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LEGISLATIVE PROPOSALS TO ENHANCE 

CAPITAL FORMATION FOR SMALL AND 

EMERGING GROWTH COMPANIES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

APRIL 9, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–74 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

SPENCER BACHUS, Alabama 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

LYNN A. WESTMORELAND, Georgia 

BILL HUIZENGA, Michigan 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 9, 2014 ..................................................................................................... 1 

Appendix: 

April 9, 2014 ..................................................................................................... 41 

WITNESSES 

WEDNESDAY, APRIL 9, 2014 

Burton, David R., Senior Fellow in Economic Policy, The Heritage Foundation ........................................................................................................................ 9 

Coffee, John C., Jr., Adolf A. Berle Professor of Law, Columbia University 

Law School, and Director of the Center on Corporate Governance, Columbia 

University Law School ......................................................................................... 11 

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

Biotechnology Industry Organization (BIO) ...................................................... 13 

Quaadman, Tom, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 15 

APPENDIX 

Prepared statements: 

Burton, David R. ............................................................................................... 42 

Coffee, John C., Jr. ........................................................................................... 58 

Hahn, Brian ...................................................................................................... 72 

Quaadman, Tom ............................................................................................... 79 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Fitzpatrick, Hon. Michael: 

Written responses to questions submitted to Brian Hahn ............................ 97 

Luetkemeyer, Hon. Blaine: 

Law360 article entitled, ‘‘SBIC Relief Act Will Be Good For Advisers— 

And Business,’’ dated April 7, 2014 ............................................................. 101 

Written statement of the Small Business Investor Alliance (SBIA) ............ 104 

Article from The Wall Street Journal entitled, ‘‘Dodd-Frank Interfering 

With Small Business Investment,’’ dated April 9, 2014 ............................ 107 

Wagner, Hon. Ann: 

Written statement of Protea Bioscienes Group, Inc. ..................................... 109 

Written statement of Richardson Patel LLP, dated April 4, 2014 ............... 111 

(1) 

LEGISLATIVE PROPOSALS TO ENHANCE 

CAPITAL FORMATION FOR SMALL AND 

EMERGING GROWTH COMPANIES 

Wednesday, April 9, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

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

Members present: Representatives Garrett, Hurt, Neugebauer, 

Huizenga, Stivers, Fincher, Mulvaney, Hultgren, Wagner; Maloney, 

Sherman, Lynch, Scott, Himes, Peters, Foster, and Kildee. 

Ex officio present: Representative Hensarling. 

Also present: Representatives Luetkemeyer and Fitzpatrick. 

Chairman GARRETT. Good morning. Today’s Subcommittee on 

Capital Markets and Government Sponsored Enterprises hearing 

entitled, ‘‘Legislative Proposals to Enhance Capital Formation for 

Small and Emerging Growth Companies,’’ is hereby called to order. 

We thank the panel for being with us for this important hearing. 

And, as we always do, we will start with our opening statements, 

and then look to the panel, so you can sit back and relax for a few 

more minutes, and listen to the words of wisdom from up here. I 

now yield myself 4 minutes for an opening statement. 

Today’s hearing will examine a variety of legislative proposals to 

enhance capital formation for small and emerging growth companies (EGCs). I want to thank all of our Members today, especially 

those who are sponsors of the legislation that will be coming before 

the subcommittee. 

The United States has the most fair, most efficient, and the 

deepest capital markets in the world. Now, the primary function of 

this market is to what? To help facilitate the appropriate flow of 

capital from investors to companies that need funds to create jobs 

and to grow their businesses. Today, America’s startups and small 

businesses continue to encounter difficulties accessing U.S. capital 

markets to finance their operation. Moreover, the costs to these 

companies of going and staying public remains unacceptably high. 

In an effort to continue to help small businesses raise muchneeded capital, we have the legislative package that is before us 

today. These measures seek to help companies raise capital, and 

comply with regulations in three specific areas: first, some of the 

2 

bills help small businesses go public, so we call them pre-IPO; second, some of the bills help small businesses be more competitive 

after they have gone public, so we call them post-IPO; and third, 

some of the bills help small businesses attract more investment in 

the private market, so we call them no-IPO. 

By focusing on the pre-IPO, the post-IPO, and the no-IPO markets, these legislative proposals span the main areas where companies raise capital from investors. These proposals hope to strike a 

delicate balance of lowering the overly burdensome cost of capital 

for some companies, while retaining the important safeguard for 

the investors. Specifically, this package includes a number of other 

reforms to the securities laws that will make it easier for small 

companies to attract much-needed capital. 

First, the post-IPO. The gentleman from Pennsylvania, Mr. 

Fitzpatrick—I think he is here—has introduced H.R. 2629, the Fostering Innovation Act. It broadens the number of companies that 

can qualify under SEC rules as nonaccelerated filers, which are 

subject to certain exemptions under the securities laws and under 

the Sarbanes-Oxley Act (SOX). 

Second, the gentleman from Illinois, Mr. Hultgren, has circulated 

a discussion draft to enhance utility of SEC Rule 701, which exempts the SEC from registration of certain securities offerings by 

companies to its employees as part of a written compensation 

agreement. 

Third, the gentleman from Missouri, Mr. Luetkemeyer—who will 

be back later on—has introduced H.R. 4200, the SBIC Advisers Relief Act, to include small business investment companies in the 

class of venture capital funds and private funds that are exempt 

from SEC registration. 

Fourth, we have the gentleman from California—who will be 

joining us later—Mr. McCarthy. He has circulated a discussion 

draft to broaden the number of companies that can qualify as wellknown seasoned issuers (WKSIs). This is a class of issuers created 

by the SEC, which are able to take advantage of certain regulatory 

benefits. 

Fifth, we have the gentlemen from South Carolina, Mr. 

Mulvaney. He has circulated a discussion draft to enhance the liquidity of restricted securities sold to the public in other qualified 

institutions through SEC Rules 144 and 144A, respectively. 

Sixth, the gentlelady who is making the last bit of introductions 

this morning, the gentlelady from Missouri, Mrs. Wagner, has circulated a discussion draft of the Small Business Freedom to Grow 

Act, and that would do what? It would reduce the burdens on 

smaller reporting companies seeking to register securities offerings 

with the SEC. 

And, finally, me. I have circulated a discussion draft of the Disclosure Modernization and Simplification Act. What would it do? It 

would direct the SEC to tailor regulations, S-K disclosures rules as 

they apply to emerging growth companies and smaller issuers to 

eliminate other duplicative, outdated, and/or unnecessary disclosure rules. 

So, in all this it is important to remember that capital formation 

and investor protection is not an either/or proposition. When invesVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
3 

tors have additional investment options to earn a return, and invest their money, that additional choice is significant protection. 

Again, I want to thank all the Members for their hard work on 

these important pieces of legislation, and I again urge our colleagues in the Senate, who have so far completely ignored the important capital formation efforts that have been done in a bipartisan manner here in the House, to quickly consider these measures in the interest of small business, and the interest of investors, 

and of hard-working Americans across the country. And I look forward to the testimony of all of our witnesses today. 

With that, I yield back, and at this point I yield to the ranking 

member of the subcommittee, the gentlelady from New York, Mrs. 

Maloney, for 5 minutes. 

Mrs. MALONEY. I thank the chairman for holding this hearing. 

The U.S. capital markets are the envy of the world. They offer investors liquidity, transparency, and flexibility, and they offer companies access to capital in the form of a deep pool of investors who 

stand by and are willing to invest in promising businesses. While 

the ecosystem of financial regulations in the United States is complex, the central tension underlying the entire system is simple: investors want as much information as possible on the companies 

they are investing in, as quickly and as accurately as possible. 

The issuing companies, on the other hand, want to keep as much 

information as possible about their business practices confidential. 

Companies also want to spend as little time as possible preparing 

the disclosures that their investors crave. It is the job of public policy to strike the right balance between these two competing desires. 

Whether public policy should favor the investors or the issuers 

often depends on the specific situation. Sometimes, more disclosure 

is appropriate. Other times, the burden on the company of the additional disclosure outweighs the benefits. 

I am concerned, however, that we are in danger of tipping the 

scales too far in favor of the issuing companies, and away from the 

investors. No one disputes that preparing audited financial statements is a time-consuming, labor-intensive process. But that by 

itself does not mean that preparing audited financial statements is 

overly ‘‘burdensome.’’ So, I think it is important to remember that 

reducing ‘‘burdens’’ for public companies can sometimes come at 

the expense of investors, the very investors we need to keep our 

capital markets strong and competitive. We would do well to remember that it is, after all, the investors’ money that is on the line. 

Of course, there are situations where the benefits of reducing the 

burdens on issuing companies outweigh the costs to investors, and 

in those situations I would wholeheartedly support eliminating 

those burdens. But, we need to engage in a careful, balancing test 

with all of the bills that we are considering today. And I have always said that our markets run more on trust than on capital, and 

really these regulations are there to build the trust of the American people so they continue investing, and I would say the world, 

in our capital markets, which are the strongest in the world. 

One of the bills, which I am pleased to co-sponsor along with Mr. 

Luetkemeyer, easily passes that test, in my view. H.R. 4200, the 

SBIC Advisers Relief Act fixes an unintended consequence of the 

Dodd-Frank Act. Under Dodd-Frank, an investment adviser that 

4 

only advises a venture capital fund is exempt from SEC regulation. 

Similarly, an investment adviser that only advises small business 

investment companies (SBICs) is also exempt, but an investment 

adviser that advises both a venture capital fund and an SBIC is, 

for some reason, not exempt. 

This makes little sense and it provides no additional protections 

to investors. And it encourages sophisticated investment advisers 

who have experience advising successful venture capital funds from 

bringing that expertise to small business investment companies, 

which restricts small businesses access to sophisticated investment 

advice. Our bill fixes this problem by clarifying that investment advisers that advise both venture funds and SBICs are also exempt 

from SEC registration. 

I look forward to hearing from all of our distinguished witnesses 

today, and I would note that one, Professor Coffee, is from the 

great City of New York. He has testified before Congress at least 

25 times. That may be close to a record. We are very happy to see 

him. He also is from New Jersey, so he is from both, and we welcome him. Columbia is one of the great universities in the district 

and city that I am privileged to represent. So welcome, Professor 

Coffee, and everyone else. 

Chairman GARRETT. Thank you, and I share the gentlelady’s 

comment: At the end of the day, it is the investors’ money that is 

on the line. I think that is a good takeaway from however we address these points. It is a very good point. 

I now yield 2 minutes to the vice chairman of the subcommittee, 

Mr. Hurt. 

Mr. HURT. Thank you, Mr. Chairman. I want to thank you for 

holding today’s hearing on the legislative proposals to further enhance capital formation. I thank all of the witnesses for being here 

as well. 

This subcommittee’s work on the issue of capital access for small 

and emerging growth companies has resulted in the bipartisan passage of numerous bills in the full Financial Services Committee 

and in the House. I look forward to their enactment so we can continue to expand upon the successes of the Jobs Act that we have 

witnessed over the last 2 years. 

Even with those successes, I continue to hear from companies— 

both public and private—in my district about the impacts of outdated and burdensome regulations on their ability to access capital. 

As our markets and the needs of participants continue to evolve, 

it is necessary for our regulatory structure to reflect those new realities. 

Today, I especially look forward to testimony from our witnesses 

regarding Chairman Garrett’s Disclosure Modernization and Simplification Act, and reforming our corporate disclosure regime. I am 

encouraged by the comments of a majority of the Commissioners at 

the SEC, including Chair Mary Jo White, about the need for the 

SEC to engage in a comprehensive review of our disclosure requirements. They have noted that disclosure overload is having negative 

impacts on investors, public companies, and the SEC itself. 

Fostering capital formation in our capital markets requires consistently reliable information on public companies, however, too 

much information, for the sake of information itself, can create inVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
5 

efficiencies and confusion, especially among investors unable to 

make informed decisions. Streamlining our disclosure regime to 

better reflect the SEC’s three missions will lead to benefits for both 

businesses and investors. 

I appreciate this committee’s continued focus on ensuring that 

our small businesses and startups have the ability to access the 

necessary capital in order to innovate, expand, and create the jobs 

our local communities need. I look forward to the testimony of our 

witnesses and thank you, again, for your appearance before this 

subcommittee. Thank you, Mr. Chairman, I yield back the balance 

of my time. 

Chairman GARRETT. Thank you. At this point, I yield 2 minutes 

to Mr. Peters. 

Mr. PETERS. Thank you, Mr. Chairman, and thank you to our 

witnesses for being here today. During my time in Congress, my 

top priority has been ensuring that small businesses have the tools 

they need to grow, especially access to capital. I appreciate the efforts of my colleagues who have put forward the bills that we will 

be discussing today, and I hope that our witnesses will help us balance the potential improvements in capital formation that these 

proposed changes would yield against any decrease in the quality 

or the availability of information investors need to make decisions 

about where to invest. 

Michigan, my home State, has some of the fastest growing venture capital communities in the Nation. Both Detroit and Grand 

Rapids have become hubs of innovation with flourishing start-up 

communities. I look forward to our witnesses’ discussion of how 

H.R. 4200, the SBIC Advisers Relief Act, introduced by my colleague, Representative Luetkemeyer, addresses the interactions between venture capital advisers and small business investment company advisers. 

I hope our witnesses will touch on how this legislation could improve advice available to small businesses and fast-growing 

startups, and whether any potential conflicts could arise from these 

proposed changes. Thank you, and I yield back my time. 

Chairman GARRETT. The gentleman yields back. Thank you very 

much. Mrs. Wagner for 2 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman, and thank you for this 

hearing. I appreciate you all being here today. Small businesses are 

the primary engine of job growth in America. The tightening of 

credit, as a result of the financial crisis and Dodd-Frank reforms, 

has made access to capital in the public securities all the more important. Yet, even in one of the strongest stock markets in years, 

small companies struggle to raise money because of overburdensome regulation. 

Today, we will discuss a number of proposed bills, including my 

bill, the Small Business Freedom to Grow Act of 2013, which is 

based on recommendations by the SEC Government-Business 

Forum on Small Business Capital, which included participants 

such as Staples, from St. Louis in my home State of Missouri, and 

also another great Missouri company, CrowdIt, LLC. 

My bill would allow smaller reporting companies to access the 

public securities markets more efficiently, by allowing them to use 

the shorter form of registration, form S-3, thus reducing costly comVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
6 

pliance. The SEC said that the proposed expansion of Form S-3 

should not adversely impact investors. In addition, my bill would 

allow smaller reporting firms, who have registered using an S-1 

form, to use forward incorporation to automatically update their 

registration statement. According to the SEC, this change would 

allow companies to avoid additional delays in the offering process, 

and could reduce or even eliminate costs associated with filing 

amendments to the registration statement. 

Lastly, my bill would preempt all securities issued by smaller reporting companies, and emerging growth companies, lessening the 

burden of having to comply with 50 different sets of States’ securities laws that require considerable compliance costs. These smart 

reforms are an important follow-up to the Jobs Act, and will improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. 

I thank you, and I yield back. 

Chairman GARRETT. I thank the gentlelady. We now yield 2 minutes to Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. I thank the ranking 

member, and I thank the witnesses for offering their assistance 

with the subcommittee’s work. Mr. Chairman, I just wanted to give 

you a heads up, well, I would ask unanimous consent within the 

next 48 hours to submit a letter to the chairman, but I would like 

to circulate it to the Members on both sides of the aisle here, regarding our ability to hold a hearing on high frequency trading, 

and especially how that high frequency trading operates within 

dock pools. 

As you know, there has been considerable concern in the last 

week or so about whether or not high frequency trading has rigged 

the system. So, just to let you know that letter is coming, and I 

appreciate any consideration you might give to that. I would also 

like to thank the witnesses here today. 

Today’s hearing has seven bills that are intended to reduce barriers to capital formation for businesses. Unfortunately, I am concerned that the bills before the committee do not fully strike the 

right balance and may do serious damage to investor protection. It 

is important to remember that the SEC rules that these bills seek 

to roll back serve important investor protection purposes that could 

be thwarted by restricting or repealing those rules. 

What we are talking about here is a zero-sum game. Reducing 

regulatory requirements for businesses seeking to access the capital markets generally means that investors will have less information on which to base investment decisions. Less information also 

increases the likelihood of securities fraud and abuse. We have to 

be careful to strike the right balance between the burden on 

issuers and the need to protect investors. 

I am concerned that the subcommittee is moving too quickly to 

reduce so-called burdens without fully understanding the effect of 

these reductions and what effect they have on the burdens on investor protections. I am particularly troubled that several of the 

bills before the subcommittee today completely exempt securities 

from State registration requirements. A blanket State law preemption is something that this Congress has rejected over and over, 

7 

and yet these provisions continue to find their way into legislation 

before this committee. 

Last Congress, we passed the Jobs Act, which significantly reduced limitations on capital formation for all companies. I agree 

with the testimony of Professor Coffee that this committee seems 

to be rushing from the first Jobs Act to kind of a ‘‘Jobs Act II,’’ 

without fully understanding the consequences of the first law. Reducing unnecessary burdens is good, and where we can make the 

securities law simpler and easier to comply with, I think we 

should. But we should not do so regardless of the cost. I look forward to hearing from the witnesses about whether these bills before us today strike the right balance. I thank you for your indulgence, Mr. Chairman, and I yield back. 

Chairman GARRETT. The gentleman yields back, and I thank the 

gentleman for his recommendation with regard to having hearings 

on this very important topic. I do wish to remind the gentleman 

that actually over the last 2 years, we have had 3 hearings and 

events so far. The gentlelady from New York and I had a field 

event, to which the gentleman was invited. We have had two other 

hearings, the last of which was about a month ago. I know the gentleman was obviously invited to all three of these things. 

Mr. LYNCH. We have gotten a lot of new information in the last 

couple of weeks, though. 

Chairman GARRETT. Right. So, the gentleman was at the last 

one, which was just shy of a month ago, and we will continue to 

have hearings on this topic. And, as the gentleman knows from the 

hearings that we have held so far, what we have begun to hear is 

the question being raised and the facts coming out as to whether 

some of the problems that have come out of late are in fact being 

driven by, and behavior is a response to, the amount and content 

of the regulations that are in place right now. So, that is some of 

the information that has been coming out so far, but to the gentleman’s request, yes, we will be having additional hearings on this 

very important topic. 

Mr. LYNCH. I thank the chairman. 

Chairman GARRETT. Next, we will be looking to Mr. Mulvaney 

for 1 minute. 

Mr. MULVANEY. Thank you, Mr. Chairman. I will be very brief. 

I know that many of us here supported the Jobs Act a couple of 

years ago. I know it passed on a bipartisan basis. I was happy that 

we had a chance to make SEC registrations a little bit easier, reduce excessive filing, and encourage crowdfunding, which I think 

has been a tremendous success, and also allow some broader advertising. 

I have a discussion draft of a bill today that will make additional 

changes which would try and do a little bit more. Proposed changes 

to Section 144 of the SEC rules, to reduce holding periods, provide 

what we call shell company relief. I am hopeful that as a result of 

the hearing, we will be able to add to the list of bipartisan bills 

that will come out of this committee. I don’t know if Mr. Lynch had 

my particular discussion draft in mind when he said it’s one of the 

ones he was concerned about, but I look forward to the discussion, 

I look forward to the input that the witnesses have here today, as 

8 

we try and move towards another round of bipartisan changes that 

would make access to capital easier. 

And with that, I yield back. 

Chairman GARRETT. The gentleman from Connecticut is recognized for 1 minute. 

Mr. HIMES. Thank you, Mr. Chairman. I just wanted a minute 

to say thanks very much for holding these hearings. I wanted to 

thank the panel in advance for their participation. And, in thanking the chairman, I just want to make the observation that like the 

Jobs Act, I think this is a really important exercise in making our 

capital markets more efficient, and better at allocating capital, and 

I encourage my colleagues here to think of this, and perhaps to 

avoid the all-too-often scenario we fall into of making this partisan, 

or of making this an argument between the absolute virtues of regulation or the absolute absence of virtue in any regulation. 

What we are talking about here with most of these bills, of 

course, is shifting risk between issuers and investors. Most of these 

bills do that, and that is a perfectly sane exercise, but we should 

remember, particularly at a moment in time when investors are 

wary of the markets—most recently, thank you Michael Lewis and 

high frequency trading—that we need to preserve the confidence of 

investors in these markets. 

So, Mr. Chairman, thank you very much for holding this hearing. 

I look forward to hopefully having nice, bipartisan support for some 

of these bills, and I appreciate your efforts. I yield back the balance 

of my time. 

Chairman GARRETT. I thank the gentleman. We will go now to 

Mr. Hultgren for 1 minute. 

Mr. HULTGREN. Thank you, Mr. Chairman. And thank you, witnesses, for being here to discuss these proposals regarding capital 

formation for small and emerging growth companies, which are absolutely a key engine for economic growth. 

The bill that I have sponsored, the Encouraging Employee Ownership Act of 2014, amends SEC Rule 701, which mandates various 

disclosures of information for privately held companies selling more 

than $5 million worth of securities for employee compensation. We 

raised this threshold from $5 million to $20 million, but still require all issuers to comply with antifraud and civil liabilities requirements. 

This bill is a simple update to the bipartisan Jobs Act reforms 

that exempted employee compensation securities from the requirements for when companies must register with the SEC. Companies 

that used to only offer employee ownership to top executives because of cost, or because they wanted to avoid distributing confidential information, will now find it easier to provide employee 

ownership to nonexecutive employees. This will help them attract 

talented employees by giving these employees a stake in their company, and the large upside that may bring. I urge this committee 

to support this legislation. I look forward to this hearing. I thank 

the chairman again, and I yield back. 

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

finally, 1 minute to the gentleman from Pennsylvania, Mr. 

Fitzpatrick. 

9 

Mr. FITZPATRICK. Thank you, Chairman Garrett, for allowing me 

to participate in the hearing. A subject I am interested in is the 

Fostering Innovation Act, which is a bill I introduced in the last 

Congress, the 112th, and again in the 113th, responding to concerns of constituent businesses that I represent back home in 

Bucks County. This is legislation that would update the definition 

of what is called a nonaccelerated filer. It is important for small 

companies, because it frees these businesses from extremely burdensome regulations, and as we know, money not spent on questionable regulation is used then for investment and for hiring. 

The Jobs Act was the result of a realization that one-size-fits-all 

regulation hurts the economy. We should be working to reduce job 

killing regulations across our economy, and even in this divided 

government there is bipartisan support for lifting burdens from 

small business and emerging companies. That is what I believe my 

bill does, and I hope that we get bipartisan support on this committee for it. 

All the bills we are going to discuss today are very important for 

job creation. I would like to take a moment to applaud my colleague, Mr. Hultgren, for his bill, which will update Rule 701, as 

we just heard. I have heard from constituent businesses in my district that would like to reward their employees by permitting them 

to invest or have investment opportunities in their companies. 

These businesses have been constrained from doing so by the current rules, and so I think that the goals of the bill are very worthy, 

and I hope that we get support for that bill as well. With that, I 

yield back. 

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

now we turn to our panel of esteemed witnesses. 

So, for those of you who have not testified before, I will just run 

through this. As always, you will be recognized for 5 minutes, and 

your complete written statements will be made a part of the record. 

I always remind you each time to bring your microphone as close 

to you as you can, so Mr. Burton, yours looks a little bit far away 

already. Please remember to turn it on when you begin, and remember to go by the 5-minute rule. The lights are in front of you. 

Green is 5 minutes, yellow is your 1-minute warning, and red is 

when time is up and I will be banging the gavel, because the person next to you desperately wants to have their say. 

So thank you, Mr. Burton for being with us today, and you are 

now recognized for 5 minutes. 

STATEMENT OF DAVID R. BURTON, SENIOR FELLOW IN 

ECONOMIC POLICY, THE HERITAGE FOUNDATION 

Mr. BURTON. My name is David Burton. I am the senior fellow 

at The Heritage Foundation, and I would like to express my thanks 

to you, Chairman Garrett, and Ranking Member Maloney, and 

members of the subcommittee for the opportunity to be here this 

morning. 

The 2012 Jobs Act was a bipartisan achievement of consequence. 

Republican and Democratic members of the committee, and your 

counterparts in the Senate, put aside partisan differences and legislated in the public interest. These reforms will help small busiVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
10 

ness entrepreneurial capital formation, innovation, and job creation. 

I had the good fortune to attend the rose garden signing ceremony, when President Obama signed the Jobs Act into law. It was 

a reminder that important constructive change can still be accomplished when policymakers resolve to craft genuine solutions to the 

problems that face the American people. 

There remains, however, much to be done. SEC implementation 

of the Jobs Act is much too slow, in some cases nearly a year and 

a half behind the pace required by Congress. And the rules being 

proposed by the Commission are often so voluminous and complex 

that they will undermine the laudable purposes of the Jobs Act. 

There are also significant statutory reforms which are still required 

if we are to give genuine rebirth to the spirit of enterprise, innovation, and dynamism necessary for a lasting and widespread prosperity, providing opportunity and better incomes for all Americans. 

I have been asked to provide my perspective on a number of legislative proposals to enhance capital formation for small and 

emerging companies. In my written testimony, I also address the 

Commission’s implementation of the Jobs Act, and suggest about a 

dozen specific policy changes that would promote small business 

capital formation and entrepreneurship. 

Regulation S-K is the regulation governing nonfinancial statement disclosures of registered companies. Along, with Regulation 

S-X, it imposes the vast majority of the costs incurred by public 

companies. The SEC has estimated that the average cost of achieving initial regulatory compliance in an IPO is $2.5 million, and following on about $1.5 million a year in annual compliance costs. For 

small and medium-sized firms, seeking to raise capital, these costs 

make access to the public capital markets prohibitively expensive. 

In my written testimony, I show on a table that these costs are 

likely to reduce a small company’s return on equity by 20 to 100 

percent, depending on the firm’s size and return on equity. Another 

way of looking at this is to capitalize the $1.5 million annual costs 

using a discount rate of 10 percent; this is the equivalent of erasing 

$15 million in shareholder’s equity. Using a discount rate of 15 percent, it would be the equivalent of erasing $10 million in shareholder’s equity. This kind of shareholder’s equity erasure simply 

cannot be justified by the higher price earnings ratio that a public 

company commands, until the expected risks to adjusted earnings 

are quite high. 

Chairman Garrett has drafted very constructive legislation designed to address this important problem, and there is reason to 

believe that the Commission itself is serious about addressing the 

problem. And the legislation may well launch a process that would 

substantially reduce unneeded impediments to smaller firms being 

able to access public capital markets. 

I have three suggested improvements. The legislation should require an SEC survey of smaller reporting companies. It should seek 

to determine which aspect of Regulations S-K and S-X are major 

cost drivers, and seek input about what should be changed. In addition, the Commission should begin to collect and publish data regarding its enforcement actions, and I have specific recommendations about how to go about that. 

11 

Commissioners, Congress, and this committee need actual information, not anecdotes, about what type of disclosures, misrepresentations or omissions are the source of enforcement actions and 

other problems. I will move on to some other things. 

I support the SBIC Advisers Relief Act. They are, in effect, venture capital funds and it is appropriate to treat them as such. I 

support the legislation increasing the threshold to $20 million with 

respect to Rule 701 in compensatory benefit plans. That will help 

them compete with larger companies. I support, particularly, Section 4 of the Small Business Freedom to Grow Act; it is laudatory. 

These companies are already public companies making full reporting, so it is not reasonable to require them to comply with 51 different sets of blue sky laws. I support, also, the Fostering Innovation Act, and in particular, exempting these companies from Sarbanes-Oxley 404(b), and that was in the bipartisan act during the 

last Congress. 

Thank you very much. 

[The prepared statement of Mr. Burton can be found on page 42 

of the appendix.] 

Chairman GARRETT. And I thank you, very much. Professor Coffee, good morning, and welcome. 

STATEMENT OF JOHN C. COFFEE, JR., ADOLF A. BERLE PROFESSOR OF LAW, COLUMBIA UNIVERSITY LAW SCHOOL, AND 

DIRECTOR OF THE CENTER ON CORPORATE GOVERNANCE, 

COLUMBIA UNIVERSITY LAW SCHOOL 

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

members of the subcommittee, I am honored to be here. Thank you 

for inviting me. 

I have been specifically asked to review seven bills. These seven 

bills range in my judgment from ones that are entirely reasonable, 

to ones that are debatable, reasonable people could disagree, and 

some that I think have unintended consequences that are dangerously overbroad. I will focus more on the latter. That doesn’t 

mean that I am opposed to everything that is before you. 

Chairman GARRETT. Why don’t you just start with the good stuff, 

maybe? 

Mr. COFFEE. I have to focus on—I only have 5 minutes. 

Chairman GARRETT. Okay, I’m sorry. I will give you an extra 15 

seconds for that. 

[laughter] 

Mr. COFFEE. Among the good ones, of course, the simplest and 

the most unobjectionable one has been proposed by Chairman Garrett, who says we should put a facing page on the Form 10-K that 

would allow you to cross-reference the rest of the documents with 

electronic links. I don’t see how anyone could be opposed to that, 

although I think you probably can do it under existing law. 

In any event, I have one other comment. These seven bills sort 

of tweak very small parts of our total Federal security system. 

They are not terribly coordinated, there is a certain ad hocery here. 

I would suggest that if you are really concerned about what I think 

seems to be the underlying theme that you are most concerned 

about, the integration of our 33 act disclosure system and our 34 

act disclosure system, which are not perfectly integrated or coordiVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
12 

nated. Then, if that is your concern, and if your concern is also 

about public offerings and private placements, you really should 

ask the SEC to conduct a serious study that maps the entire terrain, rather than sort of looking around the edges. There is a certain quality here of the seven blind men, roaming around the elephant, and reporting little problems. There should be a mapping of 

the entire terrain, to have a fuller look at all this. 

Now, with that statement, let me talk about the specific areas 

where I have problems. First of all, I have a problem with the 

downsizing of the definition of the well-known seasoned issuer, 

called the WKSI in the parlance. It is going to be reduced under 

this bill to what I will call down to the level of a slightly known, 

modestly sized issuer, what I will call an ‘‘SKMI.’’ I am not sure 

that you understand all the consequences. 

Reasonable people can debate whether it is desirable to lower 

this level, so you can test the waters, whether you want to end the 

quiet period for a larger group of companies, but there is another 

consequence that you don’t seem to have realized. Once you say that small companies with only a $250 million public float can be WKSIs, then they are automatically entitled to use 

something called Automatic Shelf Registration. What is that? That 

is a system under which the minute you file with the SEC, you can 

sell to the public with no SEC prior review. 

It means that the SEC is cut out of the process of reviewing the 

registration statement, and also that the board of directors, underwriters, counsel, auditors, and accountants do not have any opportunity to conduct a meaningful due diligence inquiry. Both of those 

things are disadvantageous to the interests of investors. 

It really is amazing to me that probably the largest division at 

the SEC is Corporation Finance, which is full of hundreds of people 

who review registration statements. They are about to lose twothirds of the companies they review, if you move WKSI down this 

far, without changing some of the consequences of being a WKSI. 

That is point one. 

Let me move on to H.R. 2629, the Fostering Innovation Act. This 

is another attempt to cut back on Section 404 of Sarbanes-Oxley. 

I understand that Section 404 is not popular, and that its requirement of an annual audit of internal controls is costly. But at least 

when you passed the Jobs Act, there was a rationale here, and 

there was a limited period of the suspension of Section 404. Emerging growth companies were exempted for an up to 5 year period, 

under the rationale that they were going to be accommodated and 

put on this learning curve, this onramp. That I can understand. 

H.R. 2629 exempts not emerging growth companies, but basically 

old and stale companies. Companies that have never gotten to $100 

million in revenues, even if they have been around for 50 years, 

and it also exempts companies that have a public float below $250 

million. You have to meet both of those standards. That means 

there will be a lot of companies out there that will be exempted 

from the internal controls, and the other companies that may need 

exactly that. 

I can understand trying to shorten Rule 144, but I don’t think 

you understand that what will probably happen, because we had 

this experience with Regulation S, is if it is only a 3-month holding 

13 

period, the arbs will come in. They will buy the privately placed 

stock, which will be sold at a discount to the public offering price, 

and they will lock in the difference through hedging. And once they 

lock it in, they will then dump the stock once the 3-month period 

is expired, and it is free for the public market. 

I think that will produce volatility and it had such adverse consequences that the SEC barred hedging when there was a 3-month 

period under Regulation S, which is a similar problem. All I am 

saying is we had experience with this, and it has had more adverse 

consequences. 

I will close now, but I want to say again, what Congressman 

Lynch said, ‘‘I don’t think preempting the blue sky laws creates 

jobs.’’ Preempting State regulation, which is focused on local companies with local problems, I think exposes investors to local scandals. The SEC is resource-constrained. The SEC doesn’t have the 

funds it needs and it tends not to focus on the smaller companies. 

Those companies that fly under the SEC’s radar screen are still 

subject to the blue sky regulators and these bills, several of them, 

would preempt that. I have other things that I would say, but, 

again, I think a number of other ideas here are quite sensible. 

Thank you. 

[The prepared statement of Professor Coffee can be found on 

page 58 of the appendix.] 

Chairman GARRETT. I thank you, professor. Good morning, Mr. 

Hahn. You are recognized for 5 minutes, and welcome. 

STATEMENT OF BRIAN HAHN, CHIEF FINANCIAL OFFICER, 

GLYCOMIMETICS, INC., ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO) 

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

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

Hahn, and I am the CFO at GlycoMinetics, a 30-employee biotech 

company in Gaithersburg, Maryland. GlycoMinetics raised $64 million through an IPO in January, the first public offering in 2014, 

and one of many enriched by the Jobs Act. 

I am here today representing BIO and the biotech industry. 

Roughly 90 percent of BIO’s 1,100 members are pre-revenue emerging businesses. Product sales do not fund their research, which can 

cost upwards of $1 billion. Instead, companies turn to external investors to finance drug development. The capital markets play an 

important role in biotech capital formation, and it is vital that 

small public companies are given the opportunity to succeed on the 

market. 

In 2003, I was part of the management team that took Advance 

Pharmaceutical public. We had only 40 employees and no product 

revenue, but 2003 was well before the Jobs Act instituted the IPO 

onramp. From day one on the market, Advance was hit with a fullblown reporting burden. We faced the same compliance requirements as the rest of our IPO brethren from 2003, including Colonial Bank, TempurPedic, and Orbitz. Compliance with SarbanesOxley (SOX) became my full-time job. 

Because small biotechs do not have product revenue, burdensome 

regulations like SOX have an outsized effect on them. One-size-fitsall compliance requirements divert funds from the lab and slow 

14 

down the development process. The Jobs Acts has led to a sea 

change in the regulatory landscape and has shown that a commonsense reporting standard can support capital formation. Nearly 80 

biotechs have gone public in the last 2 years, compared to just 30 

in the 2 years before the Jobs Act. 

I strongly support transparency for investors. Jobs Act testingthe-waters meetings have been universally praised by my biotech 

colleagues, largely because the additional time with investors allows for increased dialogue and greater information flow. But the 

key is to share the right information that investors want to know. 

Congressman Fitzpatrick’s Fostering Innovation Act will help 

emerging innovators strike that balance. GlycoMimetics will likely 

still be in the lab, in the clinic when the 5 year onramp in SOX 

exemption expires. When the ECG clock runs out, small biotechs 

will still be relying on investor capital, but will face a full-blown 

compliance burden identical to that faced by commercial leaders. 

Investors would be better served by analyzing clinical trial results, but pre-revenue biotechs will instead be forced to issue costly 

reports that do not tell the true story of their business. The Fostering Innovation Act would provide the SEC with more accurate 

company classifications in order to institute a commonsense regulatory burden outside of the EGC onramp. The bill recognizes the 

pre-revenue reality of many small businesses by incorporating a 

revenue test into SEC Rule 12B2, which is used to determine a 

public company’s regulatory burden, including SOX compliance. 

This bill will allow small biotech companies to focus on delivering 

medicines to patients rather than time-consuming and costly reporting. 

I am encouraged that the subcommittee is considering legislation 

today to further enhance the capital formation potential of the markets, which is key to financing the search for breakthrough treatments. Expanded WKSI and Form S-3 eligibility will increase access to capital through cost-effective follow-on and shelf offerings. 

Meanwhile, reforms to Reg S-K, Rule 701, and conflict minerals reporting will move capital market regulation away from one-sizefits-all standards. 

Improving the secondary market liquidity for private offerings 

will build on another success of the Jobs Act, the expansion of Reg 

D and Reg A. Overly burdensome regulatory standards present a 

unique challenge for pre-revenue biotechs. Their investors stress 

the importance of resource efficiency, because spending capital on 

compliance diverts funds from the lab and could delay drug development. 

The Jobs Act allowed enhanced access to investors, increasing 

the capital potential of an offering. And it then instituted relaxed 

regulatory burden, decreasing the amount of capital diverted from 

research. This one-two punch is critical for biotech innovators, and 

has increased the viability of the public market. I am thankful that 

the legislation being considered by the subcommittee today mirrors 

this approach. 

If the smaller issuer is having increased access to investors and 

is not forced to siphon off innovation capital to spend on costly compliance burdens, they will be able to fund their growth, and in the 

biotech industry, further research that will change the lives of paVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
15 

tients and their families. Thank you for your time and I look forward to answering any questions you may have. 

[The prepared statement of Mr. Hahn can be found on page 72 

of the appendix.] 

Chairman GARRETT. And I thank you. 

Last, but not least, Mr. Quaadman, welcome again. You are recognized for 5 minutes. 

STATEMENT OF TOM QUAADMAN, VICE PRESIDENT, CENTER 

FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER 

OF COMMERCE 

Mr. QUAADMAN. Thank you, Chairman Garrett, and thank you, 

Ranking Member Maloney. I would like to thank all the members 

of the subcommittee for your continued leadership on issues important to capital formation. 

What this subcommittee realizes is that the opportunity to succeed includes the opportunity of small businesses to grow into large 

businesses. However, not all companies are going to make it, but 

with that opportunity to succeed, along with the right to fail, those 

are the important ingredients for our economy to grow for the long 

term and create jobs. 

With the success of the Jobs Act, we are beginning to see a rise 

in IPOs, and for the first time last year since 1998, we actually saw 

a rise in the number of public companies in the United States. 

However, the long-term trends are not good. For young entrepreneurs, the public company model is not the preferred business 

structure for them for the long term. Additionally, while we have 

concentrated on the IPO issues, we continue to have an outflow 

problem, where we have mature public companies that are restructuring themselves into different business formations. 

The bills that are before us today are important. The SEC has 

not acted on the issues that are before us today, despite numerous 

recommendations from the Small Business Committee, under the 

leadership of both Democratic and Republican SECs, as well as the 

fact that many of the issues that are before us today could have 

been taken care of independently by the SEC in terms of trying to 

modernize our regulatory systems. 

We welcome the new emphasis on these issues by Chair White, 

however we believe that the passage of this legislation will set 

forth public policy directives that the SEC will have to follow by 

statue. I think one example that was a positive one was the proxy 

advisery firm hearing that this subcommittee held last June, which 

led to a roundtable by the SEC in December, and then, just last 

week, their recommendations that the SEC staff has given to Chair 

White for further action. 

Let me talk about some of the bills that are before us today. The 

draft Disclosure Modernization and Simplification Act by Chairman 

Garrett, which is also in the same vein as the XBRL bill that Congressman Hurt has championed, would change our 1930s disclosure 

model and update it and create one for the 21st Century. This will 

allow for easier access of information for investors and their ability 

to make decisions and enter the capital markets. 

The modernization study for all businesses is an important 

means of overhauling our corporate governance disclosure process 

16 

to allow American businesses to be competitive in a global economy. The draft compensatory benefit program by Congressman 

Hultgren is an important change because Rule 701 needs to be 

changed in order for the 12G Jobs Act changes to be effective. This 

is important for employee retention that allows small businesses to 

grow into larger ones. 

H.R. 4200, the bipartisan SBIC Advisers Relief Act by Congressman Luetkemeyer, is a commonsense reform that codifies congressional intent. The draft Small Business Freedom to Grow Act by 

Congresswoman Wagner, the draft bill to improve private market 

offerings by Congressman Mulvaney, and the draft bill on definitions of well-known seasoned issuers by Mr. McCarthy—I think if 

you look at them together in a package, each of them remove barriers to capital formation, because investors have more access to information with more disclosure and transparency, they will be able 

to make more informed decisions on a quicker basis. 

Businesses will have easier access to capital, as well as scalable 

costs for regulatory burdens. And what is important to note here, 

too, is that these businesses that can avail themselves of these 

changes, the SEC has a track record, they will have continued 

oversight of these businesses, and they will have tools for investor 

protection. I believe that the Wagner change in terms of preemption is an important one, as we are talking about a small number 

of businesses that are accessing the national capital markets, and 

I think we need to look at this as the Garrett bill as the key that 

is unlocking the door, and that these three bills are then opening 

that door. 

And one thing I would just like to also point out with some of 

the statements that have been said here today is that we do have 

an unbalanced system today. We have more inefficient capital markets than we had 15 years ago, but we also have a situation where 

retail shareholders or investors are effectively disenfranchised from 

the proxy system. And they are disenfranchised from their ability 

to access the capital markets, and that runs to counter to the democratization of our capital markets that started with President 

Kennedy’s efforts to do away with the financial transactions tax in 

the 1970s. 

So, with that, Mr. Chairman, I would like to conclude my remarks. I am happy to answer any questions you may have. 

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

79 of the appendix.] 

Chairman GARRETT. Great. I thank all of the panel members for 

your testimony, and I will now recognize myself for 5 minutes for 

questions and comments. And, thank you, Mr. Quaadman. I think 

that was overstating the case that my bill is the one that is the 

key to opening the door and the rest follow. I appreciate the comment, though. 

Okay. Mr. Hahn, you made a couple of comments that I noted 

down from your testimony, and maybe they sort of jibe together. 

One, could you elaborate a little bit on the revenue component, and 

the effect on industry by the costs of this current system and how 

it affects your industry? You use the expression, ‘‘diverting from 

the labs,’’ is the language I just picked up now, but also the language I just picked up now is that your task and your role, your 

17 

responsibilities have now changed, that this is now a full-time job, 

was what I wrote down, as far as compliance. Do you want to jibe 

those two, connect those two together maybe? 

Mr. HAHN. The full-time SOX issue was with Advance back in 

2003. So, we were a 40-person company. We had a finance staff of 

two and a half FTE, and when we had to do a full blown SOX implementation, we had to increase our staff to seven, and that diverted FTEs away from the lab. 

When we talk about costs, currently at GlycoMimetics, it is 

still—we have to comply with 404(a), but not 404(b). Our costs now, 

annual costs to be a public company have increased by $1.6 million 

a year, just in auditors’ fees, legal fees, and other fees by being a 

public company. To put that into perspective, our current payroll, 

base payroll for 2014 will be $4 million. So, that $1.6 million in additional annual costs could be 10 additional R&D folks who could 

be working in the lab to help advance our programs. 

Chairman GARRETT. That is significant. Thank you. 

Mr. Burton, can you—and you touched on this a little bit in your 

testimony—provide us with a few more thoughts on the Jobs Act 

that we already have in place, as implemented, are there other 

things that should be done, as far as implementation goes, to maximize job creation through it? 

Mr. BURTON. There are a number of issues. First, is actually implementing the regulation so that certain aspects of the Jobs Act 

like crowdfunding can take place. Second, to make the rules appropriate in complexity for smaller firms. The Jobs Act proposed rules, 

an example of that, Regulation A Rule, while it has very positive 

aspects, also has some aspects that are very troubling. And then 

lastly, the proposed Regulation D Rules, as a follow on to the general solicitation and verification regulations, are extraordinarily 

problematic and are unnecessary in almost all of their respects. 

Chairman GARRETT. I guess this will jump around to Mr. 

Quaadman. So, in Professor Coffee’s testimony he sort of indicated, 

and we see this in some of the economic activity in that and capital 

allocation is going through the private less to slows market than 

it is through the public. Can you say, is that happening because 

of any bad or nefarious reasons? Or is that happening largely because of what the other two witnesses have stated, because of the 

regulatory costs or other reasons as well? 

Mr. QUAADMAN. In our view, it is primarily the regulatory costs 

and burdens that are a part of it. If you take a look at any one 

regulation or any one burden, they are not necessarily going to 

cause somebody to leave the public company space. But when you 

take them all together, they make the more efficient, inefficient, 

and less likely for businesses to want to become public. So, when 

you take a look a the public company model in a different way, if 

you have an investment dollar, you have a whole array of different 

places to put it, and increasingly investors are going away from 

public company investments, and that also is why businesses are 

also beginning to move away from that as the preferred business 

structure. 

Chairman GARRETT. And I just saw something in the paper this 

morning, I am not going to name the company, but one of the largVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
18 

er institutions is saying that they may be closing some of their 

dark pool type of arrangements. Would you like to respond to that? 

Mr. QUAADMAN. Yes, I do think we are beginning to see that 

some of the financial institutions are beginning to move away from 

certain forms of financing. We have seen that, we have had a discussion here in this room about CLOs as an example of that as 

well. 

Chairman GARRETT. Okay. 

Mr. QUAADMAN. While we need a diverse financial structure, 

some of the burdens that we have here in terms of regulation are 

impeding that. 

Chairman GARRETT. All right. And I was going to, my time is almost up, I was going to say press a copy. I think we are on the 

same page on some of this. Your very opening comment was regarding a—you didn’t use the word, but I will use the word—holistic or broad approach, as far as looking back to the 1933 Act, and 

looking at the whole thing. I will close my time with, we agree on 

that, and we have asked for the SEC, this Administration, and the 

last Administration to do the same thing, so there is no question 

there. But I think we are on the same page, just what we should 

be doing in the meantime, I guess, is why we have some of this legislation. But, thank you for that comment on that point. 

We now yield to the gentlelady from New York, Mrs. Maloney, 

for 5 minutes. 

Mrs. MALONEY. Thank you so much, Mr. Chairman, and I thank 

all of the panelists today. I would like to start with Professor Coffee. Some of these bills are aimed at allowing more companies to 

take advantage of the so-called shelf registration. Can you describe 

the benefits of shelf registration? And are there major drawbacks 

for investors when companies use shelf registration? You pointed 

out in your testimony that the proposed legislation, the $700 million standard would be reduced to $250 million, at which point the 

majority of the issuers from both the New York Stock Exchange 

and NASDAQ would become WKSIs, and could use an automated 

shelf registration. Can you elaborate on what that means for investor protections? 

Mr. COFFEE. Let me begin with the irony here. Under these bills, 

many companies could be both emerging growth companies and 

well-known seasoned issuers. And, it is really hard to see how you 

are both young and immature and old and seasoned at the same 

time. Language is being tortured a bit. 

I understand that there are high costs for many companies, particularly because of Section 404, but we keep talking about an all 

or nothing choice. You are covered or you are not covered. I believe 

it is possible to scale this requirement. 

You could tell certain kinds of companies whether they are 

emerging growth companies or slightly larger that they only had to 

do a 404 audit once every 3 years. But if you don’t do it at all, 

sooner or later you are going to get burned, because if a company 

doesn’t examine its internal controls with outside auditors, something is going to go wrong, in many cases, sooner or later. So, I 

think there should be a search for scaling this obligation. 

In terms of shelf registration, when it was originally adopted the 

level was $150 million because that was the level that the SEC 

19 

thought was the beginning of the efficient market. Now, we have 

gone down to $75 million for shelf registration, that is probably 

below the efficient market, and there are proposals that some of 

the bills would say, any company that is a reporting company can 

use shelf registration. 

That would include some companies now traded on what are 

called the pink sheets, or companies that are traded in the overthe-counter bulletin boards. I don’t think those companies have an 

adequate following, even among secure—either among securities 

analysts or other informed commentators that the public knows 

what is going on. 

And if you permit universal shelf registration to these companies, 

it would also be possible for them to do secondary offerings as well 

as primary offerings. That is, the insiders could dump their stock 

without any prior disclosure. 

When the insiders are dumping their stock under a new exemption, that is not creating jobs; that is creating bailouts. So I think 

we should be a little more focused. I am not saying that you cannot 

expand the scope of Form S-3, or that you cannot facilitate more 

shelf registration, but I think the over-breadth is when you let very 

small companies do secondary offerings, and when you go well 

below the level of the lowest possible level of the efficient market, 

that is when I think you need the more formal procedures of ordinary registration. 

Mrs. MALONEY. Thank you. You also mention in your testimony 

that shortening the holding period in Rule 144 from 6 months to 

3 months could invite abuses. It would allow investors to quickly 

resell securities that they bought in private transactions, usually at 

prices that are well below the public trading price. And, as you 

know, the minimum holding period in Rule 144 used to be 2 years, 

and was only recently shortened to 6 months. So my question is, 

do you think that a 6-month holding period is sufficient to deter 

investors? And what do you feel about this shortening period? 

Mr. COFFEE. Maybe I didn’t explain it adequately. But in my 

time, if I was going from 3 years to 2 years to 1 year to 6 months 

for reporting companies, if we would go to 3 months, that greatly 

reduces the cost of hedging. It is very expensive to try to hedge 

something for 6 months or 1 year. Three months is more possible. 

What I think we would see happen is that companies would do an 

initial IPO, and then would do no more public offerings, they would 

do all private placements, and they would do private placements to 

investors in what are called pipe transactions. Pipe transactions 

are private investment and public equity. You sell to the investor 

in a private transaction at a price somewhat below the public market price. 

So, if the market price were $20 a share, you might sell in a private placement to $19 a share, because the private placement is so 

much cheaper, with so much less liability, and so much advance 

planning. You would do it that way. The investor would buy at $19 

and immediately hedge to lock in the spread between $19 and $20, 

and at the end of the 3 months, the arbs would dump into the market, which would produce volatility, and I think we would be pretty 

much ending public registry offering by seasoned companies. I don’t 

20 

think you want to do that without mapping the total train. I think 

there should be ways that we— 

Mrs. MALONEY. Thank you. So, it would increase pumping and 

dumping. My time is up, but maybe you could get back to me in 

writing. Ideally, what do you think the holding period should be, 

if you would create a holding period? 

Mr. COFFEE. I think 6 months was probably a reasonable compromise as it is now. If you were to go lower, what I would say to 

minimum is that you forbid hedging, because hedging is, right 

now— 

Chairman GARRETT. I think we will leave it at that answer right 

there. 

Mr. COFFEE. Okay. 

Mrs. MALONEY. Thank you. 

Chairman GARRETT. Thank you. The vice chairman of the subcommittee, Mr. Hurt, is now recognized for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. And I thank each of you 

for being here. Obviously, one of the parts of the Jobs Acts required 

that the SEC study Reg S-K, and how that can be improved to reduce unnecessary costs to companies that wish to go public, and 

that are public. I guess my question is for Mr. Burton, to begin 

with, I am interested in the chart that you have included in your 

testimony relating to the percentage decrease in return on equity 

by going public. Can you talk about that? Is that data that is reflected there, based on information that is pre-Jobs Act? 

Mr. BURTON. The cost data is from the SEC and it would be preJobs Act. It was included in the economic analysis discussion of the 

crowdfunding rule, I suppose. The Jobs Act did a lot of very positive things, but it didn’t dramatically reduce the cost of being a 

smaller public company. 

Mr. HURT. What is the best way to describe the disproportionate 

effect, assuming that there is, and I believe that there is, a disproportionate effect that these disclosure requirements have on 

emerging growth companies? Can you talk about that? 

Mr. BURTON. Absolutely. And there is—some of these bills address that question, particularly backing off the costs related to 

Sarbanes-Oxley 404B, the internal control reporting for smaller 

companies, I think that is genuine; it is extraordinarily expensive. 

And it is also genuinely misguided in that, in a small company, 

with a small C-suite, it is not going to have a meaningful, positive 

impact or at least a significant positive impact on the ability of 

those people to abscond with company money if they want to. The 

fact is a nice fancy internal control loose-leaf binder on the shelf 

isn’t going to stop them from ripping off investors. It will be other 

things that stop them. 

But the long and short of it is, there is a need to fundamentally 

rethink the way we do disclosure, the way we scale disclosure. 

Whether some disclosure is having a positive impact on protecting 

investors, or it is just a waste of money, and we have very little 

information to go on. And there is a need for the SEC to review 

this. 

I think the chairman’s legislation would be a very positive step. 

I think the SEC acknowledges a need to review this, but there is 

also the need to collect information, and by that I mean two things. 

21 

First, what is causing the most cost? And second, what areas are 

causing the most problems with respect to enforcement, with respect to fraud? And we don’t really have that information, nor, for 

that matter, does the SEC. They don’t collect it, they don’t collate 

it, they don’t report it to the Commissioners. I know for a fact that 

the Commissioners are frustrated themselves that they don’t have 

that information. And, it is very difficult to make policy in a data 

vacuum, and that is where we are right now. 

Mr. HURT. Do you think, are you able to say because the SEC 

has indicated that it wants to study the issue relating to reg S-K 

more, are there areas that you think they can focus on immediately? And what would those areas be? And then, second, what 

areas do you think, specifically, they can look at long-term? 

Mr. BURTON. I think that right now I am not in a position to give 

you much more feedback on that other than 404 is the biggest single problem. I have put together a securities regulation working 

group at The Heritage Foundation, which includes people from all 

over the country, in many different professions, and we are developing a solution and an answer to that question. And I hope to be 

in a position to provide that to the committee in 6 to 9 months. 

Mr. HURT. Professor Coffee or Mr. Quaadman, do you all have 

any thoughts on that question, about what the SEC can focus on 

immediately—what areas the SEC could focus on immediately in 

terms of trying to reform some of these disclosure requirements? 

Mr. COFFEE. One of the proposals was that they should focus on 

regulation S-K. I think it was a little unrealistic to ask them to do 

that in, I think, it was something like 180 days, I think they would 

need a little bit more time than that. But I think that is perfectly 

reasonable to ask them to focus on scaling Regulation S-K. I think 

too often we are talking about all or nothing here, and I do understand that scaling some of these requirements can be justifiable. 

Chairman GARRETT. All right. 

Mr. HURT. I think my time has expired, unless, Mr. Quaadman? 

Chairman GARRETT. Ten seconds. 

Mr. HURT. Ten seconds. 

Mr. QUAADMAN. Yes, Mr. Hurt, just, I think the delivery of information is important, because we are currently trying to deliver information in booklets like this, whereas we actually use something 

like this. So, just one example, companies have to publish historical 

stock price, which was fine in its day, but, you know what? Alcoa’s 

stock price on July 7, 1972, was $49.25. I found that not in an SEC 

filing, but by going on Yahoo! Finance in about 30 seconds. 

Chairman GARRETT. Here you go. Thank you. Mr. Lynch is recognized for 5 minutes. 

Mr. LYNCH. Thank you very much. And, again, I thank the witnesses. Professor Coffee, the premise of some of these bills seems 

to be that we need to assist some of these companies in capital formation, in raising money, and that we can accomplish that by providing less information to investors. 

But I can note several examples—WorldCom, Enron, AIG, Lehman Brothers—where in times of uncertainty, people actually fled 

from those companies where it was more opaque, and there was 

less information available and fled to companies where they felt 

they knew about the internal controls within those companies. And 

22 

so, I don’t buy that. I don’t buy that we need to help companies 

by providing investors with less information. And I just want to get 

your sense on that. 

Mr. COFFEE. The first thing I would say is there is a lot of evidence, empirical evidence that the more you reduce informational 

asymmetries, the more you reduce the company’s cost of capital. If 

investors aren’t sure, you report the share at $10 a share, but if 

they are not really sure whether it was $5 to $20 or where it was, 

that company is going to have a much higher cost of capital than 

a company where they are fairly certain it was $10 a share. Plus, 

there are costs, of course, to disclosure but there are benefits. 

And we have the capital markets that have the deepest liquidity 

and the greatest efficiency in the world because we have gone far 

in reducing informational efficiencies. It may cost $1.5 million a 

year for the average company, as Mr. Burton’s evidence suggests, 

but I think there are probably benefits that are greater than that 

when we look at how distinctive our capital markets are and how 

uniquely well they do in financing startups. The rest of the world 

cannot finance startups. They are dependent upon bank capital. 

And I think that is partly the success of our securities markets. 

Mr. LYNCH. Thank you. I want to talk to you about, there are 

a couple of bills here that actually take State regulators out of the 

business of regulating these small companies. I know that across 

our country, a lot of governors are doing great work on job creation 

and we are all competing. In my district we have an innovation district, which tries to bring in biotech companies and other high tech 

companies. We provide infrastructure, and we provide, in some 

cases, financing bond assistance so there is a local risk in, especially workers; obviously, I have a lot of universities and hospitals 

in my district, so the workers there are all local. 

There is a tremendous local interest and a local risk that is far 

beyond what the general market faces. And my problem is that 

now, under Mr. Mulvaney’s bill and under another bill—and I have 

great respect for my colleagues—it takes the State regulator, ironically the person who knows the company best, out of the regulatory regime, and really puts the local economy, and the State 

economy at greater risk than would otherwise be the case. And, by 

the way, we have Bill Galvin in our State, he is my Secretary of 

State, and he does a great job on this. He is all over these local 

companies, and it has actually enhanced our ability to attract these 

small start-up companies. But I just want to hear your opinions on 

the effect of boxing out the State regulator. 

Mr. COFFEE. I think there is some unexplained suspicion of the 

State regulators, who are typically the State attorneys general. The 

State attorney general does not dislike, and is not hostile or suspicious of small businesses. The attorneys general have the same 

attitudes as the governors of the States, typically. I think that the 

State and the local regulators know the most about local companies, and as long as the SEC is very resource-constrained, those 

will be the companies they give the least attention to, because they 

can barely handle, if they can at all, their current assignment, 

their current docket. So, we are removing the only sentry that 

looks at the smaller and local company. I think that is ill-advised. 

23 

Mr. LYNCH. I appreciate that. Thank you. I only have 25 seconds 

left, so I will yield back. Thank you. 

Chairman GARRETT. I thank the gentleman for yielding back. Mr. 

Huizenga for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. I appreciate this opportunity to ask a few questions, and Professor Coffee, I do have 

a couple of things that you have brought up, some of the more 

problematic elements that you have with some of these bills. I am 

curious on Mr. Mulvaney’s bill, the 6 months going to 3 months, 

what is so magical about the 6 months versus the 3 months? 

Mr. COFFEE. I don’t say that there is anything magical about it. 

I say two things. First, the consequence, again, will be that we will 

see only private placements done by public companies. They will 

not go to the SEC. They will simply do private placements, and 

there will be some loss of transparency in the system if there are 

very few public offerings in the future by seasoned companies. 

Second, the difference between 6 and 3 months, as I tried to say, 

is that it is much more feasible to finance hedging for 3 months 

than for 6 months. It is quite expensive. Now, it may well be that 

you can solve that problem by barring hedging for a 3-month holding period, which is what has been done under Regulation S, which 

is quite analogous. 

I would suggest again, that rather than just tinker and play with 

these, we should ask either the SEC or some blue ribbon group to 

give us their map of what the future should look like in terms of 

the relationships between public and private offerings. It might be 

that you would want to tell some company that it could not go to 

the private placement market again, because it had done it for 10 

straight years, until it went to the public market one more time. 

I do want there to be some continuing transparency, which going 

to the public market does enhance. 

Mr. HUIZENGA. Okay. So, having an organization like the SEC’s 

Government-Business Forum on Small Business Capital Formation 

is beneficial? 

Mr. COFFEE. I have no hostility towards that body. I point out 

that one body you should also talk in this process is the securities 

analysts. They have views about what they want. You should also 

talk to the State regulators. I don’t think they have been consulted 

about some of the bills, and the blue sky preemption. All of those 

people have a view. 

Mr. HUIZENGA. My concern is—and I have some personal experience with this because I have a bill dealing with mergers and acquisitions which passed this committee and passed the House 

unanimously—in the same situation as I am looking at Mr. 

Mulvaney’s bill, and Mrs. Wagner’s bill, these are all recommendations from the SEC’s own working group that had been put forward 

multiple times, yet the SEC doesn’t do anything about it. And, it 

is this constant drip, drip, drip of people saying we have to handle 

this, and the SEC says, yes, we will get to it, yes, we will get to 

it, yes, we will get to it. And then in my case, with my mergers 

and acquisitions bill, the SEC says, we don’t need to do that. 

We don’t need a law to do that, which was one of the arguments 

I am not sure that we need do this, and codify it, but the problem 

is we can’t get the SEC to move on some of these issues, and it 

24 

seems to me that one of the only ways is possibly through this legislative process. Professor Coffee, you put forward the notion about 

your concerns about the WKSIs, and a company being both an 

emerging company as well as a WKSI, does anybody else have that 

same concern? Mr. Quaadman, you are shaking your head, so, if 

you don’t mind addressing that? 

Mr. QUAADMAN. Sure, Mr. Huizenga, I think the question, first 

off with the Small Business Committee, is a process the Chamber 

has participated in, and it is a process investors have participated 

in. So, that is just not the business community saying that; it is 

a well-rounded group. 

What we are looking at here, and I think this is also what the 

WKSIs are looking at, as well, is that our capital markets are different, and they are out of balance, right? So, if we can lower some 

of the thresholds, we live in an age where there is more information that is available, we need to fix those delivery systems so that 

there is more information that investors have, and that they can 

actually act in a decision-useful way in their own interests. I think 

we are sort of losing sight of that fact. 

This is not an us-or-them proposition. This is a two-way street. 

Businesses need to disseminate that information into the marketplace to raise capital. If investors are burned unnecessarily, it is 

going to be more difficult for businesses to raise that capital. So, 

we need to make sure that delivery systems are in place. This is 

also something where the SEC has a track record with these businesses, and they have continuing oversight over them, so this is 

just not going to be the wild, wild west out there. Not by any 

stretch of the imagination. 

Mr. HUIZENGA. Mr. Burton or anybody else? 15 seconds? 

Mr. BURTON. Professor Coffee’s point shows the need to integrate 

and rationally re-think how we do scaled disclosure. Because he is 

right. You can’t be, in concept, an emerging growth company and 

a well-known seasoned issuer simultaneously. So there is a need to 

re-think that, and I think that we all need be part of that process. 

Mr. HUIZENGA. I am just concerned that we are going to let this 

grind on and on here. We have to address it, and I think we need 

to do that legislatively. So, thank you, Mr. Chairman. 

Mr. COFFEE. Congressman, I understand your frustration. You 

might suggest that you give the SEC a specific grant to do this 

study, and put a 1-year time limit on it. They are a very resourceconstrained body, and they are overworked, but if you gave them 

the funds for doing that kind of study, I don’t think they would 

hesitate to take it on, and meet your deadline, because they would 

be embarrassed otherwise. 

Chairman GARRETT. I guess they would be embarrassed in a lot 

of ways because we have given them deadlines by law, and the 

money has been given them to under law to do things, and they 

have failed to make deadlines on numerous occasions. So, I guess 

they must be one embarrassed organization. 

With that, I will look to the gentleman from California for 5 minutes. 

Mr. SHERMAN. Mr. Chairman, I look forward to the SEC finally 

implementing the Frank and Sherman Amendment, so that we 

have the bond rating agencies selected by a system other than the 

25 

current system, which is that the issuer selects and pays the bond 

rating agency. If I could have selected the umpires for every little 

league game I was in, I would be in the major leagues right now. 

Mr. Chairman, these have been good hearings, but I think they 

lack the excitement that we would have if we focused the next 5 

minutes on accounting issues. And so, that is the excitement I am 

going to try to provide. 

Mr. Coffee, there has been a proposal to increase the exemption 

from Section 404 audits of internal control, in spite of the fact that 

investor advocates, State regulators, State pension plans, and the 

Chair of the SEC think that we shouldn’t relax those standards 

any further. Now, of course, there are costs to an audit of internal 

control, but you also get more assurance that the financial statements are accurate. Should we be relaxing further? We already exempt 60 percent of the publicly traded companies from this standard. Should we relax it even more? 

Mr. COFFEE. I share your concerns. I would point out one compromise that rather than doing it all or nothing, the proposal here 

would say any company that earns less than $100 million annually 

would not have to do a 40(b) internal audit. I would suggest you 

could scale this. You might say some smaller companies could do 

such an audit once every 3 years. That means you are at least occasionally looking at your internal controls, and it would reduce the 

cost by two thirds. That is the better than the all-or-nothing approach. 

Mr. SHERMAN. I might disagree with you on the cost savings 

there. Once you get the internal controls up to snuff, and you get 

the audit done, the cost the second year should be a lot less. But, 

I want to move on to another issue. Mr. Hahn, I don’t know if you 

have come here to talk about FASB-2, but if you build a building, 

you capitalize it. If you spend money on research, which a lot of 

your companies do, you have to write it off immediately, even if the 

research is tremendously successful. Are your companies hurt because they are paying to build an asset, and instead they have to 

show it as an expense? 

Mr. HAHN. I would like to make two comments here about the 

404 compliance, also. So, thanks to the Jobs Act, we were actually 

able to perform test-the-waters meetings on our IPO process, and 

it gave us the ability to reach out to almost 90 investors. 

Mr. SHERMAN. Mr. Hahn, if you could just focus on the question 

I addressed to you, because I am going to try and get one more response from Mr. Quaadman. He knows what I am going to ask 

him. And if you are not prepared here to talk about that, I will just 

move on. 

Mr. HAHN. I’m sorry, could you repeat the question, please? 

Mr. SHERMAN. It was about the immediate write-off of research 

expenses, even if the research project was successful. 

Mr. HAHN. In our business, as an emerging growth in an early 

stage company, it is all about the cash burn. So the biggest question was, what is your cash runway with this IPO proceeds? 

Whether we capitalized those costs right now, or expense— 

Mr. SHERMAN. So, your focus is on cash burn rather than on 

earnings per share. Mr. Quaadman, what would it do to the ability 

to raise capital if we suddenly put $2 trillion of liabilities on the 

26 

balance sheet of American corporations as is being proposed by the 

Financial Accounting Standards Board, in their view that we 

should depart from hundreds of years of accounting principles, and 

treat every lease as if you had purchased an interest in the building? 

Mr. QUAADMAN. No, Mr. Sherman, thank you for continued focus 

on this very important issue. That change would have a significant, 

adverse impact on American businesses, as well as on the commercial real estate industry. We are currently in a position where both 

the International Accounting Standards Board and the Financial 

Accounting Standards board here in the United States are at loggerheads and are at an impasse. We have recently met with both 

boards, as well as the SEC, to try and come up with a rational solution. If, at the end of the day, the solution is to do nothing, and 

that we keep the status quo in place, we would at least avoid the 

adverse consequences that the proposals which are out there now 

would have. 

Mr. SHERMAN. And the status quo, everything that could be disclosed is disclosed, either in the financial statements or in the footnotes? So there is no lack of transparency here? It is simply a matter of whether you actually put $2 trillion on the balance sheet of 

all the American businesses? 

Mr. QUAADMAN. Correct. And with those proposals, it is important to note that the investor community has specifically said this 

would not give them any more information than they currently 

have today. 

Mr. SHERMAN. Thank you. 

Chairman GARRETT. Mr. Mulvaney is now recognized for 5 minutes. 

Mr. MULVANEY. Thank you. Professor Coffee, before we start— 

and this is not going to be adversarial—I really want to talk about 

my bill, but I couldn’t help but hear what you said about the SEC 

and how dedicated they are to the work, and if they just had 

enough money, they could get all their work done and so forth. On 

this committee, we are very familiar with that, and we remember 

intimately how, when faced with Dodd-Frank, it seemed like for 

some reason conflict minerals took priority over the Volker Rule. I 

am not sure how that happened at the SEC, but I would suggest 

to you, sir, that maybe, maybe, just maybe the SEC is susceptible 

to political pressure, just like other institutions. 

Mr. COFFEE. One area on which we can totally agree is conflict 

minerals, and I am surprised that provision is still in the law 

today. 

Mr. MULVANEY. So, thank you. That is good. Let’s move on, because you had some comments on my discussion draft, and, again, 

this is one of those, I think, very productive meetings, where we 

can actually ask questions, because we want to know the answers. 

We are not trying to bait witnesses; we are actually trying to get 

information about the bills. 

You had some criticisms of, I think, one section of the discussion 

draft that I offered on SEC Rule 144. You said that by lowering the 

date—as Mr. Huizenga mentioned to you, by lowering the holding 

period from 6 months to 3 months, it would create this arbitrage 

opportunity. I think Mrs. Maloney, before she left, said it would 

27 

create a bunch of froth in the market and so forth. Let me just ask 

the question this way: what is magic about 6 months? Why doesn’t 

that same risk, as you perceive it, exist now, just with a 6-month 

holding period, instead of with a 3-month holding period? 

Mr. COFFEE. It is very costly to arbitrage for 6 months. If you 

are looking at a spread of a dollar, that is going to be used up by 

the cost of that additional 3 months of hedging. 

Mr. MULVANEY. Didn’t this rule used to be a year? 

Mr. COFFEE. The rule still is a year— 

Mr. MULVANEY. Right. 

Mr. COFFEE. —for nonreporting companies. It is 6 months for reporting companies. 

Mr. MULVANEY. Okay. Was it ever a year for the nonreporting 

companies? 

Mr. COFFEE. It was, yes, it was once a year for nonreporting. 

Right now, it is a year for nonreporting companies. 

Mr. MULVANEY. I guess my question is, if we have made changes 

in the past, did we see the type of concerns you have come to fruition or not? 

Mr. COFFEE. I can’t answer that question without investigating. 

I can tell you that we saw it over in the context of Regulation S. 

Regulation S invites you to sell securities abroad, and then after 

a period of time, bring them back. It is the same arbitrage potential, and when it got down to 3 months, we saw a huge arbitrage, 

and eventually the SEC had to amend the rule to prevent that. 

So, I am not telling you this prevents doing what you are saying. 

I am saying if you do it, you should really think about the arbitrage potential. 

Mr. MULVANEY. But let’s talk about the good, Mr. Quaadman, because I think your organization had commented on that holding period. Tell me why you think it would be helpful to do this? 

Mr. QUAADMAN. We think it would be helpful to do, because you 

are actually going to provide more opportunities for businesses to 

raise capital, and you are actually going to provide more liquidity 

for smaller businesses and that has been something that this subcommittee has looked at very closely. 

I understand where Professor Coffee’s concerns are. If we are 

concerned about market manipulation, that is something the SEC 

has the tools to fight and combat now, and that is something I 

think, if this bill were to pass, we can ask for increased disclosure, 

we can ask for the SEC to report back on that, and then determine 

if further action is needed. 

But, clearly, if we provide the information to investors, and provide them with the opportunities to invest in businesses, they are 

more apt to do that. Part of the reason why we also had longer 

holding periods was that it was more difficult to deliver that information to investors than what we currently have today. So, I think 

we are in this position where the SEC is sort of looking at the elephant and deciding, well, the elephant is just too big to eat. Whereas, we should be taking the position of, you have to do it one chew 

at a time. I think this is a good place to start. 

Mr. MULVANEY. And no one has mentioned the other two or three 

parts of the bill. Professor Coffee, since you seem to be the most 

interested in, at least, criticizing it in a positive kind of way, not 

28 

a negative kind of way, do you have any difficulties, sir? Or does 

anybody with the proposed changes to the shell company relief that 

we are talking about? 

Mr. COFFEE. I thought that was reasonable. I would want to hear 

the SEC’s views, but as I say in my statement, I did not have an 

objection to that. 

Mr. MULVANEY. What about the changes to the exemptions from 

State laws? Does anybody see any difficulties with that? 

Mr. COFFEE. That is the blue sky preemption; you have already 

heard me say that I am doubtful about blue sky preemption. 

Mr. MULVANEY. That was your point— 

Mr. COFFEE. Although I did accept it with regard to, I think, preemption of venture capital fund advisers. 

Mr. MULVANEY. Got it. Thank you, gentlemen, very much. I yield 

back the balance of my time. 

Chairman GARRETT. The gentleman yields back. Moving down 

the row, I guess, Mr. Scott is recognized next. 

Mr. SCOTT. Thank you very much, Mr. Chairman. Professor Coffee, each of the pieces of the seven pieces of legislation before us 

today seeks to ease the ability of smaller companies to raise capital. However, Congress just recently passed the Jumpstart Our 

Business Startups Act of 2012, and that piece of legislation also 

sought to encourage capital formation for the same businesses. 

How have the reforms of that legislation, the Jobs Act of 2012, that 

we passed, changed the capital-raising landscape for small businesses? And have we effectively evaluated that Jobs Act? 

Mr. COFFEE. I can give you some anecdotal answers, but I do 

think that we do need a thorough evaluation of what the impact 

has been, and I don’t think we have enough data. We can’t just 

look at the number of IPOs, because IPOs are very volatile. 

What has changed is the following: almost every issuer is now 

using the confidential filing provisions so they can work things out 

with the SEC before they disclose it to the public. That may be 

good. That may be bad. But that is clearly happening. 

With regard to the emerging growth company being able to use 

only 2-years’ financial rather than 3-years’ financial, about half of 

those companies are being advised by their underwriters that they 

should still give 3 years, because the market wants it. So, it has 

been partially used, but not entirely used. 

The other provisions, certainly any company that can escape 404 

is escaping 404, which emerging growth companies permit. Underwriters are actually not using the provisions to free them up from 

observing the quiet period. The major underwriters have agreed to 

a procedure under which they will observe a quiet period for basically, I think it is 40 days, after the time of the IPO. 

That suggests that the underwriters decided it looked a little 

dangerous to have underwriters put out their own analysts’ reports 

days after they did the offering. So, some of these rules look like 

the market thought they made sense. Others, we are definitely seeing some changes. I think it takes a little bit more, and I don’t 

want to shoot from the hip to say what the overall impact of the 

Jobs Act has been. 

Mr. SCOTT. So, with that, does it make sense for us to pass a 

Jobs Act II? Point zero, which is this collection of bills we are lookVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
29 

ing at today, before we have had substantive analysis of the impact 

of the first Jobs Act that we passed last year. 

Mr. COFFEE. I agree with you. And I say that even more about 

crowdfunding, because there is apparently going to be a bill coming 

in on crowdfunding, and we have not yet had a single crowdfunding 

offer, and I think it would be wise to see how that works before 

we expand the crowdfunding exemption. 

Mr. SCOTT. And then, finally, Mr. Coffee, how reasonable and appropriate is it to expect the Securities and Exchange Commission 

to effectuate all of these rule changes, given their inadequate funding today, and the fact that they are still finalizing rules under the 

Dodd-Frank Act, and the Jobs Act? 

Mr. COFFEE. I have to say that they are an overworked, understaffed, resource-constrained agency, which is probably as frustrated as is this committee. I understand that no one is happy with 

this process. I think there is also some demoralization in some portions of the SEC. So, I think that you can’t expect them to do more 

without giving them more resources. 

Mr. SCOTT. Thank you, very much. I yield back the balance of my 

time, sir. 

Chairman GARRETT. Mrs. Wagner is recognized for 5 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman. Mr. Quaadman, my 

proposed legislation would allow smaller reporting firms who have 

registered on an S1 to use forward incorporation to automatically 

update their registration statement. The SEC has recently taken 

other steps to update rules, given that the widespread accessibility 

of filings, as you have displayed, has increased investor information, access, and protection. Mr. Quaadman, how would this change 

help smaller reporting companies which are seeking to raise money 

in the capital markets? 

Mr. QUAADMAN. It would have a significant impact, because the 

smaller companies that have to use S1, when they use S1, they 

have to go back and have the SEC approve it. So, that affects their 

ability to go into the capital markets. It almost puts them on a 

slow treadmill, rather than putting them on a fast track. So, this 

actually would be very beneficial to short-circuiting it, and to also 

make it less costly. 

Mrs. WAGNER. Will investors in smaller reporting companies be 

just as protected as investors in large companies? 

Mr. QUAADMAN. Yes, because, again, this is a situation where the 

SEC has a track record with this company that the information 

here and the company is known to the investor community as well. 

So, the investor protections are all in place as is the SEC’s continued oversight. 

Mrs. WAGNER. Thank you. Mr. Hahn, I received a letter from a 

small biotech company, Protea Biosciences Group, Inc. It is now a 

world leader in molecular analysis technology. They basically save 

lives. He has 48 employees, including 10 Ph.D. scientists, and is 

helping to bring high-paying jobs to rural parts of America. They 

have been fully reporting for 2 years, and their SEC filings have 

always been on time. 

The CEO of Protea wrote to me, ‘‘If a small company is complying with SEC reporting requirements at the same quality as a 

large company, then in the spirit of fairness,’’ he believes, ‘‘the comVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
30 

pany deserves the same options for raising capital. Specifically, the 

availability of SEC Form S3.’’ Mr. Chairman, I ask unanimous consent to submit this letter for the record? 

Chairman GARRETT. Without objection, it is so ordered. 

Mrs. WAGNER. Mr. Hahn, have you heard stories like this before? 

And how do think expanding Form S3 to allow smaller reporting 

companies under $75 million in market cap will help small biotech 

companies across America, like Protea? 

Mr. HAHN. I fully support increasing access to capital markets 

for smaller reporting companies. There is actually a company in 

Maryland right now, a biotech company that is in the same exact 

situation, where they are having difficulty trying to access capital, 

and with some of these changes, I think it would make it much 

easier for those companies to raise capital and advance their programs. 

Mrs. WAGNER. Thank you very much, Mr. Hahn. 

Mr. Burton, in 1996 Congress preempted State regulation of 

most offerings on the national securities exchange, and in 2012, 

Congress further preempted State regulation of public offerings of 

up to $50 million under SEC Regulation A. Mr. Burton, why is it 

important that we expand preemptions to smaller reporting companies and emerging growth companies? 

Mr. BURTON. The primary reason is that they are already making full reports because they are public companies. So, it is really 

fundamentally unreasonable to expect them to also have to comply 

with 51 different State securities laws, the blue sky laws, particularly in the States that are merit review. It makes the offerings extraordinarily expensive, because you are literally increasing by a 

factor of 50 the number of people with whom you have to deal. 

And, we see that in other areas as well, with Regulation A; blue 

sky laws killed Regulation A. That is the reason that nobody uses 

them. They use Rule 506. So, there are a whole series of areas 

where it has become clear. 

Now, nobody is talking about eliminating the ability of State regulators to police fraud. We are just— 

Mrs. WAGNER. Right. 

Mr. BURTON. —talking about the registration requirements and 

the qualification requirements depending on the State. So, it is an 

extraordinarily important issue in terms of reducing the cost of 

raising capital in a national marketplace. 

Mrs. WAGNER. Thank you very much, Mr. Burton. I couldn’t 

agree more. And, Mr. Quaadman, I would like your input on this 

also, why it makes more sense to allow Federal regulations to have 

this patchwork of an additional 50 State laws? 

Mr. QUAADMAN. Sure. First off, there are 28 million businesses 

in the United States, and we fully support the State-based business 

formation system. However, what we are talking about here is we 

are talking about taking a small number of those several thousand 

businesses and helping them access either the national or international capital markets. 

So, that clearly is a system where they are trying to get in to bigger capital markets, where you need to have one set of rules. What 

I think your bill does, is you leave in place the ability of States to 

regulate those other 28 million businesses, as well as the interVerDate Nov 24 2008 13:51 Sep 30, 2014 Jkt 088536 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\88536.TXT TERRI
31 

mediaries. So I think this is a partial preemption that makes sense 

and helps facilitate the capital formation abilities of these businesses to grow from small ones into large ones. 

Mrs. WAGNER. Thank you, Mr. Quaadman. I believe I have used 

all of my time. Thank you, Mr. Chairman. 

Chairman GARRETT. Your time has expired. And the gentlelady 

yields back? 

Mrs. WAGNER. Yes. 

Chairman GARRETT. Yes. Mr. Kildee is recognized for 5 minutes. 

Mr. KILDEE. Thank you, Mr. Chairman. In looking at the legislation that is the subject of this hearing, it is obvious that the principal intent here is to increase, provide more access to capital for 

companies potentially engaged in significant growth. Obviously, 

that is something with which we are all very concerned. But the 

notion, or the premise would be that the barrier to that would be 

accomplished or would be overcome, I should say, by reducing or 

eliminating requirements for information. 

Just sort of thinking about the context of some of the more recent, in the last several years, say a decade, significant financial 

calamities that this country has faced, it seems to me it that it was 

not based on an overabundance of information. 

I would just like to, perhaps have Dr. Coffee make some comments, but let me just premise the question by saying this: Sort of 

stepping back from these proposals, from my perspective, I would 

like to take a look at this from a slightly higher elevation, because 

when it comes to Congress, one of the things I have learned in the 

15 months that I have been here is that there are a couple of overriding themes. One has to do with regulatory reform, which has 

evolved into a term of art, which really, for the most part, means 

creating greater exemptions for existing regulations. Reform has its 

own definition here, I have learned. 

And the other continuing theme is, when we deal with the development of regulations, with the lack of a cost-benefit analysis, to 

look at the effect of a regulation and its cost and implementation 

versus the public value that it would generate. 

Yesterday’s hearing in the full Financial Services Committee was 

focused mostly on the cost-benefit question, and today we are talking more about this notion of reform. But, in thinking about this, 

in areas that are in need of capital formation, it would seem to me 

that the committee would focus, and it has somewhat, but focus 

more attention on areas like the mortgage market is a good place 

to start, and if we are thinking about capital for small and emerging companies we might think more aggressively about reauthorization of the Export Import Bank, since the notion here is that 

somehow the government is crowding out the capital that could be 

available through the private sector. 

But, since today we are focused on the SEC, and these various 

legislative initiatives, and as I stated, some which cause some concern for State regulation, my question would be this to Dr. Coffee, 

specifically: To what extent are these regulations, these proposed 

new legislative initiatives necessary? Is there a significant problem 

with small companies being able to access capital? Or if it is a 

problem that needs a solution, are these legislative initiatives the 

solution that you would prescribe? Or would you come up with 

32 

some other initiatives that might be more helpful in dealing with 

that underlying problem if it exists? 

Mr. COFFEE. I think there have been two very significant reforms 

that greatly increased the ability of smaller issuers to access the 

capital markets. First of all, there is a general solicitation, private 

placement under Rule 506, which we have only had now for about 

3 or 4 months, that the rules have been effective. That is going to 

be available to small issuers as well as large issuers. Second, we 

have Regulation A Plus—it is colloquially called Regulation A 

Plus—which has a $50 million ceiling on it, but $50 million is real 

money to a smaller issuer, and that allows you to reach even the 

retail investor who doesn’t qualify for a Prop 4A private placement. 

So, you can go to accredited investors under 506, with a general 

solicitation. You can go to retail investors under the Regulation A 

Plus. Neither of those has had much experience yet—6 months, 2 

months, I think those will be developed. It takes a while for industry to adapt to these things, but I think both of those will significantly enhance the ability of issuers to access the capital markets. 

I understand there are some costs, there some problems about 

the continuing costs of compliance, a different issue. But I think, 

again, we should be searching for scaling these requirements, and 

there are lots of ways you can do that and not go into this complete 

exemption mode that some of these bills do. I hope that is helpful. 

Mr. KILDEE. It does. And if I could just quickly ask Mr. 

Quaadman a question, you mentioned that there is a lot of data out 

there, and, of course, you and I both access most of our information 

through these devices. In that the presence of data is not the issue, 

but it is the delivery system of that data, the question I would have 

for you is if that is the case, who would determine what data is 

required to be out there? We are fixing delivery systems, but how 

do we determine what data would have to be provided, under what 

intervals, and to what extent, if it is not through regulations that 

are adopted by some entity of the government, the SEC or others? 

Mr. QUAADMAN. Sure. The corporate secretary of Ryder Systems 

was at the Chamber a month ago at an event where we were discussing corporate governance issues, and he was actually talking 

about the fact that with an over 100-page proxy, that makes it 

more difficult for them, Ryder, to communicate with their shareholders or potential investors to get capital. 

So, the question I think we are all faced with, and this is something that I think we all know, and the SEC has actually been 

looking at it for several years, and this is actually what the genesis 

of XBRL was, that different investors want to look at different data 

that they feel is more important to them, right? And where I think 

where Mr. Garrett’s bill is going is, you can come up with that 

summary page, and then you could sort that information, and determine what is best for you. But, more importantly, I think we 

need to do that study in the Garrett bill, because that is what is 

going to make it, it is what is going to inform all of us, to determine what is the data that is needed? How should it be delivered? 

And what is the best way to do that? And we don’t disagree that 

it shouldn’t be done through regulation, but the problem is we are 

dealing with regulations that are rooted in 1930s legislation. 

33 

Chairman GARRETT. Thanks. Yes, so, it was pointed out to me, 

two points. One is, we had a study in there, and that is in legislation because, as you probably all know, this is not information that 

we haven’t already sought from them in the past, and we just don’t 

get it. So, now we have do it through legislation. 

And, to Mr. Kildee’s comment, before I yield over, actually, we 

came up with a simpler solution so maybe what we need to do is 

just provide a total government guarantee for the entire 

securitization process there, and then there will be complete investor confidence regardless of the information that is provided and 

then we can ensure a robust securitization market. So, let’s think 

about that for a little while. And with that, I will yield to Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Mr. Chairman. And thank you, 

again, to all of the witnesses for being here. I want to address my 

first question to Mr. Quaadman. The U.S. Chamber of Commerce, 

I know, represents more than 3 million businesses of all shapes 

and sizes. Do your interactions with member businesses lead you 

to believe that some companies would consider increasing employee 

ownership beyond their top executives if we passed this type of legislation, which makes it cheaper and less risky to do so? 

Mr. QUAADMAN. Yes, and first of all, thank you for introducing 

this legislation. I have heard from companies during the Jobs Act, 

actually before the Jobs Act debate, that they were very worried 

that 12G was inhibiting their ability to retain employees. And 

these were small businesses, private businesses that are trying to 

grow. What happened after the Jobs Act passed is they said they 

effectively called in and said 12G is fine, but 12G doesn’t work unless Rule 701 is lifted, and that the dollar level is raised, and it 

hasn’t been raised since 1976. So, this is a device that, unless we 

get this Rule 701 changed, that your bill is looking to do, it will 

be exceedingly difficult for these businesses to retain important employees in order for them to succeed. 

Mr. HULTGREN. I would open this up to anyone. I wonder if anyone could elaborate on the danger that confidential information 

could pose to a privately held companies? 

Mr. QUAADMAN. Mr. Hultgren, there is a reason why private 

companies are private. If they wanted to enter the public markets 

and disseminate that information in such a way that they felt was 

beneficial to them, they would. They have made a decision that 

they feel they would rather not have certain confidential information be displayed, and that is something they have made that value 

judgment on. 

It is something also, when you take a look at the Facebook, when 

you take a look at the Facebook capital raising issues from several 

years ago, they specifically tried to evade the American capital 

markets, because they didn’t want to have some information disseminated. And, that is, if that is a value judgment they make, 

they are doing so in what they feel is in the best interest of that 

business. 

Mr. HULTGREN. Let me offer this out, if anyone has any 

thoughts, if anyone could elaborate on how increased employee 

ownership could benefit the market performance of privately held 

companies. Mr. Burton? 

34 

Mr. BURTON. I think it is clear that for some medium-sized companies, the current threshold makes it difficult for them to compete 

with larger companies that can offer stock options, ISOs, and stock 

that has sold at a discount into the pensions and so on and so 

forth. In other words, compensatory benefit plans. The long and short of it is that by raising the threshold to $20 

million, a lot of companies are currently running up against these 

restrictions, will be able to compete with the Microsofts or the Apples or the Googles or what have you as they are trying to develop 

new technologies, create jobs, and provide better products to the 

American people, and we don’t want to set up the world so that the 

only people who can provide these kind of employee benefits are 

the largest corporations in America. We want there to be parity between the small firms and the large firms, in terms of how the employee benefit programs work, and this is by no means the only 

case where that goes on. 

Mr. HAHN. We are a 30-person— 

Mr. BURTON. It needs to be fixed. 

Mr. HAHN. We are a 30-person emerging growth biotech company. So, we compete for talent against the large pharmaceutical 

companies. We can’t always compete with the salaries, so it is important for us to be able to give equity stakes, compensation to 

those employees to help attract the top talent. 

Mr. HULTGREN. I have visited in my district—I have a couple of 

ESOP companies, and it is just a noticeable difference when you 

walk in there, of a sense of ownership, a sense of pride of every 

single person there feeling like this is their business, from the top 

to every single level, it is just amazing. 

Do you feel like that is similar as well, of certainly impacting and 

incentivizing employees to come to a business, but also to work 

more diligently, and ultimately what have you seen? What would 

be the benefit for some of your employees to have access to this? 

Mr. HAHN. Like you said, ultimately, they have a stake in the 

company if it does well. If the company grows, their ownership in 

the company grows. Their stock value goes up. Interestingly, we 

have had a lot of investor meetings where investors were actually 

happy that we provide stock options to all of our employees, and 

some of the investors liked that because, as you said, it gives them 

more of a stake in the company. It makes the employees actually 

work harder and feel more ownership to what we are doing. 

Mr. HULTGREN. Really quickly, I wondered, has the SEC articulated any reason as to why they have not promulgated a rule since 

1998 to update Rule 701? Does anyone know? Okay, thank you, Mr. 

Chairman. My time has expired. I yield back. 

Chairman GARRETT. The gentleman’s time has expired. The gentleman from Connecticut is now recognized. 

Mr. HIMES. Thank you, Mr. Chairman, and thank you for holding 

this hearing. I am looking at a number of pieces of this legislation, 

including some related to the SBICs, which I think are a very effective mechanism for financing smaller companies. 

I have two questions, though, for the panel. Thank you for being 

here. My first question relates to the nature and intensity of the 

problem that we face. Mr. Burton, and Mr. Quaadman, in particular, you speak in pretty dire terms about the current state of 

35 

the IPO market. Mr. Burton, in your testimony you say that it is 

prohibitively expensive for small and medium-sized companies to 

access the public markets. That is somewhat belied by the IPO volume that was saw in 2013, which was a record in about the last 

15 years or so, so I am trying to get at what is really going on. 

Mr. Quaadman, you put this in terms of declining competitive, 

saying that there is a steady decline of public companies in the 

United States and new businesses are eschewing public markets 

for more private forms of financing. So the question is, and by the 

way this comes from, I was a supporter of the Jobs Act, and I was 

just—it was hard to get at what was really going on. I was regularly shown charts of the IPO market in 2008 and 2009, as evidence about how tough Sarbanes-Oxley was, this while the financial markets were, of course, in ashes around our feet. 

So, my question is this, and Mr. Quaadman, maybe you can just 

give us a little bit more information. You frame this in terms of 

competitiveness, saying there is both less public market financing 

happening and less in the United States. When I got into IPOs 25 

years ago, there was Japan, New York, and London, and that was 

it. Today, it is a very different world. You have all sorts of markets 

in Asia, and all over Europe. 

I have two questions for you, really. What is the optimal distribution internationally that allows you to say that it is too little 

here in the United States? Number one, can you show us that we 

have deviated from what you see as internationally appropriately 

distributed? And number two, your statement that we are doing too 

much private and nontraditional, as opposed to public. What is the 

right split between young companies going public, seeking private 

sources of financing or seeking strategic exits? It is hard to know 

if there is a problem if we don’t know what the optimal steady 

state is. So, what do you have for us in that regard? 

Mr. QUAADMAN. Thank you for the thoughtful question and 

thank you for your continued leadership on these issues. Last year 

was the first time we saw a rise—a significant rise with the IPOs, 

and it was also the first time, as I said in my opening statement, 

in 15 years that we actually saw a rise in public companies in the 

United States. I think what we did see in 1999 and 2000, at the 

same time we were going through Sarbanes-Oxley and the Enron 

scandal and all of that, we actually had for the first time since 

World War II, increasingly competitive global financial markets, 

right? So, our markets now have to compete in a way that they 

didn’t have to compete for 70 years, and from our vantage point, 

that is not a bad thing, because if we have to go out and compete, 

let’s go and do it because the American business community does 

that best. 

What I think is problematic, and this is where the Chamber has 

had a concern since before the financial crisis, is that our regulatory structures haven’t kept up with the course of time, which is 

what I think we are seeing with some of the bills here, is that we 

are actually updating things that haven’t been updated in a while. 

And, at the same time, our regulatory systems are sort of holding 

back the ability of these businesses to compete. 

Mr. HIMES. But, let me stop you. I got that. 

Mr. QUAADMAN. Yes. 

36 

Mr. HIMES. My question is, can you assert with confidence, based 

on some view of what is optimal, that we are not doing enough 

public financing here in the United States relative to Asia and Europe? And can you assert with confidence that we are doing too 

many private and strategic take outs, rather than IPOs? 

Mr. QUAADMAN. I spoke before a group of 100 top entrepreneurs 

under 35. And I asked them a question, ‘‘Who here wants to go 

public, and who wants to stay private? Who wants to be acquired?’’ 

That split up a third, a third and a third. Had I asked that question 10 years ago, 90 percent of the hands would have gone public. 

So, what we have done, and this is why I think you are right, I 

think it is difficult to see where the trends are right now, but what 

we have seen is that the mindset of our younger business people, 

and our business people is changing, because one thing that is true 

is that the wealth effects of a company going public and the job creation effects of a company going public, are established, and that 

we are seeing less of that happening, or have up until last year. 

Mr. HIMES. Thank you. I appreciate that answer, and I want to 

follow up. I am almost out of time, but I really am interested in 

this question of what is optimal, because, again, it is just not obvious that— 

Mr. QUAADMAN. Yes. 

Mr. HIMES. —we have a problem, unless we look at numbers. I am almost out of time, but Mr. Burton, you talked about $1.5 million in costs. I want to talk to you afterwards about gross spreads. 

The average gross spread for an IPO has been 7.5 percent for 

about, well, for forever. The average IPO is $200 million in size, 

a little bit of math tells you that is $15 million in capital that goes 

away for public companies, and for some reason I hear a lot about 

the $1.5 million, but I don’t hear anybody talking about that $15 

million in the gross spread. I am out of time, but I would really— 

I am going to approach you afterwards to kind of get a sense of 

why that is happening, and what you think about it. And with 

that, I will yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and thank you for 

holding this hearing. Mr. Hahn, I think there is a lot of perception 

out there, that, basically, the securities laws in this country kind 

of assume that everybody is a big corporation and are flush with 

money, and that the large, sophisticated multinational companies, 

and that kind of discriminates against smaller companies, because 

of the way those laws are imposed. Would you agree with that? 

Mr. HAHN. I agree completely with that. As I was stating earlier, 

with the 30-person company, and with the Jobs Act, we reached out 

to 90 investors during our road show, and test-the-waters meetings, 

and when we talk about 404(b) and the internal controls, I can tell 

you that in not one of those meetings did anybody ask about our 

internal controls, our financials. They wanted to dig into the 

science, and understand where were coming from. The only financial question we ever received was, how long is this cash going to 

last? 

Mr. NEUGEBAUER. Yes, I think one of the things, particularly, 

and maybe it discriminates against biotech companies and research 

37 

companies a little bit more, but the life bread for those companies 

is to pour as much money back, I guess, into research and development as you possibly can because that, ultimately, is going to create value for your company. Is that a fair assessment? 

Mr. HAHN. That is very fair. As we were saying earlier, the cost of our IPO was $2.5 million. And then, $1.5 million a year just to 

be a public company. And, with a base salary expense, annual salary expense of $4 million, that additional $1.5 million could be put 

toward research and development, hiring more scientists. 

Mr. NEUGEBAUER. Creating more jobs, right? 

Mr. HAHN. Creating more jobs. 

Mr. NEUGEBAUER. And creating more value for shareholders, and 

creating more jobs. I think, Mr. Burton, we heard Professor Coffee 

say that the SEC is overworked and underpaid, or underfunded. Do 

you agree with that? 

Mr. BURTON. I think that is maybe true with respect to enforcement, but it definitely is not true on the regulatory side. The SEC 

budget, and I have these numbers in a paper I put together about 

3 months ago, has grown approximately—this is from memory—10 

percent a year for nearly 30 years, which is a pretty high rate of 

growth. And if you look at the regulations, even the relatively simple regulations have, perhaps, a dozen lawyers involved in it. So, 

the bottom line is I don’t think they are under resourced in the regulation area. In fact, I think to some degree, they may have too 

many people involved in each project, and that impedes your ability 

to get done what we would all like to see them get done. 

Mr. NEUGEBAUER. Yes, in fact, the numbers are this: the oper- ating budget for 2013, I believe, is $1.26 billion. That is 20, 22 percent higher than the highest level of funding approved by the 

Democratic-controlled Congress from the period of 2007 to 2010. 

Mr. BURTON. I think they have a management problem, not a financing problem. And that requires a different kind of solution. 

Mr. NEUGEBAUER. Mr. Quaadman, I think you picked up on 

something that I wanted to talk about a little bit, and this is about 

when these small to medium-sized companies can access the capital 

markets, can go public, it provides a lot more capital for them to 

accelerate the growth of a lot of those companies, and creates quite 

a few jobs. Is that a fair assessment? 

Mr. QUAADMAN. Yes, there are numerous academic studies which 

show that the job impacts and the wealth creation that goes along 

with that, and that is where I was getting to, something that I 

think we have lost, and I also think we are seeing the mindset 

changing. 

But also, to go back to your earlier question, as well, we came 

out with two separate studies that have 51 recommendations for 

how the SEC can better manage itself, and I think you see that 

with some of, even the prioritization of rulemakings, that the SEC 

has done, where they have put conflict minerals ahead of other 

rulemakings that are of more consequence to investors and businesses. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. The gentleman yields back. I guess last, but 

certainly not least, Mr. Luetkemeyer is recognized for 5 minutes for 

the last word. 

38 

Mr. LUETKEMEYER. Thank you, Mr. Chairman, I will be brief. 

Thank you very much, I appreciate your allowing me to participate 

this morning in your subcommittee, as I don’t normally sit on your 

subcommittee, but I think it is an honor to be here, and I appreciate your indulgence. 

Also, this morning, I would like to ask for unanimous consent to 

add to the record two op-eds: one that appeared this morning in 

The Wall Street Journal regarding to my bill; and one that appeared in Law360 regarding my bill. 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. LUETKEMEYER. They are such glowing and supportive tomes 

that I could not resist putting them in the record, so I certainly appreciate your willingness to do that. Thank you, sir. 

With regards to H.R. 4200, I assume that most of the Members 

here this morning are familiar with the bill, and what it does, I can 

just briefly say that it allows advisers that have jointly advised 

only SBICs and venture funds to exempt from SEC registration. 

Combining the two separate extensions that currently exist, one 

for advisers that solely advise SBICs and one for advisers that solely advise venture capital funds as well as exclude SBIC S. That is 

from SEC registration, threshold calculation, and exempt from 

State regulation advisers of SBIC funds with less than 90-man assets under management, leading those to be regulated by the SBA 

as they are they are today, which I think is an important point. 

So I would just like to get some acknowledgement of what a wonderful bill this is, Mr. Quaadman, from the Chamber. How do you 

appreciate that effort by myself and other colleagues of mine, with 

tremendous bipartisan support on this bill? 

Mr. QUAADMAN. Yes, sir, we support your bill, and we appreciate 

the bipartisan manner in which it is moving forward, and I look 

forward to working with you for its passage. 

Mr. LUETKEMEYER. Do you have any advice or do you like everything in it? Do you think it is going to address a need, a concern? 

Mr. QUAADMAN. We think it actually addresses a very significant 

problem in that we have seen where we don’t have the exemptions 

normally lining up as they should, so I think you are correcting a 

problem here. I think it makes the markets more efficient and will 

help business who use both SBICs and venture capital, and we appreciate your work on this. 

Mr. LUETKEMEYER. Mr. Burton, do you have any comments about 

the bills? 

Mr. BURTON. As outlined in my written statement, I think the 

bill is very constructive and addresses a significant problem, and 

the bottom line is that SBICs should not be treated less favorably 

than other venture capital firms. And they are a form of venture 

capital firms. 

Mr. LUETKEMEYER. I appreciate your remarks, and I also want 

to give kudos to Ranking Member Maloney for her welcome support, and again it is a bipartisan effort, and her efforts to support 

the bill are greatly appreciated. 

Mr. Chairman, there is an old saying that you want to quit while 

you are ahead, and understanding that, I certainly appreciate the 

support and all the fine words from our panel this morning, and 

I yield back. 

39 

Chairman GARRETT. So, now we understand why you wanted to 

come to the panel here at the meeting today. Great. While taking 

that under advisement for the next time that you come into our 

subcommittee hearing, great. So, again, I appreciate the testimony, 

information, and responses from each and every member of the 

panel. It is always helpful, and as somebody here said—I think it 

was Mick Mulvaney—that this type of hearing is a good hearing 

because we are, honestly, each one is trying from both sides of the 

aisle just to try to get to the root issues, on the problems, and to 

try to elicit what we can do in the best case on these very complicated topics. So, I do thank you for that. 

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

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is now adjourned. Thank you again. 

[Whereupon, at 12:04 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

April 9, 2014 

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