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LEGISLATIVE PROPOSALS TO IMPROVE 

THE U.S. CAPITAL MARKETS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 2, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–64 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

December 2, 2015 ............................................................................................. 1 

Appendix: 

December 2, 2015 ............................................................................................. 39 

WITNESSES 

WEDNESDAY, DECEMBER 2, 2015 

Carcello, Joseph V., EY and Business Alumni Professor, and Department 

Chair, Department of Accounting and Information Management, Haslam 

College of Business, University of Tennessee, Knoxville .................................. 10 

Grundfest, Hon. Joseph A., William A. Franke Professor of Law and Business, 

Stanford Law School; and former Commissioner, U.S. Securities and Exchange Commission .............................................................................................. 6 

Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on behalf of the 

Biotechnology Industry Organization ................................................................. 8 

Mathieu, Chris, Chief Financial Officer, Horizon Technology Finance, on behalf of the Small Business Investor Alliance (SBIA) ........................................ 11 

Quaadman, Tom, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ................................................................ 13 

APPENDIX 

Prepared statements: 

Carcello, Joseph V. ........................................................................................... 40 

Grundfest, Hon. Joseph A. ............................................................................... 49 

Hahn, Brian ...................................................................................................... 58 

Mathieu, Chris .................................................................................................. 66 

Quaadman, Tom ............................................................................................... 73 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Letter from Hon. Joseph A. Grundfest, dated December 8, 2015 ................. 83 

Hinojosa, Hon. Ruben: 

Written statement of Public Citizen ............................................................... 85 

Written statement of Jennifer Taub, Professor of Law, Vermont Law 

School ............................................................................................................. 89 

Quaadman, Tom: 

Letter to the Public Company Accounting Oversight Board, dated October 

7, 2009 ............................................................................................................ 98 

(1) 

LEGISLATIVE PROPOSALS TO IMPROVE 

THE U.S. CAPITAL MARKETS 

Wednesday, December 2, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:06 a.m., in room 

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

Members present: Representatives Garrett, Hurt, Huizenga, 

Duffy, Stivers, Fincher, Ross, Wagner, Messer, Schweikert, 

Poliquin, Hill; Maloney, Sherman, Hinojosa, Himes, Ellison, Carney, Sewell, and Murphy. 

Ex officio present: Representative Hensarling. 

Also present: Representatives Green and Sinema. 

Chairman GARRETT. Good morning. And we are not going to go 

by the clock on the wall, which I see is a little bit behind. 

The Subcommittee on Capital Markets and Government Sponsored Enterprises is hereby called to order. And without objection, 

the Chair is authorized to declare a recess of the subcommittee at 

any time. 

Also, without objection, members of the full Financial Services 

Committee who are not members of the Subcommittee on Capital 

Markets and Government Sponsored Enterprises shall be permitted to participate in today’s hearing. 

Now, as we indicated on the website, today’s hearing is entitled, 

‘‘Legislative Proposals to Improve the U.S. Capital Markets.’’ With 

that, I welcome our witnesses to the hearing today. Some of them 

are familiar faces and there are new faces as well. 

I thank you all for coming and I thank you for appearing before 

us. 

Before we get to the panel, however, I will recognize myself for 

21⁄2 minutes for an opening statement. 

So today’s hearing, as I said, will examine a generalized topic, 

and in so doing we will be looking at five legislative proposals. And 

in so doing we will be continuing our work over the last 5 years 

to modernize those securities laws and help to improve the U.S. 

capital markets. 

Now, four of these bills would build upon the success, if you will, 

of the 2012 JOBS Act by lowering barriers to capital formation for 

small and growing businesses. And I want to take this time to 

2 

thank the sponsors on both sides of the aisle for their work on 

those issues. 

The fifth bill we will discuss today is one that I have introduced 

and that is H.R. 3798, the Due Process Restoration Act. This legislation would allow defendants in litigated SEC enforcement cases 

to have their cases be removed to a Federal district court, thereby 

availing themselves of the due process protections that currently do 

not exist in the SEC administrative proceedings. 

And you may ask, why is this necessary? Well, in recent years 

the SEC has transformed itself into a veritable judge, jury, and 

executioner as it has brought more and more enforcement cases before its own in-house tribunal where they are heard then by administrative law judges who are themselves actually employees of the 

SEC. 

Let us look at the numbers. In fact, in Fiscal Year 2014 the SEC 

brought nearly half of its litigated actions through administrative 

proceedings, and that was an increase of about 35 percent over 

2012. And its win rate in these cases is, not surprisingly, extraordinarily high. 

So while prosecuting more cases in this manner is maybe more 

efficient and leads to lower expenditures for the SEC, we must realize that these efforts come with a significant cost. The cost is less 

due process protection for defendants who find themselves beholden to a seriously flawed system that violates the constitutional 

rights of the accused. 

And despite recent attempts by the SEC to address some of the 

concerns that have been raised, its in-house courts still lack many 

of the protections provided under the Federal Rules of Civil Procedure and the Federal Rules of Evidence, such as full discovery 

rights and the right to jury trial. 

So the solution envisioned under the Due Process Restoration 

Act, my bill, is a simple one: Simply allow defendants the option 

to have their cases moved to a district court where robust due process protection exists. 

The legislation maintains the ability of the SEC to commence an 

administrative proceeding in cases where the SEC, for example, 

may be seeking to bar someone from practicing from their Commission. And importantly, the bill does not mandate that certain cases 

automatically move to a district court. Instead, it leaves the decisions up to the defendant. 

So if the administrative proceedings are as fair and impartial as 

the SEC says they are, under the bill those defendants would have 

the ability to remain within the SEC’s in-house tribunal. 

Hopefully, we can all agree that enforcement is an essential part 

of the SEC’s mission, but we can also agree that the rights of the 

innocent must also be protected when the SEC takes actions that 

can destroy the career and reputation of an individual. 

So the Due Process Restoration Act would help protect the innocent against government overreach. And I look forward to hearing 

from our witnesses today on this important matter. 

With that, I yield to the gentlelady from New York for 3 minutes. 

Mrs. MALONEY. I thank the gentleman for calling this hearing 

and for yielding to me. 

3 

And this hearing will address a series of legislative proposals, 

most of which address capital formation issues. They are intended 

to make it easier for companies to raise capital. 

I am proud to be a cosponsor of one of the bills, the SEC Small 

Business Advocate Act, which my colleague Mr. Carney has worked 

so hard on. This bill would create an Office of the Advocate for 

Small Business Capital Formation within the SEC and would also 

create a permanent Small Business Advisory Committee at the 

SEC. 

This is a common-sense proposal. It is actually modeled off of the 

provision in the Dodd-Frank Act which established the SEC’s Investor Advisory Committee. 

Ms. Sinema and Mr. Fitzpatrick also have a bill that would provide very targeted relief on the auditor attestation requirement in 

the Sarbanes-Oxley Act. All of the Democrats on this committee, 

myself included, voted against a bill last Congress that would have 

provided a blanket exemption from this requirement for roughly 75 

percent of all public companies. 

But I am intrigued by this compromise bill from Ms. Sinema, 

which is substantially more narrowly targeted. In effect, the bill 

would only provide limited relief and only to companies that can 

prove that they don’t have enough revenue to pay for the auditor 

attestation requirement. 

So I will be very interested in hearing more from our witnesses 

about this proposed compromise. 

Finally, the Due Process Restoration Act would overhaul the 

SEC’s administrative courts. I am very concerned about making 

changes that could weaken the SEC’s enforcement authorities as 

well as their ability to quickly and fairly prosecute wrongdoers. 

It is also important to remember that the SEC has long had the 

authority to try certain cases in an administrative forum rather 

than in Federal court. And we simply expanded this authority in 

Dodd-Frank because it has been such a useful tool. 

In fact, people forget that much of our insider trading law was 

developed in an administrative case, the insider trading case of 

Katie Roberts in 1961 was an administrative opinion and the Supreme Court later adopted much of the Katie Roberts analysis as 

the basis for insider trading law. 

So I think the SEC’s administrative forum has been a useful tool. 

And I will be interested to hear from our witnesses about this proposal. 

I look forward to all of your testimony and the exchange we will 

have. Thank you for being here, and I yield back. 

Thank you. 

Chairman GARRETT. Thank you. The gentlelady yields back. 

I now yield to the vice chairman of the subcommittee for 21⁄2

minutes. 

Mr. HURT. Thank you, Mr. Chairman— 

Chairman GARRETT. For 11⁄2 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

And I thank the witnesses for appearing today in this important 

hearing. 

I represent a rural district in Virginia, Virginia’s 5th District. It 

stretches from the northern part of Virginia in Fauquier County to 

4 

the North Carolina border. As I travel across my district, I am reminded by my constituents again and again that the number one 

concern that they face is jobs and the economy. At a time when our 

economy is still struggling, Congress must do everything possible 

to help our small businesses achieve success. 

These entities are our Nation’s most dynamic job creators and 

their success is essential to our economy and American working 

families depend upon their success. 

Every one of the measures we are considering today is designed 

to achieve that goal, whether that means establishing an office for 

small business capital formation, reducing the size of the administrative state or helping startups market their securities to a larger 

poll of investors, the goal is to help our Nation’s small businesses 

achieve that success. 

One such measure we are considering today is the Helping Angels Lead Our Startups Act, or HALOS Act. If enacted, this legislation would help startups by allowing them to better market their 

securities and to take part in economic development events like 

demo days where these startups can interface with potential investors without the risk of violating Federal securities law. 

If adopted, the HALOS Act would alleviate the burden placed on 

startups with regard to privacy and compliance concerns which 

often require entrepreneurs and startups to take on burdens that 

are unnecessary and disproportionately expensive for small firms. 

These burdens have a significant impact on an entrepreneur’s ability to deal with investors because of the risk of having their interactions with investors viewed as general solicitations or advertisements in violation of the Federal securities laws. 

The adoption of the HALOS Act would be an important step in 

continuing the success that this committee has achieved in the bipartisan JOBS Act. 

I look forward to the testimony of each of our distinguished witnesses. 

I thank the chairman and yield back the balance of my time. 

Chairman GARRETT. Thank you, and the gentleman yields back. 

And now for 2 minutes, Ms. Sinema. 

Ms. SINEMA. Thank you, Chairman Garrett and Ranking Member Maloney, for holding this legislative hearing. 

I have heard from companies throughout my district that burdensome and unnecessary regulations continue to stifle their ability to grow and succeed. My bipartisan bill, the Fostering Innovation Act, provides targeted regulatory relief for companies on the 

cutting edge of scientific and medical research. 

The bill adds an additional 5 years to the current JOBS Act exemption from auditing requirements under Sarbanes-Oxley for 

emerging growth companies that have an annual average revenue 

of less than $50 million and less than $700 million in public float. 

This common-sense exemption will help ensure that costly regulations don’t stand in the way of success for companies with a research-driven business model. 

I am also a sponsor of the Helping Angels Lead Our Startups 

Act, or the HALOS Act. This bipartisan bill provides a clear path 

for startup businesses to connect with angel investors and venture 

5 

capitalists through demo days without being subject to onerous 

verification requirements. 

Demo days are business-planned competitions, startup days, innovation summits, and other public forums that introduce entrepreneurs to potential investors. But because of confusion under current law, small businesses that need equity capital may forgo these 

events, losing opportunities to meet not only accredited investors, 

but also students, professors, and business professionals whose 

input and eventual investment could be invaluable. 

I am committed to working with my colleagues on both sides of 

the aisle to ensure that Arizona’s innovative small businesses have 

every opportunity to thrive. 

So thank you to Mr. Chabot, Mr. Hurt, and Mr. Fitzpatrick for 

working with me on these common-sense, bipartisan bills. 

And thank you again to Chairman Garrett and Ranking Member 

Maloney for holding today’s hearing. 

I yield back my time. 

Chairman GARRETT. The gentlelady yields back. 

The gentleman from Maine is recognized for 1 minute. 

Mr. POLIQUIN. Thank you, Mr. Chairman. 

I want to thank Chairman Garrett and Chairman Hensarling for 

bringing forward the Small Business Capital Formation Enhancement Act in a draft format today that I am sponsoring. 

I also want to thank Congressman Juan Vargas from California 

who will be the lead cosponsor on this bill. 

We all know that 80 percent of the new jobs in America are created by small businesses. But often, small businesses can’t get the 

traditional loans from banks that they need to grow and expand 

and to hire more workers, so it is so important for our small businesses to be able to access our capital markets, the most liquid in 

the world, to make sure they have that lifeline. 

Now, it doesn’t matter if you are a boat builder in Ellsworth, 

Maine, or you are a call center in Lewiston, Maine, those jobs are 

critically important to our district and other employers throughout 

the country. 

Now, during the past 35 years, as required by law, the SEC 

holds a forum that combines government officials and the private 

sector to make sure we come up with the best ideas possible on 

how our small businesses can access capital so they can grow and 

hire more workers. And we get the best academics and 

businesspeople, industry people and attorneys and government 

folks in the same room so we can come up with the recommendations. 

Now, one of the problems we have, Mr. Chairman, is that this 

group every year comes up with some terrific recommendations 

that should become part of the rulemaking here in Congress or 

part of legislation that we sometimes advance here in this committee. But the SEC is not required to do anything with these recommendations. 

So all this Act does is require that the SEC access this information, take it very seriously, and issue a public statement on whether or not they are going to use these recommendations to further 

capital access in America. 

6 

So with that, Mr. Chairman, again I want to thank you very 

much for letting me introduce this legislation in draft form. 

And I thank Congressman Juan Vargas for being a lead cosponsor on this bill. 

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

thank the gentleman for his work on the legislation and for him 

introducing the bill. 

We will now turn to our panel. And again, I welcome everyone 

here on the panel and I thank you very much for being with us. 

You have all submitted written testimony. I have reviewed it, and 

I suggest the subcommittee has reviewed it as well. 

You will be given at this point 5 minutes to address the subcommittee. For those of you who have not been here before, there 

should be in front of you indicator lights: green menas you have 5 

minutes; yellow means you have 1 minute left; and red means you 

are out of time. And without objection, each of your written statements will be made a part of the record. 

So with that, we will turn to the professor, Mr. Grundfest. Welcome to the panel, and you are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE JOSEPH A. GRUNDFEST, 

WILLIAM A. FRANKE PROFESSOR OF LAW AND BUSINESS, 

STANFORD LAW SCHOOL; AND FORMER COMMISSIONER, U.S. 

SECURITIES AND EXCHANGE COMMISSION 

Mr. GRUNDFEST. Great. Thank you, Chairman Garrett, Ranking 

Member Maloney, and distinguished members of the subcommittee. 

I would like to thank you for the opportunity to address matters 

that are important to the enforcement of our Nation’s securities 

laws in general and to the issues that are raised by H.R. 3798, the 

Due Process Restoration Act of 2015 in particular. 

A few brief words of introduction. I am the William A. Franke 

professor of law and business at Stanford Law School. I am senior 

faculty at the Rock Center on Corporate Governance at Stanford 

University. And I served as a Commissioner of the United States 

Securities and Exchange Commission from 1985 to 1990. 

The substance of my testimony this morning can be summarized 

in a single word: balance. There should be a reasonable balance between the cases that the Commission decides to pursue through its 

internal administrative proceedings and those it decides to pursue 

in Federal court. And as for cases brought as administrative proceedings, there should be a reasonable balance between the respondent’s rights to mount an effective defense and the Commission’s reasonable interests in the prompt and effective enforcement 

of our Nation’s securities laws. 

There is, however, cause for concern that both processes are out 

of balance from many different perspectives. Legislative proposals 

of the sort that this committee is exploring this morning can, I believe, help restore a more effective equilibrium. 

The SEC’s administrative procedures have been criticized for decades. Critics have complained of a lack of depositions, the imposition of a rocket docket, the admission of hearsay evidence, the absence of a jury, bias by administrative law judges, long delays in 

appeals to the Commission itself, and the incongruity of an appeal 

to the same body that initially authorized the complaint. 

7 

These concerns have recently been compounded by SEC statements suggesting a plan to increase the number of enforcement actions filed as administrative proceedings and correspondingly to reduce the number of actions filed in Federal civil court. 

The Commission has also clearly signaled its intent to insist on 

Chevron deference to its interpretation of the Federal securities 

laws, even when a significant number of Federal judges disagree 

with the Commission. Indeed, a sitting Federal judge has warned 

of serious adverse consequences for the evolution of the Federal securities laws if the Commission succeeds in this endeavor. 

For all of these reasons, concern has mounted about the fairness 

of the SEC’s internal administrative procedures and the frequency 

with which the agency resorts to administrative proceedings and 

not to Federal court. 

To the Commission’s credit, it has not been deaf to these concerns. It has recently proposed to amend its rules governing administrative proceedings so that instead of prohibiting all depositions, 

respondents will now be permitted to take up to five. But these are 

minor concessions given the litany of concerns that have been 

raised about the Commission’s internal procedures. 

Indeed, as a leading commentator in The New York Times recently observed, these are, ‘‘at best, small steps in responding to 

criticisms over truncated rights.’’ 

The challenge for Congress is to consider a legislative strategy 

that might help restore a more effective balance in the Commission’s internal procedural rules and in the process by which the 

Commission decides which cases to file in Federal court and which 

to bring as administrative proceedings. 

One possible approach to this challenge would be to consider legislation that would help assure that appropriate cases are heard in 

Federal courts and by administrative law judges, and the same legislation could provide incentives for the Commission to reform its 

internal procedures so that they are viewed as reasonable by the 

Federal judiciary. 

This proposal would categorize SEC enforcement proceedings as 

falling into one of three groups. The first group of cases would involve proceedings that Congress determines can remain in the administrative process and that don’t, as a rule, require the greater 

safeguards available under the Federal Rules of Civil Procedure or 

the Federal Rules of Evidence. Examples of these cases might include late filing cases, net capital violations, and a host of other 

matters that should not clutter the dockets of the already overburdened Federal courts. 

The second group of cases would be composed of cases that raise 

questions that Congress considers particularly well-suited for resolution in Federal court. Examples of these cases might include insider trading prosecutions, or fraud in the sale of securities. As to 

these cases, respondents would have an unconditional right of removal, much as they would under the legislation being considered 

today, H.R. 3798. 

The third group would be composed of cases that fall in neither 

the first nor second categories. Respondents in these cases could 

have a right to petition the Federal courts for an order of removal 

that would be granted at the discretion of the judge. The entire 

8 

process could be modeled on Federal Rule of Civil Procedure 23(f) 

which creates a right to petition for interlocutory review of decisions on motions for class certification. 

This tripartite approach can, I believe, lead to an appropriate 

balance that does not interfere with the SEC’s legitimate interest 

in the fair and efficient enforcement of the Nation’s securities laws 

and protects the legitimate interests of respondents in these proceedings. 

Thank you very much. 

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

49 of the appendix.] 

Chairman GARRETT. I thank the gentleman. 

Now turning next to the representative from the biotech industry. Mr. Hahn, you are recognized for 5 minutes. 

STATEMENT OF BRIAN HAHN, CHIEF FINANCIAL OFFICER, 

GLYCOMIMETICS, INC., ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION 

Mr. HAHN. Good morning, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. My name is Brian 

Hahn and I am the CFO of GlycoMimetics, a clinical stage biotech 

company with 40 employees. We are conducting clinical trials to 

treat patients suffering from sickle cell disease and acute myeloid 

leukemia. 

GlycoMimetics’ story is mirrored by our colleagues cross bio’s 

membership. Our product candidates were developed by brilliant 

scientists and our early research was funded by venture capital. 

When it came time to conduct expensive clinical trials, we turned 

to the public market for financing. 

Growing biotechs do not generate product revenue. We are 12 

years into our research and we are still years away from our first 

dollar in product revenue. Because of this unique development 

pathway, investment capital is vitally necessary to support the $2 

billion search for new medicines. 

GlycoMimetics went public in January of 2014, raising $64 million that has funded our research for the last 2 years. Our IPO was 

supported by the JOBS Act, which has stimulated more than 180 

biotech IPOs by granting company-enhanced access to investors 

and reducing their regulatory burdens. 

Spending capital on one-size-fits-all compliance requirements is 

uniquely damaging to emerging biotechs. Every dollar spent on a 

reporting burden is a dollar diverted from the lab. 

The JOBS Act has been so successful because it has allowed 

emerging growth companies to focus capital on science rather than 

compliance. In particular, I am thankful that the emerging growth 

companies are given a 5-year exemption from compliance with Section 404(b) of the Sarbanes-Oxley (SOX) Act. 

The external attestation required by SOX does not provide meaningful information to biotech investors, yet is extremely costly for 

a pre-revenue company. Our investors demand information about 

our science, our patients, and our regulatory pathway, but they do 

not want us to spend up a million dollars on compliance requirements that don’t give any insight into our business. 

9 

The JOBS Act’s 5-year SOX exemption has saved millions of dollars for growing biotechs, but most will still be pre-revenue when 

the IPO on-ramp expires. 

GlycoMimetics expects our annual expenses to increase by upwards of $350,000 starting in year 6 on the market, capital that 

could be used to treat over a dozen patients in the clinic each year. 

I strongly support the Sinema-Fitzpatrick Fostering Innovation 

Act which would extend the JOBS Act 404(b) exemption for an additional 5 years for certain small companies. 

This bill would allow growing businesses to remain exempt from 

Section 404(b) through year 10 on the market if they maintain average annual revenues below $50 million and a public float below 

$700 million. 

If focusing on revenues is the key metric of a company, size is 

vital to the reform. Public float is a measure of investors’ predictions about our future potential, but revenue is a true window 

into a company’s size today and our ability to pay for expensive 

compliance requirements that are not meaningful. 

We are all working toward the first dollar of revenue. Until that 

point, we need to focus all of our investment capital on our research rather than on our compliance obligations. This important 

bill recognizes that a low-revenue company that has been on the 

market beyond the 5-year EGC window is still very much an 

emerging, growing company. 

The Fostering Innovation Act will build on the success of the 

JOBS Act by reducing compliance costs for small businesses. These 

cost savings will allow companies like mine to focus solely on lifechanging science, so I strongly support this bill. 

I also support efforts to encourage the SEC to enact capital formation initiatives. The JOBS Act came out of industry proposals 

that the SEC could have instituted on its own, but Congress had 

to step in. 

The SEC Small Business Advocate Act and the Small Business 

Capital Formation Act would improve the SEC’s policymaking processes by bringing small businesses into the room, hopefully encouraging smart policymaking that will support capital formation and 

reduce regulatory burdens. 

The JOBS Act has shown us the strong impact that a move away 

from one-size-fits-all regulatory burdens can have on capital formation. 

I applaud the subcommittee for considering further cost-saving 

initiatives and look forward to answering any questions you may 

have. 

[The prepared statement of Mr. Hahn can be found on page 58 

of the appendix.] 

Chairman GARRETT. I thank the gentleman for your testimony. 

Dr. Carcello, welcome to the panel, and you are recognized for 5 

minutes. 

10 

STATEMENT OF JOSEPH V. CARCELLO, EY AND BUSINESS 

ALUMNI PROFESSOR, AND DEPARTMENT CHAIR, DEPARTMENT OF ACCOUNTING AND INFORMATION MANAGEMENT, 

HASLAM COLLEGE OF BUSINESS, UNIVERSITY OF TENNESSEE, KNOXVILLE 

Mr. CARCELLO. Thank you. Good morning, Chairman Garrett, 

Ranking Member Maloney, and members of the subcommittee. 

Thank you for giving me the opportunity to speak with you today 

about legislative proposals that would affect the U.S. capital markets. 

I can’t reduce my testimony to one word, but I can reduce it to 

one sentence: Capital markets do not exist without investors. 

I have served as a professor at the University of Tennessee for 

over 20 years where I teach accounting, auditing, and corporate 

governance. My remarks are also informed by my service on the 

SEC’s Investor Advisory Committee and the PCAOB’s Investor Advisory Group. 

Turning first to H.R. 3784, it would establish an Advocate for 

Small Business Capital Formation and a Small Business Capital 

Formation Advisory Committee within the SEC. This bill appears 

premised on a lack of access that small business has to Congress 

and/or to the SEC. 

The facts belie the existence of a problem, given recent changes 

to small-business regulation contained in the Dodd-Frank Act and 

in the JOBS Act. Even if Congress concludes that the interests of 

small businesses need better representation, the bill as drafted is 

flawed. 

The advisory committee is essentially a lobbying group for small 

businesses, a lobbying group that Congress would have granted a 

government imprimatur to. 

Finally, H.R. 3784, as well as a number of the other bills being 

discussed this morning, seem to view any shortfall of capital experienced by small businesses as a problem of demand. That is, small 

businesses lack capital due to onerous and high-cost regulation. 

Leaving aside the veracity of this viewpoint, this argument ignores the suppliers of capital: investors. Creating a quasi-lobbying 

group to seek a more favorable regulatory climate for small businesses may succeed in reducing the cost of regulation, but at the 

potential cost of greater information risk to investors. Such an outcome would actually be counterproductive for small businesses as 

capital would either exit the market or would only be available at 

a much higher cost. 

Turning to H.R. 3798, this bill would give defendants subject to 

SEC proceedings before an ALJ the option to have those proceedings terminated. If the SEC wanted to proceed, the Commission would have to bring the charges in U.S. district court. 

Before changing the SEC’s enforcement process, it is important 

to remember that Congress, first in the Sabanes-Oxley Act and 

then in the Dodd-Frank Act, made it easier for the Commission to 

bring certain enforcement actions before an ALJ. Congress should 

not underestimate the collateral damage that may be done by 

changing the SEC’s enforcement powers. 

Giving defendants the right to effectively choose the venue in 

which they will be tried is unlikely to be in the best interests of 

11 

society and will almost certainly make it more difficult for the SEC 

to deter and punish securities law violations, including fraud. 

Finally, the Fostering Innovation Act would extend the waiver of 

auditor reporting on the effectiveness of an issuer’s controls over financial reporting for certain emerging growth companies from 5 

years to as long as 10 years. Further expanding the number of 

companies exempt from 404(b) is ill-advised because auditor reporting on ICFR is valued by investors. 

In a recent survey by the PCAOB’s Investor Advisory Group—by 

the way, $13.4 trillion of capital was represented by those respondents, 72 percent of surveyed institutional investors indicated that 

they relied on the ICFR opinion either extensively or a good bit. 

Any decision to exempt smaller public companies from auditor internal control testing ignores the ample evidence that internal control problems are often most serious in smaller public companies. 

In addition, those companies charged with financial statement 

fraud by the SEC tend to be relatively small. 

If Congress decides to move forward with this proposal, I have 

an alternative for Congress to consider. Rather than just giving a 

blanket exemption after 5 years, assuming the $700 million threshold is not hit and the $50 million revenue is in place, put it to a 

vote of the people who actually own the company: the investors. 

If my colleagues on this panel are right, they will overwhelmingly vote for a further delay in that requirement. And if they 

value 404(b), they won’t. So let the market decide, let investors 

who own the company make the decision. 

I look forward to the committee’s questions. 

[The prepared statement of Dr. Carcello can be found on page 40 

of the appendix.] 

Chairman GARRETT. Thank you. 

From Horizon Technology Finance, Mr. Mathieu, welcome to the 

panel, and you are recognized for 5 minutes. 

STATEMENT OF CHRIS MATHIEU, CHIEF FINANCIAL OFFICER, 

HORIZON TECHNOLOGY FINANCE, ON BEHALF OF THE 

SMALL BUSINESS INVESTOR ALLIANCE (SBIA) 

Mr. MATHIEU. Thank you. Good morning, Chairman Garrett, 

Ranking Member Maloney, and members of the subcommittee. 

I am here today representing the Small Business Investor Alliance, or the SBIA, which is the trade association for lower-middlemarket private equity funds, SBICs, and business development 

companies, or BDCs, and their institutional investors. SBIA members provide vital capital to small and medium-sized businesses 

across the country. 

My name is Chris Mathieu, and I am the CFO and co-founder 

of Horizon Technology Finance Corporation, an externally managed, publicly traded BDC. I have been involved in the accounting, 

finance, and venture debt industry for more than 25 years. 

Horizon is a specialty finance company that lends to and invests 

in development and growth stage companies in the technology and 

life science industries. Our investments take the form of secured 

loans or venture loans to companies backed by established venture 

capital and private equity firms. 

12 

Having served as a steward of investor capital for the last 25 

years in both public and private markets and for both institutional 

and individual investors, I believe I have a wide and deep perspective on the importance of having an advocate among the decisionmakers within an organization and industry and its underlying sectors. 

I am here to express our support for a bipartisan bill called the 

SEC Small Business Advocate Act, or H.R. 3784, introduced by 

Representatives Carney and Duffy. 

In a speech given by former SEC Commissioner Daniel Gallagher 

on September 17, 2014, the genesis of this Act was born. In his 

opinion, Mr. Gallagher argued that the SEC does not have adequate structure in place to consider the views of small businesses. 

He argued that the SEC consistently overlooks the impact of their 

decisions on small businesses and this could be a detriment to capital formation. 

We agree with Mr. Gallagher’s assessment and believe Congress 

needs to put a permanent structure in place at the SEC to give a 

stronger voice to small business and capital formation issues. The 

Act is the favored approach by the industry to create this new 

structure. 

The Act strengthens the voice of small business at the SEC by 

making significant changes to the way the SEC hears from smallbusiness stakeholders, and responds to stakeholder requests and 

makes recommendations to Congress and the SEC to improve the 

ability of small business to access capital. 

The advocate will have similar powers to the Dodd-Frank-created 

Office of the Investor Advocate, giving small businesses an equal 

footing with investors in influence over the SEC actions. 

For example, the legislation charges the advocate to produce an 

independent annual report to Congress on its recommendations. 

This report will provide a summary of the most serious issues encountered by small business and small-business investors, and recommendations for change to regulations and other guidance that 

may be appropriate to resolve these problems. 

Congress would also benefit greatly from this office. Legislating 

good policy generally includes technical assistance and input from 

regulators. The technical assistance given to Congress suffers from 

the same bias and focus on large corporations. Congress would benefit from having small-busineses’ issues included in both the technical assistance it receives and in the way regulations are crafted 

when implementing legislation. Better information means better 

legislation. 

SBIA also supports the HALOS Act. This legislation helps address a problematic issue in the raising of private capital surrounding the definition of general solicitation in the matching of investors with startup investment opportunities. 

SBIA encourages the committee to pass this legislation to provide 

associations like the SBIA and other fund managers that are members of the association the protection they need to facilitate the 

meeting of potential limited partner investors and general partner 

investment managers. 

We also support the Small Business Capital Formation Act. This 

legislation would require the SEC to respond in a public statement 

13 

to each of the suggestions by the Government-Business Forum on 

Small Business Capital Formation. 

The bill requires that the SEC acknowledge the receipt of the forum’s suggestions and explains why they will or will not adopt the 

suggestions. 

I want to thank the committee again for holding this hearing 

today on these important pieces of legislation. And I look forward 

to answering any questions. 

And I also ask for your support and cosponsor of this legislation. 

Thank you. 

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

66 of the appendix.] 

Chairman GARRETT. I thank the gentleman. 

Last, but not least, Mr. Quaadman from the U.S. Chamber of 

Commerce, you have 5 minutes. 

STATEMENT OF TOM QUAADMAN, SENIOR VICE PRESIDENT, 

CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. 

CHAMBER OF COMMERCE 

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

Maloney, and members of the subcommittee. 

A prosperous, growing economy needs to have a strong and fair 

securities regulator to facilitate efficient capital markets. I know 

that is a priority of Chair White as well as Director Ceresney, but 

we were looking at SEC enforcement long before their tenure. 

This past July, the Chamber released a report on SEC enforcement that included 28 recommendations for how the SEC can improve enforcement oversight and investigations and, what I would 

like to talk about today, due process. 

The use of administrative proceedings has changed radically over 

the last 25 years that now today administrative proceedings are 

the primary means of adjudicating violations. Administrative proceedings are also not an even playing field. The SEC has unfettered right to discovery, and can take years to bring a case, whereas defendants have 90 days to prepare their defense, lack adequate 

discovery, and no right to deposition and have no protection of evidentiary rules. 

The due process recommendations that we made this past July 

included: alternative dispute resolution, so that the SEC can quickly resolve very minor violations; clarifying the use of administrative 

proceedings, so that those ministerial matters can solely be handled through administrative proceedings; that those serious offenses where there is well-settled law in Article III courts could 

have a pathway to district courts; that the 1993 rules of practice 

be replaced with new rules of practice that include rights of discovery, ability to have depositions, as well as the reliability of evidence including hearsay evidence, as well as the right of removal 

to district court and for the defendant, not the government, to decide the right to a trial by jury. 

The SEC, as has been mentioned, has proposed limited amended 

rules of practice; I will call it a crawl in the right direction. We are 

going to file a comment letter at the end of this week, which we 

will be happy to provide to the committee. 

14 

We support the Due Process Restoration Act, but would make a 

couple of recommendations for amendments. First, we believe that 

it should include the 1933 Securities Act, the Investment Company 

Act of 1940, and the Investment Advisers Act of 1940. This will 

allow for the major enforcement matters that have well-settled law 

in Article III courts to have a pathway to district courts. 

We also believe that there should be one burden of proof. We understand what the reasoning is behind the clear and convincing 

standard, but we believe that there should be one standard of proof 

so that there is balance. 

I believe that the passage of an amended version of the Due 

Process Restoration Act, as well as the other due process enhancements that we had recommended, would allow the SEC to be a 

strong enforcer of the law and give defendants the ability to defend 

themselves. 

We also support the SEC’s Small Business Advocate Act of 2015. 

However, we believe there should be a couple of amendments as 

well. First, the powers of the investor advocate and small-business 

advocate should be similar and mirror each other. So, for instance, 

the small-business advocate should have the right to appoint a nonvoting member to the Investor Advisory Committee. 

Similarly, it is a very longstanding position of the Chamber that 

advisory committees of the SEC and its subordinate organizations 

also be transparent in their processes. Therefore, we would recommend that the bill be amended so that the Small Business Capital Formation Advisory Committee as well as the Investor Advisory Committee be subject to the Federal Advisory Committee Act 

and the Sunshine Act. 

We also agree that the SEC has had a difficult time in keeping 

up with evolving markets. We believe that the Small Business Capital Formation Enhancement Act will allow the SEC to modernize 

its regulations and overcome inertia. 

We also support the HALOS Act. We believe that this will help 

unlock capital. However, we also believe there need to be strong investor protections in place and that information is going to credited 

investors. We believe that there should be a date-certain retrospective review after implementation for the SEC to review if the 

HALOS Act is both facilitating investor protection, promoting investor protection and facilitating capital formation. 

Finally, I would just like to thank Chairman Hensarling, this 

subcommittee, and the Financial Services Committee for including 

key capital formation improvements in the DRIVE Act. We believe 

that those are very important and are an important build upon the 

JOBS Act. 

I look forward to working with the committee on these bills and 

look forward to any questions you may have. 

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

73 of the appendix.] 

Chairman GARRETT. Thank you. The gentleman yields back, and 

I thank you for the testimony, and also amendment ideas. 

But that is what these hearings are for, to see how we can improve things. 

So at this point, I recognize myself for 5 minutes for questions. 

15 

I guess I will go to Mr. Quaadman first. You heard Dr. Carcello’s 

comments, and his last comment was on the Fostering Innovation 

Act bill. One of his comments was, well, if you did it, maybe what 

you should do is allow the markets to decide and allow the investors in that field to be able to opt in or opt out. 

You heard that comment? 

Mr. QUAADMAN. Yes, I did, sir. 

Chairman GARRETT. That was intriguing to me. So if we were to 

go that way, maybe we shouldn’t just apply that to that sphere, 

maybe we should apply that to a whole myriad of Dodd-Frank 

pieces of legislation and allow investors to be able to opt out all of 

that. 

I see Dr. Carcello agreeing. 

Mr. CARCELLO. Yes. 

Chairman GARRETT. I will give Mr. Quaadman and Dr. Carcello 

10 seconds on each one. 

Mr. QUAADMAN. Sure. I think that is a very interesting suggestion. I agree with you that if you want to go down that logical road, 

then why not have that process for a whole myriad of rules and 

regulations. 

One thing I just want to do, throw out one area of concern about, 

we do believe that internal controls are important for a company 

to grow from small to big. In fact, BIO and the Chamber have been 

working together to address some concerns with the SEC and the 

PCAOB where those costs have actually ratcheted up for many 

companies. 

I think it is something worthy of discussion, but I think we also 

need to be very concerned as well of an uneven playing field. 

Chairman GARRETT. Yes. 

Dr. Carcello? 

Mr. CARCELLO. Just very briefly, I would extend it broadly. I 

would even extend it to the external audit of the financial statements. I think if that had to be selected by investors, you would 

find greater competition and probably greater responsiveness to 

market needs. 

Chairman GARRETT. I was initially troubled by your ideas because I was thinking you were looking at this as a zero-sum game 

as far as our U.S. markets. But I guess if you extended this as far 

as you would go, you would actually potentially open up our markets by making us on a more level playing field as far as investor 

concerns across the spectrum. So, thank you for that. 

Let me go back to the other end of the dais here. 

Mr. Grundfest, you laid out three pots if you will, three silos as 

far as what these could fall into, three buckets, pro forma matters 

that would remain here, the clear-cut ones that were over here, 

and then other ones that are in the middle. Maybe you could just 

spend 20 seconds on the ones in the middle. What would be the criteria? Because if this is basically left to a judge to decide, the judge 

is going to have to have some sort of criteria in order to make that 

determination, right? 

Mr. GRUNDFEST. Absolutely, Mr. Chairman. And if you take a 

look at my written testimony, the very last footnote on the very 

last page lays out six considerations in particular that a court 

might view as what would be called core factors with an analogy 

16 

to rule 23(f). They would be first, the presence of complex regulatory matters that are better resolved by an administrative law 

judge than by a jury or an Article III. 

Let’s face it, there are certain levels of complexity that belong 

with the SEC. You don’t want to clutter the Federal court docket 

if you have that kind— 

Chairman GARRETT. That is in the first category. I got that. 

Mr. GRUNDFEST. Yes. I’m sorry? 

Chairman GARRETT. That is in the first category, clearly, the 

ones that are clearly— 

Mr. GRUNDFEST. Actually, even in the toss-up cases. 

Chairman GARRETT. Okay. 

Mr. GRUNDFEST. Even in the toss-up cases, sometimes you have 

complex regulatory matters. A judge can look at it and say, we 

really need the expertise of the SEC and an ALJ to address these 

types of issues. 

Then you could look at the value of fact-finding by a jury as opposed to an administrative law judge. Sometimes they say, we have 

questions of credibility and we would rather have a jury of 12 peers 

view these issues rather than have the decision being made by an 

administrative law judge. 

Chairman GARRETT. Let me just stop you on that because I can 

go through the other six in a moment. 

Mr. GRUNDFEST. Sure. 

Chairman GARRETT. But Mr. Grundfest, on that point, if you ask 

the average person on the street, don’t we have a right in the 

United States to have a decision made on guilt or innocence, if you 

will, by a jury of our peers? That doesn’t occur here, correct? The 

fact finder is not a jury of our peers. And is that a violation of our 

Constitution? Is that a usurpation of the powers of Article III 

judges, of Article III of the Constitution? 

Mr. GRUNDFEST. Yes. And there have been a number of cases 

that have been popping up where courts have been expressing a lot 

of concerns regarding this use of administrative proceedings. 

We have now the system is set up that the government decides 

whether or not there is going to be a trial by jury, which puts defendants at a severe constitutional disadvantage. 

Chairman GARRETT. Right. And at the end of the day, what are 

we talking about as far as the penalties that could be imposed? Are 

these not life-and-death decisions actually being made by these inside tribunals? 

Mr. GRUNDFEST. Yes. In fact, Russell Ryan, who is a former Assistant Director of Enforcement at the SEC, wrote an op-ed in The 

Wall Street Journal last year where he was citing that these proceedings are being used as quasi-criminal proceedings. 

So if you take someone like a Nelson Obus with Wynnefield Capital— 

Chairman GARRETT. Okay. 

Mr. GRUNDFEST. —he was able to get into district court under the old rules and was acquitted after 12 years and $13 million. He 

would not have the opportunity to do that today and would not 

have had the discovery tools that allowed him to unearth the evidence that acquitted him. 

Chairman GARRETT. Thank you very much. 

17 

And with that, I turn to the gentlelady from New York, the 

rnaking member of the subcommittee, for 5 minutes. 

Mrs. MALONEY. Thank you. 

Professor Carcello, I would like to ask you about the Due Process 

Restoration Act. This bill would permit a defendant rather than the 

SEC to choose the venue of the enforcement action, essentially 

whether it is initially tried in an administrative forum or the Federal district court. 

Now when the SEC is bringing enforcement action, it can choose 

the venue that best serves the interests of the investors and the 

public. A defendant in an enforcement action, on the other hand, 

would likely choose the venue that is in the best interest of the defendant. 

So the bill, for example, could potentially allow a well-funded defendant to choose a district court knowing that the Federal district 

courts are overwhelmed and that may delay a trial, realistically, 

for many years. 

In your opinion, do you think allowing a defendant to have this 

choice is in the public interest? 

Mr. CARCELLO. No. And the reason why—the choices here are 

very clear. It is obvious to the defendant it is in his or her interest 

to have a choice of venue. It is, I think, clear that from a societal 

perspective the SEC is going to choose the venue that they think 

best serves investors and best serves society. 

And I think it is important for Congress and this committee to 

think carefully about the fact that the greater use of ALJ, as I have 

talked about in my testimony, was facilitated by actions Congress 

took. Congress took action in 2002 in Section 305 of SOX to facilitate the ability of the SEC to move in this venue. They took action 

in Dodd-Frank in 929(p) to facilitate the ability of the SEC to move 

in this venue. 

Both of those Acts followed severe market disruptions, massive 

financial fraud, to the point that our markets were essentially paralyzed in 2001 and 2002. 

And I would point out to this committee that in the vote against 

SOX, there were fewer people who voted against SOX—look it up— 

than voted against declaring war on Japan after Pearl Harbor was 

bombed. Okay? And President Bush was the President then, hardly 

a known liberal. So the markets were paralyzed. 

Dodd-Frank was not nearly as bipartisan, clearly, but followed 

essentially close to the complete implosion of the financial sector in 

this country. And so Congress viewed market failures there. They 

viewed it as a situation where the SEC, among many other things, 

needed greater enforcement tools. 

So I think the question the committee needs to answer—and it 

is really a very simple question—is what has changed? What has 

changed? Why did the enforcement tools that you have created 

within the last 15 years, it is not 50 years ago, this is in the last 

15 years, why are these enforcement tools no longer needed? 

Mrs. MALONEY. To follow up, are you concerned that this would 

hinder the SEC’s ability to crack down on bad actors in the securities market and especially with the funding constraints? We were 

just told from the screen that the SEC is funded 12 percent lower 

18 

than what their requests are, even though their responsibilities 

have grown. 

So I would like to ask you to follow up on that, and then anyone 

else on the panel who would like to comment on whether you think 

this would hinder the SEC’s ability to crack down on bad actors. 

Dr. Carcello? 

Mr. CARCELLO. Very briefly, to give others some time, yes, I 

think it clearly would. It would make it more difficult. I think even 

in Professor Grundfest’s testimony, part of his testimony in his 

written remarks indicated that it would make it more difficult at 

the margin. 

And the SEC, in many ways, is an underfunded agency. I think 

many people have viewed that for years. And so it is certainly 

going to make it more difficult for them to enforce the securities 

laws. 

To the extent that there is, in the minds of some, a lack of fairness to the defendant, I think that is a legitimate concern. But I 

think there are other ways that can be dealt with. 

Mrs. MALONEY. Would anyone else care to comment? 

Mr. QUAADMAN. Yes, Ranking Member Maloney, if we repeal the 

Bill of Rights a lot more people would be in jail, but we wouldn’t 

be a better country. The issue here is that if you had sufficient 

rules of practice and administrative proceedings and you had a 

right of removal, you would not have a stampede to district court, 

but at least you would give defendants the right to defend themselves. 

The reason why we have a Bill of Rights is because prosecutorial 

powers are so great, the Founding Fathers wanted to put some 

safeguards there. 

The issue here is we do not have constitutional safeguards, which 

also means there is a presumption that somebody is guilty until 

they are proven innocent. 

Mrs. MALONEY. But they can appeal to Federal court, correct? 

Mr. QUAADMAN. First, they have to— 

Mrs. MALONEY. Wouldn’t that be a safeguard? 

Mr. QUAADMAN. But first, they have to appeal to the Commissioners themselves. 

Chairman GARRETT. The gentlelady’s time has expired. 

The gentleman from Virginia, the vice chairman of the subcommittee, is recognized for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. Quaadman, I wanted to start with you. I was wondering if 

you could briefly talk about the importance of the angel capital 

markets and the importance of promoting policies here in Congress 

that encourage more investment by angel investors in startups. 

Mr. QUAADMAN. Angel investors are an extremely important investment tool for startup businesses. They are actually the first 

line of accredited investors who are going into startups, so they are 

critical for business formation. 

I think what we have clearly seen with the JOBS Act is the 

changes in general solicitation and the opening up of roadshows 

have been wildly accredited with the increase in IPOs and public 

company formation. 

19 

I think by helping to open up these venues for angel investors, 

if done in the right way, which they can be, I think that will certainly help business formation. And as I have testified before, we 

have seen over the last 7 years historic lows in business creation 

in the United States. So I think this is a critical reform we need. 

Mr. HURT. And do you think that is particularly important in 

light of the pressures that have been on other participants in providing capital, namely banks and credit unions, the pressures that 

they have suffered from over the last 8 years? 

Mr. QUAADMAN. Yes. Clearly we have seen with the implementation of the Basel III rules and other rules that are happening, there 

are disincentives now for banks to loan either through traditional 

business products or consumer financial products that are used for 

startups. So that market has receded, and we are now more dependent upon capital markets. So I think reforms like this, as with 

the BDC legislation and others, are very important in terms of 

moving forward. 

Mr. HURT. Thank you. 

I wanted to talk to Mr. Hahn and Mr. Mathieu for this next 

question. I was wondering if, beginning with you, Mr. Hahn, you 

could talk a little bit about the current general solicitation rules 

and how they unnecessarily impede the ability of startups to access 

capital under Reg D Rule 506(c), if you could talk a little bit about 

that, and then talk about our HALOS proposal and whether or not 

you believe that this proposal gets to the heart of solving that issue 

or improving that issue? And then maybe leave some time for Mr. 

Mathieu. 

Mr. HAHN. Thank you. I can kind of start working backwards 

with the JOBS Act. We went public in January of 2014. And the 

test-the-waters provision of the JOBS Act was instrumental. That 

is why we had a successful IPO. 

Working backwards toward that, though, most all of our funding 

was from venture capitalists. And over the years, when we were 

still private, we were always looking for different ways to raise 

money. So any expansion for private companies to get in front of 

more investors and to find more pockets of capital, would be a tremendous success to help more companies succeed. 

Mr. HURT. Do you think that the HALOS proposal that we are 

considering today helps remove some of those barriers and enhances the ability of startups to access that capital? 

Mr. HAHN. Yes, if it works, kind of similar to test the waters, it 

gives you more access with less barriers to get in front of more potential investors to tell the story of the company. In our case, our 

science is very complex, so it takes more meetings, more time to 

get people comfortable with our technology. I think that would definitely be helpful. 

Mr. HURT. Mr. Mathieu? 

Mr. MATHIEU. Yes, I would actually agree with Mr. Hahn. I 

think that solicitation is a broad subject and it really goes to common-sense of how you tell your story. 

At Horizon, we often look at companies like Mr. Hahn’s in their 

earlier stages as well as being public, so we actually like the stories, we like the time spent in developing the relationship. So I 

think the solicitation, broadening that flexibility is really imporVerDate Nov 24 2008 15:34 Dec 05, 2016 Jkt 099795 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\99795.TXT TERI
20 

tant, not just to raise equity capital in the private market, but also 

the public sector as well. 

Mr. HURT. And I appreciate the testimony of both you and Mr. 

Hahn, in support of the HALOS Act. Do you think that the HALOS 

Act, if enacted, would help remove some of those impediments and 

encourage more angel investing in startup companies? 

Mr. MATHIEU. I do, yes. And I think it is really a path to just 

improving a process that works, but can be improved. 

Mr. HURT. Excellent, thank you. 

I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

Mr. Hinojosa is recognized for 5 minutes. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

I ask unanimous consent to enter two statements into the record 

regarding the legislative proposals we are considering today. The 

first one is a statement from Jennifer Taub, professor of law, 

Vermont School of Law, and the second is a statement by Public 

Citizen, a public advocacy organization here in Washington, D.C. 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. HINOJOSA. Thank you. 

I would like to thank the panelists for their appearance and testimony here today. 

Our capital markets are the envy of the world because they are 

safe, transparent, and liquid. Emerging companies are the lifeblood 

of our economy. So ensuring that emerging companies have access 

to capital is an imperative if we are to maintain our global and financial leadership. 

As we consider the proposals that aim to improve our capital 

markets, we must be careful not to undermine the safety and the 

confidence in our markets. 

My first question is to John Grundfest. Professor, in your testimony you voiced some concerns that the SEC faces a crisis of confidence over the fairness of its internal administrative procedures. 

H.R. 3798, the Due Process Restoration Act, aims to address some 

of the issues raised by the critics by providing defendants to remove their case to a Federal district course, a venue of their choosing, and by increasing the SEC’s standards from a preponderance 

of the evidence to a clear and convincing standard. 

My question to you is, do you think these measures will address 

the concerns raised regarding the SEC’s administrative proceedings? 

Mr. GRUNDFEST. I think the bill is one approach that can be 

taken to these issues. And I think the existence of the challenge 

is actually effectively conceded by the Securities and Exchange 

Commission itself. 

I think it is valuable for this committee to recognize that the 

Commission itself has decided that its historic approach of saying 

no depositions in any of its proceedings may actually not be fair, 

and for that reason the Commission itself has proposed increasing 

the number of depositions to up to five. 

Now, in some of the more complex matters, the number of five 

could be viewed as being extraordinarily low, arbitrary, and capricious, given a case that might involve hundreds of thousands of 

documents, where the Commission itself may have taken testimony 

21 

from hundreds of witnesses. And in order to have a modicum of 

fairness, you need not go to one extreme and say we are going to 

depose absolutely everyone, but limiting the number of depositions 

to five might be viewed as arbitrary and also as unfair. 

Mr. HINOJOSA. That is your opinion. Do you believe this bill will 

have the result of moving most, if not all, SEC proceedings to an 

already overly burdened Federal court docket? 

Mr. GRUNDFEST. It could move a large number of important cases 

to Federal court docket. And out of concern for the loads that the 

Federal judges do face, an alternative approach might be to look at 

the three categories that I have suggested where you could carve 

out a set of cases where you don’t have to have any right to bring 

it to a Federal— 

Mr. HINOJOSA. The Federal courts in Brownsville all the way to 

El Paso on the Texas/Mexico border are just overloaded with different immigration cases and lots of other cases. And we just don’t 

have enough Federal judges to take on more like you are suggesting. 

My next question is to Joseph Carcello. The Small Business Capital Formation Enhancement Act would require the SEC to publicly 

assess the findings or the recommendations of the annual Government-Business Forum on Small Business Capital Formation. My 

question is, do you find it necessary to require that the SEC to also 

formally respond to each recommendation? 

Mr. CARCELLO. Yes, that is a concern. My understanding is, last 

year the number of recommendations that came out of that forum 

was 20. My understanding also is that any participant in the forum 

can make a recommendation. 

To the extent that these bills are patterned after Sections 911 

and 915 of Dodd-Frank, and speaking as someone who, along with 

Professor Grundfest, is on the Investor Advisory Committee, I can 

tell you it is quite difficult for us to come to a consensus. There are 

20 members in that group. Each of the five SEC Commissioners essentially have four picks. As you well know, the SEC is pretty ideologically divided, so the IAC is pretty ideologically divided. 

Mr. HINOJOSA. They seem to resemble Congress. 

Mr. CARCELLO. Yes, they seem to resemble Congress. 

Mr. HINOJOSA. Do you think the bill will help the SEC— 

Chairman GARRETT. The gentleman’s time—I will permit the last 

question. Go ahead. 

Mr. HINOJOSA. I yield back. 

Chairman GARRETT. Okay. 

Mr. Duffy is now recognized. 

Mr. DUFFY. Thank you, Mr. Chairman. 

I am concerned about the arguments that are being made that 

we can’t allow due process because our Federal courts are overburdened. If that were the case, maybe what we would do in regard 

to criminal cases, we want to have the attorney general’s office set 

up some form of administrative law judge so we can have the FBI 

investigate, the attorney general prosecute, to administrative law 

judges who are hired by the U.S. attorneys office. And then that 

therefore would be justice in the American criminal system. 

But I think most Americans would scream wildly that that is not 

fair. And to think that we are going to now make the argument 

22 

that we can’t go to Federal courts because they are overburdened, 

the better outcome then would be stay at the SEC and be guaranteed an adjudication of guilt is a better outcome for defendants, is 

absolutely insane. 

I agree with Mr. Garrett’s bill. We should give defendants an 

outlet to go to Federal courts and have their cases heard by an impartial group of judges and potentially juries. 

Mr. Quaadman, do you agree with that analysis? Am I wrong on 

that? I am supposed to be spending my time on my own bill with 

Mr. Carney, but this is, anyway— 

Mr. QUAADMAN. No, Mr. Duffy, I think you have hit the nail on 

the head. And the reason why I also mention about creating new 

rules of practice was, if you have fair due process in administrative 

proceedings, you are not going to have a stampede to district courts 

either. You might have large cases move over, but it is not going 

to be a stampede. 

The other thing I just want to mention too, because this also 

shows how Kafkaesque this is, what got us involved in this to begin 

with was that a general counsel came in and talked about a situation where they had an issue that both the IRS and the SEC were 

investigating. And the IRS gave this company a document giving 

all their rights and responsibilities during the investigation and 

the SEC had nothing. So they are in complete no-man’s land from 

the start of the investigation through. And then, when you go into 

the AP process, you have no right to discovery or anything. So it 

is a completely tilted playing field. 

Mr. DUFFY. I did well as a former State prosecutor, won a lot of 

cases, but I have to tell you I would have had a much-improved 

record if I was able to try my cases in front of my own DA staff, 

no doubt. And I think that is why we see the rates of success so 

high at the SEC. 

I do want to transition to the bill that I worked on with Mr. Carney in regard to our small-business advocate advocating for better 

capital formation with regard to our small businesses. 

I think if you look at economic growth, we look at job creation, 

it is coming from our small, emerging growth companies and making sure that they have access to capital it is incredibly important 

that we get that right. 

And I appreciate Mr. Carney’s hard work and the bipartisan effort and the support that we have had on both sides of the aisle 

for this proposal. 

We all agree that we want to protect investors. That is a really 

good thing. But we also want to make sure we have the right balance, I would argue. 

And maybe to Mr. Mathieu, do you think we have struck the 

right balance between investor protection and capital formation 

specifically in regard to small businesses? 

Mr. MATHIEU. I think currently, we are not fairly balanced. I 

think that is what this legislation is actually trying to do. 

Mr. DUFFY. I would agree. 

Mr. MATHIEU. And so I think we are trying to say that the SBIA 

supports this very strongly, because right now the small-business 

investor and the small-business operators don’t have a fair say, a 

fair spot to express their position. 

23 

Mr. DUFFY. I would agree. And I think to have an advocate there 

who can talk about the good, the bad, and the ugly specifically to 

the Commission would benefit our small businesses and emerging 

growth companies. 

I just want to make one comment. I know that some on the right 

have made some complaints, people are concerned about the 

growth of government. We have a really big debt. None of us ran, 

at least on this side of the aisle, to grow government and make it 

bigger. And some have said, well, this bill is a growth of government. 

But I think that making sure that you have an advocate inside 

the SEC promoting policies that will support our small businesses 

so they can access capital, they can grow, they can create jobs, they 

are the next innovators, Mr. Hahn, of the next lifesaving products 

or the next iPad or Apple or whatever that technology may be. 

To think that we are going to use the growth of government argument against good policies that help American businesses, I 

think is shortsighted. 

Mr. Mathieu, would you agree with that? 

Or Mr. Hahn, would you agree with that? 

Does the growth of government for the small agency that is funded by fees, not by appropriation, is that small in comparison to 

what this does for the American small-business community? 

Mr. MATHIEU. Yes, I think this is common-sense. It is a nobrainer. The incremental cost, if any, far supports the benefits that 

will come. The lack of support of small business from day to day 

has to change. 

Mr. DUFFY. Mr. Hahn, quickly? 

Mr. HAHN. The SEC doesn’t often act on the recommendations of 

the advisory committee or the Government-Business Forum. The 

small-business advocate would bring those industry stakeholders 

further into the SEC’s decision-making process. 

Mr. DUFFY. Thank you, I yield back. 

Chairman GARRETT. Thank you. 

There are some people on the right who are making that argument. I appreciate that. 

Mr. Green is now recognized for—oh, Mr. Carney is recognized 

for 5 minutes. 

Mr. CARNEY. Thank you very much, Mr. Chairman, and Ranking 

Member Maloney for having this panel today and for all of you who 

have come to testify. 

A few years ago, I worked with my friend on the other side of 

the aisle, Mr. Fincher, on the JOBS Act, and in particular the IPO 

on-ramp. I come from the State of Delaware; my district includes 

the whole State of Delaware. We pay very close attention to corporate formation and business development issues. Most of the 500 

companies are incorporated in our State. 

And folks whom I know well, who do that business in the Division of Corporations have been reporting to us that companies were 

no longer going to IPO. And we had had a real problem with that, 

a cutback, and there are lots of different reasons. 

And Treasury convened a group of business leaders. And out of 

that confab came a number of ideas to try to promote businesses, 

emerging growth companies to go to an IPO, because the facts were 

24 

that companies that sought public financing through an IPO were 

in a growth stage creating more jobs. And what had happened was 

for some of those companies that were emerging, they were looking 

at a merger and acquisition kind of an outlet, which actually resulted in fewer jobs. 

And so the effort that we did in a bipartisan way to put the IPO 

on-ramp together out of the work that Treasury had done I think 

has produced some pretty good results and the facts speak for 

themselves. 

We heard the argument from BIO a while ago that biotech and 

pharmaceutical-type companies, research companies take a longer 

time to develop and therefore need a longer on-ramp. And I think 

that is part of the reason for the bill that is before us that Ms. 

Sinema and others have cosponsored. 

Is there any concern? Originally when we had that testimony a 

year or so ago, I was interested in providing an extension of that 

on-ramp to bio-type companies. This would just do it to any company that fits the definition, an emerging growth company as defined by the original JOBS Act, and then had the limitations of size 

as part of the bill. 

Should we look at limiting it further to the kinds of companies, 

Mr. Hahn, like yours, or not? 

Maybe Mr. Quaadman could answer this more generally? 

Mr. HAHN. In the last 18 or last 20 years, I have been in earlystage startup companies. And I have been in manufacturing, IT, 

and I have been in life sciences now since 2002. I would say, every 

one of those industries, every one of those companies, I think this 

is beneficial across-the-board. 

Mr. CARNEY. Okay, good. So the other issue that we struggled 

with when we did the initial IPO ramp bill, and Mr. Himes was 

arguing that maybe the size limitations were too big, does anybody 

have—is there any concern, I guess from Mr. Carcello, about the 

definition of emerging growth companies under that piece of legislation, that it ought to be more limited, or anybody on the panel? 

Mr. CARCELLO. It is certainly significantly more limited than the 

bill you considered last year. So if you are going to move forward, 

I think the way you have structured it now is certainly less risky 

to the market than the bill that was voted down last year. 

Mr. CARNEY. Okay, thank you. 

So Mr. Quaadman, I didn’t catch everything that you said about 

the small-business advocate bill, but there was some recommendation for a change that you mentioned. Could you restate? 

Mr. QUAADMAN. Sure. I appreciate your work on the bill. And as 

I said, we support it. 

The SEC has a tripartite mission, right: investor protection; capital formation; and competition. And your bill addresses capital formation and competition. 

The two changes we recommended were: one, that the investor 

advocate and the small-business advocate be on the same plane, so 

that there should be an amendment that the small-business advocate would have a similar right to appoint a nonvoting member to 

the Investor Advisory Committee as the investor advocate has with 

the Small Business Capital Formation Committee. That is one. 

25 

Number two, and this has been a longstanding position that we 

have advocated for, is that these types of advisory committees, and 

I would say for the Small Business Capital Formation Committee 

as well as for the Investor Advisory Committee, that they be subject, that they be under the jurisdiction of the Federal Advisory 

Committee Act so that there is transparency with the proceedings, 

so that neither the Investor Advisory Committee nor the Small 

Business Committee could be a quasi-lobbying group that Mr. 

Carcello says. 

Mr. CARNEY. I am running out of time, but I just want to make 

a comment about that. To us, those of us who are sponsoring the 

bill and supporting it, we think advocacy, for some, advocacy is lobbying. We think it is advocacy and it is appropriate in this context. 

We do this in all kinds of different ways for small businesses at 

State, local, and Federal Government. We think it is appropriate 

in this context. 

And I want to thank everybody again for being here today and 

for your comments and input. 

Chairman GARRETT. Thank you. And the gentleman yields back. 

Mr. Schweikert is recognized for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Mr. Hahn, you were kind enough in your testimony, in your written testimony to talk a bit about some of the successes and some 

of what was helpful in the JOBS Act. 

First off, thank you from many of us who cared a lot about that. 

But just for curiosity, what would you add? What would you 

change? And what other legislation—the legislation we are talking 

about here today, do you think it enhances both your success and 

your use of the JOBS Act? 

Mr. HAHN. Thank you. As I stated, the test-the-waters meeting 

provision of the JOBS Act was great. It takes investors some time 

to understand our technology and our science and what we are 

doing. 

I think the Fostering Innovation Act takes a targeted approach 

to build onto the JOBS Act from the 404(b) exemption. So for the 

first 5 years, we are 404(b) exempt. And the company, 

GlycoMimetics, has been around since 2003. So here we are in 2015 

and we still don’t have—we are still several years out from a product to market and product revenue. 

So we are going to be in year 6 and we have most of our expenses, our top three expenses, are our payroll, our clinical trials 

supplies, and clinical trial expenses. So I think in year 6, we are looking to add upwards of $350,000 

in 404(b) attestation and we are still going to be 40 employees, I 

am still going to have a staff of 3, we are still going to have vanilla 

financials. 

Mr. SCHWEIKERT. Let me ask, within your specialty, how common is this, particularly in biotech, research-intensive sort of new 

intellectual capital to have as long an on-ramp as you are having? 

Mr. HAHN. Very common, very common. It takes upwards of $2 

million and anywhere up to 10-plus years to get a product from 

concept to FDA approval. 

Mr. SCHWEIKERT. Okay. And do you think we are going far 

enough on these pieces of legislation to give you that window to tell 

26 

your story, but also to have the capital without the, shall we say, 

auxiliary expenses? 

Mr. HAHN. I think it is a good, measured, targeted next step. So 

the first 5 years, I think, a lot of companies, we are in that stage 

now where hopefully we can get to years 6 through 10 and see how 

that works out. And then possibly expand more and measure it. 

Mr. SCHWEIKERT. Thank you. 

Mr. Quaadman, in that same sort of realm of subject, I am sort 

of doing a broad brush of, okay, here is our—we will call our success from a couple of years ago the JOBS Act, here we are doing 

some very small, incremental touches and improvements, may be 

able to have some voices, some other paths if you hit the wall of 

regulatory or litigation. What else would you add? What are we 

failing to even engage in the conversation on? 

Mr. QUAADMAN. First off, I think both the Small Business Advocate bill as well as Mr. Poliquin’s draft bill go a long—those bills, 

if they are implemented, will have far-ranging consequences because we will actually start to have a real debate about capital formation and competition within the SEC. 

Mr. SCHWEIKERT. Okay. But first on the Poliquin bill, and I think 

we are still just in draft or discussion draft at this point? 

Mr. POLIQUIN. Yes. 

Mr. SCHWEIKERT. Does it actually provide the path that you believe is necessary? 

Mr. QUAADMAN. Yes, because what you are doing is you are creating a mechanism that the Commission actually has to respond to 

recommendations. Because remember, the JOBS Act was a series 

of recommendations that advisory committees and the SEC had 

been making for years and nothing had ever happened. So rather 

than things just going over the transom and being ignored, this actually starts to force mechanisms for something to happen. 

So I think it is also important, for it allows the SEC to take the 

self-initiative to try and keep up with the markets rather than having Congress having to bear down on them. 

Mr. SCHWEIKERT. Okay, sort of the second half of this, and I 

don’t mean to get ethereal. With what I am seeing in much of the 

capital formation marketplace, we all see the numbers that today 

we have, what, a third, or 40 percent fewer publicly traded companies, but we see the movement in private equity, we see the movement now on versions of capital raises that are happening online. 

Are we being robust enough in understanding that the way we 

raise capital today, but over the next decade, is going to look really 

different than it did last decade? 

Mr. QUAADMAN. The capital markets are always evolving. So I 

can guarantee you that 10 years from now, it is going to be much 

different than it is today. Remember, we are seeing online lending 

start to ramp up. 

Mr. SCHWEIKERT. Yes, peer-to-peer, the Lending Club models are 

exploding. 

Mr. QUAADMAN. Yes. 

Mr. SCHWEIKERT. But are we being sort of future-proof in the designs of how we are addressing this? And are we being prescriptive 

enough to the SEC? 

And I know, Mr. Chairman, thank you for your patience. 

27 

But for many of us, we sat here for 3 years waiting for the rule 

sets on crowdfunding we all thought was going to be pretty simple. 

So asking the SEC to promulgate rule sets has become a disaster. 

And we almost have to be prescriptive in what we do, which also 

means we have to get it right. 

Mr. QUAADMAN. Yes. The one other thing that I would mention 

that should occur is also, what are the policies and regulations that 

are driving public companies out of that space? So what is the outflow problem? And I don’t think we have really addressed that one. 

Mr. SCHWEIKERT. Okay. 

Mr. Chairman, thank you for your patience. 

Chairman GARRETT. Thank you. The gentleman’s time has expired. 

The gentleman from California is welcome and recognized for 5 

minutes. 

Mr. SHERMAN. Thank you. I think it is critical that we get capital 

to small business. Outside the scope of this hearing, most businesses borrow most of their capital. And what I am seeing is that 

if you are borrowing money at prime-plus-3, you can get the money. 

If you want to borrow money at 33 percent annual, well, there is 

an advertisement every few minutes about how you get your money 

the next day. 

But the prime-plus-6, prime-plus-8 loan, prime-plus-5 loan that 

I was used to seeing when banks and other lenders took some limited risk seems to be gone. But here we are focused on capital and 

shareholders’ equity rather than loans. 

Mr. Carcello, beyond the JOBS Act, what proposals can you come 

up with that will help small and medium-sized businesses get access to equity capital? 

And perhaps others would have a comment as well. 

Mr. CARCELLO. I initially thought, as I read through these bills, 

that the HALOS Act was good. And so this gives me an opportunity 

to talk about that Act. And as these panelists have talked about 

it, they have focused on angel investor groups, and I actually think 

those are quite good and quite helpful, and I think would be bipartisan. 

What threw me when I read that Act, though, is the expansion 

of that Act into venues such as not-for-profits and universities and 

governmental entities. And for someone who has worked in a university for over 25 years, I can tell you most people who work there 

are not accredited investors, most people who work there are not 

sophisticated investors. And I think that poses tremendous pressure. 

Mr. SHERMAN. You mean my professors were not as smart as 

they told me they were? 

[laughter] 

Go on. 

Mr. CARCELLO. Not about financial matters. Most Americans, as 

you probably know, Mr. Sherman, being a CPA, are not quite 

knowledgeable about financial matters. 

Mr. SHERMAN. Does anyone else have a comment? If not, I will 

move on to the next question. 

Mr. Quaadman, I am a cosponsor of the SEC Small Business Advocacy Act, which would create an Office of Advocate for Small 

28 

Business Capital Formation. Do you think this new office would 

help energize the capital markets for small and medium size in initial public offering companies? 

Mr. QUAADMAN. Yes, I think it would allow for that voice for capital formation to be heard within the halls of the SEC where it 

hasn’t been before. And as I said before, I think it would also force 

the SEC to modernize rules that would prevent Congress from having to go through a JOBS Act exercise again. 

Mr. SHERMAN. Dr. Carcello, should we be providing additional 

exemptions from Section 404, I believe it is 404(b), dealing with reporting on a company’s internal controls? I know this is a cost for 

some companies and it seems like an unwarranted cost except 

when it discloses a problem. 

Mr. CARCELLO. Right. Yes, I don’t think we should. I think if the 

Congress decides to move forward, as I suggested to the committee, 

I would at least give the investors, the owners of the company, the 

right to elect. So at the end of 5 years, put it to a vote, put it to 

a shareholder vote. And if it is as good an idea as all of the people 

to my left and right think it is, then the shareholders will overwhelmingly approve it. 

I do think that 404 has produced tremendous benefits. There is 

a lot of research, not just in the academy. The Financial Executives 

Research Foundation recently released a study where financial executives, approximately half of them, have said the benefits of the 

internal control attestation far exceed the costs. 

Again, it was put in place because of problems with financial reporting, restatements, fraud. And when that happens, confidence in 

the capital markets evaporates and capital dries up. So if we are 

concerned about capital formation, don’t lose sight of that other 

side. 

And if you would give me the ability, I want to make a very 

small comment, if I could, about the Small Business Advocate Act. 

I think it is important— 

Mr. SHERMAN. I do want to. I have just a few more seconds and 

it wouldn’t be a committee hearing if I didn’t rail about the Financial Accounting Standards Board (FASB) and their decision to put 

$2 trillion on the balance sheet of businesses, chiefly small and medium-sized businesses. 

Mr. Quaadman and I have been trying to prevent this unwarranted damage to our business system. And members of the subcommittee should be aware that the FASB has said they are going 

to go forward with this with virtually no input from any part of the 

public that isn’t already in their own Rolodex. 

And it is just illustrative of the fact that we should never have 

that much governmental power located in Norwalk, Connecticut. 

I yield back. 

Chairman GARRETT. Thank you. The gentleman yields back. 

The gentleman from Maine is recognized for 5 minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. I appreciate it very 

much. 

When we have an opportunity to get government together with 

the business community, the folks who are on the ground, growing 

their companies and creating jobs, it is a better time and a better 

place for all Americans and all job creators. 

29 

That is why I am excited about discussing with you your experience when it comes to the small business capital formation forums 

that the SEC has been having over the past 35 years. 

Now, it is my opinion if we are going to get all this talent together, folks who are taking time out from running their businesses to try to inform government officials, in particular in this 

case the SEC, on the best way to allow small companies to borrow 

money and grow and hire more individuals and grow the economy, 

then we should listen to the results they come up with. 

Now, what I would like to do is start with you, Mr. Hahn. I believe that you were not or have not participated specifically in 

these business-government forums that the SEC has been holding 

the last 35 years, but you represent folks who do. 

And could you, to the best of your ability, inform all of us here 

on this committee and the public as to what experience your folks 

have had with respect to this forum? Have the recommendations 

been useful? 

Mr. HAHN. I think from my understanding, as I said earlier, a 

lot of—the SEC often doesn’t act on the recommendations of the advisory committee and the Government-Business Forum. However, 

they are published. I think it was Congress that took parts of the 

JOBS Act out of those recommendations— 

Mr. POLIQUIN. Right. 

Mr. HAHN. —which was a tremendous success. 

Mr. POLIQUIN. So these specific recommendations from past forums ended up in legislation that was passed through this committee. Correct? 

Mr. HAHN. Yes. 

Mr. POLIQUIN. So it was pretty useful. 

Mr. HAHN. Very useful. 

Mr. POLIQUIN. Okay. And doesn’t it therefore make sense that 

not just that one example in the JOBS Act, but on an ongoing basis 

we have the body, the SEC, that is holding these and organizing 

these forums to make sure that every recommendation that comes 

out of these forums they address, they comment on in a public format. And if they are going to adopt some of the recommendations, 

fine. And if not, why? Doesn’t that make sense? 

Mr. HAHN. Total sense. 

Mr. POLIQUIN. And that would be helpful to those in this space 

to make sure they know what rules coming down the pike might 

affect them when it comes to raising money for their companies. 

Mr. HAHN. Also, it makes you wonder what else has been missed. 

Mr. POLIQUIN. Say that one more time. 

Mr. HAHN. It also makes you wonder what has been missed, 

what hasn’t come out of those recommendations that could be helping businesses like mine. 

Mr. POLIQUIN. Absolutely. I was about to morph into that. 

And Mr. Mathieu, maybe you can comment on this. If you have 

35 years of forums that are coming up with all of these experts 

from their field, in government, in academia, attorneys even, that 

are coming up with these ideas, doesn’t it make sense that if you 

publicly come out and you comment on each of these recommendations, then you don’t have to start over the next year? 

30 

You now have a wealth of information, a database of recommendations that might make sense going forward such that we 

can go forward instead of repeating what we have just done the 

last few years. 

Mr. MATHIEU. That completely makes sense. First, thanks for introducing the legislation. 

Mr. POLIQUIN. You bet. 

Mr. MATHIEU. It is very important. What is crazy about this is 

that, as you said, there are a lot of people who spend a lot of time 

preparing for those forums, the structure makes a lot of sense, it 

gets a lot of people, thoughtful-thinking people into group sessions, 

breakout sessions where they are really spending a lot of their 

emotion and mental efforts to come up with really great ideas to 

help small business. 

They put them in a package, they come up with the idea, and 

then it just goes nowhere. 

Mr. POLIQUIN. It sits on the shelf. 

Mr. MATHIEU. It goes into the atmosphere, which is just crazy. 

That is like, have every small business spend a week-and-a-half 

doing business development or strategic planning and then throw 

it in the trash and the shredder right after they have finished it. 

It doesn’t make sense. 

Mr. POLIQUIN. Yes. We have a fellow named Tom Coyte from Atlantic Financial in Maine who runs a VC shop, who came down and 

participated in some of these forums. So, it is close to our heart. 

Mr. Quaadman, if I could end with you, I just have a short 

amount of time here. Doesn’t it make sense to also require the SEC 

to not only participate in these forums, but make sure that their 

recommendations are not only public, but they are relevant to the 

dynamic nature of our markets? 

One of the great things about our economy and why it has been 

so strong for so long, notwithstanding the recent period of time we 

are going through, is that we have a dynamic and growing, evolving and creative capital markets system, the envy of the world. 

These regulations should evolve along with our capital markets, 

shouldn’t they? 

Mr. QUAADMAN. Yes. And I agree with all the other comments 

that were said. The other thing I would say too, and the reason 

why it is important for the SEC to be a part of that and to respond 

to it is because it should also focus them on areas where they are 

not looking and where they should be looking. So, I think there is 

a win-win here. 

Mr. POLIQUIN. I thank all of you gentlemen very much for participating. I appreciate it very much. 

Thank you, Mr. Chairman. I yield back my time. 

Chairman GARRETT. The gentleman’s time has expired. 

Mr. Ellison, for 5 minutes, if he is— 

Mr. ELLISON. Thank you, Mr. Chairman, and the ranking member. I appreciate the recognition. 

Professor Carcello, thank you for your service on the Securities 

and Exchange Commission’s Investor Advisory Board. I do appreciate it. 

Anyone following the Presidential election knows that many people think that the rules are rigged in favor of powerful companies. 

31 

H.R. 3798 seems to further rig this, in my view, by allowing big 

companies, the defendants, to pick a more favorable venue for investigations into their alleged misconduct. 

The SEC now chooses a venue for enforcement that serves the 

interests of investors and the public, yet this bill would allow a 

well-funded defendant to choose a district court venue. We know 

that district courts are often overwhelmed, so this type of forum 

shopping may delay trial for up to a decade in some cases. 

How is allowing a defendant to essentially forum shop in the 

public interest? 

Mr. CARCELLO. Yes, I am not convinced it is in the public interest. And here is a thought experiment for the committee. Imagine 

if 15 years ago, the SEC thought there was a problem with Bernie 

Madoff, and they brought it in Federal court because they were 

forced to as a result of this, and there was a long delay. And during 

that time, he continued to collect money and ruin people’s lives. 

Does this committee really want that obligation on their head? 

Mr. ELLISON. Dr. Carcello, I think I can say on behalf of all of 

my colleagues on both sides of the aisle, no. So I think we should 

take steps to address it. 

When you served on the Investor Advisory Committee, one of the 

areas the committee considered was the prevalence of contracts 

and bylaws that contained mandatory arbitration clauses. In fact, 

Commissioner Aguilar called to end mandatory arbitration. 

I wonder what your views are on the issue of, say, this committee 

bringing a bill to allow defendants to choose the venue of the enforcement action while not allowing investors the same option. 

Mr. CARCELLO. Not just investors, Congressman Ellison. How 

about every person in the United States? There was a powerful series of stories by The New York Times about a month ago that everyone should read, about how the United States has essentially 

become a land where every citizen in this country, all of your constituents are routinely every day signing away their rights to jury 

trials in employment, in consumer purchases, in virtually every 

sphere of their life. And there is no outrage about that, but there 

is outrage about due process for largely well-monied financial professionals. 

It is far from clear to me, and I think it would be far from clear 

to most people in the United States, why that is in the interests 

of the republic. 

Mr. ELLISON. I actually have a bill called the Investor Choice 

Act, H.R. 1098, that would prohibit predispute mandatory arbitration clauses in investment contracts. I urge all my colleagues to 

sign it. 

But if I may just ask you a few more questions. In your testimony you detail a number of concerns with both small-business 

bills we are considering today. One of your concerns is that H.R. 

3784 requires redundant authority. And I will just quote your testimony, the Small Business Advisory Committees, ‘‘create a quasilobbying group to seek a more favorable regulatory climate for 

small businesses. This may succeed in reducing the costs of regulation, but at the potential cost of greater information risk to investors.’’ 

32 

You note the advisory committee created a rigged system that 

lacks ideological balance and seems gerrymandered. If Congress 

mandated the Small Business Advisory Committee, should it require that investor and public interests are represented and have 

voting powers? And can you give us a few ideas to make it less of 

a quasi-lobbying group? 

Mr. CARCELLO. Exactly. That is exactly right. The IAC, which 

this is arguably patterned against, has—as I said earlier, five Commissioners have four picks. Look at this committee. Professor 

Grundfest is here representing the Republicans; I am here representing the Democrats. We are both on the IAC. 

The SEC is highly split, so the 20 members on the IAC bring an 

ideological diversity to our discussions. It forces us to seek consensus solutions. 

If you look at the proposed Small Business Advisory Committee, 

it is essentially officers, directors, advisers, and investors, which 

sounds good until you realize it is venture capital, largely, which 

are heavily owners in that company with a different stake than the 

kind of mom-and-pop retail investor, and it is not at all comparable 

to the IAC. 

So if you are going to move forward with that group, first of all, 

I think one thing that should be thought about, Congressman Ellison, there is this implicit undertone here that investors are one 

constituency and small business is another. Why don’t we have an 

advisory committee for midsize business and large business and 

biotech businesses? 

Investors are every single adult in this country. 

Chairman GARRETT. The gentleman’s time is way over. 

Mr. ELLISON. Thank you so much, sir. 

Chairman GARRETT. Mr. Huizenga is recognized for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

And I will turn to you, Mr. Grundfest. Do you care to comment 

on that riff that we just heard? I would love to hear from you. 

Mr. GRUNDFEST. Yes. Just one simple point, in terms of point of 

accuracy. I think many of the issues that we are dealing with today 

aren’t Democratic or Republican issues. Not that it means anything; I am a registered Democrat, and have always been a registered Democrat, and I don’t view myself as being here representing the Republican side or the Democratic side. 

I think there are fundamental questions of fairness about how 

the process is actually operated. I agree with Mr. Ellison that fairness is an issue that needs to be considered for all people in all forums of all proceedings. 

Fairness can be in the eye of the beholder. That is why I go back 

to that one word that I think is the focus of my testimony. The 

question is, how do we achieve an appropriate balance? Clearly, 

there are situations where investors’ rights and the SEC’s rights 

need to be very aggressively protected. 

But by the same token, you can’t have a situation where I think 

the SEC acts as judge and jury and as summary prosecutor and 

eliminates the rights of everyone else involved in the process. 

It is a difficult question. Let us admit that it is a difficult question. But let us not try to polarize the issues more than they already are. 

33 

Mr. HUIZENGA. I appreciate that. 

Mr. Hahn, I want to quickly turn to you. The Fostering Innovation Act and the high costs associated with the SOX 404(b) compliance has been cited repeatedly by small and emerging companies 

as one of the deterrents from listing in the U.S. public markets. I 

wanted to get your comment on that. 

And then also regarding Sarbanes-Oxley, obviously, that is an 

admirable goal to protect investors. However, many argue that the 

cost of Section 404(b) far outweighs any perceived benefit for most 

small, public companies. You suggest in your testimony that investors in biotech companies do not list 404(b) compliance as a top priority of their own due diligence. Could you describe what types of 

information are used by investors and people looking at that? 

So if you want to touch on the 404(b), and then give me a profile. 

Mr. HAHN. On the 404(b) side, I think it is important to note that 

just because we are 404(b) exempt currently, we do have a strong 

internal control framework in place and we do have an outside 

party that audits our controls and reports directly to the Audit 

Committee. 

I spend maybe $15,000 a year on that. As the current now in 

year 6 when I have to be 404(b) compliant, my expenses in that go 

to $350,000 and nothing is going to change from our business from 

year 5 to year 6. We are still going to have 40 employees, I still 

have a staff of three. So that is kind of the impact on the 404(b) 

side. 

As it relates—I’m sorry, what was the second part of your question? 

Mr. HUIZENGA. Yes, just, if they are not looking at 404(b), what 

type of information are investors in small biotech companies looking at? 

Mr. HAHN. As I stated earlier, for the test-the-waters IPO, we 

met with 90-plus investors. And since we have been public in January of 2014, we have met with approximately 130 more investors. 

So about 220 one-on-one investor meetings in about the last 21⁄2

years. All of the questions around understanding our technology, 

our science, the indications that we are going after in our current 

clinical trials. I think the only financial-related questions I get are, 

what is your cash balance and what is your runway, and how long 

is that going to get you? The only questions, no other financial 

questions that way. 

Mr. HUIZENGA. Okay. So is that information not useful or is it 

just not relevant really to the biotech space? 

Mr. HAHN. It is not, I would say, it is not relevant, not primarily 

relevant to the investors. It is a secondary issue. They want to understand the science and the technology and they want to know 

that we are spending our resources and our money on the R&D 

side and not on the administrative side. 

Mr. HUIZENGA. All right. 

Mr. Quaadman, you said something that I don’t even remember 

how many speakers ago it was or questioners ago, but the outflow 

problem on businesses, and I want to give you the last little bit 

here to talk about that problem, because I am very concerned about 

that as well. 

34 

Mr. QUAADMAN. Sure. We have half as many public companies 

in the United States as we did in 1995. The number of public companies has gone down every year, for 19 of the last 20 years. Clearly, something is wrong and something is broken. 

Mr. HUIZENGA. Isn’t it just a bad economy? That is what we 

hear. 

Mr. QUAADMAN. No. Remember, 1995, 1996, 1997, those were 

awfully good years and that is when the decline started, right? So 

we have to really match up our policies with capital formation. 

Two other points I just want to quickly mention. To Professor 

Carcello’s notion of, let’s put this out for a shareholder proposal, 54 

percent of institutional investors say our current corporate disclosures are too voluminous and don’t provide relevant information. 

Mr. HUIZENGA. In other words, sometimes too much information 

really doesn’t give you any information. 

Mr. QUAADMAN. Correct. So you know what? Let’s crank up the 

shareholder proposals because that will be faster than the SEC 

with the disclosure effectiveness project. 

Secondly, what we really have to also pay attention to while we 

are looking at these issues is that Europe is trying to replicate 

what we are doing. So we should also remember that as well. 

Chairman GARRETT. Thank you. 

Mr. HUIZENGA. Thank you, my time has expired. 

Chairman GARRETT. The gentleman’s time has expired. 

Mr. Green, you are recognized for the next-to-the-last word. 

Mr. GREEN. Thank you, Mr. Chairman. 

And I thank the witnesses for appearing today. 

I am exceedingly concerned about the conflating of criminal and 

civil law today. Whether by accident or design, this seems to have 

taken place. All of you are scholarly people and you know that out 

of the same set of circumstances, you can have a criminal case or 

you can have a civil case. 

And in a criminal case, the standard of proof is guilt beyond a 

reasonable doubt, the doubt in the mind of a reasonable person. If 

it exists, then you must say by your verdict, ‘‘not guilty.’’ 

In a civil case, generally speaking, most of the time it is preponderance of the evidence, the greater weight and degree of credible 

testimony. 

If you differ with what I have just said, will you kindly raise 

your hand? Let the record show that no one differs. 

And it is also true that these hearings with the SEC actually go 

before an independent arbiter known as an administrative law 

judge? And the administrative law judge makes a finding of facts 

and issues and also conclusions of law? 

If you differ with what I have just said, raise your hand. How 

do you differ, sir? 

Mr. QUAADMAN. The administrative law judge is an employee of 

the SEC; they are not independent. 

Mr. GREEN. If this is the case, the judge who hears my case in 

court, who also hears my motion for a new trial, is it inappropriate 

for that to happen, to take place? 

Mr. QUAADMAN. No, what the point here is, and I think Mr. 

Duffy was making this point earlier, if we were to look at it in that 

35 

way, the district attorney would also be the judge. And that is currently— 

Mr. GREEN. I am pleased that you said that because it has been 

my experience that most judges are former DAs. 

If you differ with what I have just said, raise your hand. 

The point to be made is this. If you are talking about preponderance of the evidence in a civil case that can be appealed to the 

Commission, correct, and then from the Commission to a Federal 

judge, why would you have clear and convincing evidence as a 

standard at the administrative hearing and then when you go to 

the Federal judge you have preponderance of the evidence? 

Do you agree that can occur? If no one agrees, then I will have 

to make the case again. Do you agree that can occur? If you have 

preponderance of the evidence in the Federal district court, and 

you have clear and convincing evidence before an administrative 

law judge, you now have the same set of facts, two arbiters, different standards of proof. 

Mr. Carcello, do you agree? 

Mr. CARCELLO. Yes. 

Mr. GREEN. Okay. Let us find someone who differs. Who differs? 

Who differs that we would have two standards of proof with the 

same set of facts? 

Mr. QUAADMAN. Mr. Green, as I mentioned in my opening statement— 

Mr. GREEN. Would you kindly do this? Would you start with yes, 

I agree, or no, I don’t agree? Because sometimes when people finish, I don’t know whether they have said yes or no. 

Mr. QUAADMAN. No. We had suggested an amendment to the bill 

that there be one standard of evidence. 

Mr. GREEN. So you agree with what I have said. The question 

is, do you agree with what I have just said? You agree. So if you 

agree with what I have just said, and you understand the difference between criminal and civil law, O.J. not guilty criminal 

case, O.J. guilty civil case, these things exist and they have been 

decided clearly by Federal courts that they are constitutional. 

There is no unconstitutionality here. 

And I would also add this. To say, to use terminology of finding 

a person guilty before an administrative law judge, now, you heard 

that said earlier. Why would a professor of law not correct that in 

the record? The administrative law judge doesn’t find anyone guilty 

or any corporation guilty. 

If you differ with what I have just said, raise your hand. Let the 

record reflect that nobody differs. 

Dear friends, we have to take these issues seriously when we are 

talking about changing the laws that impact not only corporate 

America, but also the citizens of the United States of America. Investors are citizens. They are taxpayers. They deserve fairness, too. 

Bernie Madoff treated a lot of investors unfairly. And but for the 

SEC’s ability to go before an administrative law judge, I am not 

sure how that would have ultimately ended. 

So I thank you for your time, Mr. Chairman, and I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Hill is recognized for 5 minutes. 

Mr. HILL. Thank you, Mr. Chairman. 

36 

And I appreciate the witnesses’ forbearance today. 

I think I want to start out and continue on that theme. 

And Mr. Quaadman, if you would just, I think, for the committee 

state the difference between mandatory arbitration and the SEC 

administrative proceedings. Because having been in the brokerage 

business for many years, we have had mandatory arbitration and 

it has worked, I think, very effectively. Fifty percent of those cases 

tend to reach a conclusion before they even go to a hearing panel. 

But I think we ought to clarify the difference between these two. 

Mr. QUAADMAN. These are two completely different things. And 

we are talking about two completely different universes. 

Mandatory arbitration deals with two private entities engaged in 

a transaction, and they go before a neutral third party if there is 

a dispute. That actually has been a system which has worked very 

well with keeping cases out of the courts, which people have talked 

about overburdened court dockets. 

What we are dealing with here, with administrative proceedings 

with the SEC, is we are actually having the government prosecute, 

whether or not we want to talk about whether it is civil or criminal, but there are prosecutions that will destroy a person’s career. 

So these are completely different items altogether. 

Mr. HILL. Thank you. I appreciate that clarification for the 

record today. 

I have spent a lot of my career in private placements for small 

business. And so I appreciate the effort of my colleagues on this 

subject. And I have also on and off been involved in small-cap public companies and I know about the cost of trying to manage smallcap enterprises. 

One concern I have always had is this quarterly cost to be public. 

And many years ago, I was associated with a company with a market cap of around $70 million and around $10 or $12 million in 

EBITDA. And if my memory is right, and I am going from memory, 

I didn’t prepare for this conversation, it was about $400,000 a 

quarter to do a Q and K prep and internal control work and that 

kind of thing. This is both the audit fee as well as the preparationtype costs. And that is substantial. 

So anything that affects costs, I think is one of the barriers to 

Mr. Quaadman’s talk about why we have declining numbers of IPO 

companies, despite efforts in recent years to reverse that trend. 

Section 404, what is a way to, in my view, look at the marginal 

difference in 404? In other words, sure, there is some benefit by 

having a robust internal control system. But haven’t we gone overboard in the prescriptive nature of it and perhaps the costs really 

do outweigh the benefits, particularly for small, simple businesses 

where they are really being held to a 404(b) standard that goes a 

lot deeper than you would have to do in a simple, straightforward 

business? 

Mr. Hahn, do you want to start out on that? Because I know you 

are preparing essentially for this feature. 

Mr. HAHN. I have been involved in four startup companies and 

implemented the accounting systems and the process and procedures. And every one of those, as I have learned over the last 18 

years, is measured controls, appropriate controls measured that are 

appropriate to the business and the business processes. 

37 

If you put too many controls on, you just clamp down the business and people can’t operate. 

I think the 404(b) should take that same approach where we are 

exempt now, but it seems that this one-size-fits-all; that we are 

held to the same standards as these large corporations, we have a 

$130 million market cap, we cut 125 checks a month, we have two 

check signers. So to hold us to the same standards as these large 

corporations, I just don’t feel is appropriate. 

Mr. HILL. It is like in the bank regulatory environment where we 

are all held to a high IT standard for data security in commercial 

banks. Some banks are more simple than others, but the regulation 

is written the same for Citibank’s IT protocol as for a small community bank. 

And I think 404(b) over the years, because the accounting industry wants to be conservative in their approach, they have to be certified, they have to be peek-a-boo licensed, and so they don’t make 

a distinction perhaps enough, I think, for small businesses. 

Any comments on the crowdfunding proposal? In my seconds left, 

who wants to tackle the comments on the SEC’s crowdfunding proposal? Does anybody have any thoughts on that? It just got published in the last couple of weeks. 

Mr. QUAADMAN. I think we are going to have to see how that is 

going to progress. I think that has been an innovative portion of 

the JOBS Act. We have argued for strong internal controls. I know 

Europe is trying to do some similar things. 

So I think that is something where we had also called for, as we 

did with the HALOS Act, a retrospective review after a couple of 

years to see how it is working and what needs to happen to make 

it better. 

Mr. HILL. Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. The gentleman yields back. 

This brings us to the end. But since one of the Members raised 

a point, and I will yield to you another minute if you want, but just 

to clarify a point since I think he was referring to me when I used 

the term ‘‘guilt’’ or not. 

I will just ask Mr. Quaadman for 1 minute the question, is this 

a case where there is a distinction without a difference? Truly, 

there is a difference between a criminal and a civil matter, but as 

far as the ability of the SEC to impose a fine or require restitution 

or to require that you lose your license, is that a distinction without a difference? Because you can basically devastate an individual, 

take all his livelihood away and take all of his assets away by an 

SEC enforcement action. 

Mr. QUAADMAN. That is correct. And not only have we seen APs 

change in the way that they are used, but the way that the civil 

tools are used, they are now quasi-criminal trials and cases. So I 

think we can quibble, but I think you are exactly right. We are 

talking about a distinction without a difference. 

Chairman GARRETT. And since I went over our time, does Mr. 

Carney have anything else for another minute? 

Mr. CARNEY. Yes. I would just like to take a minute again to go 

back to the characterization, which I think is troubling to hear the 

small-business advocate referred to as a lobbying kind of thing. 

38 

The thing that I hear most from my business constituents, large 

businesses and small businesses, is that there is no advocate, there 

is no voice for small businesses in a lot of administrative procedures. 

My history is more at the State and local government level. And 

many of these big bureaucracies that we deal with here in Washington, it is an entirely different thing. And maybe it is that our 

politics are so poisoned by that word being such a negative thing. 

But the essence of the bill is to bring small-business concerns, 

which are varied and different, to the SEC in their processes to facilitate policies and regulations that don’t hurt small businesses 

and capital formation. 

I think some of the work that has been done through the JOBS 

Act, again, my effort was with Mr. Fincher on the IP on-ramp as 

the attempt is to get beyond characterizations that are pejorative 

or whatever in such a way to try to move the ball so that we do 

do something that makes it more beneficial for a company to be a 

public company, for companies in particular to be incorporated in 

the great State of Delaware, and not to get in these political battles 

back and forth. 

That is not to diminish the concerns, Dr. Carcello, that you have. 

I acknowledge those, and I will look at those in relationship to the 

legislation. 

But if we are going to make progress, I think we have to think 

about the language that we use as we characterize these things. 

Mr. Chairman, thank you, and I yield back. 

Chairman GARRETT. Thank you. 

I thank the panel, all of our witnesses here today, for your written testimony and also for your testimony today and your questions 

as well. 

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

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And with that, without objection, this hearing is adjourned. 

[Whereupon, at 12:00 p.m., the hearing was adjourned.] 

(39) 

A P P E N D I X 

December 2, 2015 

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