BDCs to provide significant resources to small businesses as 

originally intended by Congress. Since the commission’s position on 

the legislation has been frustratingly unclear, I urge the SEC to 

take this opportunity to express their support for this legislation 

that would have a tremendous impact on the ability of small businesses to access capital. 

The legislation was first introduced last Congress, passed the 

House unanimously and now awaits Senate consideration. After 

working with the SEC on the legislation for several years, it is time 

for the commission to give a public endorsement of the bill and 

help small businesses by moving the process along in the Senate. 

I thank all the witnesses for their appearance before the committee to address these important issues. It is my hope that we together will make progress that will enable small businesses to devote their energies to their customers, and not outdated and inefficient requirements that no longer reflect the realities of our new 

economy. 

3

[The prepared statement of Hon. Sue W. Kelly can be found on 

page 30 in the appendix.] 

Without objection, all members’s opening statements will be 

made part of the record. 

I would like to turn now to Mr. Moore. Mr. Moore, do you have 

an opening statement? 

Mr. MOORE. Madam Chairman, I do not have an opening statement. I do appreciate the witnesses here today and am anxious to 

hear their testimony. 

Chairman KELLY. Thank you. 

Mr. Paul? 

Mr. PAUL. I do not have an opening statement. 

Chairman KELLY. Mr. Paul has no opening statement. 

Mr. Inslee? 

Mr. INSLEE. Briefly, perhaps everyone is aware of this, but I 

think probably every member of Congress when they return on the 

weekends talks to small business members about the cost of compliance of Sarbanes-Oxley. It is particularly acute, obviously, for 

small business people. I just think over the next year or two or 

more, I hope this committee will be engaged in a continuing effort 

to see if there are ways to accomplish our purposes and reduce that 

obligation of small business owners. 

I just throw out the idea almost that we ought to even have tiger 

teams looking for any possible things we can do to reduce the cost 

of compliance as this process goes along. I just hope we look at it 

as an ongoing process, because it is a very, very important thing 

and we all hear it in 435 districts. So I look forward to any ideas. 

Even though a rule has been adopted, I do not think it is the beginning of the end. It is the end of the beginning. 

Thank you. 

Chairman KELLY. Thank you very much. 

We turn now to our first panel. 

Testifying on our first panel is Mr. Alan Beller, the Director of 

the Division of Corporation Finance and Senior Counselor at the 

U.S. Securities and Exchange Commission. Mr. Beller joined the 

SEC in January of 2002. Prior to joining the SEC, Mr. Beller practiced law concentrating on a variety of domestic and international 

corporate securities and derivatives issues. 

Without objection, sir, your written statement will be made a 

part of the record. You will be recognized now for a 5-minute summary of your testimony. 

If you have not testified before in front of this committee or any 

other committee here on the Hill, there are black boxes at either 

end of the table. They will be lit first with a green light, which 

means you have 5 minutes. The yellow light means please summarize. The red light means 5 minutes is over. 

We now turn to your testimony, and we welcome you. Thank you. 

STATEMENT OF ALAN L. BELLER, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION 

Mr. BELLER. Thank you, Chairwoman Kelly, members of the subcommittee. I am pleased to appear before the subcommittee today 

on behalf of the Securities and Exchange Commission. 

4

The stated mission of the Securities and Exchange Commission 

is to protect investors, maintain fair, orderly and efficient markets, 

and facilitate capital formation. The commission has long strived to 

balance its mission to facilitate capital formation with its mission 

to protect investors. 

For example, while we can carefully consider how our regulatory 

scheme impacts small businesses, we also believe that investors in 

small companies deserve a proper level of disclosures and equivalent protections to those of investors in larger companies. 

In most cases, we believe the two goals complement each other. 

The public is more likely to invest in our capital markets if they 

believe that their investments are being protected. The strength 

and vigor of our markets, including our markets for small business 

issuers, notwithstanding the difficulties that you have mentioned 

and that we are aware of, are we believe unmatched and are ample 

proof of this very important fact. 

Our mission to facilitate capital formation requires us to consider 

carefully how our rules and regulations impact small businesses. In 

order to ensure that we do this, the SEC has taken a number of 

steps to focus on small businesses. 

Primary among these is the Office of Small Business Policy in 

the Division of Corporation Finance. The office directs the division’s 

small business rulemaking initiatives and interpretations and comments on SEC rule proposals affecting small companies generally. 

It also answers questions received from small businesses by telephone or at its e-mail address, and works with outside groups concerned with small businesses. 

The head of the Office of Small Business Policy also serves as the 

commission’s Special Ombudsman for Small Business. The SEC 

created this position in 1996 to represent the concerns of smaller 

companies within the entire SEC. The ombudsman also answers 

general questions from small businesses. 

The disclosure operations section of the Division of Corporation 

Finance, whose primary role is to review registrant filings, is central to the mission of the Division. Disclosure operations is divided 

into 11 groups, 10 of which are organized by industry type. 

The 11th group is the Office of Emerging Growth Companies, 

which reviews substantially all of the initial filings of small business issuers. We feel that the small business expertise that is developed within this office is as important to small businesses and 

investors as the industry expertise that exists in our other groups. 

In addition to these offices, which serve as resources for small 

business, the commission has a special page targeted to small businesses on its Web site. This special page includes material created 

to help small businesses understand how to raise capital and comply with the federal securities laws, as well as links to other information of interest to small companies. 

We also coordinate with other government regulators to discuss 

issues related to small business. In April of this year, we held our 

annual conference with state securities regulators at which we discussed methods of achieving greater uniformity and effectiveness in 

securities regulation. The SEC staff also works closely with the Office of Advocacy at the U.S. Small Business Administration on regulatory matters affecting small entities. 

5

I want to talk a moment about the Government-Business Forum 

on Small Business Capital Formation. Since 1982, under the mandate of the Small Business Investment Incentive Act of 1980, the 

SEC has sponsored this forum. It is an annual meeting that provides the only government-sponsored national forum for small businesses to let government officials from different parts of the federal 

government know how their laws, rules and regulations impact 

smaller companies. This year’s forum was held just this past Monday at our headquarters here in Washington. 

The focus of this year’s forum was, first, developments in auditing and their impact on smaller public companies; and second, the 

current challenge to smaller public companies related to disclosure 

and SEC filings and corporate governance. 

I want to pause. If you are familiar with some of the requirements of Sarbanes-Oxley, as I know you are, I think you will understand that these two focal points of the forum were, I think, direct results of the concerns of small business and smaller companies that have been referenced with the expense and difficulties of 

complying with Sarbanes-Oxley for smaller companies. That definitely was a focus of this year’s forum. 

The recommendations that came out of the forum, I think the 

primary recommendations, we are still reviewing them. We just 

had since Monday to sort out what the primary recommendations 

were. Quite clearly, the most important recommendation is to deal 

with the impact of the internal control assessment and audit requirement of Sarbanes-Oxley on small business. 

Other important recommendations involved our exemptions in 

rules that accommodate capital formation by small businesses, and 

the status of nonregistered intermediaries, sometimes called ‘‘finders,’’ in the capital formation process. 

The finder recommendation was also an important recommendation of last year’s forum and our Division of Market Regulation is 

currently quite actively involved in looking at questions related to 

how the registration requirement for broker-dealers impacts the 

processes of paid intermediaries such as finders, who help small 

businesses raise money. 

The Division has been in discussions with many small business 

representatives, including a group formed under the auspices of the 

American Bar Association. It is addressing the important question 

of what sorts of requirements and what aspects of the registration 

process are or are not appropriate for application to those sorts of 

intermediaries. Obviously, the task for us there is to balance the 

need to facilitate capital formation with the very important mandate to protect investors. That is what the division intends to do. 

In terms of our regulation of small businesses more generally, a 

number of our rules and exemptions are specifically tailored to provide accommodations for small businesses that seek to raise capital 

in the U.S. Some of the accommodations come in the form of general exemptions to our registration requirements that apply only to 

small businesses. Others are general exemptions that in fact by 

their nature have greater or special applicability to small businesses. 

These rules and regulations are detailed in my written testimony, but briefly, Regulation A provides an exemption from regVerDate 0ct 09 2002 11:01 Feb 04, 2005 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\DOCS\98155.TXT FIN1 PsN: MICAH
6

istration for nonreporting issuers issuing up to $5 million in any 

12-month period. Regulation D is an exemption that has several 

prongs to it. Most importantly for small business Rule 504 exempts 

offerings of up to $1 million in a 12-month period and allows for 

the issuance of freely tradable securities if the companies make offerings in accordance with State laws. 

Rule 506 permits sales without limitation to accredited investors 

and to a limited number of nonaccredited investors who are sophisticated. Finally, Rule 701 exempts from registration sales of securities of private companies to their employees. That has been a very 

important element in allowing small businesses and other private 

companies to retain their employees and compensate them appropriately before they go public. 

We have received suggestions, including from the forum, to increase the amount of capital that can be raised under these exemptions and to loosen the conditions. We are always willing to, and 

frankly are always in the process of, considering those recommendations and balancing them against the overall context of 

our investor protection mandate. 

In addition to the exemptions, we have a regulatory regime for 

public companies that is designed specifically for small businesses. 

They have a special set of disclosure rules that are simpler and 

easier to comply with than the rules for larger companies. They 

have a special set of registration forms that is also easier to comply 

with. 

An issue that small businesses now consistently face with us involves the Sarbanes-Oxley Act of 2002 and our rules implementing 

that act. In doing that implementation, we tried very hard to be 

sensitive to the concerns of small business issuers. 

We made a number of accommodations for them that are detailed 

in my written testimony. I am happy to discuss them further. 

Despite these accommodations, we have heard, as has already 

been suggested by a member of the subcommittee, that some smaller public companies are burdened by the new rules. 

I think we agree that the rulemaking process that we have now 

completed is not the end, but the end of the beginning. We intend 

to consider over the coming months what, if any, appropriate steps 

we can take to recalibrate the way the regulatory system affects 

small businesses. 

The staff is actively in listening mode. I think the commission is 

actively in listening mode. I think we are going to seek advice 

wherever we can get it. We will try to come up with the best solutions that we can. 

I think everyone recognizes that in doing that recalibration, it is 

important to keep front and center the principle enshrined in Sarbanes-Oxley that improved corporate governance, improved financial reporting, improved auditor performance are important for all 

companies regardless of size. 

The last thing I would like to touch on a little bit is use of technology. I know it was raised in the last hearing, the importance of 

the SEC coming to grips with changes and improvements in technology. 

I think since 2001, the commission has in fact to a greater degree 

than ever before embraced new technology, embraced the use of the 

7

Internet. All-Internet offerings are something that we have now, at 

least in one case, blessed and in others would consider. The whole 

Internet auction process is now something that we have not only 

accepted, but frankly facilitated in initial public offerings. The use 

of company Web sites for posting of information is something that 

we encourage, consistent with companies continuing to comply with 

their reporting requirements with us. 

We do continue to have concerns about the use of the Internet 

for private offerings where access to the offering material is not restricted to the appropriate target class of investors. That is a concern that we continue to balance against the important advantages 

that the Internet and technology offers. 

We are in the course of a fairly significant overall reform project 

of our Securities Act offering processes. One element of that 

project, when it comes out as a recommendation to the commission 

and if the commission approves, would be a proposal that would involve updating the communications process to permit use of the 

Internet and other new technologies in ways that are currently not 

permitted by the statutory restrictions. We are cognizant of the 

need to be responsive to technological developments. 

Chairman KELLY. Mr. Beller, if you could sum up. 

Mr. BELLER. I think that is the last point I wanted to address 

from my written testimony. 

All I would say again is I thank you for the opportunity to be 

here today. 

The SEC has long considered small businesses to be an important part of our regulatory responsibilities. We have looked and we 

are continuing to look for ways to accommodate small businesses 

in the fulfilling of our dual mission of facilitating capital formation 

and protecting investors. 

I would conclude by saying I would be pleased to answer any 

questions that Chairwoman Kelly or any other members of the subcommittee might have. 

[The prepared statement of Alan L. Beller can be found on page 

32 in the appendix.] 

Chairman KELLY. Thank you very much. 

I am interested in the definition of small companies. There are 

a number of different definitions used. Standard & Poor’s uses, for 

instance, a small cap index as a $300 million to $1 billion company. 

Some people find it difficult to consider that that is a small company. But the question is, if you have a company that is $300 million to $1 billion, how complicated, how difficult is it for them to access 

capital? I am wondering if the SEC should reexamine size standards for some of these small businesses. 

Mr. BELLER. For purposes of our regulations directly related to 

small businesses, the defined term involves assets or revenues of 

$25 million, that is assets or revenues. So that is not anywhere 

near the $250 million level. 

So, for example, our Regulation S-B, for special disclosure rules, 

our special forms tie to that number. I am sorry, it is market cap 

and revenues, not assets and revenues. 

I think the other important cut-off we have in our regulatory re- gime is that companies with market cap of $75 million or more are 

8

eligible to use shelf registration for primary offerings. Companies 

of $75 million are similarly defined as accelerated filers in our new 

rules that have shortened the period in which companies have to 

file their quarterly and annual reports. 

Chairman KELLY. Mr. Beller, my question really was, do you 

think you should reexamine the size standards for these small 

businesses, the ones that you use? 

Mr. BELLER. What I think we have to focus on is two things, for example, whether the $25 million is the right level or whether it 

should be $50 million, for example; whether the $75 million for 

some purposes is maybe even too small; and also whether there 

should be different levels for different purposes. 

I am thinking particularly of the internal control requirement in 

Sarbanes-Oxley, where I think we are hearing, and I would not be 

surprised if the members are hearing, that $250 million is a definition for small business. Companies with $250 million of market cap 

find the internal control requirement to be a burdensome requirement in its current form. 

So yes, we should think about changing them, but I think also 

we should think about whether there ought to be maybe different 

levels for different purposes. 

Chairman KELLY. I am glad to hear you say that. 

Also I am glad that in your testimony, you finally acknowledge 

the need to modernize some of our security laws relating to the 

BDCs. Representative Velazquez and I have been working on this 

legislation now for two Congresses. It has passed the House unanimously. 

In spite of all this support and no opposition, we continue to ask 

the SEC for feedback. Don’t you think our legislation would help 

many of these small businesses access capital? 

Mr. BELLER. We certainly agree with the premise of the legislation that the changes in the margin rules in 1999 had an unacceptable impact on the operation of the definition for eligible portfolio 

companies. We have been in communication with your staff on an 

ongoing basis on the legislation and the rulemaking that you mentioned that is being considered within the staff at this point. 

The commission has not taken a position on the legislation. I 

know that it has passed the House. I know that it would deal with 

the eligible portfolio company issue. 

I am more than pleased to take back the request to the staff of 

the Division of Investment Management. The BDCs do not come 

under the jurisdiction of the Division of Corporation Finance. I am 

happy to take that request back to the Division of Investment Management and back to the commission itself and get you an answer, 

but I cannot answer that question today. 

Chairman KELLY. I wish you would come back to us with an answer for that question. 

One of the problems that I see with small business issues at the 

SEC is they cut across a lot of different internal divisions of the 

SEC. I am wondering if it would not be better at the SEC, if it 

would be better for the people in the businesses and the SEC itself, 

if you had some sort of a small business policy office that was a 

part of the Division of Corporation Finance, but separate from, so 

that they could be within the umbrella, but separate so there is one 

9

way for those of us in Congress and the businesses themselves to 

get some clarity and specific direction. I think it would speed up 

a number of issues. 

As I said, Ms. Velazquez and I have been working on this for 4 

years and we do not have a response from the SEC. We would really appreciate getting one. 

I also would hope that you would come back to us with your 

thoughts about the idea of having a specific separate small business policy office. I think that would be very helpful for some of 

these businesses and for the SEC. 

I am out of time. I am going to turn now to Mr. Davis. 

Mr. DAVIS. Thank you. 

Mr. Beller, I probably will not use my full 5 minutes, but I wanted to go back to the area of your testimony that relates to Sarbanes-Oxley. I was reviewing the part of your written testimony 

that deals with some of the allowances that have been made for 

small businesses who may be struggling, or who will eventually 

struggle with the compliance aspects of Sarbanes-Oxley. 

Let me ask you a broader philosophical question. What is your 

position or the SEC’s position on whether Sarbanes-Oxley ought to 

apply to certain small businesses at all? 

Can you talk about whether there is any strong public interest 

or any strong public policy rationale that dictates that SarbanesOxley even apply to a lot of these smaller companies? 

Mr. BELLER. Sure. I would answer that in two different ways. 

One, as a regulatory agency, we take our direction from Congress, of course. The Sarbanes-Oxley Act of 2002 does not itself 

make any distinction between larger companies and smaller companies. I think we take that direction very seriously. So the direction from Congress is in a sense the benefits in that statute are to 

be directed at all of our reporting companies. 

The second answer I would give you is that consistent with that 

direction, I think the commission’s philosophical view, and certainly mine, is that the benefits of Sarbanes-Oxley to improved financial reporting, to improved disclosure, to improved performance 

by auditors, to improved corporate governance, and to improved 

performance of people, gatekeepers like lawyers and accountants 

and underwriters and analysts, all of those improvements are important to companies of all sizes. 

So the statute correctly directs us, if you will, as a philosophical 

matter, to apply its principles across the board. 

Mr. DAVIS. Let me ask a different follow-up. Let’s say that in the 

109th Congress for whatever reason we were to take a look at Sarbanes-Oxley and we were of a mindset to make some changes in 

it, recognizing that we make the policies and theoretically you do 

not. 

Give me some guidance if Congress were to be interested in carving out exceptions for small businesses or if Congress were to be 

interested in creating a different set of standards. Give me some 

guidance of how we ought to be thinking about that process. 

Mr. BELLER. I think the honest answer to that is that we have 

certainly heard enough regarding the impact of the burden of the 

requirements to assess and audit internal control over financial reporting, that certainly the Chief Accountant of the Commission, 

10

Don Nicolaisen, and I have both indicated publicly that we would 

like the private-sector individuals, principally an organization 

called the Committee of Sponsoring Organizations, or COSO, we 

would encourage COSO to think about whether they should develop an alternative framework that would apply to smaller companies. I actually think that that would be the most appropriate way 

to address that burden, and I think before we were to do something, before the PCAOB were to do something and before Congress 

were to do something, I would like to see what COSO is prepared 

to do. 

Beyond internal control, what I said earlier holds. We are at the 

end of the beginning. We have completed the rulemaking process. 

We have now very actively entered listening mode, both at the commission level and the staff level. I think we are not bashful at all 

about our eagerness to get outside help in that listening mode. 

Mr. DAVIS. Let me try to slip in one question while I have a little 

bit of time left on the clock. 

Can you comment on an issue that, as you know, has been very 

controversial in this chamber and is now before the other body, relating to expensing of stock options? 

Of course, as you know, the House passed a particular bill and 

the Senate right now is reviewing it. It is unlikely we will get a 

final product before we adjourn. 

Can you comment for a moment on whether it makes any sense 

to carve out exceptions to the expensing rules for smaller businesses? 

Mr. BELLER. I think my answer to that would be the same as the 

commission’s answer has been with respect to that issue generally. 

Our chairman is certainly very clearly on record as to this. 

We believe that the right place for these questions to be dealt 

with is the FASB. We think the FASB has an open and appropriate 

due process. The question of whether there should be different 

treatment for smaller companies and whether there should be different treatment for private companies has certainly been presented to the FASB. That is where I would look to get the answer 

to that question. 

What I think we are committed to do once the FASB has acted 

is to provide appropriate implementation guidance so that the rule 

that the FASB comes out with is a rule that is appropriately implemented by the companies large and small that it would apply to. 

I think that is where we are. 

Mr. DAVIS. I think my time has expired, if the Chair would give 

me an additional 30 seconds. 

One of the controversies as you know has been the degree to 

which we should be deferential toward FASB. We have had a fairly 

strong discussion over that. 

So if you can answer just theoretically, if Congress were to decide 

to put some kind of restraints on FASB’s decisionmaking process, 

as the House has already done, what should we be looking at if we 

were to try to do some kind of a carve-out for smaller companies 

to make them less subject to the full expensing requirements? 

Should we be looking at the small companies in the same way 

we look at the large companies when it comes to the expensing 

issues? 

11

Mr. BELLER. Again, I think my answer has to be that we would 

encourage leaving this to the FASB and not the legislative process. 

I am not sure I can give any more guidance than that. 

Mr. DAVIS. Okay. I will take the witness’s answer as I do not 

think I am going to get another one, Madam Chairwoman. 

Chairman KELLY. Thank you, Mr. Davis. 

Mr. Paul? 

Mr. PAUL. Thank you, Madam Chairman. 

Your mission has been described as protecting investors, ensuring orderly markets and promoting capital formation. I am going 

to ask the question, then I am going to develop a little bit. 

Has it ever crossed your mind that this is an impossible mission 

and something that is unachievable? 

The reason I ask this is that I think the wrong things get blamed 

for our problems. In the 1930s, we had a bad period of time. We 

had a crash in the stock market and we introduced this notion that 

all we needed were regulations and everything would be okay. And 

yet when they investigated the crash and the loss of funds in the 

late 1920s and early 1930s, they found out there was essentially 

no fraud. There was a financial bubble and there was a collapse. 

Yet during the 1930s, we kept introducing more and more regulations and kept the markets out of balance for a long period of time 

and things got worse. Therefore, there was no proof that regulations in the 1930s were helpful; maybe exactly the opposite was 

true. 

Today we have problems. We had the collapse of the Nasdaq bubble, 80 percent, probably trillions of dollars lost. We had Enrons. 

And yet we did have the SEC and others sort of poking around 

there hoping to prevent this, and it did not do any good. 

Our conclusion now is we need even more regulations, so the 

Congress responded. You are right. You do not create these problems. You do what we tell you, so we passed Sarbanes-Oxley and 

now you are making this effort. 

I still maintain maybe the impossibility of solving our problems 

through regulation because we are not directing our attention to 

the problem. To me, the problem is the bubble. You do not create 

the bubble. As a matter of fact, nobody can prevent the correction 

once the bubble is created. Right now, we have had a partial collapse of the bubble, but we probably have a long way to go. 

So far we as legislators always have to do something, and we are 

doing something, and you are responding and you are doing your 

best. But you are involved in trying to cause capital formation 

while what we are doing is causing costs of capital formation to go 

up. 

I do not think we have the right definition of ‘‘capital formation’’ 

because in a free market economy capital comes from savings. It 

does not come out of the thin air. I think what we talk about when 

we talk about capital formation, and when you talk about it, I 

think you are alluding more to allocation of credit, how to send 

some credit over into small business in places where we think it 

is necessary. 

I think that is completely different than capital formation. Capital formation means productivity and savings, yet our savings rate 

12

is real low, so we are not doing a heck of a lot to create real capital. 

Of course, we do create credit out of thin air. 

I just am concerned that we are on the wrong track, and that all 

your good efforts will not pay off very well because we have not 

asked the question: How have we created the bubble and the collapse and the mal-investment and all the debt in the system? 

And some people lose money, and we have very disorderly markets. When you think about it, they are very disorderly. Just one 

day this week, the dollar lost 1 percent. This affects everybody’s investments, exporters and importers, and prices, and the whole 

works. 

So once again, the question is: Has it ever occurred to you in the 

slightest manner that maybe the regulatory process is on the 

wrong track and it cannot solve the problems that we face? 

Mr. BELLER. I guess I would say that I agree with you that the 

SEC is not, without trying to address whether there is a regulator 

or which regulator it is, the SEC is not the regulator to address 

issues of bubbles and collapsing of bubbles and productivity and 

savings rates and the other things that you very properly allude to 

as the critical underpinnings of a capital market. 

I think when we talk about capital formation, what I think we 

think our mission is, is to eliminate obstacles in the way that markets operate, including regulatory obstacles, that is, thinking about 

our own rules, that keep the capital formation process that you are 

talking about from operating in a free market, competitive way. I 

think that is a mission that we can appropriately address. 

I think there is evidence that it is a mission that can be consistent with our investor protection mission if we do it right. I 

think that the fact that the global markets, which have lots of models available to them other than ours, the global markets have 

more often than not followed the U.S. lead in terms of both the way 

we regulate markets to encourage capital formation and the way 

we regulate companies to facilitate their being able to raise capital 

and to foster investor protection. 

I think that trend following the U.S. lead in the global markets 

is actually also true of Sarbanes-Oxley. If you look at what is happening in Europe, certainly, and what is happening in some parts 

of Asia even, you will find best practices and legislation and EU 

directives, all of which to some degree mimic what Congress did in 

Sarbanes-Oxley and what we did in implementing it. 

So I think if you narrow what capital formation means to the 

narrower concept that I think we use, and not savings and productivity and the like that are really not part of our function, I think 

the mission is a possible one. The mission can be swamped by 

forces outside our control. That is, bubbles can come and go and 

our regulatory function does not really address them in any way. 

Mr. PAUL. May I have 30 seconds for one quick one? 

Chairman KELLY. So ordered. 

Mr. PAUL. If there is an argument made that these regulations 

are too great a burden for the small company, wouldn’t this be the 

perfect argument to show that if it is a burden to small companies, 

it is also a burden to the large company and it would make the 

case that all the regulations are not beneficial. 

13

Mr. BELLER. It would, and I think we do think about that. I 

think if you take internal control as an example, though, I think 

you can fairly reach a conclusion that differentiates larger companies from smaller companies. 

The internal control mechanism at larger companies depends on 

processes, depends on checks and balances, depends on documentation. And properly so, because there is no one consciousness that 

knows all the things that are going well or going badly across the 

board. 

A smaller company, you will find, and certainly when we get 

down to the $25 million level, you will find that it is the rule, rather than the exception, that the CEO knows everything that is going 

on, or the CFO knows everything that is going on in the financial 

area. 

The right kinds of control mechanisms and the right kinds of assessments really could be different in that environment. So when 

we talk about right-sizing the framework for thinking about internal control, it is those kinds of issues. I think you can get to saying 

small businesses ought to have different treatment or ought to be 

recalibrated. 

There are other instances where, as you say, you can fairly argue 

that what is burdensome for the small companies is proportionately 

burdensome for the large companies and why are we doing it at all. 

We do think about that. 

Chairman KELLY. Thank you, Mr. Paul. 

Mr. Beller, there is clearly some overlap between the work of the 

SEC and the work of the Small Business Administration for small 

private businesses and small public companies. Especially there is 

an overlap when small businesses reach the point where they want 

to go public. 

I am interested in the fact that the SBA I know has written to 

the SEC for comment on proposals that could have an impact on 

small businesses. I want to know what the SEC is doing to be 

proactive for the small businesses? How are you working, what are 

you doing to try to work more closely with the SBA to make that 

juncture a little easier for people to navigate? 

Mr. BELLER. I think we have good relations and good communications with the Small Business Administration, certainly with 

the Office of Advocacy. The head of our Office of Small Business 

Policy is in I would say ongoing communication with them about 

their concerns and our concerns. 

Chairman KELLY. But you do not have a small business advocate 

at the commission, nor does the commission have one person designated to be a small business liaison. That might help, don’t you 

think? 

Mr. BELLER. I took your earlier point about whether it should be 

someone within the Division of Corporation Finance or whether 

there should be a separate office. I think we feel we do have someone who acts as a liaison between the agency and small business 

for all issues. That is the head of the Office of Small Business Policy. 

You correctly observed that that office is within the division and 

I think fairly ask, is that the best place for it to be. But there is 

14

such a person, and that person certainly believes that part of his 

function is to be the liaison. 

We will certainly take your question back and consider it. I 

would say that one of the reasons that person is in the division—

and in a sense it could be in any of three divisions: there are four 

divisions in the SEC—and functions that get spun off outside those 

divisions, they think more multi-divisionally, but they risk becoming orphans. That is, I think, the issue we have to address in 

thinking about the right place for that office. 

But we do have an office. The man who heads that office firmly 

believes, and I as the division director firmly believe, that he is the 

liaison between the commission as a whole and small business. We 

talk to the other divisions about that liaison function. 

Chairman KELLY. Is that apparent to the small businesses who 

need that person? 

Mr. BELLER. I think we try to make that point extremely clear. 

I think, for example, the small business forum, the forum that was 

just held last Monday, is organized by that office. It is held by that 

office, organized by that office, but the subjects that are raised include the finders issue from market reg; include BDC issues and 

investment management. 

The small businesses who participate in that forum, I think it is 

crystal clear to them that the head of that office is the liaison for 

all purposes within the agency, yes. 

Chairman KELLY. Since you brought up the small business 

forum, there was in the report, I think it was this last report, that 

there was a recommendation that the commission create a position 

to act as a small business liaison, and that one commissioner serve 

as an advocate. 

I think that that is something that we would be very interested 

in seeing happen. I would hope that you will consider that. You 

seem to indicate that you will. 

We thank you very much. The Chair notes that the U.S. Small 

Business Administration will submit a statement in writing due to 

their inability to be appear before this subcommittee today. 

We thank you very much for appearing here, Mr. Beller. 

The Chair also notes that some members probably will have 

some additional questions for this panel which they may wish to 

submit in writing. So without objection, the hearing record will remain open for 30 days for members to submit written questions to 

these witnesses and to place their response in the record. 

We thank you very much, Mr. Beller. We appreciate your sharing 

time with us today. Thank you. 

Mr. BELLER. Thank you for the opportunity to appear before you. 

Thanks very much. 

Chairman KELLY. Thank you. 

As Mr. Beller leaves, I would like to bring up our second panel. 

We have several private-sector witnesses to discuss the current 

state of small business development and access to capital. 

Our first witness is Ms. Joan M. Sweeney, the chief operating officer and chief compliance officer of Allied Capital in Washington, 

D.C. Ms. Sweeney has worked with Allied Capital since 1993 and 

oversees the company’s daily operations. Prior to joining Allied 

15

Capital, Ms. Sweeney was employed by Ernst and Young, as well 

as Coopers and Lybrand and the SEC Division of Enforcement. 

We welcome you, Ms. Sweeney. 

Also appearing on our second panel is Mr. Frank Speight, chairman and chief executive officer of American Capital Partners in 

West Palm Beach, Florida. Mr. Speight is representing the National Small Public Company Leadership Council, a Washington, 

D.C.-based group seeking to educate the White House, Congress 

and federal agencies about the economic contribution of small publicly held companies. 

In addition, we also hear from Mr. Thomas Schneider, the President and chief executive officer of Pathfinder Bank in Oswego, New 

York. Mr. Schneider will be representing America’s Community 

Bankers, an advocacy group of community banks whose members 

have assets which aggregate more than $1 trillion and pursue progressive entrepreneurial and service-oriented strategies in financial 

services to benefit their customers and communities. 

Our final witness of the day is Mr. James Connolly III, the President of the IBA Capital Funding in Perrineville, New Jersey. Mr. 

Connolly is representing the CEO Council, a group which advocates 

on behalf of CEOs of small public companies. Mr. Connolly is also 

the director of the new business development of InvestTrend, a feefor-service financial analysis organization. 

Without objection, your written statements will be made part of 

the record. You will each be recognized for 5 minutes. 

We will begin with you, Ms. Sweeney. We welcome you here. 

STATEMENT OF JOAN M. SWEENEY, CHIEF OPERATING 

OFFICER AND CHIEF COMPLIANCE OFFICER, ALLIED CAPITAL 

Ms. SWEENEY. Thank you, Madam Chairwoman and members of 

the subcommittee. I am Joan Sweeney, the chief operating officer 

of Allied Capital Corporation. We invest in the American entrepreneurial economy as the nation’s largest business development company or BDC. 

Thank you for the opportunity to discuss the essential role that 

BDCs play in providing growth capital and expertise to smaller 

businesses. 

I also want to thank you, Madam Chairwoman and Congresswoman Velazquez, for your efforts in passing H.R. 3170, the Increased Capital Access for Growing Business Act. If enacted, this 

important piece of legislation will increase the number of American 

companies that could access capital from BDCs. 

Allied Capital has been investing in growing businesses for 46 

years, and over that time we have provided financing to thousands 

of companies. Our assets today are over $3 billion and we have investments in 116 portfolio companies, which generate aggregate 

annual revenues of approximately $11 billion and employ more 

than 105,000 people. 

We provide both mezzanine debt and equity capital. We believe 

that smaller companies need additional financing sources. The U.S. 

financial services industry has been contracting as a result of consolidation. This trend has reduced the amount of debt capital available to smaller companies. In addition, the cost of being a public 

company in a post-Sarbanes-Oxley world is higher than ever. Going 

16

public has become less attractive, and more companies are seeking 

private financing options. 

Small public companies, however, cannot turn to a BDC as a private financing source because under current law they are not eligible. This is unfortunate because BDCs, as regulated entities, provide transparency as to their investing activities and are a natural 

match for smaller companies. 

Deprived of this option, many small public companies, desperate 

for capital, have instead sought private financing from private equity and hedge funds, which provide private investment in public 

equities, or PIPE financing. 

These unregulated funds have little transparency as to their activities, and may not have the best interests of the small company 

in mind. Some have even structured ‘‘death spiral’’ PIPEs where 

the fund intends to profit from the fall of the small firm’s stock 

price. 

Congress saw the need for alternative financing sources for small 

companies in 1980 when it created BDCs. In defining the types of 

businesses eligible for BDC financing, Congress defined an ‘‘eligible 

portfolio company’’ as a company that did not have a class of 

marginable securities under the rules of the Federal Reserve. 

According to the legislative history, Congress intended the pool 

of eligible portfolio companies to be very broad, and it was estimated that 8,000 of the 12,000 publicly traded companies at the 

time would be eligible. 

However, in 1999 the Federal Reserve greatly expanded the definition of marginable securities. Today, any security listed on the 

Nasdaq stock market is considered marginable, which is a substantial shift from what was marginable in 1980. 

The Federal Reserve’s changing view of marginability collided 

with congressional intent for BDCs and drastically reduced the universe of companies eligible for BDC financing. Small public companies needing cash for growth are no longer eligible, and recently 

questions have been raised about the eligibility of private companies with outstanding debt securities, since debt securities are also 

now marginable. 

BDCs may invest limited capital in companies that are not eligible, but we do not think there should be any limit when it comes 

to providing growth capital for smaller companies. 

One investment that Allied Capital made is in a small public 

company called Blue Rhino, which you may recognize as the supplier of the propane gas cylinder for your outdoor grill. This company came to us in 2001 for $15 million in financing. Their stock 

was trading at only $3.70 per share, and their market capitalization was less than $100 million. They were not suitable for a secondary public offering. 

Our financing enabled the company to grow its sales substantially in 2001 and 2002. The company increased in value, its shareholders benefited, and Allied Capital’s shareholders benefited with 

a capital gain. 

BDCs work well. BDCs can play a much more meaningful role 

in providing capital to entrepreneurial companies if the definition 

of ‘‘eligible portfolio’’ company is updated. 

17

We encourage the subcommittee to review the rulemaking activity of the SEC to ensure that the definition is appropriately amended both to restore Congress’s original vision and to provide consistency with the provisions of H.R. 3170. 

Thank you for the opportunity to testify today. 

[The prepared statement of Joan M. Sweeney can be found on 

page 58 in the appendix.] 

Chairman KELLY. Thank you very much. 

We move next to Mr. Connolly. 

STATEMENT OF JAMES A. CONNOLLY III, PRESIDENT, IBA 

CAPITAL FUNDING, REPRESENTING THE CEO COUNCIL 

Mr. CONNOLLY. Thank you. Good morning, Chairwoman Kelly 

and members of the subcommittee. 

Chairman KELLY. It is a busy day. 

Mr. CONNOLLY. I am certainly aware, and I thank you for taking 

the time. I do not know that I will be as compelling to listen to as 

Mr. Allawi, but I will try. I have congratulated Ms. Sweeney for 

truly cooking with gas, as Blue Rhino is certainly a great stock and 

a valuable addition to the marketplace. 

To begin again, good morning, Chairwoman Kelly and members 

of the subcommittee. First, allow me to thank you for the opportunity to appear before you to present a somewhat different perspective than has been heard here today on small business capitalization as experienced by the over 7,000 publicly traded companies 

currently listed on either the Over-The-Counter Bulletin Board or 

the Pink Sheets. 

We are gratified that our efforts to communicate with the Congress and relevant federal agencies, under your leadership as advocates for small business, results in my appearance here today. 

My name is James Andrew Connolly III. I am a native New 

Yorker and am here as a founding member of the CEO Council, a 

Maryland-chartered 501(c)(6) organization of small public company 

executives, with both a growing network of local chapters and an 

expanding membership base throughout the country. 

Our stated purpose is to enhance the public markets for investors and couple this with affordable financing options for smaller 

public companies. We are seeking to achieve these goals with both 

a member-driven advocacy effort, along with supplementing the information available to the markets as to the opportunities open for 

investment in these engines of economic growth, job creation and 

innovation. 

Our market space of 7,000 companies includes hundreds of millions of dollars in market capitalization, tens of thousands of employees, and likely hundreds of thousands of stockholders. We are 

the dirty little secret of the securities markets, much maligned, 

overregulated, and often referred to as ‘‘penny stocks’’ in the same 

sentence as ‘‘scam.’’

I can state with certainty that the perception of fraud is not the 

same as fraud, and the substantial majority of these companies are 

operated in an ethical and businesslike manner. They are responsive to their customers, good employers and contributors to their 

communities along the way. They operate in all 50 States and probably in most congressional districts. They range from startups to 

18

well-seasoned enterprises who all share the competitive challenges 

of a global marketplace, a recovering economy and the burden of 

often-unaffordable compliance costs. 

It is frequently the case when apportioning resources that a 

microcap CEO is compelled to choose between expanded reporting 

costs and new hiring, payroll and benefits or audits and expanded 

legal advice. Public transparency costs, whether as traditional investor relations or fully compliant research dissemination, director 

indemnification or liability coverage, without which many of these 

companies cannot attract qualified outside directors, compete for 

scarce corporate resources and are therefore often lacking. 

Heretofore, our microcap colleagues have had to compete without 

being able to collectively represent their interests as significant 

contributors to the economic well being of the United States, not 

to mention often very good investments without running the gauntlet of regulatory indifference at best, and outright hostility to our 

continued existence at worst. 

This has not occurred in a vacuum. There clearly have been instances of abuse. We hear of them in the press when advised to 

avoid penny stock investments, and unfortunately with regular and 

necessary enforcement actions that become highly publicized. 

Taken cumulatively, these facts explain both the virtual impossibility of obtaining either startup or expansion capital on terms 

that are rational, as well as diminished liquidity in secondary trading. 

Undoubtedly, the modern era of instant execution, online trading 

and affordable transaction costs, combined with the relative lack of 

substantive reliable data on many microcap securities, has led to 

an overall lack of transparency and created multiple opportunities 

for both fraud and market manipulation. 

The CEO Council was formed with these challenges in mind and 

has worked deliberatively over the past 3 years to effect what we 

hope are progressive changes. 

We took an early and active role in opposing the BBX as envisioned by Nasdaq. They, like all profit-motivated organizations, 

hoped to escape the costs of regulating the Over-The-Counter Bulletin Board without provision for the thousands of companies who 

either would not, could not, or chose not to list, thereby relegating 

them to Pink Sheet status, which demonstrably would lead to a 

major loss of both market capitalization and reduced investor liquidity. 

The council has maintained an active presence at the annual, 

most recently on Monday concluded SEC Government-Business 

Forum on Small Business Capital Formation held every year since 

Congress mandated it in 1980. 

We have contributed to its agenda and suggested several of the 

hundreds of recommendations that small business owners, regulators and industry practitioners have suggested for implementation. Sadly, far too few have been adopted or implemented. As a 

matter of fact, Madam Chairwoman, virtually every year one of 

those recommendations is to re-adopt the recommendations from 

the year before. 

It often seems that the various, admittedly dysfunctional divisions of the SEC are in conflict with each other when responding 

19

to our concerns. The perception of enforcement appears to be guilty 

until examined innocent. Corporate finance clearly has a Fortune 

1000 focus, and it is left to the small business ombudsman, Mr. 

LaPorte, to represent our interests within the bureaucracy, often to 

no avail. 

I have included with my written testimony for the subcommittee’s review the recommendations from 2002 and 2003. 

If I may, just as an aside, I would like to point out that recommendation number 24 last year was mine. It called upon the 

SEC to work diligently to expand financial literacy within the investor community so that investors are much more confident and 

aware of the realities of investing. 

The NASD has had some significant negative effects on our marketplace as well. In their determination to disallow broker-dealers 

to receive any compensation for filing form 15(c) 211, despite substantial costs to fully due diligence a listing, the 200-plus market 

makers in Pink Sheet-listed companies shrank to 40 active submitters, creating less than a fully open and competitive marketplace. 

If the attorneys and accountants have no problem being paid for 

rendering professional services and are fully registered, licensed 

professional market makers who, through their due diligence prior 

to a filing, are the first line of defense against fraud, any less deserving? 

Time does not permit me to cite many other obstacles microcap 

companies encounter in a full discussion here today, but with your 

indulgence I will cite three other significant proposals that the 

CEO Council would recommend. 

Firstly, I am aware that there is interest at both the American 

Stock Exchange in New York and the Pacific Coast Exchange in 

San Francisco in the development of a specialist-based new venture 

or microcap exchange. This should be fully explored at both the 

SEC and the NASD, neither of which appear to be overly interested 

in those proposals from the indications I have received, as its potential for small company access to capital is very promising. 

Secondly, we would like to propose a new regulatory regime for 

small business issuers. This might include consultative roles for organized participation by all elements of the capital markets with 

investor advocates, institutional investors, regulators, issuers and 

other interested parties operating in a framework to create what 

some have called the ‘‘enterprise exchange.’’ There are opposing 

views on whether a specialist or a dealer market is a better solution, but we believe this is worth exploring. 

Finally, we believe that regulation 15(c) 211 should be improved 

and streamlined, such that nonreporting issuers should provide financial information to the marketplace, and that regulation 15(c) 

211 should be right-sized to fit this goal. 

Additionally, despite multiple efforts, some with very substantial 

congressional support, I might add, the information on this form 

which every publicly traded company in the Pink Sheets or Bulletin Board needs to file to effect trading, and therefore is available 

in the repository of the NASD, and I believe in most cases at the 

SEC, could form the basis of informed investor interest and is 

maintained by the NASD, where individuals have been refused by 

them to have these documents fully disseminated to the public as 

20

filed. There are data vendors who would gladly supply this information, several free of charge, as transparency, we all agree, is a 

paramount goal. 

Investor protection and small business capitalization need not be 

mutually exclusive and hopefully this dialogue today will add to 

the efforts expended by many of us who are deeply concerned that 

without both regulatory changes and a more fully informed investor base through increases in financial literacy, coupled with enhanced disclosures, the microcap marketplace can once again thrive 

and be a hotbed of innovation and growth for our economy. 

Thank you for hearing our concerns today, as well as your willingness to address them. I know the members of the CEO Council 

are pleased to be a resource. We hope you will call on us in your 

future efforts to keep our markets the most efficient and transparent in the world. 

With your permission, we would like to add to the record in the 

allotted record period time. Thank you again. 

[The prepared statement of James A. Connolly III can be found 

on page 47 in the appendix.] 

Chairman KELLY. So moved. 

Thank you very much. 

Mr. Speight, we welcome you here today. 

STATEMENT OF FRANK SPEIGHT, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AMERICAN CAPITAL PARTNERS, LTD., 

REPRESENTING THE NATIONAL SMALL PUBLIC COMPANY 

LEADERSHIP COUNCIL 

Mr. SPEIGHT. Good morning, Madam Chairwoman and members 

of the subcommittee. I want to thank you for the opportunity to appear before you today to testify on the issue of small business access to capital. 

My name is Frank Speight. I am the founder, chairman and CEO 

of American Capital Partners, Limited, a registered business development company which is based in West Palm Beach, Florida. I 

also serve as co-chairman of the National Small Public Company 

Leadership Council, a Washington, D.C.-based group that seeks to 

educate and inform the White House, Congress, and federal agencies about the crucial issues impacting the nation’s small publicly 

traded companies and the economic contributions that those companies are making. 

Let me first congratulate Chairwoman Sue Kelly on the House 

passage of the bill called Increased Capital Access for Growing 

Businesses Act, H.R. 3170, that would modernize outdated securities laws to ensure that small businesses have better access to capital through business development companies, or BDCs. 

We have enjoyed working with Congresswoman Kelly on behalf 

of the Leadership Council. It is exciting to see the first fruits of her 

efforts to broaden access to capital for BDCs, which are publicly 

traded investment companies that invest in both public and private 

companies and generate necessary injections of capital for all businesses. 

I am here today in support of her efforts and to urge that access 

to capital be broadened to encompass all small and developing companies. Small business is the engine of the economy. 

21

The ability of small business to raise funds and have access to 

loans or the necessary capital markets is essential. When small 

businesses do not have the capital they need, they are unable to 

make the investments they require to grow their business. This, in 

turn, hampers growth in the overall economy. We must do all we 

can to create a greater access to capital markets for all small business. 

An important step in providing greater access to the capital markets for small public companies can be taken by reinstating a modified and updated version of SEC Rule 504, which was among the 

reforms created by the Reagan Administration. 

For small businesses in particular, the paperwork and legal costs 

are prohibitive oftentimes for raising money through the capital 

markets. The Reagan Administration wisely knew that the SEC 

Rule 504 made it easier for small firms to raise money from the 

stock market by exempting them from many SEC regulations and 

registrations if they raised $1 million in a calendar year. 

To briefly review, the results of Reagan’s SEC reforms were immediate. Small businesses fueled the boom of the 1980s and 1990s. 

Small businesses quickly realized that they could raise capital as 

never before, and the sector became the engine of growth for the 

new economy. 

For example, in 1984 two friends who owned a small ice-cream 

shop in Vermont wanted to build a full-fledged manufacturing 

plant to sell their product nationally. The friends decided to bypass 

an underwriter or a broker and raised $750,000 by selling directly 

to Vermont residents. A year after raising this seed capital, Ben & 

Jerry’s listed on the Nasdaq and soon became one of the best-selling brands in the United States. 

According to a report in The New York Times in 1983, the SEC’s 

changes under the Reagan Administration had brought an additional $500 million into the markets in less than 2 years. 

Also, as Philip Koslow wrote in his book, The Securities and Exchange Commission, published in 1990, ‘‘The SEC’s new approach 

undoubtedly contributed to the expansion of the markets and the 

growth of new capital. Wall Street, which had seen some hard 

times since the 1970s slump, began to boom. New buildings were 

going up throughout the financial district in lower Manhattan, and 

firms were hiring thousands of new workers. Suddenly, Wall Street 

was the place to be for energetic and ambitious young people. All 

this activity clearly bolstered the economy in the short run.’’

During the early 1990s, the reforms of Rule 504 were liberalized 

even further and once again small businesses fueled an economic 

boom. According to the Small Business Administration, more than 

one-half of all U.S. employees work for companies with 500 employees or less. These firms produce 47 percent of all business receipts 

and nearly all the new job growth. Firms with more than 500 employees actually had a net decrease of jobs from 1992 to 1996. Some 

economists credit small business for the dramatic growth in American productivity that was responsible for the incredible prosperity 

of the 1990s. 

But since that era, the SEC has found many excuses to roll back 

the reform policy that the Reagan Administration put into place. 

22

During its reign, Rule 504 successfully proved to build prosperity 

by giving small companies more access to the capital markets. 

The SEC would argue, as I heard today, that Rule 504 still exists 

on the books. But in reality, the SEC has taken the teeth out of 

the measure and it is of little use, by relegating the decisionmaking 

process to the States and taking it away from the federal level. 

Under the former 504 guidelines, accredited investors could receive unrestricted securities for their investment, thus allowing 

them the necessary liquidity to lessen their risk exposure. It also 

allowed them the opportunity to more quickly reinvest the proceeds 

from an investment into another small public company and there 

expand the capital base. 

There is a tremendous need to modernize outdated securities 

laws to ensure that small businesses have better access to capital. 

My recommendation is a reinstatement of SEC Rule 504 to its 

former parameters, but with several modifications. These changes 

would be to increase the annual cap on the money small businesses 

can raise to $2 million, from the former $1 million. This would 

allow small microcap public companies the access to the levels of 

capital they truly need in today’s marketplace. 

Also, require the SEC to develop some kind of mechanism to 

streamline the process for filing. If a small public company is current in its SEC filings, they should be allowed to file an easy 504 

notification filing, with supporting documentation such as a legal 

opinion letter on EDGAR, similar to the current same-day filing S8 that is currently in place for compensating consultants. 

Madam Chairwoman and members of the subcommittee, small 

businesses are the backbone of our economy. There is no question 

about that. It is critical, absolutely critical, I believe, for small businesses of all kinds to have more access to capital in order to create 

jobs, buy products, invest in this beautiful country of ours, and ensure a strong and growing economy. 

Thank you, Madam Chairwoman, for your time. 

[The prepared statement of Frank Speight can be found on page 

55 in the appendix.] 

Chairman KELLY. Thank you very much, Mr. Speight. 

Mr. Schneider? 

STATEMENT OF THOMAS SCHNEIDER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, PATHFINDER BANK, REPRESENTING 

AMERICA’S COMMUNITY BANKERS 

Mr. SCHNEIDER. Good afternoon, Chairwoman Kelly and members of the subcommittee. Thank you for inviting me to testify. I 

am Tom Schneider, President and CEO of Pathfinder Bank in 

Oswego, New York. Pathfinder is a community bank traded on 

Nasdaq with capital of $22 million. I am here representing America’s Community Bankers. 

I am proud to report that the climate for small business in my 

community is improving. Small businesses are the economic engine 

in our country. They are our job creators and they are vital customers for my bank. Small businesses are growing and creating 

much-needed jobs, often because community banks across our nation focus on helping local businesses with their capital needs. 

23

Oswego, New York, is located in the old manufacturing heart of 

our nation. As the U.S. economy has shifted from a manufacturing 

economy to one that is service-oriented, our community has had to 

adapt. Pathfinder Bank has been proud to provide capital to aid in 

that transition. My bank proudly offers several types of financial 

products to meet the capital needs of the small businesses in the 

Oswego area. 

One of the greatest tools we have is also one of the best privatepublic partnerships ever created by Congress, the programs of the 

Small Business Administration. The SBA is an excellent partner in 

carrying out the mission of providing capital to small businesses. 

We use two primary programs, the 7(a) loan program and the 504 

loan program. These guarantee programs allow community banks 

the opportunity to provide capital to small businesses that would 

not otherwise qualify for credit. 

We also offer something else. Community banks offer access to 

the decision maker, and that decision maker knows the people and 

the area. Because we know and understand the unique needs of 

small businesses, community banks are often more flexible in their 

decisionmaking. Often, making a loan decision will come down to 

the character and integrity of the applicant. As a community banker, I know the people of my community and I can make that decision 

We have a vivid example of this in the case of the community 

hospital in Oswego. A few years ago, the hospital needed capital to 

renovate and expand services it provides in our community. It tried 

working with a large institutional bank, but the hospital did not 

meet the bank’s cookie-cutter criteria and the hospital faced the 

prospect of being denied the funds it needed. We at Pathfinder 

Bank knew the hospital and the people running it. Working with 

another community bank, we were able to serve the people of 

Oswego by helping secure the financing for the hospital. 

There is a second topic I would like to address today, the effect 

of the Sarbanes-Oxley Act. It has had an impact on how small, 

publicly traded banks such as Pathfinder do business. Ultimately, 

the legislation will make our economy stronger by increasing corporate accountability and providing greater confidence for investors. 

However, small banks are seeing large cost increases. A recent 

survey of ACB members found that the biggest impact of SarbanesOxley appears to be higher compliance fees and costs. SarbanesOxley is important to reeling in the conduct of bad corporate lawyers, executives and accountants. 

However, we believe that some of its provisions are unnecessary 

for the banking industry because we are already tightly regulated 

and tightly supervised by federal regulators. Parts of the law are 

particularly burdensome on the smaller community banks. 

That is why we suggest that the costs and fees associated with 

complying with Sarbanes-Oxley may justify allowing smaller organizations to be exempt from portions of the law. 

In addition, ACB and its members support efforts to see if there 

are requirements that can be streamlined or waived by the Securities and Exchange Commission to promote greater access to the 

capital markets for small businesses. While many of the existing 

24

regulations may be necessary for larger and more complex companies, they may be an unnecessary obstacle to small businesses in 

seeking access to capital markets. 

Because Pathfinder Bank is publicly traded, we have access to 

capital and can therefore make more loans to small businesses in 

our community. Before that, we were like any other small business. 

We had to seek capital so we could further expand our services and 

product lines, and more importantly hire additional employees. 

I am proud to bring to the subcommittee’s attention an effort to 

bring greater visibility and capital to community banks. In partnership with Nasdaq, we created the America’s Community Bankers 

Nasdaq Index of over 500 community banks traded on Nasdaq. 

This focuses attention on community banks as a vital sector of the 

financial services industry and our nation’s economy. 

In conclusion, Pathfinder Bank and ACB believe there is a prosperous climate for Americans to start and to grow small businesses. 

Community banks across our great country are willing and able to 

meet the capital needs of small businesses. 

Chairwoman Kelly and members of the subcommittee, thank you 

again for allowing me the time to testify today. I am available to 

answer any questions you may have. 

[The prepared statement of Thomas Schneider can be found on 

page 50 in the appendix.] 

Chairman KELLY. Thank you very much, Mr. Schneider. 

I would like to ask you, Ms. Sweeney, if BDCs are allowed to invest in all private companies, Pink Sheet companies, bulletin board 

companies, any company that is facing some sort of a de-listing, 

would that increase the number of public companies to which you 

can offer capital assistance? 

Ms. SWEENEY. Well, today, because of the way the Federal Reserve change happened in 1999, we cannot invest in any company 

that has a marginable security. So that under some very narrow 

interpretations would mean even private companies, if they already 

have an outstanding debt issuance to a private issuer, because that 

is a marginable security. 

So what was proposed in H.R. 3170, which is essentially update 

the definition, allow BDCs to finance any company with a market 

capitalization of $250 million or less, that opens up the universe to 

all private companies and to small public companies. 

Because I think you made an interesting point in the earlier 

panel, the definition of what is small, when it comes to a public 

company today, needs to be reexamined. The S&P small cap index picks up above $250 million. There is this universe of companies below $250 million, Blue Rhino is a 

classic example, that need capital. They cannot access; they cannot 

do a secondary. There is no research on these companies. There are 

no investment banks who think they are worth their time for the 

fee that they will earn to raise the capital. 

So we think that that definition, for very many purposes, needs 

to be reexamined. 

Mr. CONNOLLY. Will you marry me? 

[Laughter.] 

Chairman KELLY. Mr. Connolly, do you want to comment on 

that? 

25

Mr. CONNOLLY. Ms. Kelly, I must say, I have just asked Ms. 

Sweeney if she would like to marry me. 

[Laughter.] 

Those are the most incredible points that have not I think effectively been presented either to this committee, and certainly to the 

larger media, the public perception as well, is that we are bandits. 

Not for nothing, as they say I guess back in the ’hood. 

I am a third generation in my family in the marketplace. My 

grandfather came back from World War I in 1915; went to work for 

Brown Brothers, and became a specialist in the New York Stock 

Exchange, probably mid-way when these guys were founded, the 

SEC. I do not know if he was responsible for the necessity of their 

creation. 

My father was on the street for 30 years and when I was born 

he was working for the President’s family’s firm, G.H. Walker and 

Company. I have spent my professional career working to assist 

small public companies, both as a licensed professional regulated 

broker and also as an investor direct, specifically, venture, however 

one wants to define it. In that entire period of time, there are very, 

very few companies with market caps of over $250 million that I 

have even met. 

So the truth of the matter is that the BDC bills, the support that 

you and Ms. Velazquez cumulatively have put behind that effort, 

and by the way we have been knocking on their doors for 3 years 

as an organization, the CEO Council. 

So I would share your frustration, I suspect, in getting responses. 

But you can do something about it. So to that extent, this hearing I think is a critical link in making both my community of 7,000 

companies in the marketplace be aware that Congress is certainly 

concerned to the level of hearing, certainly considering potential 

technical corrections, I guess, if you were to the possibility of Sarbanes-Oxley looking at the issues that day to day the ladies and 

gentlemen of our community have to address. 

Chairman KELLY. Thank you. 

Does anybody else want to address that? 

In that case, Mr. Speight, you started to talk about Rule 504. 

There is a problem evidently at the SEC in trying to balance the 

interests of capital formation and investor protection. It is a very 

tricky one, and it goes to what Ms. Sweeney and Mr. Connolly were 

just talking about. The problem is that investor protection sometimes seems to get in the way of the capital formation part. 

Have you any suggestions to the SEC? Obviously, this is going 

to be printed testimony which we can pass on to the SEC. I would 

be interested in any suggestions you might have. 

Mr. SPEIGHT. I honestly believe that you can have your cake and 

eat it too. I really do believe that you can reinstate something similar to the 504 exemption, increase the limits to it. All companies 

that would have access to it would have to be fully reporting companies. That obviously tells the marketplace the financials of the 

company, any changes that have been made to the company. I 

think that the commission can keep in place all the anti-fraud provisions in it. 

I was in a meeting where a representative from the SEC basically told us that their estimate was that out of the 504 offerings, 

26

about 1 to 1.5 percent were fraudulent. I think that is an overreaction to basically take the teeth out of an exemption that did so 

much for small companies because of 1 to 1.5 percent fraud. That 

is my opinion. 

The predecessor company to American Capital Partners, Dunhill Capital, did 24 504 offerings in 1998 alone. That is $24 million that 

was pumped into small public companies and you can multiply us 

by thousands of other funding sources. 

I think it is a travesty that they took the teeth out of something that allowed small companies to access $1 million a year in capital 

in such an easy way, and they could reinstate it and still keep the 

anti-fraud provisions in there, make the company report, make the 

company even file an immediate notification that they are doing a 

504, and what the terms of that 504 are. 

Let the public know. Let it be transparent. Nobody has a problem with that. 

Chairman KELLY. One of the problems that the agencies in government seem to have, though, is that many agencies really do not 

have the funding right now to put in the information technology 

systems so that, for instance, you are talking about reporting. 

One of the problems is that some of the rules that they promulgated back in the early 1900s still apply, so that you have to do 

certain things by written note and telephone because it is mandated in the rule. 

Some of the rules need to be changed, but also I am hopeful that 

we can get the agencies to shift some of their funding priorities so 

that they can put in the information technology that is necessary 

so that we can perhaps open up the doors more, especially to something like the 504. We will have to wait and see. 

I have one question here, if I can find it, for you, Mr. Schneider. 

In your testimony, you spoke of the existing SEC regulations that 

for the large complex companies, so they probably or maybe an unnecessary obstacle for the small business access to capital markets. 

You offered a couple of examples. 

I would be interested if you have any ideas of what regulations 

you feel could be streamlined or eliminated beyond what you started talking about. I think you are in a very interesting position with 

regard to your bank being a small company, in a sense. 

I know for a fact that when we wrote the Sarbanes-Oxley bill, 

there was no intent to try to curtail. There was only an intent to 

try to make a transparent system so that investors would feel comfortable, everyone could see what was going on in the companies 

and we could then have a certain comfort level with people investing in the market. 

Obviously, there are some things there you would like to see 

changed. You suggested a couple of them. I would be interested in 

hearing any others. 

Mr. SCHNEIDER. When it comes to the governance and the independence of the organization, those were very easy things for us to 

adapt to. I think we adopted a very comprehensive set of governance guidelines. Our audit committee was already functioning after 

years of examination by the New York State Banking Department 

and the FDIC. It was already functioning in a very independent 

and effective manner. 

27

I think it is going to come about for us, and it is just 

transitioning now, but on the certification and attestation of internal control systems, which 305 does account for, and accounts for 

at the $500 million level. We are a $300 million bank. I think that 

that limit was put in there because the resources at our organization, and I was happy to hear Mr. Beller’s comments regarding it 

because he seemed to be aware of the fact that in a smaller organization the knowledge of the internal control system is inherent in 

the CFO and the CEO positions. 

But going through the process of that documentation now of that 

system is going to be very costly. That cost has already begun for 

us. I would probably put that cost somewhere at about $100,000 for 

us to get from here to there by December of 2005, which is the set 

of financials that we are going to have to put out that are going 

to have to be attested to by our external auditors. 

After that, there is going to be the accelerated filings of 10Qs and 

10Ks quarterly in annual reports. I think that that is going to be 

a difficult transition for smaller organizations, too. I think it is 

going to put a strain on the whole system. The external auditors 

that we utilize do not really get into it. We have a fiscal calendaryear end of 12/31. They do not get into us until February because 

they are working with their larger clients in January. 

So I am not certain how we are going to be able to meet those 

accelerated 10K filing requirements if the access to, and many companies are running fiscal years on calendar years. I am not sure 

how you are going to get your access to your external auditors in 

time to go through that whole certification-attestation process, with 

everybody feeling comfortable that the external auditors are opining to the financial statements. 

It just seems like, and I think you talked about technology and 

that solution perhaps lies there, but for us we are still operating 

with a good transaction processing system. It is not the greatest accounting system in the world, so it takes us a while. And that 

‘‘while,’’ frankly, is a better internal control because we are spending more time in the compilation. 

I am not so sure that you can achieve both quality and speed simultaneously. I think that the quality is probably more important 

to the stability of the place than speed is at this juncture. Those 

would be the two areas that I would think are going to be cost-burdensome. 

Chairman KELLY. Both of those areas are very serious things 

that we really do need to take a look at and work with. 

I want to thank all of you for taking the time to come here to 

speak to us. I want to just simply throw out one more question to 

all four of you. Are there any messages that you would like to leave 

this committee with that you have not had the opportunity to 

speak about today? 

Mr. CONNOLLY. Fairly simply from my testimony, Madam Chairwoman, the one item that I specifically alluded to crafting this 

statement relative to rule 15(c) 211 and its transparency. 

That came as a shocking statement from the President of a firm 

called Knobias.com or ‘‘no bias’’ as it may be referred to, who is the 

repository as an information source for professional market players 

28

and individuals of all data that is available for small fees in the 

penny stock and bulletin board arena. 

The President of that firm, which is Mississippi-based, indicated 

to me that for the last 5 years, with some substantial congressional 

assistance, as you can imagine, it found a stone wall at both the 

NASD and the SEC in terms of getting that 15(c) 211 information, 

which is the basic financial information submitted prior to a company trading publicly, to be released on an FTP server at Knobias’s 

expense and at no cost to the American public, that material and 

information transparent to the marketplace would be available. 

To the extent that the committee finds that of interest that those 

two organizations would preclude the public from having a basic 

fundamentally transparent set of facts on which to make an investment decision, I know that is of great concern to us. 

Chairman KELLY. Thank you. 

Anyone else? 

Then we thank you very much. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for the members to submit written questions to these witnesses 

and place their responses in the record. 

I thank all of you for your time and your patience and your very 

interesting comments here today. 

This hearing is adjourned. 

[Whereupon, at 1:01 p.m., the subcommittee was adjourned.] 

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A P P E N D I X

September 23, 2004

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