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76–347 PDF 2012

THE JOBS ACT: IMPORTANCE OF PROMPT IMPLEMENTATION FOR ENTREPRENEURS, CAPITAL

FORMATION, AND JOB CREATION

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES

AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

OF THE

COMMITTEE ON OVERSIGHT AND

GOVERNMENT REFORM

AND THE

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

SEPT 13, 2012

Printed for the use of the Committees on Oversight and Government Reform

and Financial Services

Committee on Oversight and Government Reform

Serial No. 112–182

Committee on Financial Services

Serial No. 112–156

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

VACANCY

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman

FRANK C. GUINTA, New Hampshire, Vice

Chairman

ANN MARIE BUERKLE, New York

JUSTIN AMASH, Michigan

PATRICK MEEHAN, Pennsylvania

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

MIKE QUIGLEY, Illinois, Ranking Minority

Member

CAROLYN B. MALONEY, New York

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

JACKIE SPEIER, California

JIM COOPER, Tennessee

(III)

HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice Chairman

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

RON PAUL, Texas

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

JUDY BIGGERT, Illinois

GARY G. MILLER, California

SHELLEY MOORE CAPITO, West Virginia

SCOTT GARRETT, New Jersey

RANDY NEUGEBAUER, Texas

PATRICK T. MCHENRY, North Carolina

JOHN CAMPBELL, California

MICHELE BACHMANN, Minnesota

KEVIN McCARTHY, California

STEVAN PEARCE, New Mexico

BILL POSEY, Florida

MICHAEL G. FITZPATRICK, Pennsylvania

LYNN A. WESTMORELAND, Georgia

BLAINE LUETKEMEYER, Missouri

BILL HUIZENGA, Michigan

SEAN P. DUFFY, Wisconsin

NAN A. S. HAYWORTH, New York

JAMES B. RENACCI, Ohio

ROBERT HURT, Virginia

ROBERT J. DOLD, Illinois

DAVID SCHWEIKERT, Arizona

MICHAEL G. GRIMM, New York

FRANCISCO ‘‘QUICO’’ CANSECO, Texas

STEVE STIVERS, Ohio

STEPHEN LEE FINCHER, Tennessee

FRANK C. GUINTA, New Hampshire

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice

Chairman

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

DONALD A. MANZULLO, Illinois

JUDY BIGGERT, Illinois

JEB HENSARLING, Texas

RANDY NEUGEBAUER, Texas

JOHN CAMPBELL, California

KEVIN McCARTHY, California

STEVAN PEARCE, New Mexico

BILL POSEY, Florida

MICHAEL G. FITZPATRICK, Pennsylvania

NAN A. S. HAYWORTH, New York

ROBERT HURT, Virginia

MICHAEL G. GRIMM, New York

STEVE STIVERS, Ohio

ROBERT J. DOLD, Illinois

FRANCISCO ‘‘QUICO’’ CANSECO, Texas

MAXINE WATERS, California, Ranking

Member

GARY L. ACKERMAN, New York

BRAD SHERMAN, California

RUBE ́ N HINOJOSA, Texas

STEPHEN F. LYNCH, Massachusetts

BRAD MILLER, North Carolina

CAROLYN B. MALONEY, New York

GWEN MOORE, Wisconsin

ED PERLMUTTER, Colorado

JOE DONNELLY, Indiana

ANDRE ́ CARSON, Indiana

JAMES A. HIMES, Connecticut

GARY C. PETERS, Michigan

AL GREEN, Texas

KEITH ELLISON, Minnesota

(V)

C O N T E N T S

Page

Hearing held on September 13, 2012 ..................................................................... 1

WITNESSES

Mr. Rory Eakin, Co-Founder and Chief Operating Officer, Circle Up

Oral Statement ................................................................................................. 9

Written Statement ............................................................................................ 12

Ms. Alison Bailey Vercruysse, Founder and Chief Executive Officer, 18 Rabbits

Oral Statement ................................................................................................. 16

Written Statement ............................................................................................ 18

Mr. Jeffrey Van Winkle, Treasurer, National Small Business Administration

Oral Statement ................................................................................................. 20

Written Statement ............................................................................................ 22

Mr. Robert B. Thompson, Peter P. Weidenbruch Jr. Professor of Business

Law, Georgetown University Law Center

Oral Statement ................................................................................................. 38

Written Statement ............................................................................................ 40

Mr. Naval Ravikant, Co-Founder, AngelList

Oral Statement ................................................................................................. 51

Written Statement ............................................................................................ 53

APPENDIX

Independent Community Bankers of America, Key Jobs Act Provision Must

Be Addressed to Benefit Thrifts .......................................................................... 76

Letter to Elizabeth M. Murphy commenting on the Commission’s pending

rulemaking under Section 201(a)(1) ................................................................... 78

(1)

JOINT HEARING ON THE JOBS ACT: IMPORTANCE OF PROMPT IMPLEMENTATION FOR

ENTREPRENEURS, CAPITAL FORMATION,

AND JOB CREATION

Thursday, September 13, 2012,

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM’S

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS JOINT WITH

THE

COMMITTEE ON FINANCIAL SERVICES’ SUBCOMMITTEE ON

CAPITAL MARKETS AND GOVERNMENT SPONSORED

ENTERPRISES

Washington, D.C.

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

2154 Rayburn House Office Building, Hon. Patrick McHenry [chairman of the Subcommittee] presiding.

Present: Representatives McHenry, Issa, Bachus, Garrett,

Schweikert, Neugebauer, Pearce, Posey, Hayworth, Hurt, Stivers,

Dold, Canseco, Fincher, Waters, Lynch, Maloney, Himes, Green,

Eakin, Quigley, Ravikant, and Thompson.

Staff Present: Will L. Boyington, Staff Assistant; Molly Boyl, Parliamentarian; Lawrence J. Brady, Staff Director; John Cuaderes,

Deputy Staff Director; Brian Daner, Counsel; Linda Good, Chief

Clerk; Peter Haller, Senior Counsel; Ryan M. Hambleton, Professional Staff member; Christopher Hixon, Deputy Chief Counsel,

Oversight; Laura L. Rush, Deputy Chief Clerk; Rebecca Watkins,

Press Secretary; Ashley Etienne, Minority Director of Communications; Carla Hultberg, Minority Chief Clerk; Adam Koshkin, Minority Staff Assistant; Lucinda Lessley, Minority Policy Director;

Brian Quinn, Minority Counsel; Safiya Simmons, Minority Press

Secretary; and Davida Walsh, Minority Counsel.

Mr. MCHENRY. The Committee will come to order.

This is a joint Subcommittee hearing of both the Subcommittee

on Oversight and Government Reform for TARP, Financial Services, and Bailouts of Public and Private Programs and the Subcommittee on Financial Services on Capital Markets and Government Sponsored Enterprises.

This hearing is entitled: The JOBS Act, importance of prompt

implementation for entrepreneurs, capital formation, and job creation.

We have a tradition on the Oversight and Government Reform

Committee to read our mission statement, our Committee’s mission

2

statement: we exist to secure two fundamental principles. First,

Americans have a right to know that the money Washington takes

from them is well spent. Second, Americans deserve an efficient, effective Government that works for them.

Our duty on the Oversight and Government Reforms Committee

is to protect these rights. Our solemn responsibility is to hold Government accountable to taxpayers, because taxpayers have a right

to know what they get from their Government. We will work tirelessly in partnership with citizen watchdogs to deliver the facts to

the American people and bring genuine reform to bureaucracy.

This is the mission statement of the Oversight and Government

Reform Committee.

Because this is a joint Subcommittee, we are happy to be with

my colleagues Scott and Mike and Maxine for this hearing today.

I will now recognize myself for five minutes for the purposes of

an opening statement.

Current economic and jobs numbers remind us that the U.S.

labor market continues to face unprecedented challenges. The unemployment rate has remained over 5 percent for 43 consecutive

months, and nearly 24 million Americans are unemployed or

under-employed. To effectively address our sluggish economic recovery, the House Oversight and Government Reform Committee

and the Financial Services Committee have identified outdated securities regulations that limit job growth and access to capital,

which is the lifeblood of our economy.

Our efforts come together in an overwhelmingly bipartisan bill

known as the JOBS Act, which the President signed into law this

April. Today’s joint Subcommittee hearing represents continuing efforts by both Subcommittees to examine obstacles faced by entrepreneurs and small businesses and allow the JOBS Act to advance

capital formation and facilitate public offerings.

Supported by every member of both Subcommittees, which is let’s

just say rare in this Congress, the JOBS Act has clear-cut intentions, and that is to revitalize the creation and growth of American

small businesses.

So while Congresses intentions made and clearly stated in the

legislation, several sections provide the SEC authority to promulgate rules and regulations in a timely fashion. Unfortunately, the

SEC chairman has already abandoned her commitment to finish

the Act’s first deadline and most straightforward provision, which

is lifting the ban on general solicitation to accredited investors,

which is title two of the bill.

And although the SEC chairman has compared the recent regulatory delays of the JOBS Act to the regulatory delays of DoddFrank, the truth is that they are dramatically different. They are

worlds apart. Dodd-Frank mandates 95 rulemakings, many of

which concerned issues that are foreign to the Securities and Exchange Commission. In particular, extracted industries and conflict

minerals.

In comparison, the JOBS Act simply looks at reforms that lie at

the core of the Commission’s expertise. So while the Dodd-Frank

rules require careful and deliberate speed, the JOBS Act should be

seen as a walk in the park for the SEC.

3

Having authored the original crowdfunding title of the JOBS Act,

I’m concerned the SEC’s habitual 11th hour decision defies the bipartisan foundation of the entire legislation and may even stymie

capital formation for small businesses altogether.

This would be a tragedy for a bill whose only motive is to promote capital formation and unlock opportunities and information

for investors and job creators.

Currently, there is a real chance that our entrepreneurs and

innovators could lose their competitive advantage simply due to

outdated securities laws. However, after recognizing efforts of

Chairman Garrett, Ranking Member Quigley and Waters to modernize our Nation’s securities laws, I am confident that our Committee can continue to promote policies that ensure the United

States never becomes complacent about its environment for

startups and innovation, and I believe that the JOBS Act is a first

step in the right direction, but only if it is implemented correctly.

I thank our witnesses for attending today’s hearing. Each of

them is respected in the field of capital formation and securities

laws or particularly in the creation of granola. So we are grateful

for the witnesses today.

With that, I would like to yield the balance of my time to the full

Committee Chair of the Oversight and Government Reform Committee, Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman. My goal in a short opening

statement is, first of all, to thank you for your leadership on this.

This is a joint committee hearing, a joint committee hearing for the

reason that is pretty clear: Financial Services and Oversight have

both worked tirelessly to try to be an active part of job creation.

Our Committee and the Financial Services Committee both were

involved in Dodd-Frank and both were involved in the JOBS Act.

Your earlier statement is exactly right: Dodd-Frank has been put

in front of the JOBS Act. The SEC Chairwoman, in fairness, got

Dodd-Frank first, but, in fact, since Congress got Dodd-Frank

wrong she is having a difficult time implementing it. It is our opinion, and I believe today’s hearings will show, that the creation of

private sector jobs should come before the creation of new bureaucratic organizations, no matter how well meaning, in Washington.

More importantly, it is clear that many of the aspects of the

JOBS Act are long overdue, and, if implemented, would have given

a signal to the private sector that business was now again a priority. I commend the President for his quick signing of it, his ceremony, his statement, but, unfortunately, rose garden ceremonies do

not take the place of actual implementation or allowing the private

sector to create jobs.

In closing, Mr. Chairman, I believe we understand that if Government grows it may create private sector jobs by spending taxpayers’ dollars, but only through private sector job growth will tax

revenue close the deficit we already have.

With that, I thank the Chairman and yield back.

Mr. MCHENRY. Thank you, Mr. Chairman.

With that, I will yield to the Ranking Member, the gentleman

from Illinois, Mr. Quigley, for five minutes.

Mr. QUIGLEY. Thank you, Mr. Chairman. I thank you Chairman

McHenry and Chairman Garrett for holding today’s hearing on imVerDate Aug 31 2005 09:38 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\76347.TXT APRIL
4

plementation of the JOBS Act. I’m also pleased to be joined by my

colleagues on the Financial Services Committee Capital Markets

Subcommittee, including Congressman Waters, the Ranking Member. This is the Subcommittee’s third hearing on the implementation of the JOBS Act.

As you know, the JOBS Act was passed with bipartisan support

and signed into law by President Obama on April 5, 2012. The act

amends Federal securities laws and regulations to make it easier

for small business and startups to raise capital. Under title three

of the JOBS Act, for example, startups will be able to raise capital

through crowdfunding. This is a big step forward toward innovation and job creation in this country, and I commend the President

and Chairman McHenry for working together on this issue.

I am just as eager as my colleagues at the SEC to meet the aggressive rulemaking deadline set in the JOBS Act. I am also eager

for the SEC to finish its rulemaking under the Dodd-Frank Wall

Street Reform and Consumer Protection Act, which was passed by

Congress back in 2010. The Dodd-Frank Act, once fully implemented, will roll back the perverse incentives that cause financial

firms to become too big to fail. It establishes the stronger provincial

regulation, closing many of the loopholes that allow Wall Street to

engage in excessive risk-taking.

Especially pertinent to the SEC, Dodd-Frank takes steps to

eliminate serious conflicts of interest at credit rating agencies.

Their inflated ratings of poorly underwritten mortgage-backed securities directly contributed to the financial crisis. I believe it is important that the SEC implement the provisions of both the JOBS

Act and the Dodd-Frank Act in a timely manner. However, it is

also important that implementation is not rushed and that the

SEC gives appropriate consideration to the impact on investor protection.

Rushed implementation of the JOBS Act could result in greater

risk of fraud and harm to investors and that would ultimately defeat the act’s intended purpose of increasing access to capital for

business. In the long term, investors must have confidence in the

integrity of U.S. capital markets, and that requires SEC rules and

enforcement to prevent fraud from corrupting the new methods of

raising capital.

In June the Oversight Committee held a two-part hearing on implementation of the JOBS Act. As I said at that hearing, just as

clean water standards keep our water safe to drink, financial regulations protect us against unsafe financial products.

The SEC has a dual mission to facilitate capital formation and

protect investors, and I believe that those must be equal priorities

going forward.

There is also no reason that the JOBS Act should be prioritized

in front of the pending Dodd-Frank rulemaking. The same standards should apply equally to all of SEC’s rulemakings that are required by law. Rushed, haphazard implementation of either act is

unacceptable. And so, while I urge the SEC to move forward expeditiously, I also urge the Commission to ensure both of its important missions are met.

Thank you, Mr. Chairman. I yield back.

Mr. MCHENRY. I thank the Ranking Member.

5

I will now yield five minutes to the Subcommittee Chairman on

Capital Markets, Mr. Garrett, my good friend and wise friend.

Mr. GARRETT. Thank you, Mr. Chairman. I appreciate you and

your staff for your collaboration with the Capital Markets Subcommittee on this very important hearing today.

Having this hearing as a joint subcommittee between two authorizing committees should show both the SEC and the American public the importance and the priority of this issue. Now, I, likewise,

recently learned that the SEC, after missing its initial 60-day requirement for implementation of the general solicitation part of

this bill, had again delayed implementation. This was even after

the staff had proposed moving forward with the interim final rule.

You know, this type of delay on what is really a pretty simple,

straightforward requirement from Congress is unacceptable. The

rulemaking process is not setting up a regulatory framework for a

multi-trillion dollar derivatives market; it is, however, on a topic

that has been around for a long time, and is well known by the

SEC and by market participants. This is both extremely disturbing,

and I expect and hope that the SEC will move forward to finalizing

this rule in the near future.

Now, earlier this year Congress passed the JOBS Act. This legislation would ensure that overburdensome regulation does not

strangle innovation and job creation. Specifically, the JOBS Act

would ease the burden on capital formation on entrepreneurs and

growth companies. In addition, the legislation would provide a larger pool of investors with access to information and investment options.

So with venture capital fundraising stagnant now in this Country and initial public offerings, IPOs, market basically closed off,

innovative startup companies who cannot access the capital markets they need to grow have been forced to delay research on medical technologies, scientific technological breakthroughs. That has

hurt everyone—the economy, our global competitiveness. You

know, developing medical cures to help people live longer, healthier

lives requires capital. Developing technology to improve the speed

of communication requires capital. Developing alternative energy

technologies to reduce our dependence on fossil fuels requires capital.

So the implementation of the JOBS Act will provide these startup companies with a cost-effective means to acquire startup capital

and keep the Country at the forefront of medical, scientific and

technological breakthroughs.

So with our Nation still struggling with persistent high unemployment, it is essential, Mr. Chairman, that the bipartisan JOBS

Act implementation becomes a high priority for the SEC to be done

in the near future.

With that, I yield now to the gentleman from Alabama, the chairman of the full Financial Services Committee.

Mr. BACHUS. I thank Chairman Garrett and Chairman McHenry

for holding this joint subcommittee hearing to review the implementation of the JOBS Act.

The JOBS Act was a victory for job creation and for job creation

in small businesses. Let’s not tarnish this victory with regulatory

6

red tape that stifles the innovation, economic growth, and job creation that is intended by this bill.

As Chairman of the Financial Services Committee, I am proud

of this legislation, comprised of six pieces of legislation that originated in our Committee and passed our Committee with overwhelming bipartisan support. The JOBS Act is proof that when we

put our minds together, Republicans and Democrats can work together, find common ground, and help small businesses, which are

the growth engine of our economy.

In previous economic recoveries, nearly 65 percent of new jobs

were created by small businesses. That is not the case today, however. What we are seeing now is that almost all job growth, such

as it is, comes from small corporations. Small businesses are not

growing for two reasons. Owners and entrepreneurs tell us that the

first reason is excessive regulation, almost all of it coming from

Washington. A second reason is lack of capital. When these regulations consume too much of our time, energy, and finances, capital

is even more critical.

In the JOBS Act we removed some of the unnecessary and outdated Depression Era job barriers to capital formation so entrepreneurs have more freedom to access capital, hire workers, and

grow their businesses.

Unfortunately, the SEC has already missed three JOBS Act

deadlines, and we are here today to discuss how important prompt

implementation of the JOBS Act is to our economic recovery. The

JOBS Act was a positive step taken by Congress and the Administration to promote capital formation. It should be implemented by

the SEC without further delay.

With each job report, it becomes more urgent. American innovation and job creation must not be stifled by slow-moving government bureaucracy.

At this time, Subcommittee Chairmen McHenry and Garrett, I

would like to introduce some of the younger Members to a former

colleague of ours, Congressman Chip Pickering, who is seated in

the first row. Chip was a senior staffer and served in this Body

with distinction for several years.

I am just sorry that some of the younger Members didn’t have

an opportunity to serve with you, Chip. We welcome you back to

Congress where you are so well thought of.

Thank you, Chairmen McHenry and Garrett.

Mr. MCHENRY. Thank you, Mr. Chairman.

We will now recognize the Ranking Member of the Capital Markets Subcommittee, Ms. Waters of California.

Ms. WATERS. Thank you very much.

Normally we start out testimony by thanking the Chair for holding the hearing. I won’t be doing that this morning because I basically believe that this hearing is not necessary.

I think that what we wouldn’t see is what gets in the way of bipartisan efforts. As a matter of fact, each of our members this

morning have talked about how we cooperated to get the JOBS bill

passed, and we did. I reluctantly supported the act with the hope

that it would help facilitate capital formation and create jobs, but

I think this kind of attack on the SEC and the kind of accusations

7

that are being made does not help us to foster bipartisan support

for other efforts.

I expressed some concerns about particular provisions in the act,

including the elimination of the walls between investor banking

and research, the expansive definition of emerging growth companies, and increasing sanctions for provisions punitively by Sarbanes-Oxley and Dodd-Frank.

I understand that today we are going to focus on some aspects

of the JOBS Act that requires SEC rulemaking before they can become effective. Some of my colleagues on the other side of the aisle

will criticize the Commission for not just rushing through the process and putting a finalized rule into place before any public comment. Apparently, being upset that the SEC missed a deadline.

There are rules that were supposed to come out in July 2012.

I guess I would have more sympathy or concern if I didn’t also

see a push to delay other rulemaking by the SEC, because, while

there are complaints about slow rulemaking on a provision that

would relax industry regulation, what I also find is there have been

attempts to delay by passing legislation to delay any of the rulemaking for two years, asking regulators to re-propose the bulk of

the rules which were also due in July and trying to buy the SEC

down by an additional cost-benefit requirement, while not supporting an increase in the budget.

Now, again, I voted for the JOBS Act and I want to see it get

implemented, but complaints about the slow pace of rulemaking

under the act are simply unreasonable given these facts that I have

highlighted. I am pleased that the SEC is taking public comment

of the proposed rule eliminating the ban on general solicitation and

advertising under title two of the JOBS Act. I had an amendment

to that title which required that issuance of securities using reasonable steps to verify that the purchasers of the securities were,

in fact, accredited investors or individuals or entities that are supposedly sophisticated and not in need of protection. Given that the

general solicitation ads have been around for decades, and given

that many stockholders had questions on how to implement my

amendment, it is appropriate occurred that the public had the opportunity to comment on this provision.

After considering the SEC proposal, I am disappointed that it

didn’t require more robust verification procedures on behalf of

issuers, and the Commission also should have considered the many

suggestions offered by investor advocates and other stakeholders

for additional measures that would decrease fraud in these expanded offerings.

I would make sure that as the SEC implements these provisions

they are putting equal focus on all facts of their mission, including

not just facilitating capital formation, but also protecting investors

and maintaining market integrity.

I look to explore that with our witnesses here today, and I will

yield time to the gentleman from Connecticut.

Mr. HIMES. I thank the Ranking Member and I just want to add

my observation. I will tell you in a moment of a hall of mirrors,

and this is truly a hall of mirrors.

I have been listening since the Dodd-Frank passage to Republicans complaining constantly daily, weekly, monthly that we

8

should delay the implementation of the regulations that are there

to keep Americans—delay, we should reverse it. Now here we are

saying that the SEC, in language, frankly, which is not promotive

of the kind of comity we would have on Capital Hill, saying that

the SEC should do it faster. I heard the Chairman of this Committee say that this should be a walk in the park. At the core of

what we are talking about is protecting American investors from

risky securities.

I supported the JOBS Act. I worked very hard on the JOBS Act.

But we are talking about protecting not just those investors, but

the integrity of our critical capital markets. The Chairman of the

Government Reform Committee said we should put the creation of

new jobs ahead of creating new regulations. That is actually a

novel idea.

The military, when something goes wrong they do something

called a stand-down, where they figure out what went wrong and

how to proceed with prudence and deliberation. The private sector,

whether it is new Coke or Gibson Greetings, when they make a

mistake, they stand back and they ask, how can we avoid that happening again? We should do this, but we should do it with care and

deliberation and not worshipping at the alter of deregulation.

Mr. ISSA. Would the gentleman yield?

Mr. HIMES. I am out of time.

Mr. MCHENRY. Well, comity is a little different than comedy, so

at this point I will just say that Members will have seven days to

submit opening statements for the record.

We will now recognize our first panel. I had a request from the

Chair of the Financial Services Committee to recognize and introduce Naval Ravikant. With that, I will recognize Mr. Bachus to so.

Mr. BACHUS. Thank you, Chairman McHenry, for allowing me to

introduce my friend.

I first met Naval before the House considered H.R. 2440, which

became Title II of the JOBS Act. It was refreshing to hear from

someone who had so much passion for helping companies access

capital they need to grow and create jobs—in fact, he has been the

catalyst for several Internet companies which are now household

words. He was a strong supporter of H.R. 2940 and H.R. 2930, your

crowdfunding bill, Subcommittee Chair, in the House, and was instrumental in getting the Senate to act on the JOBS Act, which,

as we know, was not an easy thing to do.

Using technologies such as Twitter, Naval and AngelList put together a letter of support for the House bill that contained signatures from over 5,000 investors, entrepreneurs, and small businesses. Without Naval’s support, we probably wouldn’t be here discussing the implementation of the JOBS Act.

Also, a fascinating thing for me to do, I visited one of the sites

which was responsible for new Internet companies in San Francisco, and saw a building full of young entrepreneurs. They had

video games, they had basketball courts, they were watching

sports, and they were also creating new companies. Several of them

had been with Google, eBay, and other companies, and were part

of the formation of other companies.

I didn’t see any ties. I had a tie on when I first got there and

I took it off fairly quickly. But those are the job creators, and, as

9

we all know, our identity is really not in homeownership, it is in

our occupation or our job, and without a job, it really denies us a

part of who we are and our identity.

So I thank you, Naval, and I thank Congressman Pickering for

your help as a former staffer for the Commerce Committee, senior

staff. Thank you.

Mr. MCHENRY. Thank you, Mr. Chairman. In the interest of

time, I will introduce the rest of the panel. Mr. Robert Thompson

is the Peter P. Weidenbruch Jr. Professor of Business Law at

Georgetown University Law Center. Mr. Jeffrey Van Winkle is the

Treasurer of the National Small Business Association and a partner at Clark Hill. Ms. Alison Bailey Vercruysse is the founder of

18 Rabbits, a small business that makes granola and granola bars,

and from what I hear they are delicious. And Mr. Rory Eakin is

the Founder and Chief Operating Officer of CircleUp, which is a

form of crowdfunding, a wonderful website.

Both with AngelList and with CircleUp, it has been fascinating

to see what you all are doing to link up innovators and capital.

And with that it is the policy of Oversight and Government Reform Committee that all witnesses be sworn before they testify, so

please rise and raise your right hands. Do you solemnly swear or

affirm that the testimony you are about to give will be the truth,

the whole truth, and nothing but the truth?

[Affirmative answers by all.]

Mr. MCHENRY. Let the record reflect that the witnesses answered in the affirmative and they are now seated.

In order to allow for time for discussion, if you could summarize

your opening statement, keep it to five minutes. We have a light

system. Green means go, obviously. Yellow means hurry up and

finish. And red means stop.

With that, we now begin with Mr. Eakin for five minutes.

WITNESS STATEMENTS

STATEMENT OF RORY EAKIN

Mr. EAKIN. Mr. Chairman, Ranking Members, distinguished

members of the Committee, thank you for the honor of appearing

before the Joint Committee today with an opportunity to speak on

the issue of critical importance to the American economy.

I am the founder of CircleUp, a small business which supports

other small businesses seeking growth capital from accredited investors through the Reg D 506 exemptions.

CircleUp is a private investment platform that focuses on businesses outside the technology sector providing growth capital for

consumer brands and products and companies through a network

of accredited investors. My partner and I were inspired to found

CircleUp because we saw a gap in the market, namely, established,

high-grade businesses struggling to find affordable capital, and a

network of investors eager to fuel their growth. They needed a simpler, more accessible way to come together. CircleUp provides a

platform to do just that.

America is a Country full of ideas and entrepreneurs pursuing

their dreams. Over the last two decades, small and new businesses

have been responsible for creating two out of every three new jobs,

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and today the Country’s 28 million small firms employ 60 million

workers, fully half the private sector workforce.

Investment capital is the oxygen on which young businesses survive, and today investment capital market remains on a slow path

to recovery. Bank lending, venture capital, and individual investing

all remain below their pre-2008 levels, 13 percent below in the case

of angel investments.

Beyond these broad statistics are the Americans, small businesses, and investors currently limited by the ban on general solicitation. We see these companies every day at CircleUp. Kim Walls,

the Founder and CEO of Episencial, a skin care company in Los

Angeles. Kim founded her company in 2009 to bring baby-safe, all

natural skin care products to market. After extensive product development process and strong early traction from hospitals and

consumer buyers, she needed to raise expansion capital. Her company had a passionate following of customers, parents, supporters

interested in helping their business grow. Yet, because of current

regulations Kim could not even make a passing motion of the opportunity to invest in Episencial to her 20,000 fans on Facebook.

Or consider Zak Normandin, a father of three who lives in Brooklyn, New York. Three years ago, dissatisfied with unhealthy snack

food options available for his children, Zak created a new company

to create organic, healthy snack options for all children. Today, Little Duck Organics is a rapidly growing small business. They are expected to increase seven fold this year. Little Duck has hundreds

of thousands of consumers across the Country. They are passionate

about the company, but Zak is not permitted to inform them about

a capital raise. These consumers, many of whom are investors,

would surely want at least the opportunity to learn more about

Zak’s company and his vision for a suite of products delivering

healthy, organic food to children of all ages. Yet, under current regulations, Zak’s fundraising process is limited to closed door conversations with existing angel investors, many of whom were not

yet familiar with the brand.

Mr. Chairman, our current system is one that rewards entrenched investors, an insular network of institutions and individuals that favor private investor access more than the creation and

growth of new businesses. But, with modern technology and this

Act, this is going to change.

Lifting the ban on general solicitation will spur entrepreneurship

and unlock small business growth opportunity to every corner of

America, including some of the towns that today investors might

consider unlikely or uncommon. But, like Little Duck Organics, and

Episencial, we know they are not uncommon at all. Today, thousands of small businesses just like them are waiting to connect

with investors who want to participate directly in our national recovery, by backing a young company and receiving a stake in the

business in return. We just need to open the doors and make it

happen.

Of course, investor protection is also essential. I believe the best

protection is transparency and accountability. As an industry participant, I strongly support the SEC in oversight and regulations

that protect investors while providing a more efficient flow of capVerDate Aug 31 2005 09:38 Nov 02, 2012 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\76347.TXT APRIL
11

ital. If fraudulent investment schemes are permitted to prey upon

unsophisticated investors, we will all lose.

The SEC has put forth a workable set of rules to increase the

capital available for small businesses by lifting the ban on general

solicitations. When adopted, the rules will increase the amount of

information available to prospective investors.The time is now to

implement these rules, fulfilling the mandate enacted with broad,

bipartisan support in Congress and the President’s approval without further delay.

Mr. Chairman, Ranking Members, members of the Committee, I

thank you again for the honor of this opportunity and will be

pleased to respond to any questions.

[Prepared statement of Mr. Eakin follows:]

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Mr. MCHENRY. Thank you, Mr. Eakin.

Now with that we will recognize Ms. Vercruysse.

STATEMENT OF ALISON BAILEY VERCRUYSSE

Ms. VERCRUYSSE. Thank you, Mr. Chairman and other distinguished Members. I am the Founder and CEO of 18 Rabbits. I

started my business in San Francisco, and we create, like Mr.

Chairman said, organic granola and granola bars.

I started this in my kitchen with literally a toaster oven, and

now today we make millions of bars a year that we sell. So I am

in favor of lifting this ban because we make a very easily understood and approachable product. So here it is.

Our customers include people like the Fresh Market, Peet’s Coffee and Teas, Duane Reade, Google, Virgin America. That is where

we currently sell. And we also sell them in hotels, spas, yoga studios.

All of our production takes place in the United States, in California right now, and 85 percent of our ingredients come from U.S.

farms, and most of them small farmers that I have a direct relationship with.

Our competitors are large companies like Quaker Oats and Kashi

and Nature Valley, and in order to compete against these mega

companies we need the capital in order to raise brand awareness

about who we are and what we are about and who we are selling

to and why choose us.

So to grow our company what we did is we raised money from

our friends and families. I sat in my father’s living room and asked

him for $10,000, so that is how we started the company. And then

we recently closed a $500,000 round from CircleUp. Thank you,

Rory.

So in between all of that, over the course of the three years, I

applied and spoke in front of about five or six angel networks, and

then I also met with ten private equity and venture capital firms

in our State. Time and time again I was told, okay, come back

when you are X amount of revenue, and then only to be told when

I came back when we did reach that milestone, Oh, we need double

that now. So that was really frustrating, and it also takes a lot of

time. It takes time from me being innovative and getting my ideas

out there to market, and also that is not providing value to the customer who is actually purchasing our product. What is providing

value is for me to get in there and to continue to create and change

the world with what I am making.

So the other thing that we did is we went and talked to banks

and we asked them for funding. And so then we were told, Well,

do you have positive cash flow? Do you have profit? well no. If I

want to grow my business, I need to plug all the cash I am making

in revenue back into the business.

So then what happened is luckily in 2009 there was the American Recovery and Reinvestment Act where we got a micro loan

from the city of San Francisco for $25,000. That really helped us.

We were actually able to hire a couple of more people on our team.

Right now we are at about eight people.

And then the next thing that we got was a line of credit from

a bank. So last year we actually did have a profitable last quarter.

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And this year we are growing even more rapidly and we are seeing

some profit, and next year we will be profitable every quarter.

But what we need in order to continue to expand is access to

more capital, and being able to go to our loyal customers and ask

them for their money.

So a specific example about where the lack of capital held us

back was at the launch of our bunny bars. This is a package that

you will see hopefully very soon in Costco, in October. These little

bars are geared towards kids, and they are healthy and organic

and there is nothing like them on the marketplace because of the

kinds of ingredients that we use.

So because we didn’t have the access to the necessary capital, we

had to delay the launch of the product, and then we haven’t been

able to penetrate the market deep or wide enough, where all of our

competitors have a lot of money to do advertising and get it all out

there, we don’t have that right now, so it keeps us from our mission of putting healthier food in kids’ bodies.

So we also could be providing more bars through our community

service, through our 1 percent for kids program, whereby we actually give one bar out of every hundred bars made to kids in urban

schools so we can start telling them or sharing with them that we

have healthy snacks, that you don’t have to reach for a bag of

chips.

So starting a small business in America should not feel like

starting a fundraising business. With lifting the ban on general solicitation, entrepreneurs like me and some of you can focus on running and building the business instead of using that valuable time

to raise money.

Thank you.

[Prepared statement of Ms. Vercruysse follows:]

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Mr. MCHENRY. Thank you. I know when you held up the bars

I think there were questions here on the dias whether or not you

have enough for everyone.

Ms. VERCRUYSSE. Hopefully.

Mr. MCHENRY. And I thank my friend Scott for suggesting that.

With that, Mr. Van Winkle.

STATEMENT OF JEFFREY VAN WINKLE

Mr. VAN WINKLE. Thank you. My name is Jeff Van Winkle. I appreciate the opportunity to be here to present the views of the National Small Business Association. I am the volunteer treasurer of

the NSBA and a former chairman of the Small Business Association of Michigan. I am also a member of the law firm of Clark Hill

The focus of my practice is assisting small-and medium-sized

businesses, particularly in connection with raising capital.

The NSBA was founded in 1937 to advocate for the interests of

small businesses. It is the oldest small business organization in the

U.S., representing more than 65,000 small businesses throughout

the country in virtually all industries and of all varying sizes.

The JOBS Act has the potential to dramatically and positively

transform the ability of small firms to access the capital they need

to grow, to innovate and to create jobs. Counsel for issuers have

long sought increased flexibility to connect issuers with investors.

The high-cost large broker dealer model has become a substantial

barrier to getting capital to small-and medium-sized businesses

that are seeking to grow.

The passage of the JOBS Act demonstrates the broad bipartisan

understanding that existing securities laws pose an unreasonable

burden on the ability of small firms to access the capital markets.

The JOBS Act does this while continuing strong investor protections by retaining all existing State and Federal anti-fraud laws.

The SEC and FINRA are under significant pressure from State

regulators and others who oppose the JOBS Act to use the regulatory process to accomplish what they could not accomplish in

Congress. We are deeply concerned that either the SEC or FINRA

or both will impose such a high regulatory burden on issuers and

crowdfunding portals that important aspects of the JOBS Act may

become a dead letter. This would frustrate the act, the intent of

Congress and the President, and have a severely adverse impact on

the ability of small firms to raise capital.

Both the SEC and FINRA must guard against complex regulations that will undermine the purpose of the act, and instead the

regulatory framework should be straightforward and streamlined,

imposing no more necessary costs and regulatory risks in small

firms seeking to raise capital.

The Act required the SEC to issue a rule by early July to implement general solicitation provisions contained in title two of the

Act. On August 29 the Commission issued a proposed rule that

mostly restated the applicable statutory language in the JOBS Act.

No matter how the SEC ultimately proceeds, the reasonable belief standard regarding accredited investor status should be retained and the rule needs to be written so that Rule 506 offerings

not involving general solicitation are not in a worse position than

they were prior to the passage of the JOBS Act.

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In our judgment, the traditional and almost universal practice of

using investor suitability questionnaires combined with investor

self-certification to establish accredited investor status should continue to be allowed and be deemed to constitute taking reasonable

steps to verify that purchasers of securities are accredited investors, as is required by the JOBS Act.

On balance, after careful consideration of the likely outcome of

the current situation, NSBA has decided to support the proposed

rule in its current form. It is better to let practitioners, experience,

and courts work out the contours of the verification requirement

over time. Perhaps the issue can be revisited after some period of

experience with the proposed rule.

Now Title III of the act creates a crowdfunding exception to registration requirements, this provision has the potential to be of

major importance to small firms seeking capital. However, the success or failure of crowdfunding will depend upon the regulatory

scheme applied to the portals and crowdfunding issuers. We are

deeply concerned that the SEC and FINRA will both regulate

crowdfunding, but only broker dealers will become portals and

crowdfunding will become also a dead-letter-like regulation as it is

today.

We are concerned that the SEC and FINRA will miss the yearend deadline for adopting rules.

Further, regulation must be substantially different from broker

dealer; otherwise, the process will be too expensive for a million

dollar offering or less. The Commission also needs to resist the

temptation to make issuer disclosure and reporting requirements

for crowdfunding issuers a close cousin of the requirements imposed on public companies. If they do, crowdfunding will not be viable.

We would like to see Congress also address a number of small

business capital access issues that the JOBS Act does not address.

To address the issues of finders to match capital with issuers, we

would like Congress to look at permanently and substantially reducing the regulatory burden.

We appreciate the opportunity to make these remarks. Thank

you.

[Prepared statement of Mr. Van Winkle follows:]

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Mr. MCHENRY. Thank you, Mr. Van Winkle.

Mr. Thompson?

STATEMENT OF ROBERT B. THOMPSON

Mr. THOMPSON. Chairman McHenry, Chairman Garrett, Ranking

Member Quigley, Ranking Member Waters, members of both Committees, thanks for the opportunity to talk about JOBS, its affect

on the economy, the obstacles faced by entrepreneurs in raising

capital.

JOBS produced far-reaching legislative reforms in this area. It

added two new exemptions, which was, frankly, unheard of over

the 80-year history of the Securities Act, plus it substantially expanded a third exemption, so there is a whole new area that we

haven’t had before, big space. It also increased the deregulatory

space of the 1934 act, and the on ramp creates lessened burdens

for emerging growth companies.

In implementing and passing this legislation, Congress followed

an established template for securities regulations which basically,

as I told my students this morning before this hearing, involves

four essential pillars: disclosure, SEC review, increased regulations

when there is intense selling efforts versus others, and liability to

cultivate due diligence.

The JOBS Act followed this template. The crowdfunding bill includes disclosure, includes focus on intermediaries, and it includes

a 12(a)(2)-like liability. A-plus follows this template, with a focus

on 12(a)(2) liability, intermediaries, and disclosure. Implementation

should follow the same template.

To talk about a couple of specifics, crowdfunding in bills introduced by Chairman McHenry and passed by one of these Committees, reflects an innovative path of raising securities. The challenge

in this area though is that if you are trying to raise $1 million or

less, any regulatory cost will quickly eat into what you are going

to raise, and any issuer is going to look at the relative cost and

benefits of different exemptions. I mentioned the several that are

being applied.

We heard from two members of our panel already who use 506

and probably they would keep using 506 to reach accredited investors after the crowdfunding regulation occurs. That remains a dilemma for implementing that section of the Act.

I think the focus on portals may be the way to go to try to get

some innovative approach there.

Similarly, A-plus has a problem in terms of relative use. Regulation A, which is the base for the smaller amount, has fallen into

almost never being used. Now, once we increase it by ten-fold, from

five to fifty, it may be used more, but it is going to be the same

comparative dilemma. 506 is going to be more attractive to many

people who might use A-plus.

So that takes us to 506, which I think will be the most far-reaching affect of the JOBS Act. Empirical data from the SEC for the

period 2010 and early 2011 shows that more money was raised in

private offerings, particularly in 506, than in IPOs. It is already

the biggest form of public raising, and once the general solicitation

ban is removed, which will be not too far in the future, it will grow

even more.

39

I think that that will be the focus in the near-term for accessing

capital.

Now, the problem I have with 506 is that the focus is on accredited investors, which was an innovative addition back in 1982 when

the SEC promulgated it. A lot has changed since then in the sense

that an accredited investor is carrying a lot more of the weight

than it did in 1982. Why? Business in 1982 the amount hasn’t

changed—$200,000 in income, $1 million in net worth, same as it

was three decades ago. You all know what inflation has occurred

in those three decades. I actually looked up Congressional salaries,

but I won’t talk about that. The number that got my attention is

that the number of investors who qualify as accredited, in 1982 it

was .17 or .18 of all individual taxpayers. Today that number, the

cohort that qualifies to be an accredited investor is 20 times bigger.

The focus should be on that more than anything else.

I will refer you to my testimony for my other points.

Thank you very much, Mr. Chairman.

[Prepared statement of Mr. Thompson follows:]

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Mr. MCHENRY. Thank you, Mr. Thompson.

Mr. Ravikant.

STATEMENT OF NAVAL RAVIKANT

Mr. RAVIKANT. Thank you, Chairman McHenry and Garrett,

Ranking Members Quigley and Waters, and the rest of the Committee members, I appreciate your having me here to speak.

I am the Founder and CEO of AngelList. We are the world’s largest service for connecting technology startups and sophisticated investors. In less than two-and-a-half years we have helped 1,500

companies to meet VCs and angels for successful funding rounds,

and our alumni have gone on to raise over $1.1 billion on and off

AngelList.

If you look at the map up there, there’s 80,000 companies on

AngelList today spread out over the entire United States, and we

have connected companies in Colorado, here in D.C., Texas, Seattle,

everywhere, to investors in Silicon Valley and New York.

There was some discussion here about the timing of the general

solicitation and crowdfunding provisions, but I want you to know

that the JOBS Act has already had a huge impact on us in our ecosystem.

If you go to the next slide, you will see that we recently launched

AngelList Docs, which is regulatory compliance and financing closings online. This process puts $20,000 into the pocket of every

startup, and it reduces the burden of closing from a month to three

days, and major law firms have signed up to do these closings for

free. I mean, when is the last time your lawyer did anything for

free?

Thanks to the JOBS Act, we had 250 companies sign up for this

in two weeks, and that represents a net savings of $5 million if

they all use this product. That is in two weeks.

So obviously there is a discussion about general solicitation and

crowdfunding coming up. Given our learnings, helping thousands of

companies, we have just a little bit of advice on what people should

keep in mind as we think about implementation.

On general solicitation, we think it is important that the

verification of accredited investors be doable by third parties,

whether it’s people like ourselves or broker dealers or lawyers, so

that an investor only has to go through the process once, and then

the third party clearinghouse can help with the verification in the

future and keep the cost low for issuers.

Crowdfunding is obviously a very complicated issue. On the one

hand there has to be sufficient investor protection to prevent fraud,

and, like I said, we have helped 1,500 companies raise money. To

date we have had no reports of fraud.

On the other hand, if you make the burdens too high or the regulatory compliance too high, then the good companies will opt out

of crowdfunding and they will raise money under 506 or other exemptions, and at that point you end up with a huge adverse selection problem. At least in our part of the world, a very small number of companies account for all the returns for investors. If those

companies were to not use crowdfunding, crowdfunding would be

dead on arrival.

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So we think it is important that the SEC and the regulators help

make crowdfunding more viable. Ways to do that are to allow the

crowdfunding platforms to explicitly curate what deals they show.

Kickstarter, for example, which is a celebrated poster child for

crowdfunding, curates heavily. The SEC should provide clarity on

liability issues and what qualifies as errors and omissions that may

generate liability for the issuers. Otherwise, again, the good companies will avoid crowdfunding.

Finally, it is very important to keep this exemption, the

crowdfunding exemption, compatible with raising from accredited

investors. One of the best ways to protect the crowd in a

crowdfunding situation is to also have sophisticated individual investors or VCs investing alongside on the same terms. So someone

has done the due diligence.

Finally, I want to thank you for the JOBS Act. It is a very rare

kind of accomplishment because the constituents that you are really helping with the JOBS Act are companies that don’t yet exist,

which is pretty rare. Normally there is a strong constituency already asking for whatever you work on; but in this case most of

the constituents are yet to be created. I hope they will also create

jobs that don’t yet exist and pay taxes that don’t yet exist.

We take a long view on this because we think that today’s

startups are tomorrow’s Fortune 500 companies, and I think you

have enabled a lot more of those given due time.

Thank you very much.

[Prepared statement of Mr. Ravikant follows:]

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Mr. MCHENRY. Thank you so much for your testimony. It is very

exciting to hear what the panel is doing. And I would say before

I begin my questions is that, you know, we are focused on both capital formation and ensuring investor protection. Investor protection

is not forgotten in either the JOBS Act nor SEC regulation nor

crowdfunding portals as they currently exist or angel investing networks. Capital formation is inhibited when you have fraud. It is

bad for market participants, bad for startups, and obviously bad for

those that are victims of this. So robust investor protection is highly important, and I obviously care deeply about that.

With that I would recognize myself for five minutes for purposes

of questions.

Mr. Ravikant and Mr. Eakin, if I could ask you, do you believe

that non-accredited investors are harmed by seeing advertisements

that are directed towards accredited investors?

Mr. RAVIKANT. Well, that is a fair question. I don’t think there

is any harm in actually seeing it, as long as they don’t make those

investments.

Mr. EAKIN. Agreed.

Mr. MCHENRY. Okay. Well, we will start there with some commonality here.

Ms. Vercruysse, you outlined you spent a significant amount of

your time trying to raise capital. Do these regulatory restrictions

on your ability to raise capital, did that inhibit your ability to grow

your business and create jobs?

Ms. VERCRUYSSE. Yes. I feel that it does because not only you

have to find those people that are willing, it is a lot harder to find

people that are willing to invest in your company, and that is why

it takes so much time. Whereas if I could just go to my loyal customer base that already believe in what I am doing, because we

were actually told even on Facebook a customer said, I love your

bars. How can I invest in your company? Well, I said right now you

can go out and buy a bar and that is how you are investing in our

company, because the current law forbid me from engaging him.

Mr. MCHENRY. And to that point, lifting the ban on general solicitation, the SEC just a few weeks ago, instead of making a final

rule or interim final rule, they basically put forward a proposal on

lifting the ban on general solicitation. Mr. Eakin, what affect does

that have on linking up capital and creating jobs?

Mr. EAKIN. Lifting the ban will have a tremendous positive affect

on helping more businesses reach out to more investors. We believe

that the platforms like CircleUp provide an efficient way to start

the conversation. Investors maintain the ability to conduct their

diligence, to thoughtfully review investment opportunities, but it

allows a spark to start conversation.

Mr. MCHENRY. So not putting forward a rule that can be used

now inhibits job growth and the flow of capital? Is that what you

are saying?

Mr. EAKIN. We are looking forward to the implementation of title

two of the JOBS Act.

Mr. MCHENRY. Okay. All right. So Mr. Thompson, you outlined

a couple of things dealing with crowdfunding that are of particular

interest to me. I have an idea, as something I have put forward to

the Commission, that they have enormous latitude for how they

57

implement and write the rules dealing with crowdfunding. What I

put forward is this idea that we can start just by having as much

freedom as possible to raise capital up to $100,000 as sort of a first

step for raising up to a million dollars. Would you think that that

is workable, that the Commission open up first a lower space, see

how that forms, and learn some best principles, best practices out

of that, then keep raising it?

Mr. THOMPSON. I think scaled enforcement has been a core part

of securities regulation for decades, and that means lower burdens

for lower amounts, and what benefits can be achieved, and so I

think focusing at a smaller amount, $100,000 as a good try, and

see what works there, and if we can figure out something that

works there with some prerequisites, it might well work.

Mr. MCHENRY. Okay. And Mr. Van Winkle and Mr. Ravikant,

you both outlined that you are concerned about crowdfunding as

how it is implemented and whether or not you can actually have

a robust marketplace in core participation, and, lacking that, it will

be, I would say to Mr. Van Winkle’s comment, it was dead on the

vine, I think is how you termed it.

Mr. VAN WINKLE. A dead letter.

Mr. MCHENRY. Dead letter?

Mr. VAN WINKLE. Yes.

Mr. MCHENRY. Thank you.

Mr. VAN WINKLE. If issuers need to go through too much of a

process, a disclosure process, as Mr. Thompson indicated, they are

going to look at other exemptions for the amount that is available

through a crowdfunding portal. If you took too much of your money

in trying that you might raise in compliance, it is not a good exemption.

Mr. MCHENRY. Mr. Ravikant?

Mr. RAVIKANT. Yes. I would add that we don’t want to create a

situation where only the desperate companies use crowdfunding. It

should be used by top tier companies and that means that the regulations have to be streamlined and comprehensible.

Mr. MCHENRY. To that, Mr. Ravikant, you outlined what

AngelList is currently doing. How is AngelList using the JOBS Act

right now to link up capital and help small businesses?

Mr. RAVIKANT. Right now we only connect accredited investors

and obviously don’t engage in general solicitation, so it is somewhat

limited in its nature, and it will be opened up more after the full

implementation of the JOBS Act.

Mr. MCHENRY. Okay. So a lot more to come after full implementation?

Mr. RAVIKANT. We always like to lead with a product as soon as

the law allows it.

Mr. MCHENRY. All right. Excellent.

Thank you so much for your testimony. Thank you for being

here. And thank you for what you are doing to help create jobs.

With that, Mr. Quigley is recognized for five minutes.

Mr. QUIGLEY. Thank you, Mr. Chairman.

I supported both these measures very strongly, and I know the

Administration did, and I don’t see any reason why I or the Administration want to win the race. I am not pulling for one of these

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acts over the other to cross the finish line, but they are both complicated.

Mr. Thompson, you talked about what seems to me the real challenge and the real intense dichotomy of trying to address this issue

of crowdfunding is the smaller amounts. Any kind of regulation

eats up what you are actually trying to collect, but, on the other

hand, when you are dealing with small amounts in the manner in

which we are talking, we are talking about less-sophisticated investors.

If you could give a few specific ways to try to address that if you

were advising the SEC.

Mr. THOMPSON. I think one way is to try to bring in a third party

to carry some of the load. And if the portals, as Mr. Ravikant suggested in one of his slides, can carry some of the load of verification

or regularization, then the costs go down, and so I think the SEC

might well want to look at focusing on a subset of portals who have

the capacity and the affinity to want to support capital raising and

are willing to commit some of their resources toward developing

the platform that will reduce the amount of fraud, as opposed to

making it all on the sellers who have sometimes overly addressed

an incentive to sell and get the balance wrong.

So I think the portal focus has potential in dealing with this

small amount.

Mr. QUIGLEY. Mr. Ravikant, you talked in your testimony, I

think it is along the same lines: the sophisticated investors alongside the unsophisticated. Is that the manner in which you described what Mr. Thompson is saying?

Mr. RAVIKANT. Yes. I would say it is a couple of things. As Mr.

Thompson said, the portals can help in the prevention of fraud, but

the SEC has to enable that. The examples I would give are, number one, we can help curate the deals. We have lots and lots and

lots of data on these deals, as well as competitive companies and

so forth, so by curation we can help the investors get some data.

We can build in tools for transparency. We don’t want the reputation of being a hotbed for fraud, obviously, or the investors

won’t come, and since we deal with a lot of sophisticated investors

we would put in a lot of protections.

One other protection which I talked about which you just referred to is having the sophisticated investors invest alongside the

crowd on the same terms, but that may be uniquely possible for us

for tech startups. It may not be possible for other local businesses

or consumer goods startups where you don’t have a large native

base of sophisticated investors.

Mr. QUIGLEY. And Mr. Van Winkle, you understand—and I know

you agree—that this is an extraordinary opportunity for investment for small businesses, but we want to get it right, as to the

point that you don’t want this to be viewed in a few years as a reservoir for people who are out to milk unsophisticated investors.

Mr. VAN WINKLE. I would agree with that.

Mr. QUIGLEY. What is your thought on how to balance this?

Mr. VAN WINKLE. I think the elimination of the public advertising and solicitation ban has been talked about by practitioners

for a long time, that as the markets have matured, investors are

selective, whether a small investor or a larger. We heard described

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by a panel, they had to go out and seek many people who turned

them down at times because they would have to keep going. I expect that will continue on, that we are not going to see a sea

change of the investing public because the laws change. What this

will do is it will create many more opportunities to connect folks,

and the existing anti-fraud protections will continue to protect

those investors.

I think it will enhance the opportunity to raise capital without

injuring investors.

Mr. QUIGLEY. Ms. Vercruysse, your personal experience in that

vein, you would also agree that these are sometimes very small investors for the first time, and the reputation of this type of investments is just as important as your ability to get them, is key to

it?

Ms. VERCRUYSSE. I agree. Was there a question there?

Mr. QUIGLEY. No, I just wanted to see your personal experience,

particularly with smaller investors, their concerns about something

along the lines. They are typically used to investing in Quaker, as

you said. You are a little different. So the reputation of a pool like

this is as important as anything you do.

Ms. VERCRUYSSE. I think this speaks to what you are talking

about, but what I like to do is be really transparent about where

we are as a company, and it is actually a lot easier for them to embrace a company of our size. The financials are very simple, you

know, and our expenses are very easy. We have marketing costs

and payroll and a little bit of research and development, but it is

very easily understood by a non-savvy investor by just having a

couple of conversations with them.

And then by seeing the financials they can see where their

money is going, and then also by seeing us out in the community

actually selling products they can see that we are actually selling

a viable product.

Mr. QUIGLEY. Great. Thank you.

Mr. GARRETT [presiding]. Thank you. The gentleman yields back,

and I will recognize myself for five minutes.

Again I thank the panel, and I also thank the panel specifically

for their entrepreneurial spirit, which is what makes America

great.

This morning, before I came here, the professor was teaching

classes, and I was on C-Span doing a TV interview. The questions

that were coming to us, Why isn’t there more bipartisanship in

Congress and why doesn’t both sides of the aisle just put controversies aside and work together? And I could actually point to this

piece of legislation, and I mentioned actually Ms. Waters name on

there, and actually there is legislation that we have worked together on, and we have worked together to be able to pass it

through our subcommittee, full committee, and right on through

the process. I said, don’t always believe everything you read in the

newspaper as far as all the antagonism.

The JOBS Act is an example of true bipartisanship, but that is

what happened here in Congress, and then it gets out to what we

always like to call the bureaucrats. In this case, the bureaucrats

fall into the category of the regulators or the SEC who put—what

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I am hearing from the panel, effectively an impediment to the will

of Congress.

I know the gentleman from Connecticut was here earlier—I

guess he is not here right now—and he talked about how in the

military there is a process called a stand-down, when they see that

something is going wrong first they stand down and see what is

wrong and then go forward from that. If that had occurred in the

situation in the last session of Congress when we had the financial

meltdown of 2008, and then there was a stand-down into a

thoughtful analysis of actually what the problems were that led up

to that, and we then passed a piece of legislation that resolved that

problem, that would be an appropriate stand-down in resolve and

reform, but we didn’t have that. We had a 2,000 page Dodd-Frank

that came from it addressing all sorts of areas that were not the

cause of the problem, and then not addressing areas such as this

one that could actually help us get out of the morass that we are

in.

So with that, I throw this to the panel, and maybe Mr. Eakin or

any other members might want to talk about this. We have already

heard somewhat of the effect of the SEC’s standing in the way of

the will of Congress and what the impediment will be to the cost

of industry.

If we look at Commissioner Agilar’s statement, it appears he

wants to create a whole new set of regulations to impede capital

formation, and, as I said, that runs directly counter to the initial

intent of the JOBS Act. And his dissent is entitled, actually, ‘‘Increasing the Vulnerability of Investors.’’

So starting with you, Mr. Eakin, I don’t know whether you read

that dissent or not, but the caption, ‘‘Increasing the Vulnerability

of Investors,’’ is that what Congress was doing when we passed the

JOBS Act? Was that our intention? Were we increasing the vulnerability of investors who might want to invest in this granola bar

company next to you?

Mr. EAKIN. That would be the interpretation of Commissioner

Agilar’s words to himself on that one.

Mr. GARRETT. Okay.

Mr. EAKIN. We support the full implementation of the JOBS Act

as written and believe increased transparency and accountability in

the marketplace is in the funding portals under the oversight of a

strong SRO, and the SEC will improve the capital formation in the

Country.

Mr. GARRETT. Anyone else on that? Mr. Van Winkle?

Mr. VAN WINKLE. I would simply say that there are people

standing on the sidelines waiting to see how, for example,

crowdfunding regulations are going to look and what is going to be

required. They are prepared to move froward, put their offering of

their business out there and connect that capital with the business.

We think that will be very beneficial. I believe that is what Congress and the President wanted with the passage of this act.

Mr. GARRETT. Can you also just explain, since you are speaking,

in your testimony you talk about how existing security laws pose

an unreasonable burden on the ability of small firms to access the

capital markets, harming economic growth and job creation? Those

are some of your words?

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Mr. VAN WINKLE. That is correct. So the framework before——

Mr. GARRETT. Yes.

Mr. VAN WINKLE.—the JOBS Act was such that it is very difficult for the small issuer that is out there that is looking for capital to connect. Those networks aren’t there. they need to be able

to have more opportunities to be able to connect.

The ban on solicitation, the removal of that will be very helpful

in connecting those folks. These investors often will still pass on

the ideal. They may not understand it. Maybe it is not as simple

or straightforward at they thought, so they will walk away. But

there will be transparency, as Mr. Eakin indicated, and we think

that will be very helpful.

Mr. GARRETT. I think Mr. Quigley raises a good point. Mr.

Thompson and Mr. Ravikant, can you address it a little more fully?

If I’m the investor going forward with the JOBS Act as Congress

wanted it to be implemented, why should I feel assured that I, as

an investor, maybe not a sophisticated investor, would have adequate protection under congressional intent with the JOBS Act?

Mr. THOMPSON. The act, itself, it is not just a blank sheet. It contains a large number of guidelines for implementation. It says SEC

do it, and here is what you should do: disclosure, intermediaries,

liability. All of that is in there.

Mr. GARRETT. Mr. Ravikant?

Mr. RAVIKANT. Yes, I would say the portals, like ourselves and

Mr. Eakin’s portal, will bend over backwards to try and prevent

fraud. There is no such thing as a completely fool-proof system, but

our reputations and businesses are on the line.

Mr. GARRETT. Gotcha. And with that, I see that I am over time,

so I thank you very much for the panel.

The gentlelady from California.

Ms. WATERS. Thank you very much. Mr. Chairman, I would like

to thank all of our participants in our panels here today, but I am

especially pleased about Ms. Vercruysse for your appearance here

today.

When I talk about business, small business and entrepreneurs,

I really like to talk to people who do it, who have their hands on,

who have to meet that payroll, who understand what it really

means to have to go out and find investors and money. Consultants

and lawyers and all that are fine, but I really appreciate your being

here today and the way that you have described the development

of your business.

I also know that oftentimes you must seek capital from various

sources, and I am very pleased to see that you were able to get that

micro loan of $25,000. That was part of the American Recovery and

Investment Act, so that makes me feel good that what we did is

real, and that is certainly had a positive impact on businesses such

as yours.

So again I appreciate your being here. As a matter of fact, I

worry a little bit about the time that you are spending on this, because I know you must spend that time in your business, a small

business like that where you are hands on. You don’t need to be

sitting up here in Congress for hours talking about whether or not

they are moving fast enough.

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The JOBS Act is real and it is going to happen, and I want to

tell you, even with Dodd-Frank, what we have been doing, and oftentimes in a bipartisan way. We are looking at the soft spots, the

gray areas, and we have had remarkable cooperation from both

sides of the aisle on straightening out some of these things in

Dodd-Frank, and I think that the JOBS Act, between SEC and all

of us who care about this, we will do that, so I am very confident.

I would like to, if I may, Mr. Chairman, I would like unanimous

consent to insert into the record a letter that was written to us by

many of those consumers and organizations that are paying attention to this particular legislation.

This letter was sent to the Securities and Exchange Commission

related to the rulemaking on general solicitation and advertising

under JOBS Act by a group of consumer and investor advocates,

including Americans for Financial Reform, Public Citizen and Consumer Federation of America, among others.

First, this comment letter from the group says that they would

have opposed the SEC going straight to an interim final rule on

general solicitation and advertising because they believe there were

a number of issues that were in their public comment period.

I would like to know, Mr. Thompson, do you think that it is reasonable that the SEC propose a rule on this issue rather than

going straight to an interim final rule, given that the ban on general solicitation and advertising that the JOBS Act lists has been

in place for decades? Should the implementation of its repeal be

open to a robust dialogue?

Mr. THOMPSON. The SEC rulemaking is never the end of the

story, and certainly in recent years what happens after rulemaking

is litigation, with a focus on cost/benefit analysis. That has been a

grave concern of members of this Committee. So the SEC has to

worry about will its rulemaking stand up to challenge that is likely

to come, and that suggests paying attention to notice and comment,

having a period of notice of comment, reflecting on what is commented, and then making the final rule.

So by not doing that, I think the SEC was increasing the risk

of litigation and increasing the risk of the rule not being implemented as quickly as it might otherwise.

Ms. WATERS. Thank you very much.

Just quickly to Mr. Ravikant, I want you to know that some of

the comments of members of this panel about our small businesses

not having to spend their limited capital trying to be in compliance

is something that I certainly am concerned about and I support,

and the idea of a portal or portals that could help with that I think

is extremely attractive. But, having said that, as someone who

works in the world of rules, do you think it is fair to say that the

SEC should move slowly and deliberately with the way it lifts the

general solicitation ban?

Mr. RAVIKANT. Yes. It honestly impacts us less because of the nature of the companies that we work with already have access to sophisticated investors. That said, the strange part is that a lot of

companies accidentally or not knowingly violate the general solicitation ban on a regular basis, so in that sense it does need to be

modernized quickly.

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To give you an example, this morning my fiance forwarded me

a video on You Tube pitching me to invest in a startup, me personally, so this company had gone and made a rap video singing about

me and hoping I would invest in their company. Now clearly that

is a violation of the general solicitation ban. I don’t think they will

be harmed by it because it was addressed to me, but it shouldn’t

be sitting on You Tube. So things do need to be modernized.

Ms. WATERS. Thank you. Mr. Chairman, I yield back the balance

of time I don’t have.

Mr. SCHWEIKERT. [Presiding].Thank you, though I am still trying

to get my head around rap solicitation.

Dr. Hayworth?

Ms. WATSON. Sounds good to me.

Ms. HAYWORTH. Thank you, Mr. Chairman.

Mr. Ravikant, you rap star fan base aside—that is really big, actually—but I was interested in your comments about the cost of

regulation and, of course, the entire panel has alluded to them, as

well, but I think the big theme that we face in this Congress and

in this Committee, of course, is that we are trying to balance consumer protections, investor protections, with the cost of, as Ms.

Vercruysse has described so eloquently, with the cost of trying to

navigate that system.

We can keep layering on requirement after requirement, sort of

suspenders, duct tape, you name it. But, as you have pointed out,

eventually it stifles growth, in fact, relatively quickly.

Could you comment a bit further in particular about the liability

issues that are also incurred, because I think one of the subtexts

of the regulatory burdens is not only the cost of compliance per se

but also the anticipated cost potentially of liability. Could you talk

a bit more about that?

Mr. RAVIKANT. Yes. I am really not an expert in this area, but

my understanding is that, as part of the JOBS Act crowdfunding

provision, that the directors and officers of the companies are directly liability for any material errors and omissions, so what we

are basically asking there for is some kind of a checklist for the

SEC as to what disclosures a company should go through, and then

know that it is not subject to potential liability in ex post facto

manner, and that will help issuers have some comfort on using

crowdfunding.

Part of the problem is those liability provisions do not exist on

the 506 exemption side, so a company going into crowdfunding is

going to have that additional burden, so the more streamlined that

process can be, the more transparent, a checklist or a set of guidelines would definitely help a lot.

Dr. HAYWORTH. Thank you, Mr. Ravikant.

Mr. Thompson, can you speak to that issue, as well?

Mr. THOMPSON. Sure. As Mr. Ravikant said, 506 doesn’t have liability because of the Gutherson v. Alloy case from 15 years ago,

but crowdfunding does. And it is 12(a)(2) like, which I’m not sure

what that means, but someone who drafted it must know what it

means, but there is some liability there. And so that is why I think

many investors will be using 506 instead of crowdfunding.

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Is there a way to give some safe harbor? I think the rulemaking

for that hasn’t come yet. It is not due yet. I think you will see some

attention paid to that.

It is hard to do, so I can’t predict it, but I don’t know exactly how

it is going to look.

Dr. HAYWORTH. Would any of our other panelists care to comment? Ms. Vercruysse, does that play on your mind when you think

about how you interact with potential investors?

Ms. VERCRUYSSE. The part about the liability?

Dr. HAYWORTH. About being held liable.

Ms. VERCRUYSSE. Well, I just have to speak to my own personal

experience, and that is that I was just asked by one of my business

partners, actually, and he is a major investor in my company,

whether I had D and O insurance to protect against that. That is

how we would do it.

But I, as an entrepreneur, didn’t know before about the existence

of D and O insurance, than that leaves my husband and I completely liable if we don’t have that.

Dr. HAYWORTH. Right. Mr. Eakin, is that——

Mr. EAKIN. I very much agree with Mr. Ravikant’s sentiments in

having a healthy, attractive ecosystem of companies wanting to use

this provision, and one way to do that is providing clear guidance

to those issuers of how they can protect themselves from the liability perspective.

Dr. HAYWORTH. Right. Thank you very much.

I yield back, Mr. Chairman.

Mr. SCHWEIKERT. Thank you.

Ms. Maloney?

Ms. MALONEY. Thank you, Mr. Chairman. Thank you for holding

this hearing. I welcome all of you.

First, I would like to say that I supported the JOBS Act and I

worked with my colleague, Mr. McHenry, on the crowdfunding provision of the bill because I believe that we should be able to have

all kinds of tools, investors and companies, at their disposal to

grow and create jobs.

I appreciate Mr. McHenry accepting one of my amendments to

make SEC oversight of these sites more robust and to combat

against bad actors.

The JOBS Act just became law in April, and we have had 90

days, and said it should be done in 90 days, and no question we

are past that time, but I don’t think any of us feel that we don’t

need to get it right, especially since the SEC’s job is to protect investors and guard against the bad actors.

I would like to ask Mr. Thompson, despite the well-established

need for financial regulation reform—we are still recovering from

this great recession—the majority has made considerable efforts to

delay implementation of the Dodd-Frank financial reform bill,

while supporting, in contrast, an expedited implementation of the

JOBS Act. I, for one, think we should finish the rules on DoddFrank first. But I am concerned that the majority’s attempt to rush

the JOBS Act could severely weaken investors’ protections and the

integrity of American capital markets.

In your written testimony, Mr. Thompson, you stated—and I

would like to quote your words back to you—the largest impact of

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raising capital from the JOBS Act is likely to be in the expanded

use of offerings under Rule 506.’’ That is offerings issued after the

removal of the ban on general solicitation; is that correct? And if

that is correct, the implementation of Section 201 is no small matter; would you agree?

Mr. THOMPSON. It will be the biggest impact because it is already

the largest source of capital raising, and once general solicitation

is removed it will be get even bigger. And so it is appropriate that

it is first on the list. But the SEC has got a lot of balls in the air.

They have to do them all. There were 90 sections of Dodd-Frank

that required them to do something. I mentioned there were two

new exemptions under JOBS. They are doing them all.

I think 506 needs to be a focus. They have still got a 506 regulation from Dodd-Frank to remove the bad boy, to add a bad boy exemption to 506. That was proposed a year ago. I think, given the

use of 506, that rule needs to keep moving.

Ms. MALONEY. I agree.

Mr. THOMPSON. So I think all these 506 rules ought to be on the

table first.

Ms. MALONEY. I agree. And Chairwoman Shapiro stated that she

is giving serious consideration to all of these rulemaking approaches, and she says—and I will quote from her letter—‘‘Due to

the high level investor interest and strong desire for a comment period expressed by a number of commentators in the public; however, upon further reflection and analysis I now believe that the

more appropriate approach in this matter is to proceed per our normal notice and comment process.’’ This was in response to Mr.

McHenry’s letter that she should bypass the normal notice and

comment process.

I think something that is so serious, to protect investors, and the

fact that the public has notified the SEC that they want to comment on it, I just want to know, if you agree that the approach the

Commission has decided to use for 201 to allow for the comment

period is important. Do you agree, Mr. Thompson?

Mr. THOMPSON. I agree, and I think it also assists looking ahead

toward litigation because the shorter the interim final has the potential to increase the challenge to the rules that are implemented.

Ms. MALONEY. And Mr. McHenry goes on in his letter to request

internal documents and communications related to ‘‘potential Commission action to implement section 201 of the JOBS Act.’’ And this

Committee has a legitimate role to conduct oversight, but in this

case the agency is simply following the normal rulemaking process,

and I would argue that their demands and documentations is just

adding to the time when she is following the normal rulemaking

process which allows a comment period.

I would say that their actions are somewhat disingenuous, particularly when they have voted to underfund the SEC. They wanted

a cost/benefit analysis, and tried to pass that. Believe me, if you

pass the cost/benefit analysis, we never would have gotten to any

rules. And their real action to sort of stonewall and stop the implementation of Dodd-Frank.

And I would like to respond to Mr. Van Winkle that you are saying the money is on the sidelines because we have to come forward

with the rules, but if you look at all the analyses that are coming

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out from the economists, whether it is Zandy or with McCain’s

economists or Krugman from the Times or any of them, they are

all saying that money is on the sidelines waiting for the election,

that is the real reason. I have read about five different reports on

that, not the fact that the rule isn’t in place. And I would say that

the JOBS Act went into effect, and I think it is very important that

the SEC get it right when it comes to protecting investors.

My time has expired and I yield back and I thank the Chairman.

Mr. SCHWEIKERT. You caught me not paying close enough attention.

Mr. Canseco?

Mr. CANSECO. Thank you, Mr. Chairman.

One of the biggest concerns I have with the SEC’s proposed rule

is the verification of accredited investors. It seems the proposed

rule would disincentivize the issuance of new securities for fear of

legal retribution.

Mr. Van Winkle, you allude in your testimony to issuers currently being able to rely on written statements from investors that

they are accredited. Could you explain why the new standards set

by the SEC in its proposed rule is a problem and how it could minimize the positive effect of the JOBS Act?

Mr. VAN WINKLE. The proposed rule, I don’t think it minimizes

that. Under its current structure, what I described, it is 40 years

of tradition of inquiring of an investor, Are you accredited, Do you

meet these standards, and telling the issuer. The issuer typically

has some basis of knowing that or has had some connection with

that person. The proposed rule gives room for the issuer to continue to sort out what makes sense, and will be able to verify that.

So if the proposed rule is implemented as it is currently written,

I think it will create the right playing field for the JOBS Act implementation to move forward.

Mr. CANSECO. Do you think that the proposed rules are a little

too subjective?

Mr. VAN WINKLE. I don’t think, based on what I know now, that

they are too subjective. We may know more two years from now,

but there’s plenty of protection in place to keep issuers honest.

Quite honestly, what we heard today is that issuers want to tell

about what is going on in their companies. That has been my experience in my practice, that issuers want to disclose that information. That is what is going to keep the honesty going in the system.

Mr. CANSECO. As I understand it, if the SEC rule were to become

final there would be a double standard for investor accreditation.

Issuers using new solicitation exemption would be held to a different standard than other issuers. Now, Mr. Van Winkle, do you

believe that could create a problem?

Mr. VAN WINKLE. I am certain someone could find a problem, but

I think we are concerned that we want to make sure that the existing exemption, if you are clearly not using general solicitation, that

you can continue to follow that pattern; whereas the issuers who

are seeking to find a broader expanse of investors may have a

slightly different standard to apply and they will sort through that.

Mr. CANSECO. So if an investor were to put in writing and under

a contract that they need certain net worth or income requirements

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to purchase private issued security, do you think that is sufficient

information for an issuer to rely on?

Mr. VAN WINKLE. Yes.

Mr. CANSECO. Even under the current proposed rules?

Mr. VAN WINKLE. Under circumstances, that may be very correct,

but as you allude to, the subjective nature of it, the flexibility

means that the issuer will look at, Is this the appropriate investigation for this level? And we do that all today in practice. We

make sure that there is a relationship that is established and there

has been appropriate verification.

Mr. CANSECO. So in your opinion did the SEC go far beyond what

Congress asked it to do with its proposed rule on solicitation?

Mr. VAN WINKLE. The proposed rule seems to be aligned with

what I understand Congress’ intent was with the JOBS Act.

Mr. CANSECO. Okay. So one other question, Mr. Van Winkle. The

JOBS Act received a fair amount of criticism from certain groups

who argued it could lead to increased fraud or that it somehow relaxed standards and increased risk to investors.

You mentioned in your testimony, but could you explain why

fraud protections are not weakened by the JOBS Act, and do you

believe that the SEC erred on the side of over-caution, thus damaging the intent of the JOBS Act?

Mr. VAN WINKLE. The JOBS Act, title two of it, greatly expands

the opportunity in the potential investor pool. That may or may not

lead to higher probability of fraud. I don’t know. What I do know

is that the concern is that there are more issuers that would be

causing fraud by not disclosing, so the disclosure regime is still

going to remain for issuers under rule 506. They still need to disclose what they are supposed to disclose.

I can’t predict whether or not we have more potential investors,

whether there will be more fraud. I think the fear is that there will

be people just coming out of the woodwork who are advertising

fake businesses. I mean, that is what I—my experience has been

that issuers are very concerned about making sure that they have

a reliable and viable business before they bring in investors.

Mr. CANSECO. Thank you, Mr. Van Winkle. I see that my time

has expired.

Mr. SCHWEIKERT. Yes. This time I was paying attention to the

time. Thanks, Mr. Canseco.

Mr. Lynch?

Mr. LYNCH. Thank you, Mr. Chairman.

Let’s stay right on that point about the fear of investor fraud.

Many observers believe that the most significant provision of the

JOBS Act is, in fact, at least from an investor fraud standpoint, the

elimination of the ban on general solicitation and advertising for

section 506 offerings. Indeed, I recall a statement by Chairman

Shapiro. Actually, I will quote her. This is right before the JOBS

Act passed. She said, ‘‘We must balance our responsibility to facilitate capital formation with our obligation to protect investors in

our markets.’’ And she goes on to say, ‘‘I am concerned that we lack

a clear understanding of the impact that this legislation and its exemptions would have on investor protection.’’

And sort of echoing what you just said, Mr. Van Winkle, the New

York Times editorial board, which I don’t normally quote—this is

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a first—said, this is two days after the SEC issued its proposed

rule, said ‘‘Soon retirees and other investors will be barraged with

advertisements for private stock offerings. Such advertising that

used to be banned under Federal securities law will make it easier

for hucksters and ripoff artists to lure people into unsuitable investment and outright frauds because private offerings are not subject to the disclosure requirements and other investor protections

that apply to publicly held companies.’’

What do you think about the concerns raised there? I mean,

given the fact that a lot of people, even before this relaxation, had

trouble really discerning the disclosures to begin with, and those

were more sophisticated investors. Now we are going to have general solicitations. Do you think that presents a danger to the market and to average investors?

Mr. VAN WINKLE. There are a number of pieces to that question.

I can just observe these comments in response. Maybe it is helpful.

It is assumed that there are going to be many more issuers that

are going to be promoting businesses that are fraudulent. I guess

that is——

Mr. LYNCH. Well, there is more opportunity for fraud.

Mr. VAN WINKLE. Because we have more investors potentially?

Mr. LYNCH. No, no, but because we have less protections against

fraud.

Mr. VAN WINKLE. The sole protection against fraud is really on

the issuers. It is the obligation of the issuers to be honest, to disclose what they need to disclose, and what they communicate to

those potential investors to be truthful. I mean, I am distilling that

down. The fact that——

Mr. LYNCH. No. Also you have a general population that is more

vulnerable. Therein lies the opportunity for fraud. You have a general population that now can be solicited openly, and without—and

they don’t have the protections, the ability to protect themselves.

That is what creates the opportunity. I am not as concerned about

companies that are out there now and operating under the previous

rules; I am worrying about opportunities that will present themselves where investors won’t have that protection. That is the danger.

Mr. VAN WINKLE. So we have to have an issuer that is fraudulent that is now going out into the marketplace and advertising

and seeking to bring in those investors that aren’t going to ask

those questions. We certainly don’t know what that looks like. I

mean, that is one of the concerns people have. That is why there

is this concern about the change.

I will simply say my experience has been from the very small investors—and I have worked with very small companies that have

raised small investments—that almost every single potential investor looks at issues and asks questions. I have seen that from what

I consider to be very unsophisticated financially but smart business

people, or the smart retiree who is very concerned. That retiree has

to actually have cash to put into the business in order to be an investor. So that, as a practical level, is going to be an element of

protection.

Mr. LYNCH. Let me attack this from a different direction then.

Even though lifting the ban was required under the Act, the SEC

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still had an ability in the rulemaking process, I think, to provide

some level of protection still for the investor. Did the SEC miss

that opportunity, in your opinion?

Mr. VAN WINKLE. I don’t believe the SEC has missed it. If, based

upon experience, two years from now they observe that they missed

the mark a little bit, they may move that. But just based on what

we know now, based on what the SEC knows now in its best judgment I think it issued the proposed rule which said the issuer is

going to have to make those determinations. As was previously

said, there is a subjectivity to that.

Mr. LYNCH. Okay. Fair enough. Thank you.

I yield back.

Mr. SCHWEIKERT. Thank you, Mr. Lynch.

Mr. Pearce?

Mr. PEARCE. Thank you, Mr. Chairman. Fascinating discussion.

I appreciate the testimony of every single one of you here, those of

you sitting out there, not those of us sitting up here, that give me

hope for the future. I really appreciate the depth.

Mr. Ravikant, I really appreciated your presentation, the sophistication of a small business owner. I could have used help like

yours way back when.

Ms. Vercruysse, again your struggle starting with one or two people are things that are very familiar to me, so I appreciate that.

I found it a fascinating discussion because there is a definite

split in opinions from this side of the table that somehow we are

going to protect the general public. We don’t seek to protect the

general public from people who want to read your palms. You can

advertise that. Walking down here in Arlington I can find palm

readers that are going to hook me up with a different generation

that passed away several decades ago, and I don’t get protected

from that. I go out to Las Vegas, I slap my money on the roulette

wheel where I know the odds are far less than investing with any

single one of you all, and there’s no protection for that.

And yet somehow we want to protect the general public with the

same people who watched M.F. Global from inside. We have 100-

something protectors, protectors of the general public, protectors of

the investors sitting in the room watching what was going on.

Sometimes the very highest level protectors, and somehow they

didn’t catch that we are about to defraud the investors, some guy

named J.P. Morgan, Lehman Brothers, when that guy up there

named Madoff, $50 billion they believe, and they are watching very

closely, and yet we are going to tell Ms. Vercruysse that she can’t

advertise on Facebook. If you want to stick $100 in my company

you might not get it back, but I think you will. We are going to

stop that.

I just can’t imagine where we are coming from in this Country

right now. We want to unleash the power and innovation. People

are responsible. If they stick $100 in Ms. Vercruysse’s 18 Rabbits,

maybe they only get 16 rabbits back. I don’t know.

And then we hear that the economists all are in absolute declaration that investors are sitting on the sidelines waiting for the election. Now, the President himself said a couple of years ago that

people are hoarding their money and corporations are hoarding

their money. They shouldn’t be doing it. They are hoarding their

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money because they are uncertain. The money is on the sidelines

because of uncertainty, not some election.

Mr. Ravikant, I agreed with almost everything you said, but I do

want to dig a little bit deeper on one thing. I think you said in your

testimony or in your answer to a question that you don’t want

crowdfunding for the smaller companies, that you would want to

reserve it for the larger ones? If I misunderstood, that is the reason

I am asking, because I am thinking directly of the 18 Rabbits. I can

see where, if she could just advertise on Facebook page, she probably would have enough to expand. So give me some clarification.

Mr. RAVIKANT. Okay. That was a misinterpretation.

Mr. PEARCE. Okay.

Mr. RAVIKANT. Yes. Actually, I think it would work better for

smaller companies.

Mr. PEARCE. Okay. All right.

Mr. RAVIKANT. Absolutely. Less at risk, smaller amounts, smaller

denominations.

Mr. PEARCE. Okay.

Mr. RAVIKANT. Obviously, depends on the regulatory cost.

Mr. PEARCE. I was afraid that I had misunderstood.

Mr. Thompson, one of the things that you had talked about several times is sophisticated investors, people who are knowledgeable. Again, keeping the backdrop of the gentlelady sitting straight

down the table from me there with a small investment could grow

significantly with a few people pitching in a little bit of money,

$500 apiece. Tell me a little bit about the sophisticated investor. I

heard you use the term and I am not diminishing the requirement,

but also I am thinking about her situation.

Mr. THOMPSON. Accredited investors includes $1 million in assets, which includes your pension, your retirement. Whatever you

save for retirement counts for that million dollars or $200,000 in

income. That is a large group that has disposable investment income.

Mr. PEARCE. If I could interrupt, because I am running out of

time, just apply it to her request. Why can’t we make it available

to her to advertise on Facebook for people who maybe don’t even

make $20,000 a year to stick $100 in it?

Mr. THOMPSON. I think after the ban is lifted you will be able

to do that, for accredited investors.

Mr. PEARCE. But you don’t think there is some great risk there.

Mr. THOMPSON. There’s a risk, because I think we dip too deep

into the pool, but it will expand who she can advertise too. But that

is different than what is on the other exemptions.

Mr. PEARCE. Okay. And I see my time is lapsed. If we go to a

second round I have got a couple more points.

Thank you, Mr. Chairman.

Mr. SCHWEIKERT. Thank you, Mr. Pearce.

Mr. Hurt?

Mr. HURT. Thank you, Mr. Chairman.

I want to thank each of you all for appearing today. I come from

Virginia and we have a rural south side District where we have unemployment that is much higher than the national average in

many places. We have some places in Virginia’s Fifth District that

have unemployment as high as 16 percent. So the jobs issue is

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very, very important, and very, very real to us in terms of sustaining families, sustaining businesses, and sustaining farms.

So this is all very good to hear that this JOBS Act that was

adopted with bipartisan leadership seems to be making some headway. A lot of the conversation today has been focused on the SEC,

and a lot of the financial regulation, which I think we all would

agree, despite the fact that there is polarizing, it seems, and one

side accuses the other or each other of various offenses, I think we

all agree, certainly on our side, that there are regulations that are

very, very important to making sure that we have an efficient market and a market that protects consumers.

I don’t think there is anyone on our side who doesn’t believe that,

but I think that what we see is that regulations have costs, they

have impacts, and we need to be sensitive to that because the consequences are very real. It means no jobs, or fewer jobs at a time

when, again, I have places in my District with 16 percent unemployment, and I have to answer to those people, and I should answer to those people.

I guess my questions are much more general in nature and I

would ask you to back out of the SEC, the granular look at that

level, but my question is really for Mr. Eakin and Ms. Vercruysse,

and then Mr. Ravikant. If I could just have you all talk, generally

speaking, about the regulatory burdens or regulatory issues that

you see that are a part, necessarily, from the financial regulation

and from the JOBS Act.

Could you talk about the atmosphere for job creation in terms of

regulations, whether it is an oppressive tax code, whether it is environmental regulations, perhaps all well intentioned, but environmental regulations that affect business? And then finally labor

issues. These are all things that we have control of here in Washington. I should say we don’t have control, we have responsibility

to those very important issues. How do they affect job creation?

If we could just go down the line, 30 seconds, 45 seconds apiece.

How is that?

Mr. EAKIN. Congressman, I appreciate the opportunity. I think it

is a little bit beyond my expertise, focusing on marrying credit investors to startups through CircleUp has been our primary focus

in the JOBS Act, so I think I will pass to another.

Ms. VERCRUYSSE. The regulations as far as the jobs, providing

more jobs?

Mr. HURT. Yes. I would just love to hear your input in terms of

access to capital, in terms of a regulatory climate that encourages

job growth as to one that suppresses it. If you have any general

comments?

Ms. VERCRUYSSE. Well, I think that general comment would be

that I do like how there are some micro lending organizations out

there right now that very much are into job creation. I sit on the

board of Working Solutions, and we provide micro loans to small

businesses in San Francisco and the Bay Area. They all have to

come to the table with proposal about how many jobs that they are

going to create and what sectors they are going to affect and how

their jobs are going to help their businesses grow and thrive. So I

think that is something that is definitely working.

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The regulations don’t really, at my stage of business they don’t

really burden me at all. This was a new thing going from a LLC

to a corporation. I had some things to learn, but luckily CircleUp

helps with that.

Mr. HURT. Right. Do you have anything to add, Mr. Ravikant?

Mr. RAVIKANT. Yes. it is a great question. I think that all of us

here probably have a smart phone in our pocket right now, and so

because of that what is happening is a lot of technology companies

that before would have stayed just in the technology space are entering other adjacent spaces, and they are running into regulations.

An example would be Uber Cab, with its various disputes with

the taxi companies and taxi commissions, B&B, with the hotels and

so on. So the marketization of local services has been running into

a lot of regulatory issues. That would be an interesting area to

keep an eye on.

To give you an idea of some of the craziness going on, San Francisco Bay area now has two services that have peer-to-peer taxis

where he can roll up in his car and pick me up and I have to give

him a donation based on distance travel. So these kinds of things

are very innovative on the regulatory side.

Mr. HURT. Thank you. That is very helpful.

I yield back the balance of my time.

Mr. SCHWEIKERT. Thank you, Mr. Hurt.

Mr. Fincher?

Mr. FINCHER. Thank you. I thank you, Mr. Chairman.

I am going to pick up just for a second where Mr. Pearce left off

about how so many times I am not—I am a freshman Member. I

haven’t been up here as long as some of my colleagues, so I am not

an expert politician. I am just a businessperson, a farmer from

Tennessee.

But are we really here to protect? Usually Congress, in my opinion, when I go home and talk to people in my District when it

comes to jobs, when it comes to work, how the government is in the

way, that we are not helping, we are making things worse. And

bad characters do need to be punished when they step out of line,

but so many times the more rules, the more regs that we impose

on business owners only hurt the ability to grow the economy, to

lower unemployment, and to get the private sector back in the driver’s seat.

A few minutes ago, when one of my colleagues on the other side

of the aisle was trying to talk about the JOBS Act versus DoddFrank, I mean, really it is a big difference there in Dodd-Frank and

the JOBS Act.

We somehow must get back to the place of there’s personal responsibility, and people are out there making decisions. They can

think for themselves. We are not here to make sure that the world

can go on and everything needs to travel through the House of Representatives or the Senate or the White House, that people can

make decisions for themselves.

Your testimony today has been great.

Mr. Ravikant on the end, can you comment for me just for a second on the JOBS Act, I was looking at a couple of questions about

how many dollars of capital, how many jobs it would create. If this

had not been put in place, do you think the SEC would have been

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able to clarify or make decisions making it easier for companies to

go public without the JOBS Act?

Mr. RAVIKANT. I actually don’t know anything about the public

side of it, unfortunately, I deal in much earlier stage. But I will say

that thanks to the JOBS Act there will be more capital for small

businesses. Some of it, in fact a lot of it, will come from the 506

exemptions, some of it will come from crowdfunding, and so eventually there will be more public companies. We just have to give it

time. It is a 30-year cycle. We just have to look a little forward.

Mr. FINCHER. Absolutely.

Mr. RAVIKANT. But, to give you an idea, Chairman McHenry’s

amendment to the JOBS Act which allowed us to offer that online

documentation, we can save companies $5 million in the first two

weeks. That is $5 million that is better used hiring people and

building product.

Mr. FINCHER. Absolutely. Any more comments? Mr. Eakin?

Mr. EAKIN. Sir, we believe that the JOBS Act is a great stimulus

in helping small businesses raise more capital more efficiently, and

through portals like Mr. Ravikant as well as CircleUp we are excited for full implementation.

Mr. FINCHER. And let me finish up by saying this. I was thinking

last night; I couldn’t sleep. I sleep about three hours a night now

in this job. This is not about any past political arguments or things

that one party or another party has been doing to each other. I

don’t know what happened in the past. This is about going forward,

and we have got to get this right if America is going to be able to

get back on top, and if we don’t get the private sector growing

again by allowing us to get out of the way, then it is going to be

hard to do.

So that is what we are trying to do up here, and hopefully both

sides can work together to make that happen.

Thank you for your testimony. I yield back.

Mr. SCHWEIKERT. Thank you, Mr. Fincher.

The Chair is going to yield to himself. I guess I can yield myself

all the time I want, right? I like this. No. We are not going to do

a second round of questions, but I will do sort of a lightning round.

Two things I want to touch on. One, we were hearing in some

of the questions the comment general population. I want to make

an additional clarification. It is not general population. These are

accredited investors. That was a part of that discussion.

And there is also sort of a philosophical split here, and I may be

an outlier in this. I have an intense concern that often in our attempt to protect everyone we take part of our population that

hasn’t made that threshold of being accredited and take away their

opportunity to find a golden egg, to invest in something that really

over their lifetime gives them that opportunity.

My great fear is we often end up in these debates of the have’s

and have-not’s, but if we made the barrier so, You are accredited.

You get to play. You are a small investor. We are going to add barrier and barrier where no one wants you to really even knock on

our door, but we never give them the opportunity to start that

process of taking risk and ultimately accumulating wealth.

Mr. Ravikant, you are doing some things that I find fascinating

in building a portal that allows a small business to be able to use

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your standardized documentation. Walk me through that as sort of

quickly as you can of how that benefits a small upstart.

Mr. RAVIKANT. Today if you are a small business and you find

investors, whether through AngelList or CircleUp or wherever, you

have to then negotiate a term sheet, negotiate the investment. Before the JOBS Act, if you wanted help on that regard you would

have to go hire a lawyer or work through a broker dealer, both of

which are very expensive.

The JOBS Act allows us to offer optional closing documents, soup

to nuts, online. We created a beautiful, visual process, well designed, Internet based, lays out all the standard terms. Your lawyer can even work with it, it works very quickly. It takes the process that used to take a month of back-and-forth negotiation and

generating huge documents and redlines and all that, and it is instant. It is basically instant. And we made it free, not just for the

company that raised money through AngelList, but for any company.

Mr. SCHWEIKERT. And that is for the business side. How about

if I am the person that absolutely loves Ms. Vercruysse’s product

and I sent her a note over Facebook and she says, I can’t talk to

you over Facebook because I would go to jail, but you could go take

a look at this website.

Mr. RAVIKANT. Correct.

Mr. SCHWEIKERT. And if I actually ultimately would establish,

can I invest in her through you?

Mr. RAVIKANT. Well, we can make the introduction after we establish the investor’s accreditation and their sophistication. We actually go one level beyond accreditation.

Mr. SCHWEIKERT. Mr. Van Winkle, you practice in this area of

helping folks. Give me the range of type of investor class you ultimately will represent or deal with or help.

Mr. VAN WINKLE. The investors that we are typically working

with, and usually we come across them because we are representing the businesses that are using their network. That is really their only method today, and they are going on and talking to

their friends and other business acquaintances, and they are talking to people who are their business owners. Sometimes they are

talking to family members. Many of them have been owners of

some other business, so they have some sense of how to do that.

Or they have been just a person who has paid attention to things

over the years.

It is a wide, wide range, but today it is a relatively small group

because it is based on personal connections, and so someone who

might know about an idea has no idea how to go about investing

in it. I think what we are hoping to unlock is the ability to create

a connection and then, within the regulatory framework, enable

them to make that investment lawfully.

Mr. SCHWEIKERT. You actually just nailed where I was trying to

go here. My wife and I, on occasion we find a product we absolutely

love, and I assume other people have this experience saying, We

have a little money saved up. Do we go out and buy a boat, or do

we actually put some money some place—if you put it in a savings

account or other things today you get almost no yield in this world.

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But maybe I should take a little risk because I love organic, I

live on your type of product. You said, even though it is going to

be the kid version at Costco, I will look for it. But how do we take

that next subclass of investor and make it more egalitarian so they

can invest? Do you see as with the approach we are trying to hopefully get the SEC to move with the JOBS Act to provide those opportunities?

Mr. VAN WINKLE. I think that is what the title two is trying to

do and say that there are a lot of accredited investors who perhaps

are suitable investors and they are unable to connect with issuers,

so they will be able to do that.

The issuers will be able to announce we are looking for investors,

and it will go about—I think there will be new ways of communicating, and it will connect those folks.

Mr. SCHWEIKERT. But somewhere here—and this may be JOBS

Act 3.0 eventually if we ever get to that, and I know I am heading

over time, but you are involved in a micro lender, but ultimately

I would love to see a world where it is micro equity, where I can

take a few hundred dollars or a few thousand dollars, and I know

for many folks that was a vision within the crowdfunding, and take

a risk, but actually start to be someone who gets to participate in

the rewards of taking that risk.

This is the end of this panel. Thank you for participating with

us. All of you, if you have any other ideas or suggestion of how we

can do things better, please share that with us.

We have a letter from the ICBA that will be put into the record.

Mr. SCHWEIKERT. Without any objection, this Committee is

closed.

[Whereupon, at 12;01 p.m., the hearing was adjourned.]

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