U.S. GOVERNMENT PRINTING OFFICE

60–694 WASHINGTON : 1999

GOING PUBLIC—THE END OF THE

RAINBOW FOR A SMALL BUSINESS?

HEARING

BEFORE THE

SUBCOMMITTEE ON

GOVERNMENT PROGRAMS AND OVERSIGHT

OF THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

WASHINGTON, DC, OCTOBER 14, 1999

Serial No. 106–35

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBE ́N HINOJOSA, Texas

DONNA MC CHRISTENSEN, Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT PROGRAMS AND OVERSIGHT

ROSCOE G. BARTLETT, Maryland, Chairman

MARY BONO, California

PATRICK J. TOOMEY, Pennsylvania

RICK HILL, Montana

DANNY K. DAVIS, Illinois

RUBE ́N HINOJOSA, Texas

CHARLES A. GONZALEZ, Texas

NELSON CROWTHER, Counsel

(III)

C O N T E N T S

Hearing held on October 14, 1999

WITNESSES

Page

Lane, Brian, Director, U.S. Securities & Exchange Commission ........................ 4

Wall, John, President & CEO, National Association of Securities Dealers,

Inc. ......................................................................................................................... 7

Moe, Michael, Director, Merrill Lynch & Company .............................................. 10

Ellison, Keith, Interim Director, The Wharton School, University of Pennsylvania ...................................................................................................................... 12

Dankberg, Mark, President and CEO, ViaSat, Inc. .............................................. 14

APPENDIX

Opening statements:

Bartlett, Hon. Roscoe ....................................................................................... 33

Prepared statements:

Lane, Brian ....................................................................................................... 35

Wall, John ......................................................................................................... 50

Moe, Michael ..................................................................................................... 187

Ellison, Keith .................................................................................................... 194

Dankberg, Mark ................................................................................................ 201

Additional material:

Written statement of the North American Securities Administrators’ Association ......................................................................................................... 209

(1)

GOING PUBLIC—THE END OF THE RAINBOW

FOR A SMALL BUSINESS?

THURSDAY, OCTOBER 14, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON GOVERNMENT PROGRAMS AND OVERSIGHT, Washington, DC.

The subcommittee met, pursuant to call, at 10:00 a.m., in room

2361, Rayburn House Office Building, Hon. Roscoe Bartlett [chairman of the subcommittee] presiding.

Chairman BARTLETT. Let me call to order the Subcommittee for

Government Programs and Oversight of the Small Business Committee.

I’m sorry that I was a few minutes late. C–SPAN just spent a

half hour with us talking about this subject. That was much appreciated because the goal of our hearing today, the purpose is simply

to provide information to small businesses concerning the process

of going public.

And now, in addition to the information made available through

this subcommittee hearing, we have the audience of C–SPAN who

knows that we’re holding the committee hearing and who now

knows something about how to go about getting information for

going public.

It’s a pleasure to welcome you to this hearing of the Subcommittee on Government Programs and Oversight of the House

Small Business Committee. I would especially like to thank those

of you that have traveled some distance to participate in this hearing.

For many small businesses or a company that has begun as a

small business, going public can be the end of the rainbow, the culmination of years of hard work and substantial monetary reward

for the owners of the business.

Few entrepreneurs going into business have not dreamed of

going public and being a company listed on a stock exchange. This

incentive may well be a major factor in the formation of business

enterprises and contribute to continued economic growth.

As a nation of opportunity, innovation and invention, business

formation should be encouraged. A number of factors need to be

considered by businesses considering whether to go public. It is anticipated that this hearing will provide some of the answers to

these questions.

The panel of witnesses that are invited to this hearing were carefully selected for their recognized expertise in the process of listing

and selling securities on a public exchange. Your testimony and the

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testimony of the other panel members is a vital public service to

businesses, both large and small, throughout this country.

The committee is hoping to have as broad a distribution of the

testimony in electronic and hard copy form as is possible. Both

public and private assistance is available to businesses considering

going public. And it is hoped that the hearing will provide a public

forum for communicating those sources of information to businesses.

The committee is always open to suggestions of ways how to improve or expand, where needed, federally funded information

sources and assistance. The committee would also appreciate new

legislative proposals.

The creation and expansion of small businesses are the fuel

which has generated and is sustaining our current economic

growth. America is the most prosperous nation in the world because our stock market encourages the creation of wealth by efficiently directing capital from individual investors to reward both

the investors as well as the entrepreneurs, inventors and

innovators who produce and distribute new and better products

and services to meet people’s needs.

Again, welcome to our participants and guests. I look forward to

hearing your testimony on this most important subject.

And I’d like also to welcome here on the dias my good friend

Duke Cunningham from California. And one of our witnesses is in

his district and we’d like to give him the opportunity now of introducing this witness.

Mr. CUNNINGHAM. Thank you, Chairman Bartlett and Ranking

Member Davis. I want to thank you for the opportunity to introduce Mark Dankberg.

Mark is the Chief Executive Officer of ViaSat headquartered in

Carlsbad, which is right in the heart of my district, the North

County of San Diego. ViaSat’s is a high tech company specializing

in ultra high frequency communications for satellite.

Before this hearing I was talking to Mark. He went to Rice University and graduated in electrical engineering. But even more important, he started ViaSat in 1986 in a spare bedroom in his house.

The number of his employees quickly rose. Ten years later, he took

it public, which this hearing is about.

But by then, he had created almost 400 jobs and ViaSat had annual sales of more than $70 million. Today ViaSat continues to be

one of our community’s leading companies and annually generates

more than $72 million dollars in revenue and has a strong workforce.

Besides his work at ViaSat, Mark is an active member of our San

Diego community. He serves on the Board of Directors for San

Diego Telecom Council and is a member of the San Diego County

Council Regional Economic Task Force. He also is on the Board of

Directors at REMEC, a publicly traded manufacturer of microwave

products in San Diego, and Connected Systems, a privately held

high tech firm in Santa Barbara.

Mark’s a winner, a successful businessman. And I’m excited to

meet John Wall, who I just met here this morning, of NASDAQ.

But I thank you for the opportunity to introduce Mark Dankberg

and listen to his testimony, Mr. Chairman.

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Chairman BARTLETT. Thank you very much. Let me now recognize Congressman Davis for his comments.

Mr. DAVIS. Thank you very much, Mr. Chairman. And let me,

first of all, commend you for calling this hearing.

I also want to commend you for the outstanding job that you just

did on C–SPAN not only in terms of answering questions related

to the subject matter, but also I appreciated the deft way that you

handled those that were unrelated.

I really think that you did an outstanding job and wanted to say

that to you.

It’s also a pleasure to note the presence of our distinguished colleague, Mr. Cunningham, who is an outstanding leader and member of the Congress. And, you know, there are a lot of folks who

wish they had the high tech valleys and communities to represent.

I always say that San Diego has to be the most beautiful city in

this country, with due respect to all of the other places, including

where I live.

But Mr. Chairman, as you know, I’m very concerned about small

and very small businesses and the critical role they play in the nation’s economy. The country’s 22 million small businesses employ

more than half the nation’s work force and produce more than half

of its gross domestic product.

Small businesses are the source of most new jobs and most of the

innovation in our economy. On the back of the dollar bill, there is

an unfinished pyramid with a brilliant, glowing eye at the top. It

comes from the back of the great seal of the United States and it

was placed on the dollar bill by President Roosevelt in 1935.

In the middle of the Great Depression, when the growth of America was in sharp decline, the pyramid was meant to represent economic strength and durability. The pyramid is unfinished to symbolize the constant struggle to keep our economy strong.

But I think that’s what the exploration of small businesses going

public actually is a part of, and that is a part of the continuing effort to find new ways, new approaches, new opportunities, new possibilities for the American people to become an integral part of the

ownership of the greatness of our nation.

When the concept first sort of began to emerge, I had some

thoughts and reservations about it. But then, the more deeply that

I thought about it, it occurred to me that what we’re really talking

about are ways for individuals to become a part of the ownership

of something that, in all likelihood, they may never do individually.

And that’s why I’m such a great proponent of ESOPs; that is, the

employee owned businesses. And I guess that’s why I ride the airlines sometimes that I do. But it’s really a great concept. You’re to

be commended for giving us the opportunity to look at it.

I certainly want to add my welcome to the distinguished panel

of witnesses and look forward to a great hearing.

Thank you very much.

Chairman BARTLETT. Thank you very much.

I’d just like to comment on one of the observations you made,

and that was that small businesses and very small businesses provide most of the new jobs. I mentioned this on C–SPAN a few moments ago. I’d like to repeat it here for the record.

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And I couldn’t believe these data until they were confirmed to

me. When we came out of the last recession, if you divide our companies into categories relative to size from the largest down to the

smallest, companies of 5,000 and more employees produced a few

new jobs to bring us out of the recession.

No other group of companies, until you got down to the smallest,

produced any new jobs. And 90-some percent of all the new jobs

produced when we came out of the recession were produced by companies with zero to four employees.

Now that’s small companies. And you know, Microsoft started

just that way, in a garage in New Mexico, I think, and they went

public and look where they are today. And so small business is not

only the energy that drives our society, it’s the engine that produces most of the new jobs when we need new jobs.

And the focus of our hearing today is simply to make public the

requirements, the benefits, the rewards, the challenges of going

public.

Let me welcome our witnesses: Mr. Brian Lane, Securities and

Exchange Commission from here in Washington; Mr. John Wall,

National Association of Securities Dealers, Washington; Mr. Michael Moe, Merrill Lynch & Co.; Mr. Keith Ellison, the Wharton

School, University of Pennsylvania; and Mr. Mark Dankberg, who

has already been introduced to us.

I want to thank you all very much for joining us, and we’ll start

now with Mr. Brian Lane.

Let me say that your testimony will be made a part of the record

and you can feel free to summarize. And then when you have all

finished, we will have an opportunity for questions and answers

and we’ll invite participation of the panel in addressing the concerns and the testimony of other panel members.

We’ll begin now with Mr. Brian Lane.

STATEMENT OF BRIAN LANE, DIRECTOR, DIVISION OF CORPORATE FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION

Mr. LANE. Thank you, Mr. Chairman, members of the subcommittee.

My name is Brian Lane. I am the Director of the Division of Corporation Finance at Securities and Exchange Commission. And the

Division of Corporation Finance, through its Small Business Office,

is at the forefront of the Commission’s efforts to help small businesses and deal with the regulation on going public.

What I thought I would do in my oral remarks is summarize

very briefly the mechanisms that exist for small business, the regulatory mechanisms for going public, and take a few moments to

mention some of the special programs that we have at the SEC and

outreach that we’ve done for small business.

As you noted, small businesses need to raise capital, but the capital raising process is a difficult one, as you’ll hear from other

members of the panel here. Initially, small businesses are going to

be raising capital from friends and family and from personal savings.

Then the entrepreneur may seek loans from others. If funds are

sort of sought through the sale of securities to the public, the SEC

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has what’s called a Seed Capital Rule, Rule 504, which allows an

entrepreneur to raise up to one million dollars free from federal

registration.

They would still have to satisfy state registration requirements.

And they’re permitted to raise up to one million dollars in a 12

month period without having to worry about registering with us.

Obviously they would be still subject to the anti-fraud rules

though, the federal anti-fraud rules.

If a company wants to sell stock in a non-public manner—for example, to a so-called angel investor or someone like a venture capitalist or something like this—they’re permitted to raise unlimited

amount of money without registering with the SEC.

This is the so-called Private Placement Exemption. In the federal

securities laws, the investors receive restricted securities. It is the

difference that entrepreneurs find with the private placement

route.

If a company decides that it wants to raise money by selling securities to its employees, you heard about ESOPs in the opening

program, note that the Commission adopted a rule, Rule 701,

which allows companies to sell—non-public, private companies to

sell securities to their employees with no cap.

It used to be up to a five million dollar cap. But they can sell

at a minimum of one million, regardless of their size, to their own

employees. If they sell over five million in the year to their employees, they have to provide some minimum disclosure documents.

So again, we give significant breaks to small companies selling

to their own employees who already have some knowledge, working

knowledge, of the company and, therefore, are in a better position

than just strangers to know about the company.

The next step in the company’s growth process is to sell securities to the public. If a company wants to raise more than one million dollars a year beyond the seed capital exemption but less than

five million dollars, they can use what we call Regulation A, which

is an exemption from the registration requirements and it has

many advantages.

It has reduced reporting requirements. It permits unaudited financial statements, no ongoing reporting obligations, and it permits what we call a ‘‘testing the waters’’ provision.

Because the federal securities laws regulate offers rather than

sales, people are generally prohibited from just walking up without

a registration statement to say ‘‘if we wanted to sell securities,

might you be interested in investing in our company.’’

You can’t do that unless you have a registration statement on file

with the SEC. But under Regulation A, you are permitted to test

the waters in advance; to go, before you spend money on hiring accountants and lawyers and all of that, that you could walk around

to your suppliers, your customers, whatever and say ‘‘might you be

interested’’ and give some the details on that.

So that’s been a very popular program as well, and it’s a very

streamlined form to raise up to five million dollars. If you want to

go over five million dollars, this is sort of the next step of the evolution, we have what we call Regulation SB, the initials for obvious

reasons.

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And that system is available for any U.S. or Canadian companies

that have less than $25 million in revenues and less than $25 million dollars in public float, sort of the market capitalization that’s

held by the public out there. That’s what we consider at the SEC

a small business to be eligible to use this sort of streamlined disclosure regime.

And they can continue to use it repeatedly as long as they stay

under the $25 million dollar thresholds. If they exceed the $25 million thresholds, then they have to go and file like other public companies, the more complete form.

In the past fiscal year, just in the past fiscal year, almost five

billion dollars has been raised on Form SB2, which allows raising

up to an unlimited amount of dollars under Regulation SB. It has

some streamlining, but it’s very close to typical prospectus that you

would see in a public offering.

So this is just an indication of how popular the program has been

for small businesses to actually raise money.

That’s kind of the—sort of the graduation from a small business

into a regular public company. Let me just take the last few moments to tell you about some of our special programs that we do

for small business because we do reach out to the small business

community to better tailor our regulatory system.

We host the only annual Federal Government sort of national

small business gathering. We do once a year and we’ve had it since

1982 where small businesses can come and tell federal and state

regulators how they need to change the rules and regulations and

how they impact them.

So we have been doing this now for 17 years. And many of these

recommendations that we have gotten from these annual forums

have led to SEC action in changing rules and making them easier,

things like Rule 701, to sell to your employees, and other sorts of

rules.

Since 1996, when I became director, we have significantly expanded our Office of Small Business. And they review all the small

business filings, so we now have a special unit that does nothing

but review small business filings.

I have some of the staff behind me that work in that office. They

do nothing but spend that time. And it is really a group that takes

the extra time because small businesses sometimes have more

questions about how the regulatory structure works than General

Electric, for example.

So we have that. They also direct all the small business rule

making, interpretations, and answer all the phone call questions.

We also host town hall meetings across the country. This has been

a recent development. We have had 13 town hall—small business

town hall meetings in the last three years where we go around to

Kansas City, Austin, St. Louis and basically just do what we are

doing here today: tell people how the regulatory system works.

We usually invite the state regulator, the state securities commissioner, and we invite the SBA representative to come to talk

about their loan program. And small businesses have to know

about state registration because they do have to register with the

states if they are really small.

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And so we have found that to be really useful. And last I will

mention that we have a web site with special small business information and we put out a pamphlet that we put out here on the

table that is called ‘‘Q&A: Small Business in the SEC,’’ which we

wrote in plain English, which is something that we’re pushing for

in prospectuses.

Everything you need to know about what regulations—I just

talked about today, Regulation SB, what is Regulation A, what are

my requirements if I go public, what do I have to do, what are the

considerations. And then phone numbers. You want to find out,

talk to the state regulators and such, then this is a very helpful

guide.

The small business program, ACENet and what have you—and

I noticed the NASD has a guide here, too, that was on the table

that looked good about what you need to know.

So I’m happy to be here today to tell you about these kinds of

programs and I look forward to your questions.

[Mr. Lane’s statement may be found in the appendix.]

Chairman BARTLETT. Thank you very much.

Mr. Wall.

STATEMENT OF JOHN T. WALL, PRESIDENT AND CHIEF OPERATING OFFICER, NASDAQ-AMEX INTERNATIONAL, NATIONAL

ASSOCIATION OF SECURITIES DEALERS, INC.

Mr. WALL. Thank you, Mr. Chairman.

We are delighted to have the opportunity to be here and talk to

your Committee on Small Business about the very important thing

of being able to bring companies public and seeking public funding

for the continued growth of these companies.

Often our citizens don’t get a chance to focus on the importance

of the fact that this country is blessed with strong financial markets, actually financial markets that are the envy of world financial

markets, because our markets have been able to produce more

what we call IPOs, new companies into the public market, than

any other market in the world.

The U.S. dominates this. In Nasdaq alone, since 1989, we have

brought over 4,200 new companies into the public markets. That

equals raising over $154 billion dollars in new capital to support

new businesses.

This would not be possible, however, without a strong infrastructure of the financial services industry, coupled with a very strong

regulatory structure. The partnership that we have in this country

between our industry, in terms of self regulation, and the Government, in terms of SEC regulation, is a very important function because it gives confidence to the investors whose money we’re seeking to bring into these small businesses.

The customer protection, we believe, is a very, very important

factor and one that cannot be overlooked when we talk about public

monies because it is the investor’s money that we are reaching out

to use. We owe the investor information, we owe him strong financial information as well as disclosure in terms of how companies

are doing.

There are many benefits of going public. Obviously for the company, the growth aspects are the most important, the ability to go

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from stage to stage in terms of its own growth, the providing of

ownership to their own employees and also the ability to then use

that stock as an asset to acquire other companies and to merge

with other companies.

However, if you really look at the true macro benefits, there are

two that come immediately to our minds and two that we have supported since we began Nasdaq. The first is obviously job creation.

Job creation in the United States, as we heard earlier, is something

that small businesses do regularly and is overlooked.

There was a study done between 1990 and 1995 that showed one

out of every six new jobs in the United States was created by a

Nasdaq company. Nasdaq companies only account for less than one

percent of all companies in the United States, but that job growth

and that job creation came from these new companies coming into

the public markets. If you look at the Fortune 500 companies, you

will find that they lost over 200,000 jobs during that same period.

So this supports what you were saying in your introductory remarks, Mr. Chairman, as a very important factor.

When we created and started Nasdaq, our primary mission was

capital formation. And coupled with the SEC disclosure rules, we

opened our market to companies that didn’t have profits, companies that were just starting.

But as long as they disclosed to the investing public exactly

where they stood and how they were functioning, we felt that they

should have an opportunity to come into the public markets.

I can state that there are full industries that would not have

been built if it weren’t for this willingness to open the public markets to companies that did not have profits, industries such as the

biotech industry, industries such as the internet industry.

And much of our technology industry that has been created in

the last ten years would not have been founded if we did not open

our public markets this way. So Nasdaq has been at the forefront

of this in terms of the IPOs since 1989.

Over 82% of them came out of the Nasdaq marketplace, and if

you look at those 4,000 companies, it might be interesting to look

to see how they were segmented in size. Over 25% of those 4,000

companies raised only between four and ten million dollars. The

next 50% raised between $10 and $40 million dollars. And then the

balance of the remaining 25% raised anywhere between $40 million

and $4 billion dollars. But the preponderance is really in the small

area and, as a result, we found it was an opportunity to tier our

market into two groups.

We have a small cap marketplace and we have a national marketplace. And we do that to bring in small companies to let them

grow from one tier to the next and also to alert the investor that

they’re dealing either with a small cap company or a national market company. The investor should know that because obviously

there has been, and will be, greater risk in some of the smaller

companies and they should know that at the time they are investing.

The criteria, or rather the model, of these IPOs is interesting. If

you look at 1997, we found most of the IPOs coming in with an average of about ten dollars in terms of public offering price. They

raised about $40 million dollars on average. They had assets of

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about $125 million dollars, revenues of about $50 million dollars,

and overall market cap after the offering of about $166 million dollars. So that gives you a profile of what we see coming in as IPOs

into the Nasdaq marketplace. When you look at this, however, you

cannot just look at the benefits. You also have to look at the quid

pro quos, and it is not a one way street. Because when companies

reach the public markets, they have a responsibility. They are

reaching out to individual citizens’ pockets and they have to give

something back. We look at that as information.

They must be willing to not only share the benefits of their company, share with the investors that they have brought in, but they

also have to share immediate information so I, as the investor,

know exactly what’s happening in that company that I have put

my money in. And obviously that is a change of mind set for many

managers when they go from a private company into a public company.

Looking at this and looking at the beginning of IPOs in the beginning stage of public companies, we also have to take a look at

the fact that we have a very strong venture capital market in this

country. Venture capital provides more than just money to young

companies. It provides mentoring. It provides managers who are

experienced, who then go on the boards of these companies, and

who help direct them to the next stage of growth, that being an

IPO in the public markets.

Last year, 52% of Nasdaq IPOs came with venture capital backing. At that same time, 98% of all of the venture backed companies

came into the NASDAQ stock market. We find this is a very important factor in the growth of the United States in its ability to raise

capital for young companies.

As a matter of fact, again, if you look worldwide, that is one of

the major assets that we have and that is why we see so many

companies, foreign companies, coming into the United States and

doing distributions of shares here because in the United States our

markets are open to this and we are open to providing capital.

Other forms of capital would be angel financing where you have

individual investors. But one of the biggest changes, and growth

areas, happens to be corporate ventures where you find major corporations now investing in individual companies normally along

the same segment lines that that company is in, whether it be

technology, biotechnology, computer peripherals or whatever the

product is.

So we are finding new pockets and new avenues for companies

to raise capital. And again, what we call the beginning stage of

capital we feel is very important not only because it provides the

company money, but it also provides them tremendous guidance

that they need at that stage of their growth.

So we think that the market here in the United States is strong,

will continue to be strong, and the focus that you’re putting on this

is very beneficial. And it will not only be beneficial to new companies, but it will also be beneficial to the investors here in the

United States.

Thank you.

[Mr. Wall’s statement may be found in the appendix.]

Chairman BARTLETT. Thank you very much.

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Mr. Moe.

STATEMENT OF MICHAEL T. MOE, CFA, DIRECTOR OF GLOBAL

GROWTH STOCK RESEARCH, MERRILL LYNCH

Mr. MOE. Thank you, Mr. Chairman.

I’m delighted to be here this morning to talk about what we

think is a critical area, and that’s a company’s ability to, and the

issues surrounding going public.

During the 1990s, the U.S. economy in general, and the U.S. capital markets in particular, have experienced dramatic growth. U.S.

equity capital markets have gone from $3.1 trillion dollars in 1990

to nearly $13 trillion dollars today.

Technology has been the driver of the new economy, but IPOs

have really been its fuel. If you look since 1990, there have been

over 5,000 IPOs in the United States for companies, raising $327

billion dollars.

Since 1990, 15 million jobs have been created, many of which

were from companies that didn’t even exist in the decade prior. If

you look at the fundamental demand imbalance that’s been created

in the equity markets from the cash in Flows to equity mutual

funds as well as corporate stock buy backs and cash M&A transactions, this has created a significant fuel, if you will, to support

raising capital for new companies in the IPO market.

With the aging baby boomers saving for retirement, we see a net

demand imbalance for equities for the foreseeable future.

The new economy really is a knowledge economy, and knowledge

economy is all about human capital. A fundamental tenet of the

new economy is that stock ownership throughout an organization

is absolutely fundamental and essential.

Where I live in San Francisco, it is expected that everybody from

the CEO to an entry level person owns stock in the company. And

there is an expectation that the stock of one’s own company will ultimately be a publicly traded company and that an IPO is absolutely critical not only for the modernization of the success of an

enterprise, but as a way to attract and retain key talent, which

again is absolutely fundamental to what’s going on in the knowledge economy that we are now in.

Statistically, companies are going public earlier—earlier in terms

of profitability than we have seen from our records. In fact, since

1998, 57% of the companies that went public were not making a

profit at the time.

While some of this has to do with the internet, we believe some

of this has to do just with the realities of how important it is to

be a public company in the new economy. We also think with being

a public company there comes a level of expectation from public investors which requires two things.

One is both constant and accurate information to investors, but

also a performance against expectations that is consistent with how

investors would expect a public company to perform.

Just some examples of two key drivers for performance in the

public markets and what investors look for. One is earnings

growth, but then the second is earnings growth against expectations. Three examples I would like to point out, three companies

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that have been very, very successful in this under promising, but

over delivering high earnings growth.

One is a company called Starbucks Coffee, which is now the largest coffee provider in the world. They went public in 1992, and the

expectations for Starbucks were that they were going to grow their

earnings at 27% per year. Point of fact, they grew their earnings

at 37% per year and Starbucks stock appreciated 45% per year

since 1992, or a dollar invested in Starbucks is worth $16 today.

Equally impressive, Starbucks’ stock ownership goes all the way

down to even part time employees, through what they call their

Bean Stock Program, truly a new economy type of company.

Second example, Apollo Group, which is now the largest private

university in the country focused on working adults, with over

6,000 students on line. Expectations for Apollo Group were that

they were going to grow their earnings at 25%. They performed at

50% earnings growth and the stock was actually up 89% per year,

or a dollar invested in Apollo Group’s IPO was worth $22 today.

The last example, which is an internet example, is with Amazon.com, which doesn’t make money, so they perform against earnings growth isn’t relevant. But expectations were that Amazon was

going to grow their revenues at 69%.

Point of fact, they delivered 350% revenue growth, and a dollar invested in Amazon at its IPO are worth $60 today.

How do you identify what are key, crucial issues and characteristics that investors are looking for in companies that are going public and what really makes a great public company? One is high

earnings growth and the other is performance against expectations.

This idea boils down to four characteristics which we think are

absolutely crucial that investors are looking for; what I call the

four Ps for a public company.

The first P stands for people. There is no shortage of interesting

business plans or ideas out there, but execution is the key. Many

of these companies that are going public do not have long corporate

histories, but the people at these companies all do.

Investors are looking for a management team, first and foremost,

that they feel can execute and perform to a level of the opportunity.

The second P stands for product. And here what we are really

talking about is a company that leads an industry, has a dominant

position within a marketplace, a one of a kind type of company,

some type of claim to fame. ‘‘Me too’’ companies are of very little

interest to public investors.

The third P stands for potential. Here, investors are looking for

smaller companies that can be big companies, open ended growth

stories, something that is going on that creates a tail wind at the

back of these companies.

In this, and through the written testimony, we show a chart how

investors think about these megatrends that are going on in the

new economy: globalization, outsourcing, demographics, branding,

consolidation. And the megatrend of all megatrends, the internet.

And how those cut across the growth sectors of the economy we

think are very important for how investors look at the companies

they invest in and really create this tail wind that I alluded to.

And the last P stands for predictability. This is the performance

against expectations. This is having a business model that will

12

allow a company, as a public company, to perform as public investors would expect.

So just in summary, an IPO and being a public company can

have tremendous benefits for the issuing business. Moreover, in the

new economy, broad employee ownership and stock options are a

competitive necessity. We think that the U.S. capital markets have

provided and will likely continue to provide funding liquidity for

promising enterprises.

But critical to that is to be able to have markets that are open

and equitable. And companies need to have appreciation and understanding of what the responsibilities of being a public company

are.

Thank you.

[Mr. Moe’s statement may be found in the appendix.]

Chairman BARTLETT. Thank you very much.

Mr. Ellison.

STATEMENT OF KEITH D. ELLISON, INTERIM DIRECTOR,

WHARTON SMALL BUSINESS DEVELOPMENT CENTER

Mr. ELLISON. Good morning, Chairman Bartlett, Congressman

Davis, and other members of the subcommittee.

My name is Keith Ellison and I am the Interim Director of the

Wharton SBDC, a unit of the Sol C. Snider Entrepreneur Research

Center at the Wharton School.

I also represent today the Association of Small Business Development Centers, which comprises over 1,000 SBDCs across the country, each of which are parts of higher educational institutions.

I would like to thank you for inviting me here today to discuss

the process of going public and selling securities on the stock exchange. The focus I would like to cover today are the barriers. But

before we go into the barriers, I would like to step back and discuss

the successes that we have had throughout the SBDCs.

We work with companies like ViaSat in getting them to the point

where they are ready to go public. In Philadelphia, one of our

most—one of our high profile clients has been CDNOW. I am sure

a lot of you are familiar with it.

CDNOW is the leading player in e-commerce in the music industry. Another player is a company that took advantage of an exemption through the SEC under Regulation D504. It is called Next

Step Magazine, which talks about cultural diversity.

Before we can really go into the barriers of success or the barriers of an IPO, and before we can talk about solutions, let’s talk

about what the common definition is of success. Let’s establish

what a definition of a successful IPO is.

Because a successful IPO means different things to different people. To an investment banker or to the underwriter, it means buying a block of stock and selling all of them to the public for a premium. To a day trader, it means taking advantage of the IPO and

taking advantage of the hype surrounding the IPO and buying it

at its low point and selling it at its peak.

To all the other players in the IPO process, the accountants, the

attorneys, the underwriters, the transfer agents, success means different things to different people. My point here is that there is diVerDate 20-MAR-2000 14:20 Apr 13, 2000 Jkt 010199 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HEARINGS\60694 pfrm08 PsN: 60694
13

vergent interest among all the players, among all the parties when

you are involved in an IPO, which leads to the barriers.

Barrier one is assembling the IPO team. It is very difficult for

a small business to find people with the right context who can

navigate themselves through Wall Street, who can speak the language of the SEC to make the process extremely efficient.

And just to add a bit of humor here, finding the right IPO team

is analogous to a story. It is a story of a fifth grade class where

the teacher—it was a history class and the teacher was talking

about how the country was founded and who were the players and

what were some of the significant dates.

And so finally, she came to little Johnny. And she says, ‘‘Johnny,

tell me, who signed the Declaration of Independence?’’

And Johnny looks at her and he says, ‘‘I don’t know and I don’t

give a heck.’’

And he says, ‘‘Look, young man, you go home right now and do

not come back to school without your father.’’

So Johnny goes home. He’s trying to explain to his dad why he

is home so soon. So his dad says, ‘‘Johnny, slow down. Tell me

what really happened.’’

And he says, ‘‘Well, Dad, she asked me who signed the Declaration of Independence. I said I don’t know. And she says, ‘Well, do

not come back to school without your father.’ ’’

So his father looks at him and he says, ‘‘Well, look. I am going

to go down here and straighten this out. But if I find out that you

signed that darn thing, you are going to be in serious trouble.’’

[Laughter.]

That is analogous to what an entrepreneur faces when they are

trying to find the right accountant, the right attorney, the right

printer, the right board members, the right advisors who can guide

them down the path to meeting the right investors.

And therein lies the problem or part of the problem. But it is not

just the players. It is also the experience of the entrepreneur. Because to go public, as my distinguished panelist said, you look at

the people, the people who are going to take the company to the

next level.

And that is where the role of the SBDCs across the country play.

We educate and we train entrepreneurs to get to that point where

they can matriculate through the early stages where someone is

using their own money or the money of a rich uncle, to the point

where they can get an SBA backed loan or an angel investor, to

the point from there to a venture capitalist, and then to go public.

It is that point—that process where SBDCs have the greatest impact. To underscore my point about having context, one of the

greatest examples was Joe Segel, founder of QVC and also founder

of Franklin Mint. Joe Segel, in 1986, took the company public, took

QVC public based on a business plan and, of course, his reputation

in the context that he has—or he had.

There are few Joe Segels of the world. And so again, that is just

one example of the importance of where the emphasis of the person

and how much credence that person brings to taking a company

public.

Barrier number two, which is most likely the biggest deterrent,

is the cost. It is very common, during the IPO process, for a busiVerDate 20-MAR-2000 14:20 Apr 13, 2000 Jkt 010199 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HEARINGS\60694 pfrm08 PsN: 60694
14

ness to spend half a million dollars from the time that they are

planning—from the point that they say let’s go public until it is

wrapped up.

And that is an extreme deterrent. Not everyone can raise that

kind of capital.

Barrier number three is continuous distractions. An entrepreneur should be doing what an entrepreneur should be doing.

That is running a business. And unfortunately, because of all the

right reasons, sticking to the strict rules of the SEC—and when I

say all the right reasons, I mean proper disclosure, public protection.

Because of those reasons, it is an emotional drain, it is an energy

drain, and it distracts an entrepreneur from running his or her

business when they are coordinating with all the other IPO team

members and when they are communicating with the SEC.

So, in summary, barrier one is assembling the IPO team. Barrier

two are the cost barriers. And barrier three, again, are the continual distractions. And I must repeat those are the areas that the

SBDCs of the world play the biggest—have the biggest benefit for

entrepreneurs.

Again, I would like to thank you for allowing me to present

today, and I look forward to being a part of the process moving forward.

Thank you.

[Mr. Ellison’s statement may be found in the appendix.]

Chairman BARTLETT. Thank you very much.

Mr. Dankberg.

STATEMENT OF MARK DANKBERG, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, VIASAT, INC.

Mr. DANKBERG. Good morning. Thank you very much, Mr. Chairman, ladies and gentlemen. And thank you very much for the opportunity to tell ViaSat’s story. It is really an honor for us to be

here at all.

I have submitted a written statement for the record and would

like to summarize some key points here.

We think we are a prototype of the American success story. Steve

Hart, Mark Miller and I started the company in 1986 working out

of a spare room in my house. We have grown in sales every year

and we have been profitable every year after the very first year.

ViaSat’s now headquartered in Carlsbad, California, near San

Diego, and employs about 400 people with sales over $70 million

dollars for the fiscal year that ended March 31st of this year. We

are a high tech company specializing in advanced digital communications products and systems.

Generally we compete with and work with companies like Motorola. Most of our products involve satellite communications networks, and ViaSat serves customers around the world including the

U.S., Europe, Asia, Australia and Africa.

And we even have satellite communications equipment on Air

Force One. Most of our business is in defense, but our fastest growing segment is commercial satellite networking. We started as a

self funded start up with about $25,000 from the three of us.

15

We later raised about $300,000 in venture seed funding, and

then, a few years later, got a commercial bank line of credit. We

ended up doing about a $20 million dollar public offering in December of ’96 and are listed on NASDAQ.

We believe the American entrepreneurial environment is the best

in the world. We think we are a good example that our system

works; that public and private resources available to entrepreneurs, combined with hard work, dedication and at least a little

bit of luck, offers real opportunities to live the American dream,

starting a company and taking it public.

The Government Small Business Innovation Research Program,

known as SBIR, was a big enabler for growing our company to the

point it could go public. We think we have been one of the most

successful companies at converting SBIR seed R&D funds into commercially viable phase three business.

We think the SBIR program is probably the single most effective

Government program for fostering both the growth of small business and for innovation. Our first direct Government program was

actually a $50,000 SBIR phase one contract for a communications

environment simulator for the Naval Air Warfare Center at Patuxent River Naval Air Station in Maryland back in 1987. That $50,000 phase one earned us an additional $500,000 phase two contract. But since then, we have received over $40 million dollars in phase three contracts from the Navy, Air Force and prime

contractors like Lockheed Martin for products we developed directly from that initial award and we still do work for the same

customers.

Plus, we estimate that the DOD saved about $40 million dollars

because of the technology that we developed under that SBIR program. And we have been able to repeat that success in a couple

other business areas generating over $100 million in contracts with

similar savings to taxpayers. Building on that foundation, ViaSat reached about $20 million per year in sales and close to about $2 million in pretax profits in

our fiscal ’96, the year we went public. We had also earned a small

foothold in commercial satellite networks.

We found the process of going public to be straightforward, but

very time consuming. Probably the single biggest factors though in

dealing with that are the volatility of the stock markets and the

global high tech product markets, which greatly influenced the timing and reception for an IPO.

We found the SEC, in particular, to be positive and constructive

to work with in assembling our offering documents, with the big

issue really being to present a fair and balanced view of both the

opportunities and risks of investing in our company.

We have been public for about three years. We felt like we had

a good understanding of the changes that would be involved in

being a public company. But I would say that the reality has probably been a little ‘‘more’’—with ‘‘more’’ of almost everything in

terms of time consuming than we anticipated.

Not that that is due to anything necessarily bad or bureaucratic.

It is just something that every company ought to be aware of.

Overall, I would say that the company and its investors have had

a positive experience. Well, the company has, and I hope our invesVerDate 20-MAR-2000 14:20 Apr 13, 2000 Jkt 010199 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HEARINGS\60694 pfrm08 PsN: 60694
16

tors have. And I believe access to the public markets is a big advantage to American entrepreneurs.

Thank you once again for providing an opportunity to tell our

story here.

[Mr. Dankberg’s statement may be found in the appendix.]

Chairman BARTLETT. Thank you very much.

Washington is full of acronyms and you all have used some acronyms in your presentations. I would just like to get on the record

what some of these acronyms stand for.

IPO? Just about every one of you used IPO and I do not think

any one of you defined it for the readers. IPO is what?

Mr. WALL. Initial public offering.

Chairman BARTLETT. Okay, initial public offering. That is when

you go public, okay?

SBDC? I am really pleased that two of our witnesses referenced

the good help that the Small Business Administration had been to

them. SBDC is what?

Mr. ELLISON. Small Business Development Center.

Chairman BARTLETT. Okay, and they are located where?

Mr. ELLISON. There are a little over a thousand across the country. Most of them are parts of universities. In fact, I believe close

to 99% of them are parts of universities. The Association of Small

Business Development Centers is sponsored by the SBA, and they

are headquartered in Virginia.

Chairman BARTLETT. And their function is what?

Mr. ELLISON. The function is to assist emerging businesses with

management consulting, which means assisting with business

plans, overall operational issues, helping them grow the business,

helping them reach their milestones, as well as training.

Chairman BARTLETT. One of the resources that you have available are the SCORE people?

Mr. ELLISON. Yes, we do.

Chairman BARTLETT. And can you tell us what——

Mr. ELLISON. We are in partnership——

Chairman BARTLETT. Can you tell us what SCORE stands for?

Mr. ELLISON. That is a very good question. Forgive me, I always

do not remember that acronym, but it is—I know the last two is

retired executives.

Chairman BARTLETT. Okay, it is Service Corps of Retired Executives.

Mr. ELLISON. Yes.

Chairman BARTLETT. And I am particularly fond of this part of

the Small Business Administration because I think we get the most

bang for the buck there. They do not get paid anything. We pay

their travel expenses and these are retired executives who just

have fun helping other people do what they did.

And then the last one is SBIR?

Mr. DANKBERG. SBIR is Small Business Innovation Research

Program, and that is administered by various defense or non-defense research agencies and the Small Business Administration.

And it is a way to provide relatively small amounts of seed funding

for R&D to small businesses with under 500 people, and we think

it is a great program.

17

Chairman BARTLETT. Well, thank you. We are very pleased with

the reception that the Small Business Administration programs

have across the country. Not all of taxpayers’ dollars are spent as

well as these dollars are spent. They plant the seed that yields big

rewards for our American economy.

Let me turn now to my colleague, Mr. Davis, for his questions

and comments.

Mr. DAVIS. Thank you very much, Mr. Chairman.

As a matter of fact, as I was listening to the testimony, I was

tempted to run out and give Aida Alvarez a call and say run over

here quick. I mean, there is some people saying some good things

about the Small Business Administration and so you better hurry

up.

And I also was wishing that some of the appropriators would

have been here also and some of those who have put together our

budget who think that some of the resources we have been asking

for the Small Business Administration is not quite needed.

We are afraid that we may not end up with what we need to

carry on all of these interesting and exciting programs. But that is

simply a way of saying——

Chairman BARTLETT. If the gentleman would yield for a moment.

There is a joke that always gets a laugh from an audience. The

fellah comes up and says, ‘‘I am from the Government and I am

here to help you.’’ You know, that does not get a laugh when they

are from the Small Business Administration because these are

Government people that are there to help and it is generally recognized and I thank you all for your input.

Mr. DAVIS. Absolutely.

I have one question, Mr. Lane. I was trying to determine, are

there any type businesses that we are seeing making more of a

move towards going public than perhaps others are? Are there any

businesses that are prime possibilities or in better position in

terms of public perception at the moment than others perhaps to

pursue public movement?

Mr. LANE. The short answer is yes. And there are several people

at this table and you heard from some of the panelists that obviously the technology sector has been the number one. A lot of this

is really driven by what investors want.

And as you heard from my colleague on the panel here, investors

are very interested in internet companies. That is why you are seeing them have such an easy time. You are really seeing companies

that have a life—a corporate life of less than a year starting the

public offering process, which is unheard of.

And there is a great appetite by investors for anything with a

.com, as you have read in the paper. I think some of that enthusiasm is quietening a little bit, but we are seeing it in telecom. It

is very hot right now.

Biotech fluctuates. It sort of goes out for a while, comes back in.

But it is really driven by market taste more and maybe other panelists would have something to say. And you will find that, for now,

if you want to put together a real estate investment trust, the market is not as excited today, and so people are going for the technology as a result.

18

But it is really driven, I think, in short by investor appetite. That

is what we are seeing at the SEC.

Mr. DAVIS. Anyone else want to——

Mr. MOE. Just to kind of elaborate or reiterate, I mean clearly

when you look at companies that have gone public over the last two

years in particular, the lion’s share have a technology orientation,

many of which are internet or .com type of names.

And, you know, there are different seasons where investors have

different appetites, but clearly the wave of technology is such that

it almost seems to be an insatiable appetite for investors to find innovative, growing technology companies.

Mr. WALL. And I think this is being driven by the new economy

that you talked about. It used to take years to create a product.

What we are seeing now is compounded innovation. You start a

company and it branches out into three or four new products.

Those products create companies themselves. If you look at

Microsoft, for instance, the number of companies Microsoft has

spun off in new products is tremendous. And so what you are seeing is the compounded innovation of ideas in the information technology area. And you are seeing them come to market much, much

earlier because they need capital to go through the various stages.

Mr. ELLISON. I would like to add a comment also. At the Wharton SBDC, just our client base—the composition of it took a transition from a year ago. About a year ago, about 40% of the new cases

that came our way were internet-based. Now it is closer to 75%.

As a matter of fact, part of the Sol C. Snider Entrepreneur Research Center, we host a business plan competition among students

throughout the university. And I do not remember the figures, but

there were at least 200 submittals and there were six finalists.

All six were .com companies. My prediction, which will hopefully

lend to the discussions and lend to our solutions to this, is that

there is going to be a backlog for the SEC because of this .com

fever.

Mr. DAVIS. I think all of your comments actually not only point

out what is happening then in this arena, but it further raises the

issue and the question of the digital divide and how important it

is to make sure that our educational systems contain the kind of

technology opportunities for youngsters and young people so that

they will be in a position to take advantage or to compete.

Mr. Lane, also I wanted to ask you what has been the response

to the town hall meetings that you have held?

Mr. LANE. Well, so far we have had great response. We started

out our first few getting like 75 people and such. We now—in Kansas City, we had over 200. In Seattle, it was standing room only

when we went there.

And as I said, we typically have the Small Business Administration representative there, as well as the state securities commissioner. And to my knowledge, it is the only place where we put together all three pieces.

Sometimes small businesses that come to these—these are really

small businesses sometimes—they are not ready to go public, but

they want to hear what they need to know, and they would rather

talk to the SBA people about their 8(a) program or, you know,

something like that.

19

But they still want to hear about what they need to be thinking

about going down the road. And for a lot of people, the thing they

forget most is that the states also register. If you are a small business and you do not list on the NASDAQ National Market System

and the New York Stock Exchange, if you do not list on one of the

national markets, you have to be reviewed in each state in which

you want to sell.

And small businesses need to be aware. That is why we make

sure to work closely with our state regulators and the SEC does

that. So I think it has been very successful because many states

also have some pro small business programs. They want to get out

there and say here is what we are doing as well to try and facilitate.

So, so far I have been very pleased.

Mr. DAVIS. Well, you have got me thinking that I probably want

to look at putting one of those together in Chicago.

Mr. LANE. We had one in Chicago actually——

Mr. DAVIS. Really?

Mr. LANE [continuing]. In ’97 I think.

Mr. DAVIS. Oh, okay.

Mr. LANE. I’m looking back at Richard and Barbara here who

help coordinate these programs. But Chicago is, I think, the second

one. We started in Los Angeles, then Chicago. And we have been

looking now for some of the smaller communities that never see an

SEC person.

You know, in New York we do not have a Small Business town

meeting in New York even though they have Silicon Alley that is

growing there. They see a lot of SEC people. There are conferences

and whatever.

And I am thinking places like Kansas City and, you know, Birmingham or, you know, Pittsburgh, places that have a lot of companies, San Diego, that do not normally get Government people all

together to talk to them and answer their questions is sort of

where we have been focusing lately.

We actually have one—we are going to do one in Anchorage because there was a great deal of interest in a Chamber of Commerce

up in Anchorage, and others have been very supportive of putting

this program together. And it looks like we are going to get a big

turn out, so that is the next program.

Mr. DAVIS. I think my last question here is have any of you

heard any reservations from people who are afraid that as most

small businesses look at going public, or as we move to the point

of small businesses seeking to grow and develop, that somehow or

another that will take away the small business aura and that everything is just moving towards becoming, you know, a Microsoft

or whatever?

Mr. ELLISON. Well, I will take a swing at that one first, and this

is just my opinion. I think, based on the number of small businesses that are actually public and the number that are going public compared to those that are not, I personally have not heard a

fear.

And the rate that companies are going public is so small that I

do not see it instilling a fear. But I want to get back to your previous question about town hall meetings. There is a very important

20

element with doing business in general that everyone should look

at, and that is the diversity element of doing business.

And I say that to say that the IPO process and thinking about

IPOs can be intimidating to individuals depending on their educational level, depending on their geographic area, depending on

their cultural make up.

And as we look at ways of tweaking the process, of rolling out

more forums, more town hall meetings or whatever is appropriate,

I think that is something that should be looked at closely because

someone in Boise, Idaho—let’s just say a white male in Boise,

Idaho versus a Latino in Houston, Texas, there are various ways

that you should communicate, and those are the things that you

should look at.

Because everyone in those communities—each person in those

communities can bring something to the table and bring something

to the economy. And again, like I said, I am more than willing to

assist the subcommittee in those efforts as well.

Mr. DAVIS. Thank you.

Thank you very much, Mr. Chairman.

Chairman BARTLETT. Thank you very much.

Mr. Lane, you mentioned testing the waters. Did I understand

correctly that while you are doing that, you could sell up to $5,000

worth of stock?

Mr. LANE. No, you cannot. What testing the waters does is not

permit you to sell, you just inquire.

Chairman BARTLETT. If I wanted to sell, will you be interested

in buying?

Mr. LANE. That is right.

Chairman BARTLETT. Okay.

Mr. LANE. Then you have to grow quiet for a while. After you

have tested the waters and people said yes—you know, you run a

bakery or something, people come in and they say we love your

pastries. Boy, if you sold stock, count us in, you know, sort of thing

or whatever it might be.

Then you would say fine, I am going to the expense, I am going

to hire a lawyer, I am going to get my financials in order and all

this sort of thing. And there is a period of time that elapses. Then

you can file this Regulation A. It is a Form 1A that you can do in

Q&A format. It is a very easy form.

Then you can sell. Once you go through the SEC, up to five million dollars in one year.

Chairman BARTLETT. And it is only recently that they have been

permitted to test the waters?

Mr. LANE. Yes.

Chairman BARTLETT. Well, how did they ever make a decision to

go public if they couldn’t ask somebody if I was selling stock, would

you be interested in buying it? It would seem to me that that is

a necessary step in making the decision to go public.

Mr. LANE. I think the commission recognized that, what was it,

in the early ’90s—in ’92 when we adopted that provision. I think

what happens is that the SEC just kind of knew that people were

talking and you tried to chill it as much as possible, but they would

actually talk about precise aspects of what the offering would be.

21

The idea is because when you are regulating offers, the investors

need to know at the time I show up at your doorstep and say I

have got this great idea and I would like to know if you would be

interested in it, that you say who are you, you know, what is your

background, you know, these kinds of questions that you need to

ask.

And you need to know that before you write your check rather

than after you write your check. So that is why. And you are right,

small business people in particular were saying hey, you know, this

is coming out of some of the forums we had earlier last decade

about we would like to be able to talk to people.

We would like to be able to ask people if they would want to invest. And before you would have to kind of go to an investment

banker. How they used to do it is they would go to the—if you are

a real small company, you go—maybe you would go to an SBDC.

You would go to a little regional investment bank, a regional—

you know, not Merrill Lynch right off the bat if you are a little

company, and you say here is my idea, do you think anybody would

be interested in it. And the SBDC would say yeah, this is an interesting idea or that is not going anywhere.

And the same with the regional investment bankers. You would

use them as your agents to try and find out. When we allowed testing the waters, you could do it direct, disintermediate. You can go

direct. And that is going to be actually even more interesting in the

age of the internet.

Mr. DANKBERG. We found we use medium size investment banks.

And one of the things that was important to us is even though the

company itself has to invest a lot of money in the IPO process, so

do the investment bankers. I mean, they also spend a lot of money

in the anticipation of the IPO.

And one of the things we rely on is the investment bankers’ opinion about the viability of being able to sell stock. If the investment

bankers think there is a market for it and they are willing to risk

their money, that makes it—generally it is a good sign for the company.

Chairman BARTLETT. Thank you.

You mentioned town hall meetings. I was wondering if you ever

held those in conjunction with the representative in that district?

Mr. LANE. We have. Now, Chairman Levitt does investor town

hall meetings, too. We have investor town hall meetings and we

have small business town meetings. And the chairman has done

some of each. The investor town hall meetings oftentimes are done

with members of Congress that are invited too to just kind of hear

what investors and their districts have said. Small business—we

had one in Las Vegas that had a senator present. We usually invite

members, especially if we know there is someone that is on the

Small Business Committee or something like that that might be interested. Like at Kansas City we invited Congressman Bond because he is on the Small Business Committee.

And you know, sometimes they show. A lot of times they do not.

It is really the Chamber of Commerce that tells us who is interesting in the local community that is pro small business that might

like to attend.

22

And so we work with the Chamber of Commerce to do that. But

we are happy to, you know, work with members of Congress. And

anybody who is interested in small business that would like to be

a part of that we reach out to.

Chairman BARTLETT. I would think members of Congress would

be very interested. Our district, for instance, we have only one company in our whole district that is not small business. So small business is certainly the engine that drives the economy in our district.

We have been joined by Ms. Millender-McDonald, and I wondered if she had any observations or comments?

Ms. MILLENDER-MCDONALD. Now, Mr. Chairman, thank you so

much, and indeed I have as the ranking member of empowerment.

And certainly I agree with you. And let me first thank you and the

ranking member, Mr. Davis, for holding this hearing.

I was in the aviation subcommittee and talking about delays and

bad weather and all of that, so I had to really get my two cents

in there before coming here. So I am sorry for this delay.

But you are absolutely right, Mr. Chairman. The small businesses will be the engine that drives, especially in the 21st Century. And we also recognize that women-owned businesses are really the largest business growth now in that whole spectrum.

But given that, a couple of weeks ago I had a hearing on going

public and we found that, in talking with those who were at this

hearing, that most of the businesses would like to go public because they want to either grow their business or want to expand

the business, but they had a difficult time with access to capital,

especially African-American businesses.

So I would like to ask each of you what are you doing to ensure,

if at all you are, that type of—those types of barriers—to eliminate

those barriers; and, if at all, the percentages of small and minority

businesses, specifically women and African-American businesses,

that you are reaching out to and helping them for that access to

capital?

Mr. LANE. Well, maybe I will start as representing the SEC. We

do have a special small business program that reaches out to all

small businesses in the sense of not only the exemptions that are

available for raising up to one million dollars.

We do not have a targeted program for—as the Small Business

Administration has for like 8(a) programs for women and minorityowned businesses. What we do is we just help anyone who calls.

You know, we have the brochures and we go out and do our town

hall meetings around the country and not necessarily in the biggest

of cities and invite everybody and work with the Chamber of Commerce and people that know the areas to hope to get any kind of

small businesses that normally never get to see a Federal

Government——

Ms. MILLENDER-MCDONALD. Mr. Lane, given the fact that those

have been barriers, would there be some interest in your extending

beyond the stretch of what you are doing now to extend to those

areas that have been most, you know, impeded by the growth with

the inability to have access to capital?

Mr. LANE. Yes, absolutely. And if there was a district or some

area or some kind of program——

23

Ms. MILLENDER-MCDONALD. Thirty-seventh congressional district

in California will be the first step.

Mr. LANE. Okay, just let me know and we will work with you

to—if we can get—all we ask is that we get a sufficient turn out.

You know, if we can get the——

Ms. MILLENDER-MCDONALD. Oh, absolutely.

Mr. LANE. If we can get the interest, then we will come.

Ms. MILLENDER-MCDONALD. Okay, fine.

Mr. LANE. That is all we care about.

Ms. MILLENDER-MCDONALD. Very well.

Mr. Wall.

Mr. WALL. We do not have specific programs either. What we

have is criteria for listing, and that is how we judge a company

whether it can come into our market as being a public company.

Those rules obviously are filed with the SEC and approved.

But we do segment our market between national market companies and small companies, small cap market companies. And the

net tangible asset requirement for a small cap company is only four

million dollars. So we have tried to provide an opening for small

businesses to come in to Nasdaq through the public markets.

We do not distinguish, however, in terms of minority ownership.

And quite frankly, that is in the prospectuses, that is open and on

our web site so you can go in and look to see who the management

is and that information is available.

Ms. MILLENDER-MCDONALD. Sir, again, given the fact that the

majority of business growth, especially small business, is that of

women, and women tend to have the least amount of capital to try

and expand, is there a program within your four million dollar

range that you can help them in finding those connects to, you

know, help in this access to capital?

And is that something that I can interest you in?

Mr. WALL. You certainly can. At this stage, we do not have that.

And yet, maybe there is a step before the public process whereby

you could find a way to do that in the venture capital area, in the

angel capital area, in the area that we were talking about before

in terms of small business. I think that may be the first step. Because a problem that we find for new companies coming into the

market if you look at Nasdaq last year, is that we had to delist

over 10% of the companies on Nasdaq for not meeting continued requirements.

Part of the reason for that is the fact that managers coming into

the marketplace do not have the experience, do not have the education, do not have the background, and that has to start before

the IPO process. That really has to start on the educational basis,

it has to start in with the venture capitalist where you have mentoring to those smaller companies, and in other ways of finding

capital.

Ms. MILLENDER-MCDONALD. And I certainly do agree with you on

that a lot of times this technical experience and skills that are

missing. But you know, there is a need also for some of you to help

in that area as well because, again, we are looking at the majority

of the work force in the year 2000 and beyond will be women, minorities, and there has to be some kind of program that you put

24

in place to help your future workers and future persons that will

be involved in what you do.

And I think it is important that we look at helping you to help

us to grow this country through its small businesses through the

technical assistance, as well as the education, and the other outreach programs that I am here to call upon each of you to look at

and work with me on, as I am hell bent to empower small businesses during my course as ranking member.

Mr. Moe, is it? Okay.

Mr. MOE. First of all, I am in research at Merrill Lynch. I am

not an investment banker or involved with policy. In any event, the

key responsibility that we have in research is to be looking at identifying attractive companies for our clients that will do well for

them from investing capital in those enterprises.

From that, just an observation. What matters for how well these

organizations do, going back to my original testimony, it is the

earnings growth and success of a company which leads to the performance of the stock.

And so first and foremost, it is completely indifferent. It is the

success of the company which matters. An observation I would

have would be that, from a female standpoint, female CEO, female

run business, back when I started in this business, that was sort

of a noteworthy, unique situation.

Today it is so common for many of the companies that we see

that we think are extremely attractive companies. You just do not

think twice about it, or at least we do not because we see it so

often.

So anyway, just the punch line——

Ms. MILLENDER-MCDONALD. Well, let me ask you, what is your

definition of ‘‘attractive business’’ or ‘‘attractive company?’’

Mr. MOE. Attractive company is one that can grow their revenue

and earnings at a very high rate for a very long time, has a sustainable and competitive advantage, has a claim to fame to their

business, and something that ultimately will continue to be successful for the foreseeable future.

Ms. MILLENDER-MCDONALD. And do you see a lot of female businesses in this attractive business mode?

Mr. MOE. Yes, we have significant involvement with a number—

as I just think about it off the top of my head, a number of companies are led by female CEO executives.

Ms. MILLENDER-MCDONALD. I would like to have you do a report

back to me, if you will, on those companies that are female and minorities who fit your mode of attractive businesses.

Mr. MOE. Okay.

Ms. MILLENDER-MCDONALD. Thank you.

Mr. Ellison.

Mr. ELLISON. Yes, good morning, Congresswoman McDonald.

I think that your question is a very good question. At the same

time, I think the right—first question would be what has your—

or what is your entity doing to look at itself internally in order to

roll out any successful programs.

Because before we can begin to talk about programs, before we

can begin to do town hall meetings, we have to do self examinations. And in those examinations, that is where we begin to come

25

up with the right solutions. Again, I think that that is a very good

question.

You were not here when I talked about the importance of rolling

out diversity as far as town hall meetings and as far as outreach.

Before I get into what we do at the Wharton SBDC, I had mentioned that one of our clients, Next Step Magazine, talks specifically about diversity.

In my opinion, I think that every Merrill Lynch office, every SEC

office, every NASDAQ office, every SBA office should have a copy

of this magazine. And I will leave this here for you.

Ms. MILLENDER-MCDONALD. Give them each one.

Mr. ELLISON. Okay, sure.

Ms. MILLENDER-MCDONALD. And give me one.

Mr. ELLISON. I will leave that for you.

Now, back to answering your question specifically. The Wharton

Small Business Development Center is located in west Philadelphia. And west Philadelphia’s population is primarily—it is about

90%, 95% African-American. Temple, which is also in Philadelphia,

is located in north Philadelphia, and the population there is—well,

that is close to almost 100% African-American.

Also there is a large Hispanic community in north Philadelphia.

Both Temple and Wharton’s SBDCs, we have outreaches specifically to those groups. There is an incubator in west Philadelphia.

It is titled ‘‘The Enterprise Center.’’

It is named after the late Secretary of Commerce, Ronald H.

Brown. That was a birth of the Wharton SBDC back in 1990 and

it grows minority businesses. And in fact, it has several successes.

It is also located at the same building that the American Bandstand Theater was back in the 1950s, and I am sure no one here

remembers that because of——

[Laughter.]

Ms. MILLENDER-MCDONALD. I take the fifth on that one.

I would be interested in that model that you have just mentioned

to try to make it a prototype or even go to the SBA to look at that,

becoming a prototype for those companies that are trying to get up

from the foot range to get to expansion and growth.

Because we do recognize that the majority of the workers that

are hired by business people are that of—are women and minorityowned businesses. And I should say most of the minority workers

are hired by women-owned businesses and minority-owned businesses.

And so we have got to grow those because that is your—those are

the future workers of tomorrow in this country. And if you do not

grow them and if you do not have technical assistance programs,

then you are going to lose out a lot, all of you, if you do not have

that in place.

Mr. Dankberg.

Mr. ELLISON. I would like to add to your comment. Traditionally,

society and large corporations, as well as small corporations, have

ignored the various diverse markets. And not just ethnic diversity,

but also women——

Ms. MILLENDER-MCDONALD. Gender, yes.

Mr. ELLISON [continuing]. That dimension. Let’s take the African-American community. The spending power is between $400

26

and $500 billion dollars. Hispanic Americans spend between $200

and $300 and close to $400 billion dollars. People with disabilities

spend over $100 million dollars.

Another community that is, you know, not part of our—not part

of your question is the gay and lesbian community, and they spend

about $600 billion dollars a year. I say that to underscore the point

that there is a business reason for corporations, small entities as

well as the SEC, to develop programs for those various groups.

Ms. MILLENDER-MCDONALD. I think it is imperative that they do

that because the future dictates that those will be the majority of

persons in this nation and globally as well.

Mr. Dankberg, is it?

Mr. DANKBERG. Dankberg, yes.

Well, we are a consumer of capital as opposed to a source of capital, so I’m going to get off a little bit easy here.

Ms. MILLENDER-MCDONALD. I looked down at your name and

saw what you represent. Yeah, that is right.

Mr. DANKBERG. But I would like to give just one perspective, just

from the point of view of someone that started with a very, very

small company, three people, and grew it up to one that became

public.

And that is when you are a public company, you have two different problems. They are related, but they are definitely different.

One is growing your business just from a perspective of sales and

revenue. The other one is making your stock price go up to make

it be a good investment.

And when you are a private company, it is pretty obvious how

those things are related. You negotiate with private investors. And

if your company is bigger and growing faster, it is pretty clear why

you are worth more.

As a public company, there is a lot of effort involved in communication with potential investors about why your company is worth

more even if it is growing at a high rate because public investors—

and the whole objective is to have a very liquid capital market

which lets capital flow very quickly from companies that may be

doing well to companies that might be doing better.

And so for us, being private for quite a while is kind of like being

in the minor leagues. And we got a chance to get better at the part

about growing the company and just focus on how do we make this

company work. And then, at the time we went public, we had kind

of a machine that knew how to do that.

And the entrepreneur in myself could spend a lot more time on

the fact of educating investors about—even though we had done

well in the past, why—you know, why will we do well in the future

and why we are a good investment.

And I would not minimize how much time is involved—and effort

is involved, in that. And I think that really the kinds of SBDC programs that Mr. Ellison is talking about are a really good incubation stage for any company, whether it is minority-owned, womenowned or has all the advantages in the world just to get to develop

that type of infrastructure before going public.

That is just kind of a—you know, kind of a battle tested version

of that.

27

Ms. MILLENDER-MCDONALD. Well, we recognize incubation concepts are really great concepts and programs and projects to help

small businesses.

Mr. Ellison, you remind me of my nephew who finished the

Wharton School of Business MBA, so we are proud to see you and

all of you here today.

Thank you, Mr. Chairman.

Mr. ELLISON. Excuse me. I would just like to add one more point

to your question. Next month, November, the dates between the

7th and the 13th, is National Diversity Week and I think it is

something that it is not too late for members of the distinguished

panel here, as well as the subcommittee, to get involved in.

Ms. MILLENDER-MCDONALD. I think that is a great idea and I

would like to have Mr. Lane, Mr. Wall, Mr. Moe and the Chairman

to talk with us about that.

Thank you so much, Mr. Chairman.

Chairman BARTLETT. Thank you very much.

I would just like to reemphasize the increasing role of womenowned small businesses. They are growing at twice the rate of the

general business community. Women-owned small businesses have

a lower bankruptcy failure rate than male-owned small businesses.

Bankers haven’t figured that out yet because access to capital is

still a major problem for women-owned businesses.

Women-owned small businesses are better employers. And I

would expect that. Women are different than men. We are having

trouble getting the military to understand that, but women are different than men. And those differences, I think, make them better

employers.

And they are better corporate citizens for exactly the same reasons. They are more compassionate, they are more caring, and that

makes them better employers and it makes them better corporate

citizens.

Mr. Wall has to leave us shortly and I just had one quick question to ask him.

There are many of our companies now that—whose stocks are

growing most rapidly in value who are making no profits. At what

point does the investor—you know, this growth versus profits

thing, at some point an investor is going to have to say some time

there has to be a profit.

When does that happen? This is quite a new phenomenon, is it

not, in the marketplace that you can have a rapidly growing business with the stocks increasing in value and you are not making

any money?

Mr. WALL. Right. Well, Chairman Bartlett, the purchasing and

demand of stocks based on future earnings is what we have been

seeing, and that is being driven by this new economy that we heard

about. And quite frankly, we build the markets. I am going to yield

to my distinguished panelist on my left here to answer that question because this is what he does as a researcher.

Chairman BARTLETT. Okay.

Mr. MOE. Well, and what investors are paying for is the expectation of future earnings. I mean, profitless prosperity cannot go on

forever. But what investors are doing is extrapolating this growth

against a market opportunity and making interpretation analysis

28

what a likely margin potential would be out into the future and

discount that back to today, and that is where the stock prices

come from.

Realistically, if you do that math, and it is always difficult to be

making analysis about futures, but typically even with the stock

prices doing what they have done without companies that are making money today, if in fact you are right about those future numbers, typically it would even support higher prices.

Where that argument falls short is there are so many variables

in terms of making that future analysis that you are going to be

wrong a fair amount. And in those cases, there will be significant

corrections in the stocks in which they can afford those benefits of

being paid for futures.

Mr. WALL. And we are already seeing that in the internet industry. There are many stocks that are well, well below what their

original pricing was because now it appears that those anticipated

earnings that we all paid for that stock price aren’t going to be

there. And as a result, they are coming back.

Chairman BARTLETT. So we are already seeing investors making

that choice?

Mr. WALL. That is correct.

Chairman BARTLETT. Okay.

Mr. Moe, you mentioned stock ownership in companies attracting

employees. Do you have any evidence that companies that offer

meaningful stock shares to their employees do better in the market? I would think the employees would be better motivated if they

are part owners and that we might see these companies performing

better.

Mr. MOE. I mean, capitalism works. Point of fact, we do not have

that data. I think that would be a great study to conduct. I think

also, and this is more anecdotal, but in San Francisco where I live,

it is hard to imagine a new company that did not offer stock ownership to virtually all of their employees because otherwise you would

never be able to get the best and the most talented people which

are truly the drivers of these new businesses.

Chairman BARTLETT. And keep them.

Mr. MOE. So it is all about attracting and retaining people.

Chairman BARTLETT. Mr. Ellison, you mentioned the role that

SBDC centers play in helping the business assemble the IPO team,

and you also mentioned the cost as one of the barriers. I notice that

cost runs somewhere eight, nine percent for smaller, $25 to $50

million dollar offerings.

When you look at the elements of that cost, I do not see any

meaningful way to decrease that cost. And I wonder if you have

any thoughts. And it appears to me that that is a barrier that is

just going to be there.

Mr. ELLISON. That is a very good question. In my opinion, there

is a solution to that. Part of that cost is in the corporate clean up

phase.

And what that means is most private companies just have to

admit there are certain things about how they run their operations

that is embarrassing if they are trying to go public, or it does not

really maintain high confidence among the public investor community.

29

Now what typically happens is they will work with their IPO

team that comprises the attorneys, the accountants, advisors, and

that is part of where the cost comes in.

The SBDC’s role is to prevent those companies from really getting to the point or to start early so that they can start the thinking process of okay, let me establish my business and let me set

up my structure, let me establish my systems so that if and when

I want to go public, everything will be in place.

It is not going to eliminate it, but it can reduce it. And it also

can reduce the continual distractions.

Chairman BARTLETT. I have the Nasdaq information booklet here and they estimate the cost of going public for a $25 million and $50

million dollar offering, and about three-fourths of all of those costs

are in underwriting discounts and commissions.

Is that soft? Can we reduce that any?

Mr. WALL. Well, actually—no, those are good numbers.

Chairman BARTLETT. Those are good numbers?

Mr. WALL. Yes, they are.

Chairman BARTLETT. That is about three-fourths of the total

cost.

Mr. WALL. That is correct. And yet there is a change. And technology is bringing that change. As we have seen a change in the

commission structure and the execution costs for regular transactions being decreased, we are starting to see the same thing happen in the underwriting distribution.

There are underwritings now being distributed through the

World Wide Web where traditional cost to the underwriter has

come down almost by 50%. We suspect as this part of the market

also grows, that will come down even further.

So it will open, we hope, more opportunity for smaller businesses

to come in and participate in the IPO process.

Mr. ELLISON. I would like to add something. That half million

dollar figure excludes the commissions. Yes, commissions are expensive; but if you really look at it, it is not up front costs or up

front money that an entrepreneur has to bear in the process.

Chairman BARTLETT. So your half million dollars—as a matter of

fact, it is about $2.3 million for $25 million and about $4.1 million

total start up cost for $50 million?

Mr. ELLISON. Correct.

Chairman BARTLETT. So your half million was——

Mr. ELLISON. Half million is something that you are going to

incur if you sell one share or if you sell all your shares.

Chairman BARTLETT. Okay.

Mr. DANKBERG. Or no shares.

Mr. ELLISON. Or no shares.

Mr. LANE. And Mr. Chairman, if I could add to——

Chairman BARTLETT. Yes.

Mr. LANE. The advent of the internet has also created a real opportunity for what are called direct public offerings. And this is

something that small businesses are trying to do. And they try and

sell without an underwriter.

They sell their securities directly on the internet. There have

been some that have been in the newspaper. It is not a hugely

growing phenomena, but it is something that many companies are

30

exploring. They have their own newsletters and such on how to do

direct public offerings.

On the one hand, it cuts costs considerably. On the other hand,

you lose the benefit of having an underwriter who can go find investors for you rather than just posting notices on the internet.

And underwriters also add to the process of doing due diligence on

a company and kicking the tires and looking under the hood.

And so there is the question of will the cost of capital really be

lower? Yes, you cut out the underwriter discount. On the other

hand, are investors as willing to invest in your company? And are

they willing to pay the same price they would have paid if you had

an underwriter?

And so that is—the story has not been written yet. We have to

watch and see how this unfolds.

Chairman BARTLETT. Thank you.

Mr. Dankberg, I think you mentioned that—if I remember the

numbers, you mentioned what your sales were and—you have a

roughly 10% profit?

Mr. DANKBERG. Roughly, right, yes.

Chairman BARTLETT. That is pretty good.

Mr. DANKBERG. We are happy with it.

Chairman BARTLETT. Your stock ought to be doing very well.

Congratulations.

Mr. DANKBERG. Thank you.

Chairman BARTLETT. Mr. Davis.

Mr. DAVIS. Well, the only thing I will say is that the purpose of

selling money, of course, is to make money. I mean, most people

who sell it, they sell it for the purpose of making additional money.

But it seems to me that what we are really saying is that knowledge is a tremendous factor in terms of the ability for companies

to move to another level.

And that is why I really appreciate the efforts of the SEC, the

whole concept of town hall providing information, the work that the

Small Business Development Centers do. I mean all of this, I think,

really becomes very key in helping people reach the point where

they can make that critical determination.

And my last word really was is there a critical moment in the

life of a small business where one might begin to seriously look at

whether or not they ought to go public? Is there a critical time in

the position of a company when you make that determination?

Mr. MOE. Well, I will make just a comment. I mean, with the

Dow over 10,000 and significant demand imbalance for equities

and continued investor interest in IPOs and new offerings, it is

often not the case that a company go public.

Many can, however the question is, should you go public? The

issue that I think we see and I think is fundamental; being public

is a long time. You know, the IPO’s exciting but then you have to

live with the consequences of being a public company and being

able to respond accordingly.

The reality is, if a company does not have the proper management team to be able to execute as a public company must, it does

not have the type of predictability to its business to be able to execute as a public company, it does not have its business opportunity

crystallized, it really is a mistake to go public.

31

Having said that, you could see a company that has those—has

clarity and should go public, you know, that is not making money.

It is not necessarily making money, it is not necessarily the critical

determining factor. And there could be a company that is a billion

dollars in revenue that should never go public for a zillion different

reasons.

To answer your question, there is a magic moment, I think the

moment is when you are ready to perform as a public company,

and being a public company is a smart, strategic thing both to attract and retain key people in your marketplace and how you continue to build your brand, etc.

Mr. WALL. It may be interesting to note that this year 20% of

the applications that we received to list on the national market system were withdrawn or denied. And over 60% of those for small

cap were either withdrawn or denied.

I think the managers going through that process come to a realization of what going public truly means and what they will need

to do to have a successful public company. Because obviously, if

they are not going to meet those expectations of me, the investor

who is giving my money, I am going to take that money back.

Sometimes that just does not happen until you go through this type

of process. I think the statistics are quite devastating when you

think of it, 60% withdrawing from the public process in small cap.

Mr. DANKBERG. I can tell you from a small businessman’s perspective even though going public is difficult, it is actually easier

to go public than to undo it afterwards. And so you have to keep

that in mind. I mean, and we are a company that has tripled in

three years since we have gone public, so it is not as if we regret

what we have done.

But you have to think about it carefully. And then the phrasing

of going public as being the end of the rainbow is a little bit misleading. If you have a company and you want the end of the rainbow, you are better off selling the company.

Because going public is really the start of a road that is actually,

in a lot of ways, much more difficult than being private. And if you

look at it that way, it is a new path with a lot more opportunity,

that is the right mind set. But it is a long term commitment.

Ms. MILLENDER-MCDONALD. And I think this is why a lot of minority businesses are very reluctant to going public because of the

risk factors that you have just outlined. It is so critical to them.

Mr. DAVIS. Seems to me you are saying it is kind of like getting

married.

[Laughter.]

Ms. MILLENDER-MCDONALD. With that, Mr. Chairman, I guess I

will excuse myself.

[Laughter.]

I am glad he is cleaning this one up.

Mr. ELLISON. That is a good analogy.

Mr. DAVIS. If not, then you have got a problem.

Ms. MILLENDER-MCDONALD. Mr. Chairman, may I just make one

statement though. I would like to seriously get, if I may, to have

a hearing in my district on this very topic and would like to invite

Mr. Lane—in fact, all of those folks who are out here now.

32

I think you had a great panel and they have really had very provocative information to us. And thank you again so much. I would

like to have that hearing, and I am going public with that request.

[Laughter.]

Chairman BARTLETT. Well, our district too would like to have

that hearing, so you have got two offers. And I suspect that Chicago is big enough to welcome you a second time.

I want to thank my colleagues for joining us for this hearing.

And my very special thanks to the members of the panel. You

have done a great job. I believe that the small business community

will be better advised as a result of this hearing as to what their

opportunities are for going public.

Thank you all very much, and the meeting stands in adjournment.

[Whereupon, the proceedings were adjourned at 11:49 a.m.]

(33)

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