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LEGISLATIVE PROPOSALS TO ENHANCE 

CAPITAL FORMATION FOR 

SMALL AND EMERGING GROWTH 

COMPANIES, PART II 

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 

MAY 1, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–77 

( 

(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 

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 

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: 

May 1, 2014 ....................................................................................................... 1 

Appendix: 

May 1, 2014 ....................................................................................................... 31 

WITNESSES 

THURSDAY, MAY 1, 2014 

Beatty, William, Director of Securities, Securities Division, Washington State 

Department of Financial Institutions, and President-Elect, the North American Securities Administrators Association, Inc. ............................................... 11 

Lynn, Jeff, Chief Executive Officer, Seedrs Limited ............................................. 13 

Miller, Benjamin, Cofounder, Fundrise, Rise Companies Corporation ............... 7 

Tierney, Annemarie, Executive Vice President—Legal and Regulatory, and 

General Counsel, SecondMarket Holdings, Inc. ................................................ 9 

APPENDIX 

Prepared statements: 

Beatty, William ................................................................................................. 32 

Lynn, Jeff .......................................................................................................... 59 

Miller, Benjamin ............................................................................................... 66 

Tierney, Annemarie .......................................................................................... 69 

(1) 

LEGISLATIVE PROPOSALS TO ENHANCE 

CAPITAL FORMATION FOR SMALL 

AND EMERGING GROWTH COMPANIES, 

PART II 

Thursday, May 1, 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 9:35 a.m., in room 

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

Members present: Representatives Garrett, Hurt, Neugebauer, 

Fincher, Mulvaney, Hultgren; Maloney, Scott, Carney, and Kildee. 

Also present: Representatives McHenry and Heck. 

Chairman GARRETT. Good morning, all. The Subcommittee on 

Capital Markets and Government Sponsored Enterprises is called 

to order. Today’s hearing is entitled, ‘‘Legislative Proposals to Enhance Capital Formation for Small and Emerging Growth Companies, Part II.’’ 

We welcome all of the panelists. We will now go to opening statements. I yield myself 6 minutes for an opening statement. 

So, good morning, once again, and welcome to today’s hearing. 

Thanks in large part to the JOBS Act, 2013 was the best year for 

initial public offerings (IPOs) since 2000, with more than 175 IPOs 

raising more than $40 billion in much-needed growth capital, and 

at least 80 percent of these companies qualify as emerging growth 

companies (EGCs) under the JOBS Act. And while this is a very 

positive development, we believe that more work needs to be done. 

For example, according to one small business survey, government 

regulation red tape remains at the very top of the list of the most 

important problems facing American job creators. Another survey 

shows that small business demand for private capital continued to 

outpace access in 2013, while at least 60 percent of the respondents 

found it difficult to raise new external financing. 

And so, building on the early success of the JOBS Act, this hearing—the 5th hearing we have had during this Congress—represents another opportunity to explore ways to further reduce unnecessary regulatory burdens and to enhance access to capital for 

small American businesses. 

While the bills we have considered during this Congress address 

a variety of capital formation issues, they are designed to target 

2 

regulatory problems in three overarching areas. Let me go through 

them. 

First, some of the bills continue to help small businesses access 

capital by going public. We call that pre-IPO. Second, some of the 

bills improve the ability of small companies to access capital and 

compete after they have gone public. We call them post-IPO. And 

third, some of the bills help small businesses attract more investment in the private market. We just call them no-IPO. 

These three legislative proposals we will be discussing today fit 

within the third category I just talked about. And the gentleman 

from North Carolina down at the end here, Mr. McHenry, he has 

circulated a discussion draft to fix the Senate’s burdensome statutory missteps in the crowdfunding title of the JOBS Act by restoring a bipartisan policy authored in this committee last Congress. 

Mr. McHenry has also offered a discussion draft to modernize the 

regulation A section for small companies by updating issuing caps, 

while striking the right balance between preserving State enforcement and lifting burdensome regulation requirements. 

The discussion draft also codifies language that effectively and 

efficiently facilitates liquidity in the secondary trading of what is 

called the ‘‘restricted securities’’ among sophisticated investors. So 

I thank Mr. McHenry for his hard work and thoughtful proposals 

to make the crowdfunding and Reg A provisions of the JOBS Act 

more cost-effective and efficient options for issuers and the investors alike. 

Finally, I have circulated a discussion draft to ensure that 

issuers and investors in certain private offerings under Reg D do 

not face overly complex and burdensome regulatory obstacles. As 

you all know, last year the SEC adopted a rule lifting the ban on 

general solicitation and advertising of private offerings under Rule 

506 of Reg D, as mandated by Title II of the JOBS Act. Unfortunately, the SEC didn’t stop there. Instead of simply removing the 

ban and opening up this market to new potential investors, the 

SEC decided to issue a separate rule proposal, not called for by this 

Congress, that would impose a number of new burdensome regulatory requirements on issuers seeking to use Rule 506, the exemption. 

The SEC’s selective judgment in deciding when and how to follow 

clear congressional directives and when not to is, of course, disturbing and disconcerting to me. When members of this committee, 

outside stakeholders, and even other SEC Commissioners pleaded 

with the Commission to issue a more pragmatic rule regarding conflict minerals, the Commission refused, stating, ‘‘Well, if Congress 

had intended that a mandate be limited further, we think Congress 

would have done so explicitly.’’ 

Unfortunately, the Commission did not apply this same rationale 

in a consistent manner when it came to the removal of the ban on 

general solicitation. As one comment put it, ‘‘The JOBS Act on its 

face does not authorize the Commission to attach new and additional conditions to the use of the exemption. It is not for the Commission to rely on its general rulemaking authority to bring Congress and the President back into line by adding conditions that it 

believes may enhance investor protection.’’ 

3 

However, that is exactly what the Commission did. That the SEC 

believes it has the authority to alter a clear mandate in the JOBS 

Act, but not in the Dodd-Frank Act, certainly suggests, as SEC 

Commissioner Dan Gallagher said, ‘‘In the face of a statutory mandate, the SEC only thinks outside the box and uses its expertise 

when it means adding regulations, no matter the cost.’’ 

Indeed, I believe that many of the additional requirements in the 

SEC’s Reg D proposal will, if ultimately adopted, make Rule 506 

a less attractive avenue for small business capital formation and, 

at the same time, harm investors’ choice. And this, of course, is 

clearly at odds with the goals, let alone the text of the JOBS Act. 

And so my discussion draft would address some of the more burdensome red tape portions contained in the SEC rule proposal, including, certainly, costly filing requirements and disqualification 

provisions. 

Before I conclude, I want to be clear on a few points regarding 

what this discussion draft would not do. It would not remove the 

SEC’s existing Form D filing requirements. It would not remove 

the SEC’s existing requirement that issuers take reasonable steps 

to verify that investors in Rule 506 offerings are accredited. It 

would not reduce the SEC’s existing rules requiring disclosure to 

investors. And it would not limit the SEC’s existing authority to 

prevent and punish fraud and other misconduct under the Federal 

securities laws. 

I believe this discussion draft will ultimately strike the right balance between helping America’s job creators raise much-needed 

capital and protecting Americans who invest their hard-earned 

money in these companies at the same time. 

I thank you very much for your attention. And at this point, I 

recognize the ranking member of the subcommittee, Mrs. Maloney 

from New York, for 4 minutes for her opening statement. 

Mrs. MALONEY. Thank you, Mr. Chairman. And welcome to all 

of the witnesses. I would like to particularly welcome Ms. Tierney, 

who is from the great State of New York, and I have the privilege 

of representing you. Thank you for being here today. 

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 ready and willing to invest in promising businesses. 

In short, the United States is where companies come to raise 

money. While the system of securities laws in the United States is 

complex, the central tension underlying our securities law is very 

simple: Investors want as much information as possible on the companies they are investing in, as quickly and as accurately as possible. 

Often 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 competing 

desires. 

But public policy does not run on autopilot. In the securities market, we often entrust the job of properly balancing these competing 

goals to the regulator, the U.S. Securities and Exchange CommisVerDate Nov 24 2008 17:33 Oct 09, 2014 Jkt 088539 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\88539.TXT TERRI
4 

sion. I would like to say that in the securities market especially, 

we need an active and informed regulator to write, enforce, and 

when appropriate, change the regulations to keep pace with innovation and the market. 

Of course, the SEC isn’t the only securities regulator in the 

United States, nor should they be. The State securities regulators 

play a very important role, as well. And we have one of those State 

regulators on our panel today, Mr. Bill Beatty from Washington 

State. Welcome. 

State securities regulators are in the best position to provide onthe-ground protection for retail investors who are investing in securities offerings and are too small to merit the SEC’s attention, especially given the SEC’s lack of resources. The State regulators are 

also well-positioned to provide investor’s education to mom-and-pop 

retail investors who don’t have a fortune to invest, who never 

worked on Wall Street, and who are most vulnerable to fraud. 

Sometimes, of course, Congress has decided that it is necessary 

to preempt State securities laws in order to reduce the compliance 

burden for companies seeking to raise capital. But I think that 

those decisions should be made on a case-by-case basis. Sometimes 

it will be appropriate to preempt State law, and sometimes it will 

not. 

I hope that we can use this opportunity to have a robust discussion about the proper role of State securities regulators so that we 

can inform our own thinking about how to maintain and improve 

our country’s capital markets. 

I look forward to the hearing today, and thank you very much, 

Mr. Chairman. 

Chairman GARRETT. Thank you, gentlelady. And the gentlelady 

yields back. We now turn to the vice chairman of the subcommittee, Mr. Hurt from Virginia. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for holding today’s hearing on these 

three legislative proposals to further enhance capital formation. I 

also want to thank our witnesses for being here today. 

While we have witnessed the successes of the JOBS Act in the 

2 years since it was enacted, more still needs to be done, starting 

with the SEC completing implementation of the JOBS Act. Additionally, Congress and the SEC must expand on those successes 

and find practical solutions to increase access to capital for small 

businesses without sacrificing key investor protections. 

Our securities laws are riddled with outdated and burdensome 

regulations that are hindering small businesses in Virginia’s Fifth 

District, my district, from accessing the capital they need to grow. 

As our markets and the needs of the participants continue to 

evolve, it is necessary for our regulatory structure to reflect those 

new realities. 

Chairmen Garrett and McHenry’s bills will provide important 

modifications to key sections of the JOBS Act that enhance the 

ability of small businesses and start-ups to raise capital. For many 

of the companies that would take advantage of these improvements, the public markets are not a viable option, and they would 

otherwise face increased costs and complexity to meet their goals. 

5 

I appreciate this committee’s continued focus on ensuring that 

our small businesses and start-ups have the ability to access the 

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

that we need. 

I look forward to working with my colleagues to advance these 

proposals and others that will provide growth and opportunity for 

our constituents in our communities. I look forward to your testimony, and I thank you for your appearance. 

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

time. 

Chairman GARRETT. The gentleman yields back. 

Mr. Scott is recognized for 4 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

First of all, let me say that I agree with both Chairman Garrett’s 

and Ranking Member Maloney’s very thoughtful opening statements. However, we have to look at the big picture. First, we do 

have to reduce the barriers to capital formation. But most importantly, we have to really identify exactly what these barriers are, 

be very truthful as to what these barriers are. 

Then, we have to increase opportunities to raise that capital. And 

then, yes, we must address any regulatory impediments or burdens 

that make it difficult to raise additional capital. 

As we know, the Securities and Exchange Commission has a 

three-part mission: to protect investors; to maintain fair, orderly, 

and efficient markets; and to facilitate capital formation. And nowhere is that needed more than our small businesses. Small businesses are still the heart and the soul of our economy. They 

produce most of the jobs, especially new jobs. 

Recently, the Securities and Exchange Commission’s Advisory 

Committee on Small and Emerging Companies put forth a series 

of recommendations that we, and ultimately the Securities and Exchange Commission, should provide due consideration, and I believe that this committee will, jointly with the SEC. 

Now, whether it is allowing for larger size of increments and 

bids, or tick sizes, for smaller companies, an option that is currently under consideration by the Securities and Exchange Commission, or more controversial options some of us may not initially 

care for, but we have to look at the big picture and recognize that 

we must be open for debate, like, for example, increasing the size 

of companies exempted from Sarbanes-Oxley’s auditor attestment 

requirements or, another, exempting smaller companies from 

shareholder advisory votes, yes, on executive pay and compensation, if we have that clear evidence that these are impediments to 

capital formation. Capital formation must be first. And, of course, 

we first have to look at it with a very jaundiced eye. 

We must also ascertain what significant evidence on small business capital formation exists measuring the impact of the JOBS 

Act. The JOBS Act is successful. It was signed into law just a little 

more than a year ago. The fundamental first question is, are we 

moving too soon? Have we in Congress been given enough to fully 

implement and evaluate the effects of the JOBS Act before pushing 

for additional, experimental small business capital formation proposals? 

6 

That is the big picture to me. I think we need to look at that. 

This is a very serious issue. And our small business community 

certainly deserves that. 

And with that, I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

Mr. McHenry for 3 minutes. 

Mr. MCHENRY. I want to thank the chairman for holding this 

hearing, and for his leadership on improving our capital markets. 

And 3 years ago, this committee undertook a bipartisan, committed effort to update our outdated securities laws. It created new 

partnerships on this committee and resulted in significant bipartisan votes. With a little luck, our committee’s solidarity led to the 

advancement and passage of the JOBS Act, which President 

Obama signed into law just over 2 years ago. The Act was arguably 

the most significant piece of legislation in the last Congress. 

Congresswoman Maloney and I authored Title III of the Jobs 

Act, also known as the equity crowdfunding title. What motivated 

us was a pledge to cut red tape, as well as strengthen and ensure 

investor protections and allow start-ups to employ the Internet as 

a means to solicit small equity investors from everyday investors 

without triggering costly SEC registration. 

Our original bill, passed by voice vote in this committee and by 

over 400 votes on the House Floor, was the only title within the 

JOBS Act to get the full and public endorsement from President 

Obama. That is significant. 

But then, the Senate happened. An ill-advised and 11th-hour 

move resulted in the Senate striking a broadly supported title of 

the JOBS Act that Congresswoman Maloney and I authored, and 

hastily substituting an arduous amendment that neutered the 

promise of equity crowdfunding. 

After patiently waiting for the Commission to reveal a 

crowdfunding rule proposal, and academics and market leaders 

submitting hundreds of comments, it is now clear that the current 

statute has failed. 

But that does not mean that equity crowdfunding is destined for 

failure. Today’s equity crowdfunding discussion draft not only restores what Carolyn Maloney and I started 3 years ago, this committee’s commission to democratizing capital is front-and-center in 

that. But it also incorporates thoughtful suggestions by commenters who aspire to strengthen the vitality of equity 

crowdfunding. 

Separately, the discussion draft on Regulation A in the resale of 

restricted securities simply codifies the spirited intent of Title IV 

of the JOBS Act, reviving the exemption to connect small enterprises and everyday investors. Furthermore, the draft amendment 

to the 1933 Act also codifies policy that efficiently cultivates liquidity in secondary trading of restricted securities among sophisticated 

investors. So, we do a lot for both the everyday investor and the 

more sophisticated investors. 

I believe democratizing finance and extending access to America’s 

start-ups are not partisan ideas. In fact, they are anything but. But 

what motivates each member of this committee is to ensure that 

we have a bipartisan achievement that helps entrepreneurs and everyday investors. That is what this is all about. 

7 

Thank you, Mr. Chairman. 

Chairman GARRETT. I thank the gentleman, and I thank the gentleman for his work on these bills. The gentleman yields back. 

And for the last word, Mr. Heck is recognized for 2 minutes. 

Mr. HECK. Thank you, Mr. Chairman, and Ranking Member 

Maloney. 

It is my privilege, while not a member of this subcommittee, to 

welcome on its behalf Mr. Bill Beatty from Washington State, who 

is a constituent of mine. Mr. Beatty is, in fact, the securities administrator for the Washington State Department of Financial Institutions. More importantly, for purposes of today’s discussion, he 

is the president of the North American Securities Administrators 

Association, and we are so very, very pleased, honored, and grateful that you would come all the way across the country, a trip I 

know well, to share your insights. 

Mr. Beatty is a graduate of the University of Puget Sound and 

Seattle University’s School of Law. There probably is literally nobody in the United States with more expertise in securities law. 

And I am looking forward to receiving information from him about 

how it is State securities administrators can play a role in protecting investors, while at the same time helping capital markets 

perform as efficiently as is possible. 

Thank you very much for allowing me to stop by, Mr. Chairman. 

Mr. Beatty, welcome to Washington, D.C. 

Chairman GARRETT. Okay. Thank you. The gentleman yields 

back. 

And now, we will turn to the panel. Again, we thank all the 

members of the panel, regardless of how far across the country 

they have flown, for being with us, and we thank you for flying so 

far. And so we will—for those of you who have not testified before 

this committee, just a few simple reminders. The little machine in 

front of you shows your time: green means you have 5 minutes; yellow means you are supposed to be summing up; and red means you 

are supposed to be done. 

Also, we always remind you to pull the microphone closer than 

it looks like now for each one of you, because it doesn’t pick up that 

well. So when you do speak, pull it close. 

You are going to be recognized for 5 minutes to give a summation 

of your remarks. And without objection, your entire written statements will be made a part of the record. 

So with that said, we turn to our first witness, Mr. Miller, cofounder of Fundrise. Mr. Miller, welcome. And you are recognized 

for 5 minutes. 

STATEMENT OF BENJAMIN MILLER, CO-FOUNDER, FUNDRISE, 

RISE COMPANIES CORPORATION 

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

members of the subcommittee, my name is Ben Miller, and I am 

the cofounder of Rise Companies Corporation, which owns and operates Fundrise, a real estate crowdfunding platform based here in 

Washington, D.C. I am honored to be here to testify on my experience using Regulation A to crowdfund the development of local real 

estate here in the District of Columbia. 

8 

Let me spend a moment on my background so you understand 

how I came to run Fundrise, one of the only companies in the country currently raising equity online from the public, both from accredited and unaccredited investors, in Washington, D.C., Maryland, and Virginia, prior to implementation of Title III of the JOBS 

Act. 

Before starting Fundrise, I ran a real estate company. In that capacity, I led the acquisition and development of more than 2 million square feet of property, such as Gallery Place on 7th and H 

Streets, NW, a 750,000-square-foot mixed-use development. 

As a real estate entrepreneur, I have partnered with some of the 

largest institutional investment companies in the country, such as 

MassMutual; Angelo, Gordon, & Co.; and the AFL-CIO. So I understand what it means to raise debt and equity in the capital markets. 

But one day, we asked ourselves, why are we raising money from 

institutions which have no real relationship with the places in 

which we are investing? What if we raised the money from the people who live there, who care, who are part of the neighborhood? So 

that is what we are doing and it explains why I am sitting here. 

We have been raising real investment in increments as affordable 

as $100 per share from the people who live near our real estate 

projects. 

Since the JOBS Act did not exist when we started our endeavor, 

we had to work within the existing regulatory framework. Thanks 

to our outstanding and expensive legal team, we found a way 

through Regulation A. Our initial Regulation A filings with the Securities and Exchange Commission totaled more than 350 pages, 

but eventually allowed us to sell equity online at $100 per share 

to the local public. 

To my knowledge, over the past 2 years we are the only ones who 

have successfully qualified more than one Regulation A offering, 

having climbed the regulatory mountain associated with Regulation 

A no less than 3 times. Each Regulation A offering was a serious 

undertaking, one that did not generally get easier over time. 

For example, despite many similarities among our prior offerings, our third regulation offering took us more than 6 months to 

get through the regulators, which included hundreds of pounds of 

physical paper—actually, approximately 25 pounds per filing, 8 

separate attorneys, more than $50,000 in legal fees, and 2 sets of 

reviewed accounting and financial statements, all of this to raise 

$350,000 from the residents of only 3 States. 

Yet, we view ourselves as fortunate. Our local regulators in D.C., 

Virginia, and Maryland understood that we were working to build 

local places and create a new capital source for local job development and knew that less inclined regulators could have and potentially would have made it impossible for us to move forward. 

In our experience, the likelihood that a Regulation A offering becomes effective is primarily dependent upon the jurisdictions in 

which the offering has to be registered. Given the great uncertainty 

that places upon an endeavor that requires tens of thousands of 

dollars and many months to begin, without regard to whether the 

issuer will actually be successful in its Regulation A offering, we 

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9 

tion A offerings while simultaneously increasing the regulatory certainty faced by small businesses seeking to raise capital. 

In addition, like many in the industry, we have reviewed the proposed Regulation A+, and we support the exclusion of investors in 

Regulation A+ offerings from the number of holders of record 

counted under Section 12(g) of the Exchange Act. We do not believe 

that, given the ongoing reporting requirements already proposed in 

Regulation A+, requiring small issuers to become subject to the onerous and expensive reporting requirements of the Exchange Act 

serves either investors or the small business community. 

However, we would note that we found the wording contained in 

the draft bill to be slightly confusing and ask the subcommittee to 

consider whether there are clearer and simpler ways to accomplish 

the goal. 

We at Fundrise take very seriously our ongoing mission to open 

up real estate investment to the general population beyond institutional and accredited investors that have predominantly held sway 

in the market. We believe that the proposals contained in these 

bills provide substantial, positive steps towards democratizing real 

estate investment, and we encourage the subcommittee to consider 

each of these proposals seriously. 

I am happy to take any questions that you may have at this 

time. 

[The prepared statement of Mr. Miller can be found on page 66 

of the appendix.] 

Chairman GARRETT. And I thank you, Mr. Miller. 

Next, Ms. Tierney, executive VP and general counsel of 

SecondMarket. Welcome. And you are recognized for 5 minutes. 

STATEMENT OF ANNEMARIE TIERNEY, EXECUTIVE VICE 

PRESIDENT—LEGAL AND REGULATORY, AND GENERAL 

COUNSEL, SECONDMARKET HOLDINGS, INC. 

Ms. TIERNEY. Good morning, Chairman Garrett, Ranking Member Maloney, and members of the subcommittee. My name is 

Annemarie Tierney, and I am the general counsel of SecondMarket. 

I am very grateful to be able to testify this morning. 

I have been in the securities industry for almost 25 years and 

have worked in a number of legal roles, including at the SEC, the 

law firm of Skadden Arps, and NYSE Euronext, before joining 

SecondMarket in 2010. For those of you not familiar with our company, SecondMarket was founded in New York City in 2004. We 

are a registered broker-dealer and the leading provider of services 

to facilitate transactions at private company stock. We have also 

advocated for regulatory change to help private companies raise 

capital and facilitate job creation, including changes to the 500- 

shareholder threshold and the elimination of the ban on general solicitation and advertising included in the JOBS Act. 

Today, I would like to express our support for the adoption of 

proposed Section 4(a)(7) set out in Section 5 of the draft bill to 

amend securities laws to improve the small business capital formation provisions. I will also share insights on how the current regulatory framework for resales of private company shares imposes 

significant and unnecessary challenges to private company capital 

formation and job growth. 

10 

Under current laws, the only federally codified safe harbor for resales of private shares is Rule 144. The safe harbor, however, is 

only available to shareholders who are not affiliates of the company 

and who have held their common and preferred stock for at least 

12 months. This means that Rule 144 is not available to private 

company founders, many angel investors, and officers and directors. It is also unavailable to employees who own equity in the 

form of stock options. 

Instead, resales by these types of shareholders occur in reliance 

on a longstanding legal construct referred to as 4(a)(1-1/2), which 

is a mouthful, and are subject to State blue sky regulations that 

must be satisfied in every State where potential buyers are located. 

I would like to provide two examples of the challenges that this 

legal framework poses for private companies. 

In 2012, SecondMarket expanded our business to include private 

community banks. These banks were looking to provide liquidity to 

their employees and shareholders. The benefits of that were obvious: Providing community bank shareholders a clear path to liquidity once or twice a year made it easier for the bank to raise capital 

and attract talented employees. And greater access to capital 

meant more loans to community and job creation. 

The reality, however, is that almost every State other than New 

York State prohibits broker-dealers from reaching out to their accredited investor clients to identify potential interest in private 

company stock, a prohibition inconsistent with SEC and FINRA 

rules which allow broker-dealers to discuss opportunities with clients if there is a preexisting relationship. This restriction ultimately made it impossible for us to create successful liquidity 

events for these important businesses. 

In addition, the other exemptions that are available for resales 

in the State level are interpreted inconsistently across the States 

and create a patchwork of regulation that is almost impossible to 

navigate, even for a registered broker-dealer. It is almost as though 

you are trying to put together a Rubik’s Cube and you are missing 

one piece. It is almost impossible to make it work across multiple 

States. 

This inconsistent legal framework also creates significant challenges for private company employees seeking to exercise their options and monetize a significant component of equity compensation. 

Every option has an exercise price that must be paid by the employee in order to convert the option of common stock. In addition, 

option exercise creates an income tax event for the employee. 

Since most rank-and-file employees of private companies don’t 

have sufficient funds to pay these costs out-of-pocket, they often 

need to simultaneously sell a portion of the common stock underlying their options to cover these costs, so they can’t satisfy any 

hold period, much less a 12-month hold period. 

As in the case of community banks, State law restrictions make 

it extremely difficult for employees or broker-dealers acting on 

their behalf to find buyers for these shares. As a result, a significant amount of equity of employee options expires every year, resulting in a real economic loss of private company employees. 

In my view, proposed Section 4(a)(7) merely codifies a longstanding Federal construct applicable to resales of private company 

11 

securities by shareholders who cannot rely on Rule 144. In addition, I would note that all of the securities eligible to be resold 

under proposed Section 4(a)(7) are securities that were originally 

issued to shareholders in transactions that were themselves exempt from Federal and State registration such as Rule 506 and 

Rule 701, which provides an exemption for shares issued under certain equity compensation plans. 

I would like to note that the proposed legislation also includes 

important protections, such as that the shares may only be resold 

to accredited investors and remain restricted after the resale. The 

proposed legislation also requires verification of accreditation if 

general solicitation or advertisement is utilized. 

Under the current outdated and inconsistent regulatory regime, 

founders, large angel investors, officers, and a large percentage of 

start-up employees are put at a legal and economic disadvantage 

in the post-JOBS Act world. In light of the fact that start-ups are 

estimated to create an average of 3 million new jobs annually, it 

is essential that the Federal and State regulatory framework continue to evolve to create an environment in which start-ups can 

flourish. And providing founders and angel investors greater facility to sell their shares means that more capital will become available to start new companies and create more jobs. 

I would also like to note that we agree strongly with Chairman 

Garrett and support the goals of the draft on the proposed Reg D 

changes. And in summary, I would like to state that it is absolutely 

critical that we continue to address regulatory impediments around 

capital formation and job creation, such as those addressed by the 

proposed legislation. 

Thank you again for the opportunity to participate this morning. 

I would be happy to answer any questions. 

[The prepared statement of Ms. Tierney can be found on page 69 

of the appendix.] 

Chairman GARRETT. And I thank the gentlelady. 

Next, Mr. Beatty from the State of Washington, who was already 

introduced by Mr. Heck. Welcome, and you are recognized for 5 

minutes. Thank you. 

STATEMENT OF WILLIAM BEATTY, DIRECTOR OF SECURITIES, 

SECURITIES DIVISION, WASHINGTON STATE DEPARTMENT 

OF FINANCIAL INSTITUTIONS, AND PRESIDENT-ELECT, THE 

NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC. 

Mr. BEATTY. Thank you, Mr. Chairman. 

Good morning, Chairman Garrett, Ranking Member Maloney, 

and members of the subcommittee. My name is Bill Beatty. I am 

the director of the Washington State Securities Division, and for 

the past 28 years have served as an attorney in the Division. I am 

also president-elect of the North American Securities Administrators Association (NASAA), the Association of State Securities Regulators. I have also served as chairman of NASAA’s corporation finance section and as a member of the Special Committee on Small 

Business Capital Formation. 

I am honored to testify to you today about proposals to enhance 

capital formation for small and emerging growth companies. 

12 

NASAA has two mandates: promoting grassroots investor protection; and promoting efficient capital formation. In fact, promoting 

capital formation is also a core mission of my securities department 

in Washington. We regularly meet with and assist small businesses 

to help them raise capital in our State. 

NASAA shares Congress’ goal to improve the economy by encouraging investment in small business. However, we believe this is 

best achieved through restoring investor confidence in the market. 

We want to bring investors back to the market, and we want to 

work with Congress to do so. 

My written testimony discusses how States protect retail investors, assist local businesses to raise capital, and oversee small offerings. At the outset today, I want to address an apparent theme 

running through many of the bills we will discuss today. This is the 

myth that Federal preemption of State law is the most efficient and 

quickest way to promote capital formation. 

As many of you may recall, on September 13, 2011, NASAA testified that States should play a leading role in establishing a new 

crowdfunding marketplace. Congress disagreed, and in April 2012 

enacted a crowdfunding bill that broadly preempted State authority. At the time, NASAA was already developing a model 

crowdfunding exemption. This model rule would have been adopted 

by the third quarter of 2012. 

When Congress preempted our authority in this area, our work 

on this model rule was deferred. Nevertheless, as I appear before 

you today, seven States have adopted intrastate crowdfunding exemptions, including my own State, and more than a dozen other 

States are considering similar exemptions. These actions decisively 

demonstrate that had Congress allowed the States to proceed, 

there could be a vibrant functioning crowdfunding market today. 

Today, we are discussing a draft bill that may once again preempt States from playing a key role in another emerging area that 

encourages capital formation for small local businesses: Regulation 

A+. During the JOBS Act debate, we urged Congress to preserve 

our role as the primary regulator of regulation offerings. Congress 

agreed, and NASAA supported a GAO study of the factors that affected the use of Regulation A. We committed to address any factor 

that dealt with State blue sky laws. 

Consistent with our goal of capital formation and our pledge to 

Congress, we undertook a thorough self-assessment of our Regulation A processes and examined blue sky concerns addressed by the 

GAO. We also solicited public comments and consulted numerous 

stakeholders, including the American Bar Association. 

The culmination of this effort is the NASAA coordinated review 

protocol, a modernized, efficient system for Regulation A review. 

Filings are made with one program coordinator and distributed to 

the other participating States. Only lead examiners communicate 

with the applicant. Our process is complete 21 business days after 

the initial filing, assuming no deficiencies in the application and 

any delay in clearing an application is directly tied to the issuers’ 

response time. Once lead examiners clear the application, the decision is binding on the other States. Our membership approved the 

new protocol, and as of today, 49 of 53 jurisdictions have implemented it by signing a memorandum of understanding. 

13 

We are excited about its potential to help small businesses in our 

communities. In short, the States are ready to go with Regulation 

A, provided Congress and the SEC don’t short-circuit our efforts 

through preemption. 

You requested that we comment on three draft bills. We are concerned about the overarching deregulatory nature of these bills. As 

I said, we wholeheartedly share your goal of assisting small businesses and spurring economic growth, but we believe that many of 

these bills move the goals in the opposite direction. Overregulation 

did not cause the collapse of our financial markets. America’s capital markets are viewed as the gold standard because they are free, 

transparent, and responsibly regulated. This is the formula for economic growth and job creation. 

My detailed comments on these bills are included in my written 

testimony, along with suggestions for how they might be improved. 

Some members of this committee requested our comments on related bills discussed in an April 9th hearing, and my written testimony offers brief comments on those, as well. 

In conclusion, State securities regulators share your goals, and 

we appreciate your interest in our perspective. My hope, and 

NASAA’s hope, is to work with Congress to pursue policy reforms 

that reflect smart regulation. 

Thank you. I will be happy to answer any questions you may 

have. 

[The prepared statement of Mr. Beatty can be found on page 32 

of the appendix.] 

Chairman GARRETT. Thank you very much. 

Finally, last but not least, Mr. Lynn, CEO of Seedrs Limited. 

Good morning. Welcome. And you are recognized for 5 minutes. 

STATEMENT OF JEFF LYNN, CHIEF EXECUTIVE OFFICER, 

SEEDRS LIMITED 

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

Maloney, and honorable members of this subcommittee. My name 

is Jeff Lynn, and I am the chief executive officer and cofounder of 

Seedrs. 

I want to thank you for inviting me to testify today in connection 

with the discussion draft of the Equity Crowdfunding Improvement 

Act of 2014, which I will refer to as the ‘‘Improvement Act.’’ 

By way of background, Seedrs is one of the leading equity 

crowdfunding platforms in Europe. We launched in the United 

Kingdom in July 2012, and we opened to investors and entrepreneurs across Europe in November 2013. Since our launch, we 

have completed 92 financing rounds, with a total of approximately 

8.4 million pounds, or $14.1 million, invested. We have financed 

businesses ranging from mobile app developers to theater productions to traditional manufacturers to financial services firms to a 

cheesemaker. 

Seedrs is authorized and regulated by the U.K. Financial Conduct Authority. When we received our authorization 2 years ago, 

to our knowledge, we were the first equity crowdfunding platform 

anywhere in the world to obtain regulatory approval. 

14 

My own background is as a U.S. securities and corporate lawyer. 

I practiced with the international law firm of Sullivan and Cromwell in New York and London before founding Seedrs. 

Seedrs conducts its activities under the laws of the United Kingdom. I have detailed in my written testimony how U.K. law applies 

to equity crowdfunding. And in the interest of time, I will say here 

simply that there is general consensus that the British approach 

represents a reasonable and workable balance between investor 

protection and commercial viability and that it is probably the best 

equity crowdfunding regime in the world today. 

Turning to the United States, Title III of the JOBS Act provides 

the legislative framework for an equity crowdfunding regime here. 

I have come before you today because I believe, based on the extensive experience I have gained in the equity crowdfunding space, 

that Title III as enacted is an unworkable law that will stifle equity crowdfunding in the United States before it ever begins. 

At the time the legislation which turned into Title III was first 

being discussed and introduced by Congressman McHenry and 

Congresswoman Maloney, my team and I actively considered bringing Seedrs into the U.S. market. As Title III emerged into its final 

form in the Senate, however, we decided not to enter the United 

States because we did not think it would be possible to conduct a 

viable equity crowdfunding business under the regime. 

We would very much like to provide American entrepreneurs and 

investors with the opportunity to participate in this important and 

effective new form of finance, but we simply cannot do so under 

Title III as it now stands. 

There are I believe five core problems with Title III, and the Improvement Act goes a long way toward addressing each of them. I 

do not have time to address all five of these issues in detail here, 

and for my views on the fundraising caps, the financial statement 

requirements, the maximum amounts that investors can invest, 

and curation, I would respectfully ask you to refer to my written 

testimony. 

However, I do want to take this opportunity to address the final 

issue, which I believe is the most profound. Title III provides an 

exemption from the registration requirements of Section 5 of the 

Securities Act of 1933, but it does not address the equivalent provisions of the Investment Company Act of 1940. This means that 

while a platform may facilitate the direct issuance of shares by an 

issuer to investors under Title III, there is no scope for the platform to aggregate those investors into a special purpose vehicle or 

nominee structure. 

While this may seem a technical point at first glance, it is actually one of the most important issues in equity crowdfunding. If a 

small, growing company issues shares directly to hundreds of individual shareholders, that poses significant risks both for the issuer 

and for investors. Such a structure can kill a company by preventing it from raising additional capital or being sold and it can 

deprive investors of the entirety of the appreciation to which they 

are entitled due to lack of critical contractual protections. 

The solution to this problem is the use of aggregation, allowing 

all investors to be grouped together in one SPV or nominee structure. The Improvement Act proposes to include aggregation strucVerDate Nov 24 2008 17:33 Oct 09, 2014 Jkt 088539 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\88539.TXT TERRI
15 

tures used for crowdfunding under the list of exemptions in Section 

3(c) of the Investment Company Act. I believe this is a hugely important provision and is essential to making equity crowdfunding 

work. 

To conclude, Mr. Chairman, equity crowdfunding has the potential to be a transformative tool for small businesses and for investors. If implemented correctly, it can create some of the most productive flows of capital an economy can ever see, bringing willing 

investors together to finance the businesses that will create the 

most jobs, wealth, and productivity. 

However, this cannot happen if the regulatory regime is not fit 

for the purpose, which Title III simply is not. The Improvement Act 

makes significant strides in addressing the problems with Title III, 

and I believe that if this legislation is enacted in the form proposed, there is a substantially greater likelihood that equity 

crowdfunding will be able to flourish in the United States. 

Mr. Chairman and members of the subcommittee, thank you for 

the opportunity to appear before you today, and I would welcome 

the chance to respond to your questions or to amplify or clarify 

these statements at any time. 

[The prepared statement of Mr. Lynn can be found on page 59 

of the appendix.] 

Chairman GARRETT. I thank you, Mr. Lynn. And I thank the entire panel. We will now turn to questioning, so I recognize myself 

for 5 minutes. 

I guess I will start with Ms. Tierney. Some of you folks got into 

this a little bit, but maybe you can dig a little bit deeper for me. 

Reg D, can you run down, however you want to explain it, some 

of the most troublesome, some of the most burdensome aspects of 

complying with the additional reg requirements that SEC is proposing with regard to Reg D? 

Ms. TIERNEY. Of course. SecondMarket, as I noted at the beginning of my comments, is very active in the private company space. 

And we actually support a significant number of private companies 

raising capital under 506(b) and 506(c). 

We know from our own experience as an issuer of an investment 

trust that is utilizing 506(c) that the facility to generally solicit has 

made it much simpler for us to get access to investors to whom we 

would not otherwise have access. So we think that the rules as currently in place work really well, but the proposed rules—I can tell 

you from experience—have created a real overhang on the market 

for other companies that want to utilize 506(c). And I think the 

most significant issues with the proposed rules, in my mind, are 

the multiple requirements to file Form Ds, an advanced Form D, 

the current Form D, and a final Form D. 

An advanced Form D, as proposed currently 15 days in advance 

of filing, is completely unworkable for private companies. We raise 

money on a continuous basis. There is no start or stop. I think the 

proposed rules were really drafted for a Wall Street investment opportunity model, not the way that private companies in Silicon Valley— 

Chairman GARRETT. Isn’t there a—there has to be a start period, 

right, when you start doing it? 

16 

Ms. TIERNEY. My CEO, when we were a start-up, was constantly 

raising capital. He could be at a cocktail party—and I am sure you 

know this, as well—you are at a conference, you are anywhere and 

needing every single day looking for investors in your offering. 

Chairman GARRETT. Okay. 

Ms. TIERNEY. So it is continuous. To have to stop that for 15 full 

days and potentially trip it up is just unworkable. And I know that 

NASAA wrote a very good comment letter to the SEC, noting—I 

think, Bill, you didn’t support the 15-day advanced filing. I think 

you came out at, if I recall, 2 to 3 days in advance. Is that right? 

But I know that the idea of any stop in capital raising is problematic for private companies. 

I think also the concept of having to file a final Form D, whether 

or not you have raised capital, can be a death knell for private 

companies. Nobody wants to go out and tell people that they failed 

to raise capital. That is not a good message to send if you are a 

start-up. 

And Form Ds are difficult to file. You have to file one with the 

SEC, and you have to file one in every State where you actually 

sell securities. And I know the States are working very hard to get 

a uniform Form D filing system in place, but that doesn’t exist 

right now. And every State has a different approach to Form D. 

Chairman GARRETT. Can you just go on to what Mr. Beatty was 

talking about as far as what they are trying to do in this area? Is 

that a solution to the problem or is the legislation a solution to the 

problem? Why is one better than the other, if it is, in your opinion? 

Ms. TIERNEY. I think that a concept of filing one Form D in a 

consistent manner that would apply to every State in which you 

sell would be a massive step forward for Reg D filings. But having 

to do three of those— 

Chairman GARRETT. Yes, I get that. 

Ms. TIERNEY. —and having to file, I would assume, if the SEC 

adopts the proposed rules, that the States will follow and require 

that those additional forms be filed in every State, as well. So that 

is expensive. We have to pay our outside counsel to file these Form 

Ds for us— 

Chairman GARRETT. So, in other words, even if the States do 

what Mr. Beatty was talking about and come up with a, sort of like 

a common multi-State arrangement is what you were suggesting 

there, that doesn’t solve the problem, is what you are saying? 

Ms. TIERNEY. I think it makes—it lessens the impact of the problem, but I think that my proposal and SecondMarket’s proposal 

would be one Form D filing at the time that you commence capitalraising— 

Chairman GARRETT. Okay. 

Ms. TIERNEY. —not the form—not the 15-day after, not a final— 

Chairman GARRETT. Got you. 

Ms. TIERNEY. —so we would support one filing. I would support 

a filing that had to be done at the State level if it is consistent and 

a one-stop shop kind of approach. 

Chairman GARRETT. We took all this time on this one question. 

So what about the 1-year suspension that—I will let you start, and 

then we will get— 

Ms. TIERNEY. I think that is a death knell for private companies. 

17 

Chairman GARRETT. Why is that? 

Ms. TIERNEY. Because people make mistakes. So if the rules were 

adopted as proposed, say you have a cease conversation for 15 

days, but maybe your CEO says something by accident, and now 

you haven’t filed your Form D 15 days in advance or you forget to 

file your final—there is a lot of—these are small companies. They 

don’t have expensive outside legal counsel. They are trying to do 

this themselves, and people make mistakes. 

The current requirements for Form D filings specifically state 

that the failure to file a Form D does not preclude you from relying 

on the exemption. To go from a structure where that is not a necessary item in order to comply with the requirement to you are out 

of the market for 12 months if you fail to file seems—I just don’t 

understand how that is justifiable or how that helps the market. 

Chairman GARRETT. Got it. My time has expired, but thank you 

for answering those couple of questions. 

The gentlelady from New York is recognized for 5 minutes. 

Mrs. MALONEY. Thank you to all of the panelists for your statements today. 

Mr. Beatty, during the time that we debated the passage of the 

JOBS Act, there was a great deal of debate over the State securities laws, and should they be exempted for offerings under Regulation A? Some people argued that the burdens of complying with 

State regulations was one of the reasons why companies didn’t use 

Regulation A anymore. And as many of us recall, we reached a deal 

on the Floor to remove most of the State preemption, although we 

allowed it in some circumstances. 

Can you describe the work that the State securities regulators 

have done since the JOBS Act was passed to streamline their compliance for Reg A+ offerings? 

Mr. BEATTY. Thank you, Congresswoman Maloney. Yes, we have 

done a fair deal of work—as some of it was highlighted in my oral 

comments—what we have done—we recognized, I think, that with 

the GAO study that we could be better at doing these types of offerings. We could be more consistent, we could be more timely. 

We put in place a coordinated review system that, as I said, 

would result in the initial determination of clearance or need for 

additional work within 21 business days. This is something that we 

have signed an MOU on. We are committed to this. We believe this 

provides excellent service to the companies in our State and other 

States that want to raise capital. 

I think that what has been described here by Mr. Miller and the 

fact that he had jurisdictions that understood what he was trying 

to do is an important concept. We understand what companies are 

trying to do when they raise capital in our States. We want them 

to succeed. We think it is very important. 

The days of a regulator trying to find a way to deny offerings are 

over. We don’t do that. We need these companies in our State. The 

system that we propose is very timely, it is a one-stop filing, and 

it is a filing that will be made via e-mail with our State initially. 

Eventually, it will go up on our electronic filing system that we are 

developing and will be available for Form D filings in November of 

this year. 

18 

This is something that, given the timelines—and I would note 

that at the back of my written testimony, we have the timeline laid 

out in a table that I think is pretty easily understandable. But 

quick decisions, decisions that are based on one set of guidelines, 

this results in certainty, I think, for the filers and is a good thing 

for the filers and is a good thing for the States. 

Mrs. MALONEY. Can you discuss the areas where you think State 

security regulators can play a role that the SEC can’t play? Is it 

mostly protecting the mom-and-pop retail investors or regulating 

small securities offerings? 

Mr. BEATTY. I think we do both. 

Mrs. MALONEY. What do you think you offer that the SEC does 

not offer? 

Mr. BEATTY. I think we do—as the initial question—I think we 

do both. As I said, the mandate that I think most States have is 

to protect investors and foster capital formation in our States. I 

think the role that we can play that the SEC doesn’t play is that 

we are local and we are available. 

We understand that if somebody has a problem with an offering 

in our State, an investor, that the call was going to come to us, 

whether it is a Federal offering or a State offering, it is not going 

to Washington, D.C. We also understand that from the standpoint 

of an issuer, if there is a problem and we are deemed to be intransigent or otherwise not responsive to an issuer, that we are going 

to hear about it not only from the issuer, but probably from our 

governor, as well. So we are very responsive, and we understand 

the needs of these small companies. 

Mrs. MALONEY. Okay. Ms. Tierney, could you talk about your 

company’s experience in verifying that investors are, in fact, accredited investors? There was a lot of debate over accredited investors when we debated this earlier. And do you think it is important 

to require verification that an investor is sophisticated or an accredited investor before selling them an unregistered security? 

Ms. TIERNEY. I apologize to Chairman Garrett for having to disagree on this point, but we do this for a business, so I have to be 

objective—or not objective. We have done a verification, I think, on 

about 1,200 to 1,500 investors, mostly in the context of angel companies raising company through 506(c) offerings. 

There are some points of friction in the existing rules that create 

problems. For example, they are drafted for U.S. investors and 

don’t anticipate foreign investors who can’t provide a credit report. 

So there are some frictions that the securities bar is working 

through right now. 

But I can tell you, from our experience, people have been generally willing to provide the information. We try to be rational and 

reasonable. We are a registered broker-dealer, so people know that 

their information is going to be safe. 

Mrs. MALONEY. Very quickly, do you find that investors claim to 

be accredited investors when they are not? Do you have examples 

like that— 

Ms. TIERNEY. We have found that, Representative Maloney. We 

have found that people—not a large percentage, I would say a very 

small percentage of angel investors who had done multiple angel 

investments based on checking a box on their accreditation quesVerDate Nov 24 2008 17:33 Oct 09, 2014 Jkt 088539 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\88539.TXT TERRI
19 

tionnaire, when having to provide actual documentation weren’t 

able to show that they had made $200,000. They weren’t far off, 

but they weren’t over the requisite threshold. 

But I would say that the vast majority easily satisfy the rules. 

We have very few investors who come through who make $201,000 

a year, so it is—but I know that a lot of investors that we are not 

seeing are saying that it is problematic for them to provide confidential personal information. So I think there are arguments on 

both sides. 

Chairman GARRETT. Thank you. 

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

for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. Thank you all again for 

your appearance and testimony today. 

My question is for Mr. Miller and for Mr. Beatty. In talking 

about Reg A, I think the evidence is clear that historically only a 

limited number of issuers have taken advantage of the Reg A exemption for public offering stacks, that is public markets. 

Mr. Miller, and then Mr. Beatty, why do you think it is that 

issuers have avoided using the Reg A exemption in the past? And 

do you believe—what do you think the effect would be of raising 

the exemption proffering from $5 million to $10 million? What benefit would that give to small companies looking to raise capital? 

And then from Mr. Beatty’s standpoint, what are the investor protection concerns that are posed, if any? 

Mr. MILLER. I think that the primary challenge with Regulation 

A is actually the speed. The first offering we did took us 9 months, 

and I had O’Melveny & Myers, former General Counsel of the SEC, 

actually leading the process with us. And that is—partly as a result of the fact that it is not frequently used, it is a very human 

process. People—the regulators aren’t familiar with Regulation A. 

The regulators aren’t familiar with real estate investment. And so, 

you have a learning curve. 

And I do think that when you think about the process, the SEC 

spent 6 months, 9 months, 8 months in each one of our offerings, 

and I do sometimes wonder—the SEC obviously is sophisticated, 

knows what they are doing, has to do it multiple times. We did it 

basically 4 times, because each State is sovereign, although coordinated, and so there is a question of what does the additional—sort 

of basically repeating of the process—how does that benefit the investor? It doesn’t necessarily benefit the fundraiser, even though 

the States are sophisticated in many cases. 

The other issue is that we—it is not just—everybody focuses on 

preemption, but there are other requirements State by State. In 

Maryland, we had to file as an exempt broker-dealer. Each State 

has—there are a lot of rules beyond the ones we are focused on 

that each State requires. And so it is a patchwork quilt. It is very— 

and the Internet now makes it possible to raise nationally—so 

there is an efficiency that is possible nationally in order to get to 

scale that—I can imagine interfacing with—we had hundreds, we 

had hundreds of questions from the States, hundreds, about our offering, and if I were potentially getting questions from 50 State 

regulators, I can only imagine we would get more. 

20 

So I think that the question is, is the SEC, as a sophisticated 

body, not sufficient? Why would I need to do it twice, essentially? 

That is the question that I think needs to be addressed in this Regulation A preemption issue. 

Mr. HURT. Thank you. Mr. Beatty? 

Mr. BEATTY. I think, to answer your first question about why it 

wasn’t—while Reg A was not used widely, I think it had to do partially with the offering amount. I think it had to do with—as Mr. 

Miller said—the speed associated or lack of speed associated with 

the review of the offering, particularly at the Federal level. I think 

that it was not used widely, at least in our area, in multi-State offerings, again, because it was not that large. 

Also, at least in our area with our local bar, there was a perception essentially that perhaps because it wasn’t used widely, that 

good companies didn’t use Regulation A. And so they were reluctant to try and do a Regulation A offering. I don’t know if that is 

pervasive throughout the country, but that is what our local bar 

told me when I asked them about it. 

As far as the—I would note that the system that we have put 

in place would address many of the concerns addressed by Mr. Miller in terms of inconsistent State comments and those types of 

things. As far as the investor protection element, I think what 

States bring to the table is that, particularly for local companies, 

we know these people, we know what the issues are going to be, 

we are familiar with these companies, and we are better able to, 

perhaps, address some of the questions. 

I see my time is running out, so I will conclude my remarks 

there. Thank you. 

Mr. HURT. And then I guess my question—just going back to Mr. 

Miller for a second, so the JOBS Act, of course, increases the cumulative Reg A offerings by an issuer from $5 million to $50 million. 

Do you have a sense of what an appropriate threshold would be? 

And how—would increasing that further, would that aid a small 

business? 

Chairman GARRETT. Very briefly. 

Mr. MILLER. Yes, absolutely. I think that you will see small, regional investment banks actually enter the space of Regulation A 

where—and also start seeing real institutional block sales, if Regulation A becomes available at larger amounts. 

Mr. HURT. Thank you. Thank you, Mr. Chairman. 

Chairman GARRETT. I now recognize Mr. Scott. 

Mr. SCOTT. Thank you very much. Thank you very much, Mr. 

Chairman. 

I said in my opening statement that we need to look at the big 

picture of this, and where there are regulatory impediments, we 

need to really examine it. And, Ms. Tierney, I really think you have 

hit on something here with the 506(c) and the Form D. And I do 

notice, Mr. Chairman, on our memo, we do have a mention of that, 

but we don’t have any sponsorship on it. I don’t know if that could 

be incorporated in that. 

But if so, I would be delighted to work with you on that, because, 

Ms. Tierney, I would like for you to go into a little more detail of 

exactly what we need to do, because I agree with you. If one form 

can do, and if these repeat forms of Form D is causing very difVerDate Nov 24 2008 17:33 Oct 09, 2014 Jkt 088539 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\88539.TXT TERRI
21 

ficult—a difficult obstacle to capital formation, then obviously we 

certainly need to address that. Mr. Chairman, I would like to work 

with you on that. 

And with that, Ms. Tierney, can you just share with the committee what you actually would like to see us do, succinctly? 

Ms. TIERNEY. I think that the absolute best outcome, in my 

mind, would be that every private company that is raising capital 

under 506 would file one Form D at the commencement of the offering to put the States on notice on which—whether they are 

using B or C, so that the States have the information they need 

to regulate fraudulent activity. Those forms will be filed one time, 

be available across all 50 States, say how much the intent was to 

raise, and potentially what the use of—the expected use of proceeds 

will be, but that would be it. And they would file that at the commencement of the offering. And then the States and the Federal 

Government would have the information they need. 

Right now, you have to file a Form D at the point in time that 

you sell your first—from the first time you have somebody invest, 

you have to file a Form D 15 days after the sale with the Federal 

Government, with the SEC. Then you have to file a Form D in 

every single State where you sell. So you may sell one week to 

somebody in Utah and the next week to somebody in Washington 

State, so you have to file a form in every single State the first time 

you sell. That doesn’t seem sensible to me. I don’t understand why 

that is beneficial to the States, the SEC, or to investors. 

Mr. SCOTT. And what does that cost the small business? What is 

the hardship there? Is there a cost? 

Ms. TIERNEY. It is the cost of preparation. Not every State—it is 

a patchwork, as Ben and I have been saying. And I know the 

States are working hard to address that, but under the current regime, there are States that allow you to file a Form D electronically. There are States that require you to file in hard copy. There 

are States that require a fee that is significant. There are States 

with a minor fee. There is a fee in every State, I would note, so 

this is a cash-generating business for the State. 

Mr. SCOTT. Could you share with us what that fee might be, if 

you have that knowledge? 

Ms. TIERNEY. I am so sorry, Representative. I don’t know off the 

top of my head. 

Mr. SCOTT. Okay. 

Ms. TIERNEY. I think it is as high as $2,000 in some States and 

as low as $100 in others, but you have to have—you really have 

to have either a registered broker-dealer or a law firm do this for 

you, or else you are going to get it wrong. 

And the implications for doing it wrong under the proposed rules 

are that you can’t rely on Reg D 506 for an entire 12-month period, 

which for a start-up means you are going to shut your doors and 

lay off all of your employees. That is just the reality of it. 

Mr. SCOTT. That is something very reasonable I think that we 

could really look at, Mr. Chairman. The other point I wanted to 

raise with you, Ms. Tierney, in your testimony, you mentioned safe 

harbor. Could you share with us what—I was trying to follow you 

on that, but you were going very rapidly there. Tell us about the 

safe harbor. 

22 

Ms. TIERNEY. Of course. And I’m sorry I talk so rapidly, but I 

only get 5 minutes and I was watching the clock. 

Mr. SCOTT. No, it is fine. It is more my not being able to keep 

up with you. 

Ms. TIERNEY. Okay, thank you. So the way that the securities 

laws work around resales of private company stock under the current regime are there is a clear safe harbor under Section 41 of the 

1933 Act, if you have held your common stock for 12 months. At 

the end of the 12-month period, you can sell into the market, you 

can sell to anyone, you can generally solicit. There are no restrictions whatsoever. 

That exemption, however, is only available to shareholders who 

have held the stock for 12 months, and it is not available to offices 

or directors, founders, or large angel investors who have made sizable investments in the company, so more than a 10 percent ownership stake. 

Then, you have publicly registered securities where people can 

sell as they will on the NYSE or on Nasdaq. So you have, in between those two events, this delta of shareholders and employees. 

Most of us working for private companies get a significant amount 

of our compensation in the form of options. 

Mr. SCOTT. And so, tell us, how would you like to see this—what 

would be the best way of seeing this exemption applied? 

Ms. TIERNEY. I think it would be a transaction exemption for resales of securities or founders, angel investors, employees who hold 

options. When we were working with the community banks, it is 

the officers and directors of community banks. They are middle-income Americans who just happen to work for a private company. 

They couldn’t sell their securities without worrying about the State 

law. 

And we have been working with NASAA on this issue. They are 

very well aware of our position. And I think we all have the goal 

of making capital formation and job creation simpler, and I think 

having to deal with the patchwork of blue sky law every time you 

go to sell securities in this delta shareholder group makes it extremely unworkable. 

Mr. SCOTT. Thank you. 

Ms. TIERNEY. And the implications are significant for private 

company shareholders. 

Mr. SCOTT. Thank you very much. 

Chairman GARRETT. Thank you. The gentleman yields back. 

Mr. Mulvaney? 

Mr. MULVANEY. With the permission of the Chair, I would like 

to yield my time to the gentleman from North Carolina. 

Mr. MCHENRY. I certainly appreciate my colleague yielding. 

And, Mr. Lynn, I wanted to talk to you about crowdfunding. As 

I stated in my opening statement, Carolyn Maloney and I worked 

diligently to make sure we had investor protection and the ability 

of folks to raise equity online. 

You said that before the regulations were written, you viewed 

the law as ‘‘unworkable.’’ Is that correct? 

Mr. LYNN. That is absolutely correct. 

Mr. MCHENRY. Okay, so describe to me how crowdfunding leaders around the world view the American crowdfunding equity law? 

23 

Mr. LYNN. I think that my view represents the consensus view, 

both outside the United States and inside, that Title III, no matter 

how it had been implemented by the SEC, simply wasn’t going to 

work. I know many of my colleagues in Europe have made the 

same decision that we have not to look at the U.S. market as a result of it, and I know that many platforms in the United States 

that have relied solely on 506(c) or other forms of accredited investor only rules had initially considered using Title III, but upon seeing its final form, decided not to do so. 

Mr. MCHENRY. Okay. So you mention also about the need for a 

special purpose vehicle. Explain how that actually lessens 

crowdfunding remorse, if you will, with investors and issuers. 

Mr. LYNN. Absolutely. So one of the often misunderstood, but absolutely essential aspects of investing in a private company as opposed to a fully publicly traded company is that there are complexities around minority shareholder protections and other issues that 

get addressed by contract. 

So when an angel or a venture capitalist invests in a start-up, 

they uniformly enter what is called either a shareholders’ agreement or a subscription agreement, which sets out a series of protections for investors. That works perfectly fine when there are 2, 3, 

5, or even 10 investors. When you have hundreds, though, the 

whole process falls apart, and you wind up with essentially the following scenario: No contract is entered into, the result of which is 

investors have effectively no protection against the various things 

that can happen to a minority shareholder in a privately held company, while at the same time the company is forced to deal with 

the administrative overhead and the liabilities that come from having hundreds of direct shareholders, making it significantly less 

likely that later, State investors will want to deal with them. 

Mr. MCHENRY. Okay. So this idea of a special purpose vehicle is 

for investor protection? 

Mr. LYNN. It is absolutely for investor protection. 

Mr. MCHENRY. Okay. Now, the ability—the other question is for 

portals—the question of liability, sound liability provisions. I saw 

hundreds of comments about this with the SEC. Can you address 

that? 

Mr. LYNN. I think that there are a number of issues around liability, the most important of which is that there needs to be a 

very, very clear delineation of where liability sits as between an 

issuer and a portal. One of the very frank aspects that makes 

working in European markets advantageous over the United States 

in many aspects of securities law is the lack of strike suits and the 

lack of frivolous litigation. When you are dealing with very small 

businesses, that becomes even more profound. That can be minimized significantly by making very, very clear what actions and 

what omissions a platform or an issuer can be liable for— 

Mr. MCHENRY. But this is twofold. So the portal—if they remove 

someone because they believe they are fraudsters, would they be 

subjected to liability under the current law? 

Mr. LYNN. Yes, sorry. That is right. 

Mr. MCHENRY. Okay, so if they remove someone, they perhaps 

could be sued, right? 

Mr. LYNN. Yes, sir. 

24 

Mr. MCHENRY. So it is a twofold, those coming and going, the liability provisions, right? 

Mr. LYNN. It is. And that particular issue, which I have called 

curation, is one that comes up under the fact that portals are not 

allowed under the current law to provide investment advice, but 

that can very easily be construed and has been construed as preventing them from taking down businesses or refusing to deal with 

businesses that they feel may be fraudsters or otherwise inappropriate for their platforms. 

Mr. MCHENRY. Thank you for your comments. Mr. Miller, we 

view you as the lone wolf of Reg A offerings in the United States. 

How many Reg A offerings were there in the United States in the 

year 2010? 

Mr. MILLER. 2010? 

Mr. MCHENRY. How about 2011? 

Mr. MILLER. I think that over the last 3 years, there have been 

approximately 19. 

Mr. MCHENRY. And how many of those are you responsible for? 

Mr. MILLER. Three of them, approximately 20 percent. 

Mr. MCHENRY. Okay. And what year were you the only Reg A 

offering in the United States? 

Mr. MILLER. I believe in 2012, we were— 

Mr. MCHENRY. 2012, okay. So prior to—it has been basically 

viewed as a dead letter of the law. Is that correct? 

Mr. MILLER. Effectively. 

Mr. MCHENRY. Okay. So thank you for mentioning that, but I do 

want to mention that in our view, you are the lone wolf in terms 

of your boldness for this. So, thank you, Mr. Chairman. And thank 

you. 

Mr. MULVANEY. I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

Mr. Carney is recognized for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman, and thank you to each 

of the witnesses for coming today. 

I just have a couple of really quick questions. Just following up 

on Mr. Scott’s line of questioning about the need to file in multiple 

States, Mr. Beatty, I thought there was an effort going on by the 

North American Securities Administrators Association to develop 

kind of a one-stop filing process. Is that not accurate? 

Mr. BEATTY. That is completely accurate, Congressman. The 

States have been working diligently to establish what we call an 

electronic Form D filing system. It is in development right now. It 

is scheduled to go live in November of this year. It will allow onestop filing. It will allow the payment of fees at one place. So I think 

the question about—or the concern about having to send paper filings to all 50 States will soon be a thing of the past. 

I would also note that the Form D itself, it is an eight-page form. 

I think it has like 16 items on it. It is not a big form. I think— 

I heard Annemarie say that one filing as the commencement of the 

offering and why the States maybe need to see the filing. These 

forms are incredibly important for us to see early on, because we 

are the ones who get the questions from potential investors such 

as, ‘‘I got pitched this offering, and what do you know about it?’’ 

25 

And if we don’t get the filing shortly before the offering starts, 

as we proposed in our comment letter, then what happens is, we 

are forced to say something like, we don’t have any record of this 

filing. You should be careful and ask a lot of questions. 

We don’t know, quite frankly, whether the offering is a legitimate 

exercise by a company to try and raise capital privately or, God forbid, some scam artist out there trying to take somebody’s money. 

So it is an incredibly important piece of information. It is a relatively small form. And we certainly would appreciate the opportunity to do that. 

Mr. CARNEY. Do you have any sense of what—in this world we 

live in, it is kind of amazing that we wouldn’t have that now. Do 

you have a sense as to what the timing of that is? 

Mr. BEATTY. I am not sure I completely follow you, but— 

Mr. CARNEY. The timing of the development of the one-stop— 

when will it happen? 

Mr. BEATTY. Oh, in November of this year, it goes live. We have 

been working on it for a while, but in November of this year, it is 

scheduled to go live. It is on schedule to go live. 

Mr. CARNEY. Okay. Let me use the remainder of my time to get 

any feedback from any of you. As you may know, I worked with 

Mr. Fincher, who was here a few minutes ago—he has since left— 

on the IPO onramp part of the JOBS Act. And I don’t know if any 

of you have had any experience with that, but I would be interested in any comments that you might have about how the IPO 

onramp has worked in practice, whether you are aware of any intended or unintended consequences. 

We know that the data shows that IPOs are up quite a bit. Now, 

Mr. Fincher and I are taking full credit for that, and everybody 

else who supported it, of course. Whether that is the reason, I am 

sure there are lots of different reasons, but just any thoughts that 

anybody might have on that? 

And I guess, Mr. Beatty, if you think there are problems with 

that from your perspective. Ms. Tierney, I know you have some 

Blue Hen connections, so why don’t we start with you? 

Ms. TIERNEY. I am a proud Blue Hen. We are not a public company, but we work with a lot of private companies that go public. 

And almost every single one of them is utilizing the IPO onramp 

bill in order to facilitate becoming a public company. 

Mr. CARNEY. Any feedback about which provision in particular 

has been most helpful? 

Ms. TIERNEY. Again, not out of my own experience, but I think 

the ability to file confidentially is a huge benefit to private companies. 

Mr. CARNEY. I have heard that from a lot of people. 

Ms. TIERNEY. Yes— 

Mr. CARNEY. There was a lot of—and, by the way, there was a 

lot of difference of opinion on that particular aspect of it, but that 

is the one thing that keeps coming back that has been really helpful. 

Mr. Miller, you are shaking your head. Would you like to share 

some thoughts, as well? 

Mr. MILLER. There is no doubt that is true. I have heard that 

from—I work with some public real estate companies and small 

26 

public real estate investment trusts. And across-the-board, to be 

able to file confidentially, you can withdraw without basically having a punitive result in the market, it is very, very material to the 

consideration of going to the public markets. 

Mr. CARNEY. Great. Mr. Beatty, any comments from the other 

side? 

Mr. BEATTY. I think I would agree with my co-panelists about 

the feature, the confidentiality feature. It is the one that I hear 

about the most, as well. I think from a regulatory standpoint, we 

have some concerns, not just with that particular feature, but the 

trend for less transparency in the markets. We believe that—as 

mentioned in my opening remarks—the transparency is an important feature for our public markets and it is just one of the several 

things that we have seen that have kind of decreased that transparency. 

How that will play out—we certainly haven’t gotten any complaints about it or anything like that, but how that will play out 

long term does give me some concern. 

Mr. CARNEY. All right. Thank you all very much for what you do. 

And thanks for being here today. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from Texas, Mr. Neugebauer, is recognized. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, for holding this important hearing. 

Mr. Lynn, what I heard you saying is that basically, with Title 

III the way it is now, the crowdfunding is difficult. And I think you 

used the word ‘‘impossible.’’ 

Mr. LYNN. ‘‘Impossible’’ is the word I would use, sir. 

Mr. NEUGEBAUER. And so the question is—a lot of times, we have 

good ideas that we get, really, from the private sector, and we massage them up here, and we try to codify them, and then we send 

them over to the Executive Branch and the Executive Branch massages them. And then when they come out the other end, they don’t 

always end up being like we thought they were going to be. 

So I think one of the questions I wanted to ask you is, when it 

comes to that section, was the structure of the law flawed? Or are 

the rules the problem? Or is it a little of both? 

Mr. LYNN. I believe it was primarily the structure of the law in 

the form adopted by the Senate. While the version adopted initially 

by the House I think has been improved upon by Congressman 

McHenry’s proposed draft, the core structure was there. By the 

time it came out of the Senate and went to committee, I think that 

was where the main failure was—the SEC rules could not have 

been saved, no matter what they said. 

Mr. NEUGEBAUER. And so, basically what you think is that it is 

going to take a legislative fix and not necessarily an administrative 

fix? 

Mr. LYNN. I think that is absolutely the case, and I can tell you, 

sir, that I have spoken with a number of staff members at the SEC 

who have, on an off-the-record or nonattribution basis, at least, acknowledged that they felt that their hands were tied in trying to 

address many of the concerns, because the legislation was written 

the way it was. 

27 

Mr. NEUGEBAUER. What would you say are the one or two most 

burdensome pieces of it, that really would have an impact? 

Mr. LYNN. I think if I can identify the three top ones, it is the 

levels—the thresholds for financial statements. Financial statements are something of a red herring when you are dealing with 

very early-stage businesses. They don’t say anything, because the 

company hasn’t done anything yet. And requiring an audit or even 

an accountant review for very, very small businesses is hugely disproportionate and simply makes it impossible or virtually impossible for businesses to rely on. 

I think the issue I addressed in Mr. McHenry’s question regarding curation and the inability to select which businesses go on the 

platform in a subjective way is a huge flaw. And the points around 

the lack of ability to use an SPV or nominee structure is the third. 

Mr. NEUGEBAUER. One of the things that I understand in the 

proposed rule is that, for example, if you own 20 percent of the 

company, you are subject to a look-back of 3 years of your personal 

tax returns. Is that necessary? And if I am part of a start-up, does 

that keep me from participating? 

Mr. LYNN. I think it is one of a number of perhaps secondarylevel burdens that is unnecessary. I think it is an example of the 

type of rule that was designed with much larger publicly traded 

companies in mind that simply does not apply or does not have a 

whole lot of utility when you are dealing with a ‘‘two man in a garage’’ start-up. 

Mr. NEUGEBAUER. And, Mr. Miller, I was amused by your comment about the legal fees that small businesses are having to pay 

in order to come into compliance. Is that just because there is so 

much risk out there of—if you don’t comply with all of the—if you 

don’t check all of the boxes, is it the complexity? Or what do you 

think is driving most of that? 

Mr. MILLER. I think it is primarily driven by complexity. You can 

be a software engineer or a bioscientist, but the regulatory knowledge to make sure that you maintain compliance—and in particular, if you want to grow—the compliance is critical to your next 

round, right? If you raised $500,000 and you violated securities 

law, your business is dead, even if it is successful in the underlying 

merits. 

So the complexity is outside the knowledge base of a normal entrepreneur, and so you have to rely on legal counsel, and that basically—the complexity of the law and the number of regulators involved drives the amount of legal fees. 

Mr. NEUGEBAUER. One of the things we hear from people all 

across the broad spectrum now about—in their businesses is the 

term regulatory risk, that—whether it is compliance or other areas 

of government—one of the things that is really stifling a lot of businesses is regulatory risk that is out there and how to price it into 

your product. Does anybody disagree that there are regulatory 

risks that have increased over the last few years? 

Ms. TIERNEY. I would completely agree. For a long period of my 

career, I was involved in taking companies public in the United 

States. This is the first job I have had where I worked for a private 

company and worked with private companies. And in the time that 

I have been a securities lawyer, the scales have tipped. There are 

28 

not a lot of good reasons to be a public company in the United 

States of America right now when you do a cost-benefit analysis 

around the risk, the costs, and the burdens of being a public company. 

There are a lot of good reasons to go public that will always be 

there, but I think for a lot of private companies, with the facility 

now offered with the 2,000 registration threshold and the ability to 

more easily raise capital under Reg D, under 506, they are really 

going to be deferring those IPOs for a very long time. And I think 

that is the right regime, but it is sad to me as a former SEC attorney and an NYSE attorney just to see companies not want to go 

public. 

Chairman GARRETT. We are going to have to— 

Mr. NEUGEBAUER. Thank you. 

Chairman GARRETT. We are going to have to cut it there. And 

we will have, I think, our last word on it. Mr. Kildee, you are recognized for 5 minutes. 

Mr. KILDEE. Thank you, Mr. Chairman. 

I will be brief. I was talking to Mr. Carney, and I just want to 

say, I don’t know what a Blue Hen is, except that I know that I 

have never been served one. I assume that they are very good. 

Ms. TIERNEY. You are missing out. 

Mr. KILDEE. I will just have one question. If it is redundant, if 

it has already been asked, I apologize for that. But I would just 

like to follow up on some of the comments that I made in part I 

one of this hearing that was held earlier this month, that while 

these proposals ostensibly are intended to increase capital formation for small and emerging companies, we have yet to fully realize 

the impact of the JOBS Act. Trends in the future may prove that 

there are some shortcomings in the JOBS Act, for which a cohesive 

legislative fix might be required, but now the House would have to 

address this with a legislative solution. 

Specifically, though, I am interested in the area of capital formation. It seems like to me, anyway, the mortgage market, in ensuring that people have the ability to purchase a home, might be a 

better place to start this conversation. And if we are looking to 

have additional sources of capital for small and emerging companies, we might focus on reauthorization of the Ex-Im Bank, which 

I know in my State has been a really significant player in helping 

to get small companies moving and to reach additional markets. 

But my main concern with these proposals and the ones from 

today and earlier this month is that they specifically, in some 

cases, preempt State regulator oversight. And specifically, just the 

other day, we had SEC Chair White here and we had, I think, a 

good exchange. But one of the questions that I posed to her and 

that I am concerned about is that we have the SEC that is already 

fairly thinly stretched. 

And with increasing obligations continuing, we could have a debate about whether those obligations are appropriate, and we have 

had a substantial debate on that subject, but I don’t think we 

should try to dial back on whether the regulations in place should 

be enforced by limiting the resources. But I am concerned about 

the sort of combined effect of reducing State regulatory responsiVerDate Nov 24 2008 17:33 Oct 09, 2014 Jkt 088539 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\88539.TXT TERRI
29 

bility or roles in this particular space while we have an SEC that 

seems already challenged in meeting its obligations. 

Starting with Mr. Beatty, I would certainly like to get your observations, but if the rest of you could also make a comment, I 

would certainly appreciate it. And that would be the only question 

I would have today. 

Mr. BEATTY. I share similar concerns. I note that there was a recent BNA article that talked about Regulation A+, and it noted 

that the—I am sure I have the number wrong—but the average review time for a Reg A offering before the SEC was something in 

the—over 100 days, anyway. 

We are proposing with our Reg A coordinated review proposal to 

have an initial decision back to the issuer within 21 business days. 

So I think we share your concern about diminishing resources. A 

strong and healthy SEC is important, but we also think that we 

have something to bring to the table, and that this is not the time 

to take regulators off the table in terms of providing services. 

Mr. MILLER. We have proposed to the SEC that for the offerings below $5 million, they actually would leave it to the States, rather 

than requiring the SEC and the States for an offering that is less 

than $5 million under Regulation A. And as a proposal, it would 

lessen the burdens on the SEC, while giving the States a purview 

to succeed inside, I think, what would be more likely a smaller 

local offering of less than $5 million. 

Mr. LYNN. I think—if I could just take a slightly different view, 

I have no doubt that in many ways individual State regulators may 

be more efficient or more effective than the SEC. The problem is 

that a majority of offerings, particularly—I appreciate real estate 

may be a bit different—for small and growing businesses, the fact 

that they are small does not correlate with them being local. They 

tend to have Internet-based offerings, supporters, and people who 

want to invest in them from across the country, and often internationally. 

And I think that the more barriers you put up and the more differentials you put up across borders, the more difficult that becomes. Whether the locus of regulation sits in one or the other, I 

think, is less of an important question than whether we are dealing 

with potentially 50 different, slightly altered regulatory regimes 

versus a unified one, and I think that if we get into that situation, 

that is the real problem. 

Chairman GARRETT. And having had the last word, Mr. Lynn, I 

thank you, and I thank the entire panel for all your very good testimony. It was very helpful, both your written testimony and the testimony today. And I thank the members of the subcommittee. 

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. 

With that, again, I thank the panel and wish you a good day. 

And this hearing is adjourned. 

[Whereupon, at 11:05 a.m., the hearing was adjourned.] 

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A P P E N D I X 

May 1, 2014 

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