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94–374 PDF 2015

S. HRG. 114–10

VENTURE EXCHANGES AND SMALL-CAP

COMPANIES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

ON

EXAMINING HOW VENTURE EXCHANGES CAN AID CAPITAL FORMATION 

AND SECONDARY TRADING FOR SMALLER BUSINESSES AND COMPANIES

MARCH 10, 2015

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

(

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


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

MICHAEL CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT

MIKE CRAPO, Idaho, Chairman 

MARK R. WARNER, Virginia, Ranking Democratic Member 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

JERRY MORAN, Kansas 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

ELIZABETH WARREN, Massachusetts 

JOE DONNELLY, Indiana

GREGG RICHARD, Subcommittee Staff Director

MILAN DALAL, Democratic Subcommittee Staff Director

(II)


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CONTENTS

TUESDAY, MARCH 10, 2015

Page

Opening statement of Chairman Crapo ................................................................. 1

Opening statements, comments, or prepared statements of: 

Senator Mark R. Warner ................................................................................. 2

WITNESSES 

Stephen Luparello, Director, Division of Trading and Markets, Securities 

and Exchange Commission .................................................................................. 4

Prepared statement .......................................................................................... 20

Responses to written questions of: 

Senator Warner ......................................................................................... 92

Senator Vitter ............................................................................................ 94

Thomas W. Farley, President, New York Stock Exchange Group ....................... 5

Prepared statement .......................................................................................... 27

Scott Kupor, Managing Partner, Andreessen and Horowitz ................................ 6

Prepared statement .......................................................................................... 29

Nelson Griggs, Executive Vice President, Listing Services, Nasdaq OMX 

Group .................................................................................................................... 8

Prepared statement .......................................................................................... 89

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Prepared statement of William Beatty, President, North American Securities 

Administrators Association, Inc. ......................................................................... 96

Responses to written questions of Senator Crapo from Kate Mitchell, CoFounder & Partner, Scale Venture Partners ..................................................... 103

(III)


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BANKI-41578DSA with DISTILLER
(1)

VENTURE EXCHANGES AND SMALL-CAP 

COMPANIES 

TUESDAY, MARCH 10, 2015

U.S. SENATE, SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 10:02 a.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Mike Crapo, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Good morning. This hearing will come to order. 

This is the first hearing of this Subcommittee in this Congress, and 

I want to welcome our Ranking Member, Senator Warner, and all 

of the other Members of the Committee. 

There are a lot of productive opportunities for good reform and 

good progress to be made in the jurisdiction of this Committee, and 

we look forward to a productive Congress. 

Today’s hearing will provide insights into the challenges of trading stocks of small companies and whether a venture exchange can 

aid capital formation and secondary trading for smaller companies. 

The U.S. capital markets have been and continue to be a vibrant 

ecosystem fueling economic growth. These markets provide financing and needed resources to a wide array of businesses from the 

smallest startups to the largest international companies. Smaller 

public companies, however, have had difficulty sustaining strong 

secondary market liquidity and trading. 

In 2013, the SEC Advisory Committee on Small and Emerging 

Companies stated, ‘‘The Committee believes that current U.S. equity markets often fail to offer a satisfactory trading venue for the 

securities of small and emerging companies because they fail to 

provide sufficient liquidity for such securities and because the listing requirements are too onerous for such companies.’’

SEC Chair Mary Jo White wrote, in a letter dated December 23, 

2014, ‘‘The market structure for stocks of smaller companies is one 

of the areas that demands attention. I have previously emphasized 

that we should no longer assume that our market structure should 

be one size fits all.’’

Her letter also references a 2014 SEC small-cap paper that finds 

that all metrics of market quality are significantly inferior for 

smaller capitalization companies compared to mid-sized companies. 

I agree with SEC Chair White’s assessment. While these metrics 


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2

of market quality can be expected to be less favorable for smaller 

companies as compared to larger companies, the extent of the disparity documented in the small-cap paper highlights the need to 

consider steps that might lead to improvements for smaller companies that at least narrow the gap. 

I look forward to hearing from our witnesses today whether a 

venture exchange can help narrow the gap and their insights into 

the following questions: 

How can a venture exchange aid capital formation and secondary 

trading for smaller companies? 

What are the key characteristics that will make venture exchanges meaningful and positive for small companies and investors? 

What are the regulatory or legislative steps that are needed to 

attract liquidity providers and market makers to stocks that trade 

less frequently? 

What are the tradeoffs that need to be weighed to promote investment in smaller public companies? 

I look forward to hearing from our witnesses on these and the 

other issues they want to present to us, and at this time I will turn 

to our Ranking Member, Senator Warner. 

STATEMENT OF SENATOR MARK R. WARNER 

Senator WARNER. Well, thank you, Mr. Chairman, and I look forward to working with you closely as we have on so many other 

projects over the years, and I think you’ll find this Subcommittee, 

as we all know, has an enormously important jurisdiction, and I 

think we are going to be a good team. I appreciate you holding this 

hearing. This is a subject that is near and dear to my heart since 

I have spent longer as a venture capitalist than I have as an elected official. And how we can get access to capital and grow small 

companies, startup companies, is critically important. 

I think oftentimes we talk as elected officials about the growth 

of America’s economy as so often dependent upon small businesses. 

It is, although in reality, where most of the net growth of jobs has 

come over the last 30 years has come from startups. It has not 

come from traditional small businesses. 

As a matter of fact, from 1977 through 2010, according to research done by the Kauffman Foundation, approximately 3 million 

new jobs each year, net new jobs, have come from startups. That, 

depending on your numbers, is somewhere between 60 and 80 percent of all net new jobs created in the economy over the last 30 

years. 

Now, 400,000, on average, startups, actually only about 15 of 

those get to $1 billion market cap, so the notion of how can we help 

some of those companies along the way move on that path is terribly important. 

This is an area, though, where we have—over the last few years, 

there are a lot of things Congress has not done, but this is an area 

where we have made some progress, and bipartisan action on the 

JOBS Act a few years back made important changes in terms of 

tweaks, smaller companies in terms of being able to keep certain 

information confidential as they do their filing, it really helps in 


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that process before you go on a road show to be able to submit that 

data on a confidential basis. 

Last year, I chaired a hearing on high frequency trading, and one 

of the things that came out of that hearing was, as we looked at 

small-cap companies, looking at—proposing a tick size project, I 

know some of you have got some views on that. I would like to see 

that, you know, where we widen the spreads a little bit on these 

smaller companies to protect these companies from predatory actions on some of the frontrunners that are taking place from the 

HFTs. 

Now, the SEC has supported that initiative. I am anxious to 

hear, though, why it continues to get delayed, and moving forward 

on the tick size project I think is terribly important. 

I also think we want to make sure—and I think the Chairman 

raised the appropriate questions. What are the tradeoffs as well in 

terms of investor protections? If these smaller companies are not 

going to have the market following, are not going to have the market analysis, are not going to have the research, are we really sure 

that the tradeoffs are valid? 

One of the two other things that I believe also are important that 

the SEC continues to move on is another aspect of the JOBS Act 

was modification to the Reg A filings. That has enormous opportunity and potential. I would love to hear some comments there. 

And as I mentioned to the witnesses before we came into the room, 

you know, I am intrigued by the idea of a venture exchange. I do 

wonder whether the goal is more about capital raising or liquidity. 

Sometimes for management, as somebody who was a venture capitalist, I do worry sometimes about management being able to exit 

the company before it gets to its level of stability. And one of the 

things I am also hopeful that people will make a comment on and 

my hope is that the SEC will finalize our activities on 

crowdfunding. I still believe that has enormous opportunity, and 

how crowdfunding platforms might intersect with a potential venture exchange. 

So, Mr. Chairman, I look forward to this hearing. I think it is 

one that brings great opportunities, and I am going to have a lot 

of questions for the witnesses. Thank you. 

Senator CRAPO. Thank you, Senator Warner. 

Our witnesses today are: Mr. Stephen Luparello, Director of Division of Trading and Markets at the U.S. Securities and Exchange 

Commission; Mr. Thomas Farley, who is the President of the New 

York Stock Exchange Group, NYSE Group; Mr. Scott Kupor, Managing Partner and COO of Andreessen Horowitz; and Mr. Nelson 

Griggs, the Executive Vice President of listing services at Nasdaq 

OMX Group. 

Gentlemen, we welcome you. I think you have all been advised 

we like you to keep your initial presentation to 5 minutes so that 

we have time and opportunity to engage with you in questions and 

answers. And we will proceed in the order that I just described. We 

will start with you, Mr. Luparello. 


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STATEMENT OF STEPHEN LUPARELLO, DIRECTOR, DIVISION 

OF TRADING AND MARKETS, SECURITIES AND EXCHANGE 

COMMISSION 

Mr. LUPARELLO. Chairman Crapo, Ranking Member Warner, and 

Members of the Subcommittee, thank you for inviting me to testify 

on behalf of the U.S. Securities and Exchange Commission regarding exchanges focused on the listing and trading of stocks of smaller companies. Given the importance of smaller companies to the 

strength of our economy, the SEC welcomes the opportunity to discuss approaches that address the market structure needs of such 

companies. 

The SEC is considering innovative approaches that appropriately 

balance the needs of smaller companies for efficient secondary markets and the interests of and protections for their investors. Venture exchanges potentially could achieve such a balance by providing a transparent and regulated environment that offers both 

enhanced liquidity and strong investor protections. As such, venture exchanges could strengthen the capital formation for smaller 

companies; they could also expand the ability of all investors to 

participate through well-regulated platforms in the growth opportunities for such companies. 

Venture exchanges might include exchanges that operate nationally as well as local or regional markets that focus on companies 

from a particular geographic area. Their listings could include both 

smaller companies that do not qualify under the listing standards 

for the larger securities exchanges and smaller companies that do 

qualify under such standards but seek a market structure specifically geared to smaller-cap issuers. 

A good place to start when considering market structure for 

smaller companies is to recognize that the market for the trading 

of small companies is different from the market for larger companies. My written testimony provides tables with data that show 

some of these differences. Among other things, the tables indicate 

that liquidity and market quality metrics decline rapidly as company size decreases. The data serve to highlight the issue of whether the current U.S. market structure optimally promotes capital 

formation for smaller companies and the interests of their investors. 

Of course, the SEC has been focused on small company issues for 

some time. Among other things, the SEC approved a venture exchange in 2011, the BX Venture Market. That market was designed for companies that did not qualify under the listing standards of the larger stock exchanges. Importantly, it also included 

targeted measures designed to address investor protection concerns. Although approved in 2011, the BX Venture Market has not 

been launched. My understanding is that concerns around ensuring 

adequate liquidity in BX-listed issues and attracting liquidity providers at least in part have caused that decision. 

Potentially new venture exchanges might wish to explore various 

types of initiatives to address the difficulties in promoting liquidity 

to the extent possible in smaller company stocks. These might include mechanisms to centralize liquidity across price and size as 

well as measures to attract dedicated liquidity providers to the exchange. 


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A key element that likely would be critical to the success of these 

types of efforts to maximize liquidity is the protection for the liquidity pool of a venture exchange. In this regard, two Exchange 

Act provisions provide standards for the SEC. They relate to offexchange trading and listed securities and trading by other exchanges pursuant to unlisted trading privileges. Both impose substantial tests for the Commission before it can adopt or approve 

measures designed to protect the liquidity pool of a venture exchange. 

To sum up, competition in the equities markets can assume 

many forms across different stages in the listing and trading process. A key policy question is whether the current U.S. market 

structure for smaller companies enables competition in ways that 

ultimately redound most to the benefit of smaller companies and 

their investors. The potential benefits and costs of various forms of 

competition in the secondary market for smaller companies is an 

issue that warrants close consideration by Congress, the SEC, and 

the public. 

Thank you again for inviting me to discuss an issue of such importance to the U.S. equities markets and the economy. I look forward to answering your questions. 

Senator CRAPO. Thank you very much. 

Mr. Farley. 

STATEMENT OF THOMAS W. FARLEY, PRESIDENT, NEW YORK 

STOCK EXCHANGE GROUP 

Mr. FARLEY. Chairman Crapo, Ranking Member Warner, and 

Members of the Subcommittee, we at the New York Stock Exchange appreciate your interest in capital raising for small-cap 

companies. My name is Tom Farley, as you know, and I am President of the New York Stock Exchange Group. I have been in the 

business of running CFTC- and SEC-regulated exchanges for most 

of my career. 

The New York Stock Exchange Group includes the iconic New 

York Stock Exchange as well as two additional equities exchanges, 

two options exchanges, and a bond trading platform. Across these 

venues we list and trade cash equities, equity options, exchangetraded products, and debt securities which are accessible to all investors through their broker-dealer. Of our listing exchanges, 

NYSE MKT has traditionally been the listing venue for smaller 

public companies. Over the years there have been several efforts in 

the United States to address the needs of smaller companies seeking access to capital through both exchange and nonexchange solutions. In fact, NYSE recently announced a midday auction for less 

liquid securities that we intend to launch later this summer if approved by the Securities and Exchange Commission. 

As many of you know, the data around smaller companies accessing the public markets for capital is discouraging when compared 

to the data of the late 1990s. Companies are spending more time 

as private companies in part due to increased regulatory hurdles 

to becoming and being a public company and, once public, a lack 

of liquidity in the trading of shares of smaller public companies. As 

a listing exchange, we have witnessed the negative impact on liquidity in shares of smaller public companies as the incentives for 


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market makers to participate in these securities have diminished 

over time. As a result, venture capital is locked up in companies 

for longer periods of time, which in turn decreases the availability 

of venture capital for new companies. 

NYSE believes that the idea of venture exchanges is worth Congress’ attention and may be of value to smaller companies seeking 

capital and their venture capital investors seeking a liquidity event 

that will free up money for new investment. While we believe many 

of the concerns raised about venture exchanges can be addressed 

through education, we also recognize that companies available for 

trading on venture exchanges will have a higher rate of failure and 

could potentially shed a dark cloud over the rest of the U.S. public 

markets. Consequently, we believe it will be important that companies listing on venture exchanges have an appropriate level of financial disclosure and that, in addition to the added oversight a 

venture exchange listed security would receive from the exchange’s 

Self-Regulatory Organization, venture exchanges, broker-dealers, 

and investment advisors should also differentiate a venture exchange-traded security from one listed on a national securities exchange. 

NYSE believes that the U.S. capital markets are one of the best 

avenues available for companies of all sizes to access growth capital. We are protective of the confidence investors have in the U.S. 

capital markets but believe that, if designed appropriately, venture 

exchanges may give small companies access to capital not currently 

available to them and investors the ability to invest in smaller 

companies with greater regulatory scrutiny than is currently available in the over-the-counter market for unlisted securities. 

Thank you. 

Senator CRAPO. Thank you, Mr. Farley. 

Mr. Kupor. 

STATEMENT OF SCOTT KUPOR, MANAGING PARTNER, 

ANDREESSEN AND HOROWITZ 

Mr. KUPOR. Chairman Crapo, Ranking Member Warner, Members of the Subcommittee, thank you very much for the opportunity 

to speak with the Committee regarding capital formation and the 

topic of venture exchanges. 

It has been well documented by various commentators that the 

number of IPOs in the United States has fallen significantly since 

1997, and while in large part due to the passage of the JOBS Act 

by this institution we have seen a more robust IPO environment 

in 2013 and 2014, the volume and characteristics of those IPOs remain very different. 

In particular, small-cap IPOs have remained below 25 percent of 

all IPO volume for nearly 15 years. In contrast, in the period from 

1991 to 1997, as many as one-half to two-thirds of IPOs were for 

small-caps. 

In the IT sector, which is the area in which we invest, the industry produced just north of 2,400 venture-backed IPOs from 1980 to 

2000. In contrast, in the period from 2001 to 2014, there were a 

total of approximately only 500 IPOs. Relatedly, the time to IPO 

has significantly elongated over the same time period—6–1/2 years 


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in the 1980–2000 time period versus 9 years for the 2001–14 cohort. 

So why should we care about this? Well, in addition to the strong 

nexus between IPOs and job and economic growth, we are at risk 

of creating a two-tiered capital market structure, one in which the 

majority of the appreciation accrues to those institutions and 

wealthy individuals who can invest in the private markets, and a 

second for the vast majority of individual Americans who comprise 

the retail investor base. 

In the current state of affairs, the private markets will continue 

to develop their own solutions to enable private companies to stay 

private longer. In fact, today we see hedge funds, sovereign wealth 

funds, family offices, large technology-focused buyout firms, and 

mutual funds filling in the void in the late-stage private market. 

If we want to address these trends, we must address the underlying issues that are impacting companies’ decisions to stay private 

longer. Those are both economic issues as well as what does the 

post-trading environment look like once they go public. 

With respect to the economic costs of listing, while there are always more ways to streamline the economic costs of becoming and 

remaining a public company, the JOBS Act has done a very good 

job of lessening the burden for emerging growth companies. When 

we talk with our portfolio companies, there is far less of an impediment to going public today on the basis of the regulatory costs associated with that. 

But the most significant remaining deterrent to companies going 

public is the after-market environment in which they will have to 

function as public companies. More specifically, the after-market 

environment is directly correlated to the market cap and ultimately 

the liquidity of the company post-IPO. If a company’s market cap 

is large enough, it can attract research support and market-making 

resources from the sell side investment banks and, hence, liquidity. 

In contrast, for small-cap companies, the economics simply do not 

work to attract these resources, and as a result, liquidity and institutional support remain low. And, therefore, many issuers simply 

choose to postpone an IPO until they are big enough to attain a 

market cap sufficient to engender adequate liquidity. This explains, 

I believe, the substantial decrease in the sub-$50 million IPO market. 

Among the reasons for low liquidity is the move to decimalization 

and is why we have advocated for the tick six pilot program that 

is currently pending before the SEC. But given the above, how 

would venture exchanges impact capital formation? With respect to 

the economic costs, a successful venture exchange would need to 

employ a regulatory framework that at a minimum incorporated 

the JOBS Act regulatory requirements. However, if the goal were 

to enable a significant proportion of sub-$50 million IPOs, we 

would probably need an even more scaled down framework, probably similar to the Reg A Plus regulations that are pending before 

the SEC. 

Turning to the post-IPO trading environment, at a minimum a 

venture exchange would need the flexibility to set appropriate tick 

sizes to foster trading liquidity at fewer price increments. As a result, I strongly believe that any decision to explore venture exVerDate 0ct 09 2002 16:21 Dec 23, 2015 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\03-10V~1\HEARING\94374.TXT SHERYL

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changes should not obviate the need to ensure that the pending 

tick size pilot program is implemented and with sufficient time and 

detail to garner real empirical results. 

There are also a number of open questions and concerns that I 

believe we would need to address. 

First, adverse selection in the form of companies that elect to list 

on the venture exchange. The most attractive companies that can 

raise private capital through other means, as some are doing today, 

may simply continue to do so and, thus, only those who run a 

weaker position may choose to list on the venture exchange. 

Second, there is a real risk that separating out the venture exchange from the existing national market structure may create, in 

fact, less liquidity for small caps. That is, institutional investors 

may simply wait for venture exchange companies to graduate to 

the national market exchanges instead of investing in them as venture exchange issuers. 

In summary, I would offer the Committee the following observations: Fostering more IPOs, in particular more small-cap IPOs, is 

important to job creation and to the long-term competitiveness and 

fairness of the U.S. securities markets. In the absence of structural 

capital market changes, good companies will continue to tap private sources of capital and delay going public. Independent of 

whether a venture exchange is the right solution, we must solve 

the core liquidity challenges that exist in today’s small-cap market. 

Thus, proceeding with a robust tick size pilot program I believe is 

a first crucial step toward investigating the proposed venture exchange. 

Thank you for your time, and I look forward to the Committee’s 

feedback. 

Senator CRAPO. Thank you, Mr. Kupor. 

Mr. Griggs. 

STATEMENT OF NELSON GRIGGS, EXECUTIVE VICE 

PRESIDENT, LISTING SERVICES, NASDAQ OMX GROUP 

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

Warner, and Members of the Subcommittee for the opportunity to 

testify on venture exchanges. 

With our first initial public offering in 1971, Nasdaq created the 

modern IPO, and we have become the destination of choice for 

emerging, high-growth companies. Nasdaq brought to capital markets a new view that companies could go public earlier by recognizing that most companies need capital and investors want access 

to ownership when companies are at earlier stages of their growth 

cycle. 

However, changes to the regulatory landscape over the years 

have reduced Nasdaq’s and our partners’ abilities to facilitate stable, reliable, and cost-effective capital formation for many emerging 

companies. The one-size-fits-all approach of our regulatory structure has had a negative consequence for small companies. While 

the JOBS Act did ease several burdens on companies, the extent 

of that relief has not reached all small venture companies. 

The continued aversion of small companies to the public markets 

has created a sense that there is a need for a new type of a separate venture exchange. From Nasdaq’s point of view, this notion is 


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somewhat misplaced. What we believe is needed is within the 

small-cap listing tiers of existing exchanges are simple reforms to 

make the market structure more attractive again for growth companies. Nasdaq’s approach to helping venture companies has two 

paths: 

First, change certain trading rules and both listing and governance requirements within then small-company market tier to encourage and facilitate the ability for growth companies to raise capital on the public markets and thrive. 

Second, further leverage the JOBS Act from which Nasdaq has 

built and is operating a growth platform today for companies wishing to stay private—the Nasdaq Private Market. 

To reinvigorate the capital formation benefiting small companies, 

we suggest the following changes: 

Exempt certain growth companies from the tick price provision 

of Regulation NMS and delegate the authority to define the tick 

sizes to the listing exchange. The tick size is a surprisingly important—and extremely sensitive—variable in trading quality. Too 

wide and trading costs become burdensome to investors; and too 

small and volatility increases and liquidity is limited. 

Modify the definition of a ‘‘penny stock’’ in Rule 3a51–1. In 2004, 

the SEC essentially froze exchange listing standards by defining 

any security not meeting those requirements to be a penny stock. 

This has inhibited innovation in listing requirements over the last 

decade. 

Next, adopt limited regulations to prevent aggressive short selling of smaller companies, which lack the resources to combat manipulative short selling and are consequently more vulnerable. We 

recommend disclosures of short positions in smaller companies 

similar to the same disclosures of long positions, providing companies and investors with more transparency. 

For growth companies, provide issuers a choice to suspend unlisted trading privileges. Affording certain growth company issuers 

with input into their market structure through this option to suspend unlisted trading privileges in their stock would refocus competition among orders in that stock by placing them all on a single 

platform. 

Next, permit market maker support programs. Currently, 

Nasdaq allows ETF issuers to establish a fund to subsidize market 

makers who enhance liquidity in those shares. We believe that 

such programs would help support growth companies, and these 

programs have successfully enhanced liquidity and market quality 

for investors in Europe for several decades. 

Last, for the private markets, our suggestions are—or last for the 

public markets, I apologize, eliminate certain requirements for 

shareholder approval for smaller companies. The SEC has made 

strides to reduce the time necessary for public companies to register and sell securities by allowing shelf registrations. However, 

the requirements imposed by Nasdaq on listed companies for obtaining shareholder approval of certain financing transactions have 

not followed suit. We are currently examining these requirements 

and hope that any proposal we present to the SEC to address this 

will be met with an understanding that rules applied to the world’s 


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largest companies may not be appropriate to apply equally to 

emerging growth companies. 

Concluding with private market recommendations, several provisions in the JOBS Act allow companies to remain private longer, 

and many are doing so. In light of the growing demand for liquidity 

in these companies’ shares, especially by their early investors and 

employees, we created the Nasdaq Private Market. The Nasdaq 

Private Market is a company-controlled platform that leverages 

technology solutions to serve the unique needs of private companies 

within the framework of securities laws. We are seeking an important adjustment to that framework. The JOBS Act and prior laws 

make it very clear that companies can sell shares to accredited investors without registering the transaction. In theory, this category 

of investor does not need the protections that registration requirements afford, due to their net worth, income, and sophistication. 

However, the subsequent sale of shares from an existing shareholder to another accredited investor does not enjoy the same legal 

status, despite the fact that the policy rationale for an exemption 

is similar to that for issuer transactions. Consequently, companies 

and investors are shouldering unnecessary legal and regulatory 

costs. 

Thank you again for inviting Nasdaq to testify on this important 

issue, and we look forward to your questions. 

Senator CRAPO. Thank you very much, Mr. Griggs, and I appreciate the testimony of all of you. 

Let me start out by just asking one general question. I assume 

that all of you, from your testimony—it indicates that all of you 

agree that the existing one-size-fits-all system in our markets 

needs to be revised and strengthened. Is there anybody who disagrees with that? I just want to, with that question, create the emphasis that we need to move and engage on these issues, both Congress and the SEC. 

Second—and I will start with you, Mr. Luparello—with regard to 

the SEC, you indicated in your testimony that there are a number 

of potential initiatives that a venture exchange might explore to 

promote liquidity, and some of those you mentioned were to limit 

all trading to particular times of the day through particular mechanisms; to attract dedicated liquidity providers with a package of obligations for making a market in listed companies, balanced by 

benefits for providing high liquidity; and then, finally, to explore 

different minimum tick sizes, which has been brought up by a 

number of the other witnesses. 

Could you just briefly—and I do mean try to do it succinctly—

describe the benefits you see from those actions? 

Mr. LUPARELLO. I will start with the tick pilot, which has been 

mentioned by my fellow panelists as well. The Commission has 

demonstrated a desire to explore whether widening out the tick 

size for certain securities under $2 billion in market cap may actually improve liquidity. That is why we have been—we asked the exchanges and FINRA to create a pilot plan, which they have filed 

with us and we are currently considering and should act on very 

soon. That I think is the first way to look at whether there is additional liquidity that can be brought to currently listed issuers. 


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11

I think on the question of whether we can attract issuers who 

are not in the public markets now, the idea is that we have heard 

from a variety of market participants around either exclusivity or 

concentrations of liquidity. I think we will always be open to considering—obviously we want to balance them at the same time 

against both investor protection and market efficiency concerns, 

but we tend to think, properly structured, these things can potentially work and bring liquidity where liquidity has not existed before, and do so in a way—especially if there is a minimization of 

investor confusion, in a way that is consistent with investor protection. 

Senator CRAPO. Let me interrupt there and just ask the rest of 

the panel, do you all agree that focusing on the tick size is one of 

the areas that we could successfully achieve some significant 

progress? 

Mr. FARLEY. Yes. Senator, if I could just——

Senator CRAPO. Yes, Mr. Farley, you want to——

Mr. FARLEY. If I could just make one remark about that, I absolutely agree, and we worked diligently with the SEC and others in 

the industry to help construct a reasonable tick pilot proposal. I 

just want to highlight one nuance. There are over 50 trading 

venues of consequence in this country, and only a dozen of those 

are actually fully regulated exchanges. And one thing to keep in 

mind is that securities trade on all of those venues; whereas, the 

tick pilot you could imagine—or changing tick sizes at the exchanges will only impact, roughly 20 percent of the market. And 

so it is important to keep in mind, as we think about tick sizes, 

that there is a whole other market out there that is not the fully 

regulated exchanges. In order to really get the full range of benefits 

that I heard from my colleagues here on the panel from revising 

tick pilots for smaller companies, you really have to do that on a 

market-wide basis. 

Senator CRAPO. Thank you. 

Anybody else want to comment on that? 

Mr. GRIGGS. No, we agree with the comment. 

Senator CRAPO. All right. Thank you. 

Mr. Farley, let me come back to you. The NYSE, I believe, has 

already indicated a strong interest in venture exchanges or the 

need for them, but I would like you to clarify that. And I guess my 

question would be: If venture exchanges were made a viable option, 

would the NYSE be interested in creating a platform? 

Mr. FARLEY. Sure. The short answer, if I can go back to a question you asked 3 or 4 minutes ago, do we believe the kind of onesize-fits-all makes sense and we need to kind of think differently 

about different companies, I absolutely agree with that, and I just 

want to highlight that. The midday auction that was referenced in 

the written testimony but that I did not mention today in the interest of time, that we are implementing, we are actually only implementing for our less liquid securities. And so that is an anecdote 

that demonstrates we absolutely agree. And it is also an anecdote 

that demonstrates that we are committed to bringing additional 

capital formation to less liquid securities, also lesser capitalized 

companies, which gets to your direct question about the venture exchange. We are indeed interested. Whether or not it comes in the 


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form of a venture exchange or modifying our existing listing venues 

to accommodate these smaller companies and create a more constructive environment for capital formation for those securities, we 

are indifferent for the most part. But we are—presuming that Congress and the SEC and our colleagues in the industry put in place 

a system along the lines that we have described in our testimony 

and, quite frankly, that some of my colleagues on the panel here 

have described, we indeed would, the New York Stock Exchange, 

support it and look to create a business based on that. 

Senator CRAPO. All right. Thank you. My 5 minutes has expired. 

We will have a couple of rounds, but, Senator Warner, do you want 

to go ahead? 

Senator WARNER. Yes, thank you, Mr. Chairman. And let me 

just—I want to be convinced, but I have got a couple questions. 

And, Mr. Chairman, I have also got a statement here from Mr. William Beatty, who is the President of the North American Securities 

Administrators Association for the record. 

Senator CRAPO. Without objection. 

Senator WARNER. First of all, Mr. Luparello, one of the things I 

would hope, as we think about these new platforms, I would just 

strongly urge you—as I have urged your commissioners—that we 

would have a lot more knowledge if we could actually get the tick 

size project out, if we could finish the Reg A Plus regulations, and 

we are now approaching 4 years on the JOBS Act, and we still do 

not have final crowdfunding rules. These are all tools to help smallcap companies. Do you want to make a comment, or do you want 

to go ahead and make a commitment for the record about when all 

those projects will be finalized? 

Mr. LUPARELLO. I can, on the record, too, I can quote the Chair, 

who has said on a number of occasions that finishing the 

crowdfunding rules and Reg A Plus are among her highest priorities for this year. 

Senator WARNER. But that was also, I think, a comment she 

made last year, too. 

Mr. LUPARELLO. On the tick size pilot, which is in my division, 

we noticed the pilot plan in December—I am sorry, November. We 

received a significant number of comments through the comment 

period, which closed toward the end of the year. Our statutory 

deadline for acting is early May, and we have every intention of 

hitting that deadline. 

Senator WARNER. Good. I think it is very important because it 

is kind of like you could actually question whether a venture exchange might undermine the tick size pilot, so, you know, I think 

getting that data would be very helpful. 

Mr. LUPARELLO. We absolutely agree. 

Senator WARNER. One of the other things I would simply ask, 

and maybe some of you have got the data, and I have to say I was 

part of this effort so I am guilty as well in the late 1990s of having 

a whole series of companies, dot-com companies in particular, that 

had huge valuations that very quickly went to zero. So while I 

think it is great that we can get small-cap companies onto exchanges, I would like to get some record of particularly the number 

of those late 1990s companies that went public that were still in 

existence 3 or 4 years later, if we could get that for the record. 


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I guess one of the questions I have got for everyone is that—you 

know, I saw Arthur Levitt’s comments about venture exchanges 

saying, you know, a solution in search of a problem. Do you all 

want to comment? We know that Nasdaq has got the ability to 

start a new exchange in 2011. I know the American Stock Exchange had a plan; I think it was called the Emerging Company 

Marketplace in 1992. It never went forward. The Canadian Stock 

Exchange has got a venture-type exchange. The Brits have got one. 

You know, do we have any success records that we can point to? 

Are the British the most successful so far? Mr. Griggs, do you 

know—we talked earlier in the outer room. You might want to 

share some of your comments about——

Mr. GRIGGS. Sure. 

Senator WARNER.——why you have not taken advantage of the 

opportunity that you got granted in 2011. 

Mr. GRIGGS. Yeah, thank you for the question. Our belief is that 

through smart regulation a smaller-cap venture market can work, 

but the best way to do that is through addressing the challenges 

that the current small companies face that are already public, and 

letting that take hold and then spill over to new companies potentially looking to go public. 

The challenges of starting a brand-new listing venue or exchange 

due to the necessity of having connectivity, data feeds, et cetera,

and the limited economics that are involved in it make a brandnew platform extremely challenging. So I think when you look at 

it, our view would not be to open the flood gates and have an exchange that lists every OTC company that is on the market on this 

exchange, but first and foremost fix some of the issues we have 

talked about through the tick pilot, through potentially suspending 

the UTP privileges as well as the market maker program, and create a more sound small-company market for existing companies 

first. 

Senator WARNER. Would anybody else care to make a comment 

or comment about some of the other smaller exchanges around the 

country or around the world? 

Mr. FARLEY. I would only add to my colleague’s comments that 

the other thing to look at are the minimum listing standards and 

whether or not it would be worthwhile to revise those minimum 

listing standards to allow companies that are, in effect, smaller to 

also be able to list on those exchanges. 

Mr. LUPARELLO. I am probably the only one here old enough to 

remember the AMEX EMC, and its failure was in part because of 

the quality of the issuers that were brought forward. And I think 

what we have seen in conversations now, including the issues 

around the BX market, there was a much greater focus on that element of investor protection of issuer scrutiny. I think anything we 

do in this space has to have that as a very important component. 

That plus, you know, making sure we are doing everything we can 

to prevent investor confusion are clearly things that need to happen for a venture exchange to be successful. 

Senator WARNER. Because it seemed to me, Mr. Chairman, just 

the Canadian experiment seems to be such small-cap that it is almost a bit sketchy—a technical term. You know, whereas, the BritVerDate 0ct 09 2002 16:21 Dec 23, 2015 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\03-10V~1\HEARING\94374.TXT SHERYL

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ish exchange seems to have a little more parameters. But I will 

come back on the next round. 

Senator CRAPO. Thank you, Senator Warner, and thanks for 

those answers to those questions from the witnesses. 

A number of you indicated that the regulatory environment needed to be addressed, particularly the JOBS Act, and if I understood 

you correctly, those of you who raised the JOBS Act were making 

the point that it needs to—its provisions need to be strengthened 

and, in fact, perhaps even adjusted to deal with this issue of the 

smaller companies on a venture exchange. 

Would any of you like to elaborate on how we should deal with 

the regulatory environment in general and, in particular, how we 

should deal with the JOBS Act? Mr. Griggs? 

Mr. GRIGGS. Sure. I think as stated by my fellow panelists, the 

most attractive provision today in the JOBS Act is the confidential 

filing, and we do feel that could be expanded to other types of offerings. In particular, PIPEs and other forms of secondary transactions would be valuable to the smaller-cap companies is one area. 

I think we do look at—the JOBS Act did also have provisions 

that certainly allow for companies to stay private longer, and I 

think the Committee should not overlook the fact that some of the 

challenges in the private—in the venture space today can be solved 

in the private market as well. So we make a recommendation of 

clarifying the definition of accredited investors in our statement, as 

well as looking at how the transaction between accredited investors 

are officially recognized or approved are important. So that would 

be our view as two examples that should be looked at in the next 

version of the JOBS Act. 

Senator CRAPO. Mr. Kupor, do you want to add to that? 

Mr. KUPOR. Yeah, I would agree with that. But I would also say 

I think in terms of the regulatory framework around which companies are going public, I think the JOBS Act has actually done a 

very good job there. So I think, you know, having reduced the filing 

requirements, you know, things like the confidential filings, testthe-waters provisions I think has been very effective. So I see that 

as less of an issue of companies making the decision to go public 

than certainly it was prior to the JOBS Act. But I would agree that 

certainly we could strengthen some of those provisions particularly 

as it relates to the private markets as well. 

Senator CRAPO. Mr. Farley or Mr. Luparello, do you want to 

weigh in on this? 

Mr. FARLEY. I agree with the comments of my colleagues. I would 

just note that I have been more focused on and we have been more 

focused on at the New York Stock Exchange with respect to the 

regulatory provision, not extension of the JOBS Act per se, although I do indeed agree, but some more of the items that have 

already been discussed: number one, more discretion around tick 

sizes for these smaller companies, but, number two—and if I can 

kind of step back and give you a little bit of context, going back 

20 years ago, the New York Stock Exchange for a New York Stock 

Exchange-listed company traded 100 percent of the volume of those 

stocks or thereabouts. And then there was something called UTP 

that came into the market, which enabled and required that those 

stocks be traded on multiple venues, which by and large was a very 


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healthy construct for the market. And when you think about it for 

a stock like, say, Bank of America, it has no really deleterious impact on the liquidity of Bank of America stock, because it is so liquid all day long, with a continuous bid-offer, even though it was 

spread across many venues, but it was a one-size-fits-all model that 

was put upon the market. And so for these smaller companies, 

some of which trade only multiple times a day, maybe once a day—

some trade many times a day, but they are still relatively illiquid. 

They, too, have this UTP obligation, and it would require, as I understand it, an act of Congress in order to provide discretion, 

whether the company’s discretion or the exchange’s discretion or 

even the SEC’s discretion, to look at those small companies and 

say, well, wait a minute, do we really want to fragment liquidity 

for a small company like this? Or do we want to bring it back together? There may be some resistance in general toward doing that 

because people may say, well, wait a minute, is this the exchanges 

looking to just bring more business and establish some sort of, say, 

monopoly or duopoly? But this is a very, very small part of what 

we do in terms of revenue, in terms of volume. This is more about 

what can we do to help the little guy. And I think those kind of 

changes coupled with some of the things my colleagues said could 

be quite helpful. 

Senator CRAPO. Thank you. 

Mr. Luparello, do you have anything to add? 

Mr. LUPARELLO. I would just point out on the issue of whether 

there needs to be a legislative fix on the unlisted trading privileges 

issue, that is something the staff at the Commission has studied 

for a while, and is in the process of formulating a position. There 

is certainly a way that you could read the statute that is very restrictive, and that, in fact, may be the conclusion, but that is not 

a conclusion we have reached yet. So it seems incumbent upon us 

to make a determination that we do not have the authority before 

we come and ask for the authority. 

Senator CRAPO. Well, thank you. It seems to me what I take 

from the collective testimony here is that there is some very profitable potential for congressional changes that would either improve 

or strengthen the JOBS Act or focus on getting the right level of 

discretion for the tick size or for other decisions about this matter. 

And it would be very helpful if you would help us to summarize 

where Congress needs to act to help improve the potential for these 

markets. 

Senator Warner? 

Senator WARNER. Thank you, Mr. Chairman. I want to follow up 

on Mr. Farley’s comments. 

I would agree as well that if we were going to go down this path, 

you need to concentrate these trades on a single exchange so that 

there is enough volume and focus to have a market maker and 

hopefully to generate the research. 

You know, I am—and with apologies if—in my prior life, I would 

be sitting on your side of the table. But, you know, could a cynic 

say that a venture exchange is just a quicker way for VCs to get 

out of their investments or, to management, to get liquid earlier 

on? Obviously, we have got lots of examples of when VCs leave or 

management teams leave, early stage companies do not do as well. 


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How do we guarantee the lockups and some of the protections 

that—especially if you were suddenly bringing in less informed investors and the public? 

Mr. KUPOR. Yeah, I think, Senator, it is a very fair point. One 

thing I would point out is, number one, this is happening today in 

the private markets in the absence of a venture exchange. So there 

is a liquidity market that has been created initially for employees, 

and so, you know, obviously Nasdaq Private Market has been a 

part of this, and so I am sure Mr. Griggs can——

Senator WARNER. But that is generally with accredited investors, 

isn’t it? 

Mr. KUPOR. It is, yes, right. But I think what we are seeing is 

there is certainly a lot of—to your question about whether this is 

kind of venture capitalists or management looking for liquidity, 

there are alternative avenues for them to achieve liquidity, albeit 

to your point to accredited investors. 

I also agree with your general point, which is I think the only 

way that this venture exchange works and we do not have a repeat, obviously, of some of the companies that, you know, you mentioned from the early 1990s—or late 1990s, excuse me, is we would 

have to have, you know, a regulatory regime that would actually 

ensure that there is, you know, a more structured way for people 

to actually exit these markets. So I agree with you that if this were 

perceived as people trying to kind of, you know, run for the gates 

on the liquidity side, I do not think it works. I do not think the 

market maker is going to be there to support it. You know, the interesting—the opposite is also true, which is in the absence of 

these changes, I think the venture capitalists are actually quite 

fine, even if we do not make these changes. So from an economic 

perspective, it just means they will hold their stocks longer. It may 

mean that they have to change their limited partner structures in 

order to enable longer hold periods. But it probably means also, 

you know, very significant appreciation still accrues to them in that 

respect. 

So I think this is more about making sure that we can kind of 

find an appropriate time for the public investors to also be able to 

participate in some of that appreciation. 

Mr. GRIGGS. I will just add to that. I think those are great points 

that Scott made. If you look at what is happening in the private 

markets and how long companies are staying private, it is not just 

the founder or the CEO looking for liquidity. It is also the employees who have been there for 7, 8, 9 years. It is the early investors 

who have been in the portfolio or a company for a very long period 

of time, and giving them access to liquidity does help them recycle 

that cash into new investments into the economy. So I think providing some liquidity when we have seen this dramatic expansion 

of how long companies stay private is fairly important. So that 

would be an additional viewpoint. 

Senator WARNER. I think one of you all raised what about the adverse selection issue. You could say the good companies that are 

still roaring with huge market caps are going to go straight to 

Nasdaq or New York. You know, will—how do we protect against 

that at least perception or reality? Would you encourage that evVerDate 0ct 09 2002 16:21 Dec 23, 2015 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HE3E8B~1\03-10V~1\HEARING\94374.TXT SHERYL

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erybody would start on a venture exchange? Or any comments on 

that? 

Mr. GRIGGS. Yeah, I will make a comment. I think that is our 

viewpoint, that leveraging the existing market that exists today 

with some smarter regulation is a preferred path by Nasdaq as opposed to creating a brand-new venture market that would be, 

again, very challenging to attract that first company. And if you 

look at the existing pool of companies on the Nasdaq Capital Market, there are about 600 companies. I am not saying that is the 

right size of companies that would be in this venture exchange, but 

if you would look at that as a subset and then how far down you 

want to go in terms of what the different qualifying standards are, 

that would be a discussion we would want to have. But I think that 

is how you would start this, again, not open it up to 2,000, 3,000 

companies that may, if you look at the Toronto exchange, other exchanges around the world that are venture-like, they are that expansive. And I think our viewpoint would be that we limit the 

number of companies and hopefully deflect some of the adverse selection. 

Mr. FARLEY. As reflected in our written testimony—again, I did 

not deliver all of it here today—we are not cavalier about moving 

to this kind of venture exchange idea, and we have some of the 

same concerns that you do. And so we need to at a minimum be 

very deliberate about how we implement it. 

One of the things we suggested in our testimony and I did mention today is that the existing listing standards today are reasonable. So to the extent that we lower those listing standards, we 

think that we would need to provide additional disclosure to the 

end investor and not just us, the exchange, but also there would 

be an obligation on the broker-dealers. 

You mentioned Canada. My understanding of the venture market 

in Canada is they actually have a ticker where they flag for every 

single stock that it is a ‘‘V’’ for a venture stock, which I think is 

a reasonable approach. 

My guess is your adverse selection concern is not—it is not theoretical. That is exactly what would happen. And Uber is not going 

to choose to list on a venture exchange, if you will. And so it is important and it is incumbent upon all of us and you to make sure 

that there is the appropriate level of disclosure for the companies 

that would choose to list using these lower standards. 

Senator WARNER. Mr. Chairman, I guess my time is up and go 

back to your round, but I do think we ought to—I think this is a 

very good hearing, but we ought to get from the panel and others, 

you know, what steps we can take within some of the existing 

frameworks, because my sense is that venture exchanges have been 

tried, maybe we need to move toward that. But there are a series 

of things—I am coming back to you, Mr. Luparello—that if we can 

get the SEC to go ahead and finish some of the work they are already working on, we might have some—we would have more good 

data. 

Could I just get—the Chairman has been generous to give me 

one more question. I was quite excited 5 years ago when the notion 

of crowdfunding came about. You know, it has been slower to develop, partially because of the lack of rules, partially as well even 


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in other countries that have been more forward leaning. Do you all 

want to make any comment on what you see as the future of 

crowdfunding? You know, will it be the kind of broad-based capitalraising tool? I particularly thought it was a potential for more rural 

areas and areas where companies did not have access to sophisticated venture money. Or is it going to be—you know, still remain 

kind of a niche? Comments? 

Mr. KUPOR. I will make a comment on it. So I agree with your 

position, which is I think it is more likely a viable source of capital 

for things that probably are not accessible to the broader venture 

capital market, and I think for that, that is actually quite valuable 

and could be helpful. 

You know, I will also say, you know, I do have a concern that 

it is a little bit the same adverse selection concern that we have 

talked about here with respect to venture exchanges, which is we 

are talking about obviously the riskiest portion of the market. We 

are talking about seed capital where we know the failure rates are 

tremendously high. And I do worry a little bit about the dichotomy 

here, which is we have—we are granting access to potentially 

unaccredited investors even to be able to invest in what is probably 

the riskiest portion of the market. At the same time we keep kind 

of pushing out the IPO timeframe and, you know, kind of restricting to accredited investors the much later end of the market, you 

know, maybe even some of these larger offerings that we are seeing 

out there. 

So, to me, my concern would be just, you know, do we really feel 

like we have enough of a regulatory framework to be able to kind 

of protect against bad actors in that market? And if so, I think it 

can be a very viable economic alternative. But I do think it could 

also end up as a significant opportunity for people to find that 

there is greater risk than I think can be appreciated at the time 

of investment. 

Mr. GRIGGS. We tend to agree with the comments. When we look 

at the JOBS Act, when it did come out, we were very excited about 

some of the private market provisions, and they go down the path 

of the Nasdaq Private Market. But I think a comment was made 

initially by Mr. Luparello about geographical areas so that will 

echo Mr. Kupor’s comment about the fact that this would be—is 

not needed in certain parts of the marketplace that are very robust 

from angel investing today. But there are certain parts that certainly could be beneficial, but you would have to be extremely vigilant on the adverse selection because there will be some great stories on the positive side, but there is also going to be quite a bit 

of downside risk there as well. 

Senator WARNER. I do think for rural underserved areas, you 

know, the ability to—because there is no seed capital, there are no 

angel investor networks, it has the potential for—that we still need 

to push. And, Mr. Luparello, I am going to try to hold the Chair’s 

comments about making sure that we get those final regulations 

out. 

Mr. Chairman, I really appreciate you holding this hearing. I 

think it has been a very informative one. 

Senator CRAPO. Well, thank you, Senator Warner. And, again, 

thanks to the witnesses. 


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I have a ton of other questions, but we are going to probably 

have to wrap up here. What I would like to do is to follow up on 

Senator Warner’s suggestion that we ask each of the witnesses to 

provide—you were asking, I think, for a list or a description of 

what steps we could take, short of creating a formal venture exchange, to help improve the dynamics. We have heard a lot of discussion about that here today, but if the witnesses could—even 

though you have it in your written and in your oral testimony here 

today, provided and said a lot of this, if you could just succinctly 

give us a statement of what you think those steps might be that 

we could take now even before the creation of an exchange, if the 

creation of an exchange is a good idea, I think that would be very 

helpful. 

Senator CRAPO. And then I would like to add a request for another list, and that would be a list of what you think the necessary 

regulatory and legal fixes need to be made or structure needs to be 

of an existing—the creation of a venture exchange. And let me just 

give you an example of what I am thinking here. 

In terms of the information that we have received so far, it seems 

that there has been a strong suggestion that the potential characteristics of any venture exchange should be to have scaled disclosure requirements and more basic listing standards, wider tick 

sizes for securities trading, and some have said that the trading of 

venture exchange-listed securities should be limited to occur only 

on a venture exchange. If there are other characteristics that a 

venture exchange should have, I would love to have you give us 

that list as well so that we can help to continue narrowing and 

identifying the scope of the discussion and the action that we may 

need to take here. 

Senator CRAPO. Do you have anything else, Senator Warner? 

Senator WARNER. No. Thank you. 

Senator CRAPO. I would like to thank each of you. Your written 

as well as your oral presentations have been outstanding and are 

very helpful to us. And as I said at the beginning of this hearing, 

I think that there is a tremendous amount of potential for us to 

do some good things in this next Congress. And I will also state 

again I am elated to be able to have as my co-partner here in this 

endeavor on this Subcommittee, Senator Warner. He and I are 

good friends, but we also are committed to making sure we have 

a bipartisan effort to build good policy. 

And so, again, thank you all for coming. Without anything else, 

this hearing will be adjourned. 

[Whereupon, at 10:57 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follows:] 


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1 Venture exchanges potentially could include existing or new exchanges that operate nationally. The Commission could also consider local or regional exchanges that focus on companies 

from a particular geographic area. 

PREPARED STATEMENT OF STEPHEN LUPARELLO

DIRECTOR, DIVISION OF TRADING AND MARKETS, SECURITIES AND EXCHANGE

COMMISSION

MARCH 10, 2015

Chairman Crapo, Ranking Member Warner, and Members of the Subcommittee:

Thank you for inviting me to testify on behalf of the U.S. Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) regarding exchanges focused on the listing 

and trading of stocks of smaller companies. Smaller companies are important to the 

strength of our economy. The SEC welcomes the opportunity to discuss approaches 

that address the market structure needs of smaller companies and their investors, 

which can serve to facilitate capital formation for such companies—an important 

part of the agency’s mission. 

The SEC is considering innovative approaches that appropriately balance the 

needs of smaller companies for efficient secondary markets and the interests of investors in smaller companies. Venture exchanges potentially could achieve such a 

balance by providing the investors a transparent and well-regulated environment for 

trading the stocks of smaller companies that offers both enhanced liquidity and 

strong investor protections. As such, they could strengthen capital formation and 

secondary market liquidity for smaller companies and expand the ability of all investors to participate through well-regulated platforms in the potential growth opportunities offered by such companies. 

Venture exchange listings could include both smaller companies that do not qualify under the listing standards of the large securities exchanges and smaller companies that do qualify under such standards.1

My testimony today will provide an overview of market structure challenges for 

smaller companies, efforts that the SEC already has taken and is taking in this 

area, and statutory provisions that set the context for SEC review of venture exchange proposals. It is important to consider, as part of our review of current market structure, the distinctive needs of smaller companies and their investors. 

I. Market Structure Differences for Smaller Companies 

The market for small companies is different from the market for large companies. 

While smaller companies contribute significantly to the U.S. economy, the opportunities for smaller companies seeking capital and for investors seeking to invest in 

smaller companies are not comparable to such opportunities with respect to larger 

companies. 

For example, the smaller the company, the lower the level of ownership by institutional investors, which act as intermediaries for much of the available capital in 

the modern U.S. equity markets. Smaller companies face the challenge of attracting 

the attention of these institutional investors that typically seek to invest in large 

sizes that are significant given the size of their portfolios. Moreover, given that most 

smaller companies will inevitably have a significant percentage of ownership by individuals who are self-directed investors, small companies face the challenge of attracting the attention of these individual investors, who often do not have the time 

and resources of institutional investors to evaluate companies. To illustrate, Table 

1 below sets forth ownership data for exchange-listed companies categorized by their 

market capitalization. As can be seen, institutional investors dominate ownership 

(83.5 percent) in Table 1’s category of largest companies, which are defined as those 

with more than $1 billion in market capitalization. In contrast, for companies with 

less than $100 million in market capitalization, individuals dominate ownership 

with 80.1 percent of ownership or higher. 


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2 Jeffrey M. Solomon, CEO, Cowen and Company, ‘‘SEC’s Advisory Committee on Small and 

Emerging Companies—Panel Discussion’’ at 13 (September 17, 2013) (‘‘Solomon Presentation’’) 

(citing Bloomberg and Capital IQ as of September 6, 2013 for listings on major U.S. exchanges), 

available at http://www.sec.gov/info/smallbus/acsec/acsec-091713-jeffreysolomon-slides.pdf). A 

recent academic working paper found that, between 1980 and 2010, institutional investors increased their holdings of the smallest companies that make up 10 percent of the value of the 

market from 3.5 percent to 10.2 percent. See Marshall E. Blume and Donald B. Keim, Working 

Paper, Institutional Investors and Stock Market Liquidity: Trends and Relationships, 1 (Aug. 21, 

2012), available at http://finance.wharton.upenn.edu/keim/research/ChangingInstitution

Preferencesl21Aug2012.pdf. While the study uses market value percentages, and thus is not 

directly comparable to an analysis using percentages of the number of stocks, it provides evidence of a potential upward trend in institutional ownership of small-cap stocks. 3Solomon Presentation, citing CapitalIQ as of September 6, 2013.

Table 1

Percentage Ownership of Exchange-Listed Companies 2

These major ownership differences between small companies and large companies 

are reflected in their coverage by research analysts. Table 2 below sets forth data 

on the research coverage of NASDAQ-listed companies categorized by market capitalization. For Table 2’s largest category of companies with more than $1 billion 

in market capitalization, only 1 percent have no coverage, and the median number 

of analysts is 14. For companies with less than $100 million in market capitalization, the median number of analysts is 1 or less, and 40 percent or more of companies have no research coverage. 

Table 2

Research Coverage of NASDAQ-Listed Companies 3


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4For example, the S&P SmallCap 600 Index includes companies with market capitalizations that range from $400 million to $4 billion. See S&P Dow Jones Indices, available at http://

us.spindices.com/indices/equity/sp-600. The Russell Microcap Index includes companies with market capitalizations that average $560 million and range as high as $3.47 billion. See Russell 

Investments, available at https://www.russell.com/indexes/americas/indexes/. 5 Charles Collver, ‘‘A characterization of market quality for small capitalization U.S. equities’’ 

(September 2014) (‘‘Small Cap White Paper’’), available at http://www.sec.gov/marketstructure/

research/smalllcaplliquidity.pdf. 6See Small Cap White Paper at 4, 7, 15, and 17. 7Some of the lower liquidity of small cap stocks also may be due to greater informational 

asymmetries, hence, higher information risk for small caps. See Easley, David, Soeren 

Hvidkjaer, and Maureen O’Hara, 2002, Is Information Risk a Determinant of Asset Returns? 

Journal of Finance 57(5), pp. 2185–2221. 8Low secondary market liquidity may be reflected in a higher cost of capital, which can potentially have adverse effects on capital formation. For example, research has shown that investors 

in less liquid stocks demand a return premium, which translates into a higher cost of capital 

for issuers, and hence may affect the allocation of resources in the economy. See Amihud, Yakov, 

2002, Illiquidity and Stock Returns: Cross-Section and Time-Series Effects, Journal of Financial 

Markets 5(1), pp. 31–56. Amihud, Yakov, Haim Mendelson, and Lasse Pedersen, 2005, Liquidity 

and Asset Prices, Foundations and Trends in Finance, now Publishers Inc., Hanover, MA. Brennan, Michael, Sahn-Wook Huh, and Avanidhar Subrahmanyam, 2013, An Analysis of the 

Amihud Illiquidity Premium, Review of Asset Pricing Studies 3(1), pp. 133–176. The illiquidity 

premium is concentrated among small stocks. See Ben-Rephael, Azi, Ohad Kadan, and Avi 

Wohl, 2013, The Diminishing Liquidity Premium, Journal of Financial and Quantitative Analysis (forthcoming), available at: http://ssrn.com/abstractlid=1099829.

A recent study estimates the monthly illiquidity premium to be 0.5 percent. This study also 

finds that return anomalies are attenuated when liquidity increases and concludes that policies 

to stimulate liquidity and ameliorate trading costs improve capital market efficiency. See 

Chordia, Tarun, Avanidhar Subrahmanyam, and Qing Tong, 2014, Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity? Journal of Accounting 

and Economics 58(1), pp. 41–58. Investment banks’ fees in seasoned equity offerings (SEOs) are 

Tables 1 and 2 also illustrate that not all ‘‘small’’ companies are alike. Although all companies with less than $1 billion in market cap often are considered smallcap or micro-cap companies,4 there are major differences in ownership and research 

coverage even within this category. They range from 62.4 percent institutional ownership and a median of 7 research analysts for NASDAQ-listed stocks with $501 

million to $1 billion market cap, to 10.9 percent institutional ownership and a median of 0 analysts for NASDAQ-listed companies with less than $50 million market 

cap. 

These differences among tiers of smaller companies are also replicated in various 

measures of secondary market liquidity. The Office of Analytics and Research in the 

Division of Trading and Markets posted a research paper in September 2014 that 

analyzed the market quality for small capitalization U.S. equities.5 Among other 

things, the paper sets forth differences in volume, bid-ask spreads, and order book 

depth for exchange-listed companies with different market capitalizations and stock 

prices (see Table 3). 

Table 3

Market Quality Measures for Small and Medium Cap ExchangeListed Stocks in 2013 6 Stock Price from $10–19.99

This research illustrates that significant measures of market quality rapidly deteriorate as market capitalization decreases. Smaller companies generally will have 

less favorable metrics of market quality than larger companies. Among other things, 

smaller companies on average have less public float than larger companies, which 

yields less potential for trading volume.7 Most market quality metrics are highly 

correlated with trading volume. The key issue for the Commission to consider is 

whether the current U.S. market structure optimally promotes capital formation for 

smaller companies and the interests of their investors, which necessarily requires 

an analysis of whether smaller companies can maximize their volume and other 

measures of liquidity and market quality.8 The data in Tables 1–3 counsel an ongoing evaluation of how market structure can be changed to improve secondary marVerDate 0ct 09 2002 16:21 Dec 23, 2015 Jkt 000000 PO 00000 Frm 00026 Fmt 6621 Sfmt 6621 L:\HE3E8B~1\03-10V~1\HEARING\94374.TXT SHERYL

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also significantly higher for firms with less liquid stock. See Butler, Alexander, Gustavo Grullon, 

and James P. Weston, 2005, Stock Market Liquidity and the Cost of Issuing Equity, Journal 

of Financial and Quantitative Analysis 40(2), pp. 331–348. 9The Advisory Committee’s materials are available at http://www.sec.gov/info/smallbus/

acsec-archives.shtml#recommendations. 10Securities Exchange Act Release No. 64437, 76 FR 27710 (May 12, 2011). 

ing evaluation of how market structure can be changed to improve secondary market liquidity for smaller companies and their investors. 

II. SEC Efforts to Improve Market Structure for Smaller Companies and 

Their Investors 

A. SEC Advisory Committee on Small and Emerging Companies 

The challenges facing smaller companies and their investors have been a focus at 

the SEC for some time. This focus has been highlighted in the SEC’s Advisory Committee on Small and Emerging Companies (‘‘Advisory Committee’’). The Advisory 

Committee’s mandate relates to small and emerging privately held businesses and 

publicly traded companies with less than $250 million in public market capitalization. Its mission is to provide the Commission advice with respect to protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, as they relate to capital raising, trading, public reporting, and governance 

requirements in the securities of these small companies. 

In March 2013, the Advisory Committee recommended to the Commission the creation of a separate U.S. equity market that would facilitate trading in the securities 

of small and emerging companies.9 The supporting materials for that recommendation indicate that two of the most significant challenges facing such companies in 

the secondary market are attracting the attention of a wide range of investors and—

closely related—achieving a liquid secondary market. 

B. Prior Approval of Venture Exchange 

Traditionally, exchanges have offered a suite of services that are tailored to meet 

the needs of two key constituencies of an equity market—listed companies and investors. For listed companies, exchanges can offer heightened visibility and a more 

liquid trading market than might be available in the unlisted markets. For investors, exchanges can offer important investor protections, such as heightened transparency of trading, and effective oversight of trading and listed company standards. 

These investor protections help promote confidence in the integrity of the trading 

market and listed companies. In addition, a good secondary market can support capital formation and issuers’ ability to raise capital on more favorable terms. By offering greater liquidity and more efficient pricing, a good secondary market helps assure that investors will have an efficient means of liquidating their positions in a 

company if and when they choose. And a strong secondary market generates price 

discovery that helps efficiently allocate capital to the companies most able to put 

it to productive use. 

In addressing the unique needs of smaller companies and their investors certain 

considerations need to be addressed. For example, smaller companies generally involve greater investment risk. For investor protection purposes, it is vital that investors understand those risks and that the nature and size of their investment is suitable for their investment objectives. Exchanges, the SEC, and other regulators must 

be aware of the risks associated with smaller companies and put appropriate protections and surveillances in place to help minimize them. 

The Commission also has previously approved market-driven proposals that appropriately balance the benefits and risks of smaller companies, while protecting investors. For example, the Commission approved a venture exchange in 2011—the 

BX Venture Market created by NASDAQ OMX BX, Inc.10 The BX Venture Market 

is designed for securities of smaller companies being delisted from another national 

securities exchange for failure to meet quantitative listing standards and for smaller 

companies contemplating an initial exchange listing. The goal of the BX Venture 

Market is to provide an opportunity for smaller businesses to have their securities 

traded in an environment that offers the potential for enhanced transparency, liquidity and regulatory oversight, which could make these companies more attractive 

to potential investors. The BX Venture Market’s rules include a variety of measures 

to address investor protection concerns. These include rigorous vetting of listing applicants, such as background checks and independent investigators, enhanced surveillance of trading, and clear disclosure to investors that BX-listed securities differ 

from other exchange-listed securities because they generally present more risk, 

among other things. 


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11Securities Exchange Act Release No. 72460, 79 FR 36840 (June 30, 2014). 12Securities Exchange Act Release No. 73511, 79 FR 66423 (November 7, 2014). 13The SEC recently extended the time period for considering the proposed tick pilot plan until 

May 6, 2015. Securities Exchange Act Release No. 74388, 80 FR 12054 (March 5, 2015). 

In approving the exchange, the SEC noted that the exchange could provide small 

companies with an alternative to being quoted on the unlisted market by offering 

these companies the opportunity to list their securities on an exchange, in an environment that offers the potential of enhanced liquidity, transparency and oversight. 

Moreover, providing an alternative to the over-the-counter market could also facilitate competition for the quotation/listing of securities of smaller issuers. In addition, 

the SEC noted that the availability of an exchange listing, and the prospect of more 

efficient secondary market trading, could facilitate smaller issuers’ ability to raise 

capital and invest in the growth of their businesses. Finally, the Commission believed that clear disclosures distinguishing BX Venture Market from the NASDAQ 

Stock Market would reduce the potential for investor confusion. 

To date, however, the BX Venture Market has not been launched. My understanding is that concerns about ensuring adequate liquidity in BX-listed securities 

and attracting liquidity providers, at least in part, have caused the delay. 

C. Tick Size Pilot 

The Commission also has sought to address concerns about improving liquidity in 

the secondary market for smaller companies through the development of a pilot program that would allow smaller companies to trade at wider tick sizes. In June 2014, 

the SEC directed the equity exchanges and FINRA to act jointly in developing and 

filing a national market system plan to implement a tick pilot program.11 The Commission noted particularly that a pilot program could facilitate studies of the effect 

of tick size on liquidity, execution quality for investors, volatility, market maker 

profitability, competition, transparency, and institutional ownership in the stocks of 

small-capitalization companies. 

The efforts to develop a tick size pilot for smaller companies have progressed over 

the last year. In November 2014, the SEC published for public comment a national 

market system plan submitted by the SROs to implement a tick size increase for 

the stocks of smaller companies.12 The comment period ended on December 22, 

2014, and the SEC is closely considering the comments in assessing how to proceed.13 The data from the pilot program could help the SEC and market participants assess the impact of wider tick sizes for small and mid-cap companies. 

Although widening tick sizes potentially could improve liquidity in smaller company stocks, it may not be a complete solution to the challenges faced by smaller 

companies as discussed in Section I above. For example, the smallest of these companies have average daily dollar volume of less than $10,000 and bid-ask spreads 

of more than 28 cents. For these and other smaller company stocks, it appears that 

other regulatory initiatives are worthy of consideration. 

III. Exchange Act Provisions that Govern Venture Exchange Proposals 

As with other types of national securities exchanges, venture exchanges are required to register with the SEC. Their rules and other material aspects of their operations are subject to a public notice and comment process, and, ultimately, SEC 

approval. To approve an exchange rule proposal, the SEC must find that it is consistent with the relevant provisions of the Securities Exchange Act of 1934 (‘‘Exchange Act’’). 

As it did with the BX Venture Market, the SEC will carefully consider any efforts 

of exchanges to fashion innovative services that are particularly designed to meet 

the needs of smaller companies and their investors. The SEC will continue to be attentive to both the benefits and potential risks of venture exchanges, with a particular focus on whether it can facilitate capital formation and address concerns 

about investor protection. For example, venture exchanges must operate in ways 

that are transparent and forthcoming regarding the risks of investing in venture exchange companies. In general, the SEC has considerable flexibility to interpret the 

Exchange Act in ways that recognize the particular needs of smaller companies and 

their investors. 

For example, the BX Venture Market adopted quantitative listing standards, such 

as stockholders’ equity, that were lower than those of any other national securities 

exchange with an active listings program, but these lower listing standards were 

balanced by rigorous vetting, surveillance, examination, and disclosure requirements 

to protect investors. In addition, stocks to be listed in the BX Venture Market are 

not considered national market system securities under Section 11A(a) of the ExVerDate 0ct 09 2002 16:21 Dec 23, 2015 Jkt 000000 PO 00000 Frm 00028 Fmt 6621 Sfmt 6621 L:\HE3E8B~1\03-10V~1\HEARING\94374.TXT SHERYL

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14See NASDAQ OMX, Inc., available at https://www.nasdaqtrader.com/trader.aspx?ID=marketsharedaily. The column for Total Volume captures relative trading volume 

across the three tiers of NASDAQ-listed stocks, while the columns for NASDAQ, NASDAQ TRF, 

and Other Exchange and TRF capture relative trading volume within each listing tier. 15The NASDAQ TRF (Trade Reporting Facility) reflects trades reported by off-exchange 

venues. Across all NASDAQ-listed stocks, the NASDAQ TRF represents approximately 93% of 

off-exchange volume. The other 7% of off-exchange volume in NASDAQ-listed stocks is reported 

to the NYSE TRF.

change Act. They therefore are not subject to Regulation NMS, which applies only 

to national market system securities. 

As discussed below, several Exchange Act provisions, however, do limit the flexibility available to the SEC in approving any proposed venture exchange models, 

particularly with respect to how they maximize liquidity in secondary market trading. As evidenced by the market quality statistics above, maximizing liquidity is 

likely to be essential to the success of venture exchanges. 

In this regard, there are a variety of potential initiatives that a venture exchange 

might explore to promote liquidity. One option would be to limit all trading to particular times of the day or through particular mechanisms. Such an option could include running batch auctions at particular times that are designed to centralize liquidity across both price and time. Another option would be to attract dedicated liquidity providers with a package of obligations for making a market in listed companies, balanced by benefits for providing high-quality liquidity. A third option would 

be to explore different minimum tick sizes in ways not limited to those under consideration in a tick size pilot. 

A key element that likely would be essential to the success of these and other efforts is protecting the liquidity pool on the venture exchange. If trading venues 

other than the venture exchange could execute trades in the venture exchange’s listings and thereby bypass the mechanisms designed to maximize liquidity, the effectiveness of these liquidity-enhancing mechanisms might well be impaired. 

Trading volume in U.S.-listed equities today is widely dispersed across a variety 

of different venues, including 11 exchanges, 46 dark pool ATSs, and more than 200 

broker-dealers. This dispersal of trading volume is even greater for the stocks of 

smaller companies. For example, the table below breaks out the trading volume in 

January 2015 across the three tiers of NASDAQ-listed stocks—NASDAQ Global Select (‘‘NGS’’), NASDAQ Global Market (‘‘NGM’’), and NASDAQ Capital Market 

(‘‘NCM’’). The initial financial and liquidity requirements for the NGS tier are higher than those for the NGM tier and, likewise, the initial listing requirements for 

the NGM tier are higher than those for the NCM tier. 

Table 4

Dispersal of Volume Across NASDAQ Listing Tiers14

These data show that stocks in the NASDAQ listing tier (NGS) with the most extensive listing requirements account for the largest share of trading volume, relative 

to stocks in the bottom two listing tiers. When considering the composition of trading volume by trading venue for stocks in each NASDAQ listing tier, NASDAQ exchange trading accounts for a larger share of trading volume (29.02 percent) for 

stocks in the highest listing tier relative to stocks in the bottom two listing tiers 

(22.06 percent and 20.47 percent). Conversely, the off-exchange portion of trading 

(represented by NASDAQ TRF) accounts for a smaller share of trading volume 

(30.78 percent) for stocks in the highest listing tier, relative to stocks in the bottom 

two listing tiers (41.54 percent and 36.13 percent). 

The broker order-routing practices that led to these statistics for NASDAQ-listed 

securities would likely be similar for venture exchange-listed securities. As a result, 

venture exchanges might seek to adopt rules applicable to their members, or request 

the SEC to adopt market-wide rules applicable to all exchanges and broker-dealers, 

that limit the extent to which other venues could bypass the venture exchange’s 

mechanisms for centralizing and maximizing liquidity. 


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Two Exchange Act provisions provide standards for the SEC to adopt or approve 

measures to protect the liquidity pool of a venture exchange. 

Section 11A(c)(3) authorizes the Commission to prohibit broker-dealers from executing transactions otherwise than on an exchange, provided that the Commission 

is able to make certain findings. For example, Section 11A(c)(3)(A)(i) requires a finding that the fairness or orderliness of the markets has been affected in a manner 

contrary to the public interest or the protection of investors, and Section 

11A(c)(3)(A)(iii) further requires a finding that the maintenance or restoration of 

fair and orderly markets may not be assured through other lawful means under the 

Exchange Act. Moreover, Section 11A(c)(3)(A)(ii) requires a finding that ‘‘no rule of 

any national securities exchange unreasonably impairs the ability of any dealer to 

solicit or effect transactions’’ for its own account. Accordingly, Section 11A(c)(3)(A) 

imposes a substantial test for the Commission before it can adopt rules that restrict 

the ability of broker-dealers to execute off-exchange trades in stocks listed on venture exchanges. It is worth noting that Section 11A(c)(3) was adopted in 1975, when 

a major congressional concern was the dominance of trading volume by the major 

stock exchanges in their listings. 

The other Exchange Act provision limiting the extent to which a liquidity pool of 

a venture exchange can be protected is Section 12(f), which was enacted in 1994. 

It generally grants exchanges the right to trade securities listed on other exchanges 

(‘‘unlisted trading privileges’’ or ‘‘UTP’’) as long as the UTP exchange has appropriate rules in place to govern such trading. As with Section 11A(c), Congress adopted Section 12(f) when the major stock exchanges dominated trading in their listed 

companies. In the context of initial public offerings (‘‘IPOs’’), the statute gives the 

Commission authority to delay unlisted trading in IPO shares for a certain period 

after the IPO’s launch, with Section 12(f)(1)(C) setting an initial interval of two 

trading days. Consequently, even with respect to IPOs, Section 12(f) presents a 

meaningful test for approving an extended period when exchange trading may occur 

only on the listing exchange, particularly for periods sufficient to enable smaller 

companies to reach adequate levels of liquidity such that UTP restrictions were no 

longer reasonably necessary. 

Of course, the Commission would need to carefully evaluate whether rules protecting the liquidity pool of a venture exchange would serve the needs of small companies, their investors, and the broader markets. Simply allowing a venture exchange or its liquidity providers to enjoy monopoly trading privileges would not be 

the justification or objective, and such rules could be approved only after a full opportunity for public notice and comment. As with any rule where the Commission 

must determine whether an action is necessary or appropriate in the public interest, 

the Commission must also consider the protection of investors and whether the action will promote efficiency, competition, and capital formation. Moreover, the Commission would have to evaluate whether and when any period of liquidity pool protection would need to end if a listed company reached significant size and levels of 

liquidity. 

The Commission must also consider how efforts to protect a venture exchange’s 

liquidity pool would affect competition. While such efforts would restrict one form 

of competition—that is, competition among trading venues for order flow in a particular group of securities—it could potentially open up new forms of competition. 

Multiple venture exchanges might compete to fashion market structures designed 

to maximize liquidity for small companies and investors that currently are unavailable under the existing Exchange Act regulatory scheme. Such competing venture 

exchanges could be created by existing exchange groups or others, such as groups 

of dealers who believe they have the ability to offer innovative and competitive services to smaller companies. It is also possible, however, that high costs and other barriers to entry, such as network effects or cost-related economies of scale, may result 

in a more concentrated market with few active venture exchanges. The success or 

failure of the exchanges would largely depend on the extent to which the various 

venture exchanges were able to attract small companies and their investors. 

In sum, competition in the equities markets can assume many forms across different stages in the listing and trading process. A key policy question is whether 

the current U.S. market structure for smaller companies enables competition in 

ways that ultimately redound most to the benefit of smaller companies and their 

investors. Particularly if combined with strong measures to promote investor protection and market integrity, opening up new forms of competition in the listing and 

trading of smaller companies potentially could offer significant benefits to smaller 

companies and their investors. Conversely, protecting the liquidity pools of venture 

exchanges in their listings and thus eliminating off-exchange competition for trading 

volume from broker-dealers may affect execution costs, resulting in potentially larger transaction costs for investors. The potential benefits and costs of various forms 


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1 In 1992 the American Stock Exchange launched the Emerging Company Marketplace which 

was closed in 1995. More recently several private markets have launched platforms for the trading of nonregistered securities and Congress enacted the JOBS Act, of which several provisions 

are designed to help capital raising for Emerging Growth Companies. In addition, last summer 

the national securities exchanges that trade cash equities and FINRA proposed an NMS Plan 

pilot to study the impact of wider tick sizes on the trading of smaller public companies. 2Securites and Exchange Commission Chairman Mary Jo White, June 5, 2014; http://

www.sec.gov/info/smallbus/acsec/slides-acsec-meenting-030415-venture-exchanges-weild.pdf.

of competition in the secondary market for smaller companies is an issue that warrants close consideration by Congress, the SEC, and the public. 

IV. Conclusion 

Thank you again for inviting me to discuss an issue of such importance to the 

U.S. equity markets and economy. I look forward to answering your questions. 

PREPARED STATEMENT OF THOMAS W. FARLEY

PRESIDENT, NEW YORK STOCK EXCHANGE GROUP

MARCH 10, 2015

Chairman Crapo, Ranking Member Warner and Members of the Subcommittee, 

we appreciate your interest in capital raising for small-cap companies. My name is 

Tom Farley and I am President of the New York Stock Exchange Group (NYSE). 

I have been in the business of exchanges for most of my career including as President and COO of ICE Futures US (formerly the New York Board of Trade) and as 

Senior Vice President of Financial Markets at Intercontinental Exchange (ICE) 

where I oversaw the development of initiatives within ICE’s financial markets. 

NYSE Group includes the iconic New York Stock Exchange as well as two additional equities exchanges, two options exchanges and a bond trading platform. 

Across these venues we list and trade cash equities, equity options, exchange traded 

products and debt securities which are accessible to all investors through their 

broker-dealer. Of our listing exchanges, NYSE MKT has traditionally been the listing venue for smaller public companies. Over the years there have been several efforts in the United States to address the needs of smaller companies seeking access 

to capital through both exchange and non-exchange solutions.1 In fact, NYSE recently announced a mid-day auction for less liquid securities that we intend to 

launch later this summer if approved by the Securities and Exchange Commission 

(SEC). 

As many of you know, the data around smaller companies accessing the public 

markets for capital is discouraging when compared to the data of the late 1990s.2

Companies are spending more time as private companies in part due to increased 

regulatory hurdles to becoming and being a public company and, once public, a lack 

of liquidity in the trading of shares of smaller public companies. As a listing exchange, we have witnessed the negative impact on liquidity in shares of smaller 

public companies as the incentives for market makers to participate in these securities have diminished. As a result, venture capital is locked up in companies for 

longer periods of time, which decreases the availability of venture capital for new 

companies. 

Venture Exchanges 

NYSE believes that the idea of venture exchanges is worth Congress’s attention 

and may be of value to smaller companies seeking capital and their venture capital 

investors seeking a liquidity event that will free up money for new investment. 

While we believe many of the concerns raised about venture exchanges can be addressed through education, we also recognize that companies available for trading 

on venture exchanges will have a higher rate of failure and could potentially shed 

a dark cloud over the rest of the U.S. public markets. Consequently, we believe it 

will be important that companies listing on venture exchanges have an appropriate 

level of financial disclosure and that, in addition to the added oversight a venture 

exchange listed security would receive from the exchange’s Self-Organization (SRO), 

venture exchanges, broker-dealers and investment advisors should differentiate a 

venture exchange traded security from one listed on a national securities exchange. 

Listing Standards 

In addition to the appropriate levels of differentiation, NYSE believes there 

should be minimum listing standards in place that a venture exchange can develop 

and change over time to ensure that the intended companies are targeted. We believe two likely standards would be based on a minimum level of public float and 


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3See Exchange Act Section 15(h) and Exchange Act Rules 3a51–1 and 15g–1 through 15g–

100. http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&tpl=/ecfrbrowse/Title17/

17cfr240lmainl02.tpl. 4 http://www.sec.gov/info/smallbus/acsec/chart-meeting-030415-coordinated-reviewchart.pdf.

a minimum number of shareholders. These thresholds can be set relatively low. We 

would suggest a public float of around $1 million and a minimum of 50 shareholders. We would warn against requiring a minimum price threshold for the venture exchange securities and, for this reason, believe that Congress should strongly 

consider exempting venture exchange securities from the penny stock requirements.3 Venture exchange companies should also be expected to graduate from a 

venture exchange to a national securities exchange where higher listing standards 

and greater financial scrutiny exists. Such thresholds for graduation could be designed around the current minimum listing standards for national securities exchanges. 

Venture exchanges should be required to register as national securities exchanges, 

which are self-regulatory organizations. Through its obligations as an SRO, a venture exchange would be responsible for venture companies’ compliance with listing 

standards and the surveillance of trading activity taking place on the venture exchange. In fulfilling that obligation, NYSE would require and confirm that companies meet the minimum listing standards prior to listing and monitor for companies’ 

compliance with the continuing listing standards. An SRO would also conduct background checks of directors and senior management of the venture companies both 

prior to listing and upon any change of directors or senior management. 

Market Structure 

Several suggestions have been made with regard to the market structure for trading of venture companies. Among the suggestions is whether a venture exchange 

should be permitted to trade securities listed by another venture exchange. These 

unlisted trading privileges (UTP) are currently granted by Section 12(f) of the Securities Exchange Act of 1934 and permit an exchange to trade securities listed on 

another national securities exchange immediately following an initial public offering. It is this statutory privilege that allows NASDAQ OMX to trade NYSE listed 

securities and vice versa. Many have argued that eliminating UTP would result in 

less fragmentation of liquidity in venture securities and, thus, encourage market 

makers to post more liquidity at better prices. While we support eliminating UTP 

for venture exchange securities because it would have the effect of centralizing liquidity among venture exchanges, it is important to note that off exchange venues, 

such as dark pools, would continue to be able to trade venture securities away from 

venture exchanges in the over-the-counter market. If helping small companies 

source liquidity and raise capital is the goal, we believe it is essential that rules 

also be adopted to require lit liquidity at the National Best Bid (NBB) or National 

Best Offer (NBO) be given primacy over dark liquidity at the NBB and NBO, and 

that exceptions to the rule be limited to instances when brokers are matching trades 

of large size or when the orders receive meaningful price improvement better than 

the NBB or NBO. Without such a rule being adopted, we believe the incentive for 

market makers to participate in venture exchanges will be lost and liquidity will 

remain anemic in these securities. Eliminating UTP will, however, allow for each 

venture exchange to design its own market structure with regard to tick sizes and 

execution design (e.g., continuous trading or periodic auctions). This flexibility would 

give the venture exchanges the ability to test new designs and find the right balance 

that is best for venture exchange listed securities. 

Another key topic is with respect to preemption of State registration of securities 

listed on a venture exchange. Again, if Congress’s intent is to create a venue with 

minimal hurdles to success, we believe Congress should give serious consideration 

to preempting State registration just as it has previously done for listed companies 

and products on national securities exchanges. If Congress does not preempt State 

registration, we recommend adopting a provision that gives the SEC the ability to 

preempt State registration after a stated period of time if it is determined by the 

SEC that State registration is an inhibitor to the success of venture exchanges. We 

recognize the efforts of State securities commissioners to establish an easier path 

to registration and can see value in testing that option.4 However if that effort does 

not succeed once it is further tested, it would be prudent to have a mechanism in 

place as a backstop. 


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Conclusion 

NYSE believes that the U.S. capital markets are one of the best avenues available 

for companies of all sizes to access growth capital. We are protective of the confidence investors have in the U.S. capital markets but believe that if designed appropriately, venture exchanges may give small companies access to capital not currently available to them and investors the ability to invest in smaller companies 

with greater regulatory scrutiny than is currently available in the over-the-counter 

market for unlisted securities. 

PREPARED STATEMENT OF SCOTT KUPOR

MANAGING PARTNER, ANDREESSEN HOROWITZ

MARCH 10, 2015

Chairman Crapo and Ranking Member Warner, thank you very much for the opportunity to speak with the Committee regarding capital formation and the topic of 

venture exchanges. I applaud this Committee for your efforts to examine liquidity 

challenges existing in today’s small cap market. This is a critical issue to the health 

of our markets, entrepreneurship and the American economy. 

By way of background, I am the Managing Partner for Andreessen Horowitz, a $4.5 billion multi-stage venture capital firm focused on IT-related investments. We 

invest in both consumer-facing IT companies and those that sell primarily into corporate enterprises. We have been operating this business for just over 5 1⁄2 years 

and some of the companies in which we have invested and with which you may be 

familiar include Facebook, Twitter, AirBnB and Pinterest. 

Prior to joining Andreessen Horowitz, I held several executive positions in a publicly traded software company named Opsware, which we sold to Hewlett Packard 

in 2007. Prior to Opsware, I was an investment banker servicing technology companies at both Credit Suisse First Boston and Lehman Brothers. 

The Current Landscape 

Before jumping into the specific topic of venture exchanges, I’d like to spend a 

minute on the current state of capital formation for venture-backed startups in the 

United States. 

It’s been well documented by various commentators that the number of Initial 

Public Offerings (IPOs) in U.S. markets has fallen significantly since 1997. This is, 

at least in part, a reason why the total universe of listed companies in the United 

States has fallen by nearly 50 percent over that same time period. [See David Weild, 

‘‘The U.S. Need for Venture Exchanges,’’ March 4, 2015—attached hereto as an exhibit]. 

And while it is also true that, in large part due to the work of this institution 

through the passage of the Jumpstart our Business Startups (JOBS) Act, we have 

seen a more robust IPO environment in 2013 & 2014, the volume and characteristics of those IPOs remain very different. In particular, IPOs that raise $50 million or less, a proxy for truly micro-cap com- panies with market capitalizations of $250–500 million, has remained below 25 percent of all IPOs for nearly 15 years. In contrast, from 1991–1997, as many as onehalf to two-thirds of IPOs raised $50 million or less in proceeds. 

Looking at the IT sector, which is the area in which we invest, we have seen similar trends. 

From 1980–2000, the industry produced just north of 2,400 venture-backed IT-related IPOs. In contrast, for the 14-year period from 2001–2014, there were a total 

of approximately 500 IPOs. 

Relatedly, time to IPO has significantly elongated over the same time periods: in 

the 1980–2000 time period, the median time to exit for IT-related IPOs was 6.5 

years; for the 2001–2014 cohort, it was over 9 years. In 2014 alone, the median time 

to IPO was 11 years. [These data are published by Jay Ritter, ‘‘Initial Public Offerings: Updated Statistics,’’ December 20, 2014]. 

Combining these various data points, we see the following trends—the total number of IPOs has declined significantly, the average time to IPO has elongated and, 

correspondingly, the relative maturity of companies at the time of IPO has also 

grown (as an example, the median sales at time of IPO for the 1980–2000 class was 

$30 million, compared with just shy of $100 million for the 2001–2014 class). 

Why should we care about this? 

In addition to the strong nexus between IPOs and job growth, we are at risk of 

creating a two-tiered capital markets structure in which the vast majority of investment appreciation accrues to those institutions and wealthy individuals who have 


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access to invest into the private markets, at the expense of public market investors 

(and, in particular, the vast majority of individual Americans who comprise the retail investor base). 

That is, when companies do in fact go public, because they do so at a later stage 

of financial development, they are of course lower risk investments, but also with 

the attendant lower return potential. As an example, public investors in Microsoft 

have seen an appreciation in the public stock price of approximately 500 times the 

initial public offering price. For public investors in Facebook to see this level of public market appreciation would require that Facebook grow to a market cap that exceeds the entire market cap of the global listed markets today. 

In the absence of doing something to address these trends, we will continue to 

see the private markets developing their own solutions to enable private companies 

to remain private. In fact, today we see larger amounts of institutional capital being 

made available in the late-stage private markets—both in the form of primary capital and in the form of secondary sales intended to provide partial liquidity to employees. These transactions are being funded by hedge funds, sovereign wealth 

funds, family offices, large technology-focused buyout firms and mutual funds. With 

the exception of the last category of investor, none of these investors services the 

retail investor. 

What are potential ways to address these trends? 

Doing so requires that we address the underlying issues that are impacting companies’ decisions to stay private longer:

• Economic issues—e.g., the one-time costs associated with going public and the 

ongoing costs associated with regulatory compliance

• The post-IPO trading environment—i.e., how will my stock trade in the 

aftermarket; will I be able to raise additional capital as a public company; will 

I achieve the benefits of going public without being an orphaned stock? 

Economic Issues 

While there are always more ways to streamline the economic costs of becoming 

and remaining a public company, the JOBS Act has done a good job of lessening 

the burden for emerging growth companies (‘‘EGCs’’) in this area. When we talk 

with our portfolio companies, this is far less an impediment to going public, although it is more acute for smaller companies where the public company compliance 

costs as a percentage of their total cost base is still significant. 

It should also be noted that the Confidential Filing provisions of the JOBS Act 

have been very significant in making the on-ramp to an IPO much smoother. Companies no longer have to expose themselves in a long quiet period, where their competitors have an unfair ability to paint their story without the company’s ability to 

respond adequately. 

Post-IPO Trading Environment 

Thus, the most significant remaining deterrent to companies going public is the 

after-market environment in which they will have to live as a public company. 

Outside the scope of this hearing—but an important issue nonetheless—has been 

the growth of activist shareholders and the tendency toward short-term investing 

more generally. Particularly in technology companies, where the product cycles ultimately drive most of the enterprise value, investments in R&D that have the nearterm impact of depressing earnings per share to create long-term growth and competitive advantage can be difficult to make if subject to activist and other short-term 

investor pressures. This is the reason why you see a significant amount of dual class 

stock listings among recent tech IPOs—this is the best way to protect against shortterm influences that could detract from R&D investments. 

More fundamentally, the after-market trading environment is directly correlated 

to the market capitalization and ultimately liquidity, of the company post-IPO. If 

a company’s market cap is large enough (a minimum of $1 billion), it can attract 

research support and market-making resources from the sell-side investment banks. 

As a result, this firm will garner institutional investor support, robust liquidity and, 

ultimately, the ability to tap the public markets for additional growth capital. 

In contrast, for small market cap companies, the economics simply don’t work for 

either sell-side research or market-making investments and, as a result, liquidity 

and institutional investor support are very low. The details of this phenomenon 

have been described more fully in the Equity Capital Markets Task Force November 

2013 report to the Treasury Department (which is attached hereto as an exhibit). 

Among the reasons for low liquidity is the move to decimalization and is why we 

have advocated for the robust tick size pilot program that is currently pending before the SEC. Empirical data is required to demonstrate that clustering trades at 


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fewer price increments will enhance trading liquidity and thus reduce the ‘‘tax’’ that 

institutional investors face when trying to enter or exit such stocks. That is, any 

attempt to buy a low liquidity stock causes the stock price to increase on entry and 

attempts to sell similarly drive down the stock price. 

As a result of this challenged after-market trading environment for small cap 

stocks, many issuers simply choose to postpone an IPO until they matured to a 

point where they can attain a market cap sufficient to engender adequate liquidity—this explains the substantial decrease inthe sub-$50 million IPO market. Liquidity is required to create a stable after-market, to enable meaningful stock price 

appreciation through the attraction of institutional investors and to permit companies to raise follow-on growth equity financing in the public markets. This liquidity 

seldom exists in the current market for small cap stocks. 

Venture Exchanges 

Given the above, how would venture exchanges impact capital formation? I’d like 

to offer a few thoughts in relation to the economic issues and post-IPO trading environment concerns noted above. 

With respect to economic issues, a successful venture exchange would need to employ a regulatory framework that at a minimum incorporated the JOBS Act EGC 

filing/ongoing requirements. However, if the goal were to enable a significant proportion of sub-$50 million IPOs, it would likely require a framework that could scale 

down to Reg A+-like regulations for smaller companies. This approach would likely 

reduce the costs sufficiently to no longer serve as a barrier to participation in the 

marketplace. Blue-sky pre-emption would also be a critical component of any well 

functioning venture exchange. Any regulatory regime, however, would need to be 

evaluated as well based upon its ability to attract and protect investors from bad 

actors. 

Turning to the post-IPO trading environment, at a minimum a venture exchange 

would need the flexibility to set appropriate tick sizes (and likely trade-at requirements) to foster trading liquidity at fewer price increments. As a result, I strongly 

believe that any decision to explore venture exchanges should not obviate the need 

to ensure that critical changes are made to the pending tick size pilot, as the empirical data from a well-designed pilot with an adequate length of at least 3 years 

would prove critical to determining the right trading rules for a venture exchange. 

There are also a number of open questions and concerns that I believe need to 

be investigated further before determining whether a venture exchange is a better 

alternative to simply implementing the small-cap market reforms for which we have 

been advocating to date. 

First, adverse selection in the form of the companies that elect to list on the venture exchange, as opposed to staying private longer and waiting until they meet the 

existing national market listing requirements, is a legitimate concern. The most attractive companies that can raise capital privately through other means, as some 

are doing today, will simply continue to do so and only those that are in a weaker 

position will choose to list on the venture exchange. In a sense, this is a chicken 

and egg problem in that if the market works as designed and is policed appropriately to root out fraud and bad actors, it will attract good companies, but it needs 

to attract good companies in the first place to create a well-functioning market. 

Some commentators have suggested that setting the listing requirements high for 

the first set of potential issuers, accepting market capitalizations of up to $2 billion 

and having a dedicated and strong SEC enforcement organization are ways in which 

the adverse selection problem may be mitigated. In addition, one may need to consider economic incentives—at least at the outset—to attract the best companies to 

list on the exchange. However, whether these suggestions in fact solve the adverse 

selection problem remains an open empirical question for which further study is required. 

Second, there is a real risk that separating out the venture exchange from the 

existing national markets creates less liquidity for small caps by causing institutional investors to simply wait for venture exchange companies to ‘‘graduate’’ to the 

national markets instead of investing in them as venture exchange issuers. Again, 

the ultimate determination of whether this risk is real depends upon the success 

of the venture exchange—if liquidity is attractive in this market and the economic 

incentives are such that the sell-side can in fact support research and market-making activities, the institutional investors are likely to follow. As with the adverse selection risk, further study is required to determine the potential liquidity impacts 

of a dedicated venture exchange. 

Summary 

In summary, I would offer the Committee the following observations:


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• Fostering more IPOs—in particular, more IPOs at an earlier stage of company 

maturity—is important to job creation, to the long-term competitiveness of the 

U.S. securities markets and to extending significant stock appreciation opportunities to retail investors in the public markets.

• In the absence of structural capital market changes, good companies will continue to tap private sources of capital and delay going public until employee liquidity needs cannot be satisfied in the public markets and a currency is required for broad, strategic M&A activity. This means that more value accretion 

will continue to accrue to private market investors at the expense of public market investors.

• Independent of whether a venture exchange is the right solution, we must solve 

the core liquidity challenges that exist in today’s small cap market. Thus, proceeding with a robust tick size pilot program of sufficient length (three years) 

is a crucial first step at a minimum to gathering the empirical data required 

to set-up the proper trading rules for a proposed venture exchange. In addition, 

empirical research should be undertaken to inform the adverse selection and liquidity bi-furcation risks noted above.

I thank you for your time and look forward to the Committee’s feedback.


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PREPARED STATEMENT OF NELSON GRIGGS

EXECUTIVE VICE PRESIDENT, LISTING SERVICES, NASDAQ OMX GROUP

MARCH 10, 2015

Thank you Chairman Crapo and Ranking Member Warner. I deeply appreciate 

the opportunity to share Nasdaq’s experience and views on the important subject 

of ‘‘Venture Exchanges and Small Cap Companies.’’

Nasdaq owns 24 securities markets spanning the globe, including 18 that trade 

equities. Our First North Markets in Stockholm, Copenhagen and Helsinki are venture exchanges that list emerging growth companies in Europe. Seventy exchanges 

in 50 countries trust our trading technology to run their markets while at the same 

time, markets in 26 countries rely on our surveillance technology to protect investors—together driving growth in emerging and developed economies. 

Upon the launch of its first initial public offering in 1971, Nasdaq created the 

modern IPO and has become the destination of choice for emerging, high growth 

companies. Nasdaq brought to the capital markets a trusted listings venue and a 

new view that companies could go public earlier in their growth cycle. We broke the 

Wall Street mold that kept companies from exchange listings—for example, there 

were rules that required companies to be profitable for 3 years and applied revenue 

hurdles that ruled out small companies. Nasdaq recognized that most companies 

need capital, and investors want access to ownership when companies are at earlier 

stages of growth. Around Nasdaq has emerged a diverse ecosystem of brokers, investors, legal advisors, and analysts that give growth companies unprecedented access 

to capital. Companies who go public on Nasdaq—such as Apple, Microsoft, Google, 

Intel, Staples, Biogen and Gilead Sciences—use that capital to make the cutting 

edge products and medical breakthroughs that enhance our daily lives. As public 

companies they grow rapidly and sustainably, and their growth drives the U.S. 

economy forward and ultimately creates jobs for millions of Americans. It is our 

unique heritage that drives our support of a renewed marketplace that supports and 

empowers cutting-edge, high growth companies. 

However, changes to the regulatory landscape in recent years have reduced 

Nasdaq’s ability to facilitate stable, reliable and cost-effective capital formation for 

many emerging companies. Importantly, the one-size-fits-all approach of our regulatory regime has had unexpected and serious negative consequences for smaller 

companies—even as it has effected revolutionary improvements around more actively traded companies. While the 2012 JOBS Act did ease the disclosure burden 

on companies going public, the extent of that relief hasn’t reached small, venture 

size, companies. The disclosure and governance requirements for these small companies need to be further tailored to the financial realities and distinct challenges they 

face. 

The continued aversion of small companies to public markets has created a sense 

among many that there is a need for a brand new type of market, a separate ‘‘venture market.’’ From Nasdaq’s point of view, this notion is somewhat misplaced: 

what’s needed—whether in a separate exchange or within the small cap listing tiers 

of existing exchanges like Nasdaq—are simple reforms to make the market structure attractive again for growth companies. Nasdaq’s approach to reform has two 

paths:

• First, change certain trading rules and listing requirements within a small company market tier to encourage and facilitate the ability for growth companies 

to raise capital on the public markets and thrive as publicly listed and traded 

companies—this includes the need for Nasdaq and other exchanges to evaluate 

and adjust their own listing standards and corporate governance standards to 

better serve venture companies.

• Second, further leverage the Jumpstart Our Business Startups Act (JOBS Act) 

from which Nasdaq has built and is operating a growth platform for companies 

wishing to stay private—the Nasdaq Private Market.

If Congress seeks to reinvigorate the already robust and vibrant U.S. capital infrastructure to support small companies, we respectfully suggest the following regulatory and legislative policy changes:

• Exempt certain growth stocks from the ‘‘tick price’’ provision of Regulation NMS 

and delegate the authority to define tick sizes to the listing exchange: The tick 

size is a surprisingly important—and extremely sensitive—variable in trading 

quality. Too wide and trading costs become burdensome to investors; too small 

and volatility becomes rampant. It is our view that the listing exchange is in 

the best position to optimize tick size policy, and to do so in a way that is responsive to the ever-changing needs of listed companies. Since exchanges do not 


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benefit from wide spreads which large tick sizes can impose, they can impartially assess the tradeoffs and protect the interest of investors and listed companies.

• Modify the definition of a ‘‘penny stock’’ in Rule 3a51–1: In 2004, the SEC essentially froze exchange listing standards as they then existed by defining any 

security not meeting those requirements to be a penny stock. This has inhibited 

innovation in listing requirements in the last decade. We believe that the SEC 

should reconsider this definition to allow exchanges greater flexibility to adopt 

novel listing standards for growth companies. Moreover, if we hope to attract 

new growth companies to our markets, beyond those already on exchange tiers 

for smaller companies, we will need to adjust the listing standards so they can 

qualify without being subject to burdensome penny stock and blue sky requirements.

• Expand availability of confidential filings: The ability to submit a confidential 

draft registration statement to the SEC is one of the most widely used provisions of the JOBS Act and is heralded with encouraging a large number of companies to go public, making their securities available to public investors. We believe that this ability will also be useful to smaller companies once they are listed, allowing these companies to prepare for a potential secondary offering without facing reputational risk and business uncertainty if they determine not to 

proceed with a registered offering.

• Adopt limited short selling regulations: We would encourage tailored rules to 

prevent aggressive short selling (selling at or below the best bid) of smaller 

companies, which lack resources to combat manipulative short selling and are 

consequently more vulnerable. We also recommend consideration of disclosures 

of short positions in smaller companies that are similar to the disclosures required of long positions, providing companies and other investors with transparency.

• Issuer choice to suspend ‘‘unlisted trading privileges’’ for certain growth companies: the purpose of the regulatory changes in U.S. equity markets over the past 

several decades was to encourage multiple markets to compete with each other. 

This revolutionized trading in many liquid securities, in particular by enabling 

innovative new technologies, dramatically increasing the speed and throughput 

of exchange systems, and by encouraging price competition. Unfortunately, 

these benefits are not meaningful to small, illiquid companies. As the SEC itself 

points out in a 2005 rulemaking:

‘‘ . . . [C]ompetition among multiple markets trading the same stocks can 

detract from the most vigorous competition among orders in an individual 

stock, thereby impeding efficient price discovery for orders of all sizes . . . 

Impaired price discovery could cause market prices to deviate from fundamental values, reduce market depth and liquidity, and create excessive 

short-term volatility that is harmful to long-term investors and listed companies.’’—Securities Exchange Commission, Release No. 34–51808; File No. 

S7–10–04.

Affording certain growth companies issuers with input into their market structure 

through the option to suspend unlisted trading privileges in their stock would 

refocus competition among orders in that stock by placing them all on a single platform. To the extent that this competition results in improved spreads and deeper 

liquidity, growth companies electing this option could enjoy many benefits, including 

reduced capital costs.

• Permit market maker support programs: Currently, Nasdaq allows ETF issuers 

to establish a fund to subsidize market makers who enhance liquidity in those 

shares. We believe that such support programs would also help growth companies. Market quality incentive programs of this kind have successfully enhanced 

liquidity and market quality for investors in Europe for several decades.

• Eliminate certain requirements for shareholder approval for smaller companies: 

Over the last decade, the SEC has made strides to reduce the time necessary 

for public companies to register and sell securities by allowing shelf registrations. However, the requirements Nasdaq imposes on its listed companies for 

obtaining shareholder approval of certain financing transactions have not followed suit. As a result, these approval requirements now can delay many transactions, causing companies to consider less favorable structures to avoid these 

requirements. This can be especially onerous for smaller companies that have 

an ongoing need to raise capital to fund their businesses. We are examining 

these requirements and hope that any proposal we present to the U.S. SecuriVerDate 0ct 09 2002 16:21 Dec 23, 2015 Jkt 000000 PO 00000 Frm 00094 Fmt 6621 Sfmt 6621 L:\HE3E8B~1\03-10V~1\HEARING\94374.TXT SHERYL

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ties and Exchange Commission to address this will be met with an understanding that rules applied to the world’s largest companies may not be appropriate to apply equally to emerging growth companies. 

NASDAQ PRIVATE MARKET IS A VENTURE MARKET 

There are improvements that can be made in the world of private companies as 

well. The JOBS Act, passed by Congress and signed by the President in 2012, allows 

companies to remain private longer. In light of the growing demand for liquidity in 

these companies’ shares (especially by their employees) we created the Nasdaq Private Market to help private companies provide selective liquidity in their equity securities. Nasdaq Private Market uses technology solutions to serve the unique needs 

of private companies within the legal framework set forth by the securities laws 

using Nasdaq’s established competence to help ensure transparency and investor 

protection. The platform has had encouraging success in the short time that it has 

been operational. It has a growing universe of companies and continues to build out 

a robust toolkit specifically designed for private companies. However, from a legislative standpoint, private markets such as our own still need assistance to make them 

robust capital markets for companies wishing to stay private. 

The JOBS Act and prior laws make very clear that companies can sell shares to 

accredited investors without registering the transaction. In theory, this category of 

investor does not need the protections that registration requirements afford—due to 

their net worth, income and sophistication. However, the subsequent sale of shares 

from an existing shareholder to an accredited investor does not enjoy the same legal 

status, notwithstanding the fact that the policy rationale for an exemption is similar 

to that for issuer transactions. Due to a lack of certainty concerning the legal requirements for exempt secondary transactions, a range of market practices have developed. As a result, these transactions often do not occur, and, when they do, they 

take place amidst uncertainty and risk, as companies and their investors shoulder 

unnecessary legal and regulatory costs to facilitate such transactions. The time has 

come to provide clear guidance for secondary transactions where accredited investors—who are already deemed not to need registration level protection—are the purchasers. For these reasons, we encourage you to pass legislation exempting from 

registration transactions where an existing shareholder in a private company sells 

shares to an accredited investor. The SEC should further be encouraged to consider 

changes to the accredited investor definition, so that an investor can establish their 

sophistication through means other than their net worth and income. Regardless of 

any future modifications, antifraud provisions must remain in effect for both issuer 

and non-issuer transactions, whether registered or exempt. 

Thank you again for inviting Nasdaq to testify on this important issue. We believe 

that Nasdaq is uniquely positioned to help more companies go public, provide investors with access to companies earlier in their growth phase, employ the higher risk/

reward inherent in venture companies and bring our deep experience and competencies of market transparency, quality and surveillance to these markets. We believe that our approach to reforming the public and private markets is the best road 

forward for venture-class companies. Thank you and I am happy to answer your 

questions. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM STEPHEN LUPARELLO 

Q.1. What steps short of creating a venture exchange could help to 

improve the dynamics for smaller companies?

A.1. There are a variety of potential initiatives exchanges we could 

explore to promote liquidity in smaller companies that would not 

necessarily require the creation of a separate venture exchange. 

Exchanges could consider, for example, approaches designed to promote smaller company liquidity, such as running batch auctions at 

particular times, attracting dedicated liquidity providers with a 

package of obligations and benefits for making a market in listed 

companies by providing high-quality liquidity, or exploring different minimum tick sizes in ways not limited to those under consideration for the Commission’s own tick size pilot program. Of 

course, any exchange rule proposing any of these approaches or 

other mechanisms for promoting liquidity would need to be carefully evaluated by the Commission in accordance with the Federal 

securities laws. 

Facilitating capital formation is an important part of the Commission’s mission, and we continue to consider ways to consider 

ways to facilitate small and emerging companies’ access to capital. 

These include:

• JOBS Act Rulemakings—The Commission recently adopted 

amendments to Regulation A to enable companies to raise up 

to $50 million over a 12-month period. SEC staff also is working on a recommendation to the Commission for final rules on 

crowdfunding, which remains an important priority. These exemptions from the registration requirements of the Securities 

Act should provide new ways for smaller companies to raise 

capital and provide investors with additional investment opportunities.

• Tick Size Pilot—The Commission recently approved a pilot 

program that would test whether wider tick sizes could positively impact liquidity and trading in some smaller companies.

• Disclosure Effectiveness Review—Staff in our Division of 

Corporation Finance is conducting a comprehensive review of 

the disclosure requirements for public companies. The goal is 

to find ways to improve the disclosure regime for the benefit 

of both companies and investors. Part of this initiative includes 

evaluating whether additional scaling of the disclosure requirements for smaller companies would be appropriate.

SEC staff also is continually working to ensure that the views of 

small business owners, investors, and other stakeholders in the 

small and emerging business community are heard. For example, 

we organize an annual small business forum to provide a platform 

to highlight perceived unnecessary impediments to small business 


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capital formation and whether, consistent with investor protection, 

they can be eliminated or reduced. The SEC also benefits from the 

expertise of its three advisory committees: the Advisory Committee 

on Small and Emerging Companies, the Investor Advisory Committee, and, most recently, the newly created Equity Market Structure Advisory Committee. Each of these committees has members 

with significant expertise investing in, advising, or trading small 

and emerging companies.

Q.2. What necessary regulations or legislative changes can be 

made/need to be made to aid the creation of a venture exchange? 

What characteristics should venture exchanges have including 

whether it should include:

• Scaled disclosure requirements and more basic listing standards

• Wider tick sizes

• Limit trading to only a venture exchange

• Anything else we view as necessary

A.2. Exchanges play a vital role in assuring the proper functioning 

of our securities markets. They have a statutory responsibility for 

overseeing trading on their markets and their members’ compliance 

with applicable statutory and regulatory provisions. They establish 

the rules by which securities are listed and traded and listing companies are vetted, and set standards of conduct for their members. 

They also generally are responsible for enforcing both their own 

rules and the relevant provisions of the Exchange Act, including 

the rules and regulations thereunder. In addition, they must have 

a robust and resilient technological infrastructure and operational 

integrity. Exchanges are required to register with the Commission 

and are subject to Commission examination and enforcement. Additionally, their rules and other material aspects of their operations 

are subject to a public notice and comment process, and, ultimately, Commission approval in accordance with the relevant provisions of the Exchange Act. 

In general, the SEC has considerable flexibility to interpret the 

Exchange Act to accommodate a venture exchange business model. 

A venture exchange may seek to have disclosure requirements and 

listing standards it believes are suitable to the unique characteristics of smaller companies. In addition, robust vetting, surveillance, 

and examination programs by an exchange could help protect investors, and the exchange environment, from potential ‘‘bad actors’’ 

on the exchange. 

There are, however, certain Exchange Act provisions that may 

limit the Commission’s flexibility regarding venture exchanges, 

particularly with respect to how a venture exchange might be able 

to maximize liquidity on the exchange:

• Section 12(f) of the Exchange Act grants unlisted trading privileges to exchanges as long as they have appropriate rules in 

place to govern such trading. For IPOs, the statute gives the 

Commission authority to prescribe the duration of a time period after an IPO before unlisted trading can begin. Section 

12(f)(1)(C) set an initial interval of two trading days, and 

under current Commission rules unlisted trading privileges are 


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extended to a security when at least one transaction in that security has been effected on the listing exchange. Commission 

staff is looking at what flexibility there may be to establish an 

extended time period for centralized trading for smaller company securities.

• Section 11A(c)(3)(A) of the Exchange Act authorizes the Commission to prohibit broker-dealers from executing transactions 

otherwise than on an exchange (i.e., over-the-counter trading) 

provided that the Commission is able to make certain findings, 

such as a finding regarding the fairness and orderliness of 

markets and a finding that an exchange rule does not unreasonably impair the ability of any dealer to solicit or effect 

transactions for its own account. This test must be met before 

the Commission can adopt rules restricting the over-thecounter trading of broker-dealers that would allow a venture 

exchange to establish mechanisms to protect the liquidity pool 

on the exchange.

There are a variety of ways that a venture exchange might structure its operations to address the capital formation needs of smaller companies, including, but not limited to, measures to promote liquidity through mechanisms to protect the liquidity pool on the 

venture exchange and obligation/incentive packages to attract liquidity providers to the exchange. The Commission would need to 

evaluate any such mechanisms as part of its review of a venture 

exchange’s registration application to the Commission to determine 

whether such mechanisms were permissible under the securities 

laws and regulations and whether they would serve the needs of 

small companies, their investors, and the markets as a whole. 

RESPONSE TO WRITTEN QUESTION OF SENATOR VITTER 

FROM STEPHEN LUPARELLO 

Q.1. Mr. Luparello, in your testimony, you stated, ‘‘The SEC is considering innovative approaches that appropriately balance the 

needs of smaller companies for efficient secondary markets and the 

interests of investors in smaller companies. Venture exchanges potentially could achieve such a balance by providing the investors a 

transparent and well-regulated environment for trading the stocks 

of smaller companies that offers both enhanced liquidity and strong 

investor protections. As such, they could strengthen capital formation and secondary market liquidity for smaller companies and expand the ability of all investors to participate through well-regulated platforms in the potential growth opportunities offered by 

such companies.’’

When do you believe the SEC will be ready to announce these 

‘‘innovative approaches’’ and what is the reason to delay?

A.1. The SEC has supported innovative efforts to promote an appropriate secondary market structure for smaller companies. For 

example, the Commission recently approved a pilot program that 

will test the impact of wider quoting and trading increments, or 

ticks, on the securities of smaller capitalization companies. The 

pilot program is a significant market structure initiative and it will 


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generate data on whether wider tick sizes enhance the market 

quality for the stocks of smaller capitalization issuers. 

Another example, noted in my written testimony on behalf of the 

Commission, was the Commission’s approval of the BX Venture 

Market in 2011. To date, however, the BX Venture Market has not 

been launched. My understanding is that concerns about ensuring 

adequate liquidity in BX-listed securities and attracting liquidity 

providers, at least in part, have caused the delay for the launch. 

In light of these developments and broader discussions about improving markets for smaller issuers, Commission staff is assessing 

the hurdles facing exchanges that seek to maximize secondary market liquidity for such issuers. One focus is the design of approaches 

that would protect the exchange’s liquidity pool for a smaller company’s stock. 

The three primary provisions of the Securities Exchange Act of 

1934 that bear on efforts to protect an exchange’s liquidity pool are 

the national market system requirements of Section 11A(a), the unlisted trading privilege (‘‘UTP’’) provisions of Section 12(f), and the 

off-exchange trading provisions of Section 11A(c)(3). 

As noted in my testimony, stocks to be listed on the BX Venture 

Market were not considered national market system securities and 

therefore would not have been subject to the provisions of Regulation NMS. With respect to Section 12(f) and Section 11A(c)(3), Commission staff is considering the extent to which interpretations or 

exemptions would be appropriate to help promote the efforts of exchanges to protect their liquidity pools for smaller companies. 

In addition to these staff efforts, the Commission staff remains 

open to considering other innovative initiatives from exchanges or 

others that appropriately balance the needs of smaller companies 

for efficient secondary markets and the interests of investors in 

smaller companies. I anticipate that we would respond to such efforts in a timely and constructive manner.


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