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80–819 2013

JOBS ACT IMPLEMENTATION UPDATE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT 

AND REGULATIONS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

APRIL 11, 2013 

Small Business Committee Document Number 113–010 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missour 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. David Schweikert ........................................................................................... 1 

Hon. Yvette Clarke .................................................................................................. 1 

WITNESSES 

Mr. Lona Nallengara, Acting Director, Division of Corporation Finance, 

United States Securities and Exchange Commission, Washington, DC .......... 3 

Mr. John Ramsay, Acting Director, Division of Trading and Markets, United 

States Securities and Exchange Commission, Washington, DC ...................... 3 

Ms. Jean Peters, Managing Director, Golden Seeds, Midlothian, VA, testifying 

on behalf of the Angel Capital Association ........................................................ 17 

Mr. William Klehm, III, President and CEO, Fallbrook Technologies Inc., 

San Diego, CA, testifying on behalf of CONNECT ............................................ 18 

Mr. Kevin Rustagi, CEO, Evolutions of Noise, Co-Founder, Ministry of 

Supply, Austin, TX, testifying on behalf of the SBE Council ........................... 20 

Mr. James J. Angel, Associate Professor, McDonough School of Business, 

Georgetown University, Washington, DC .......................................................... 22 

APPENDIX 

Prepared Statements: 

Mr. Lona Nallengara, Acting Director, Division of Corporation Finance, 

United States Securities and Exchange Commission, Washington, DC .. 30 

Mr. John Ramsay, Acting Director, Division of Trading and Markets, 

United States Securities and Exchange Commission, Washington, DC .. 30 

Ms. Jean Peters, Managing Director, Golden Seeds, Midlothian, VA, testifying on behalf of the Angel Capital Association ....................................... 46 

Mr. William Klehm, III, President and CEO, Fallbrook Technologies Inc., 

San Diego, CA, testifying on behalf of CONNECT .................................... 55 

Mr. Kevin Rustagi, CEO, Evolutions of Noise, Co-Founder, Ministry of 

Supply, Austin, TX, testifying on behalf of the SBE Council .................... 61 

Mr. James J. Angel, Associate Professor, McDonough School of Business, 

Georgetown University, Washington, DC ................................................... 66 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

Letter from Hon. Chris Collins, Member of Congress to the Hon. Elisse 

Walter, Acting Chairman, Securities and Exchange Commission ............ 80 

NASE - National Association for the Self-Employed ..................................... 81 

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(1) 

JOBS ACT IMPLEMENTATION UPDATE 

THURSDAY, APRIL 11, 2013 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND

REGULATIONS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. David Schweikert 

[chairman of the subcommittee] presiding. 

Present: Representatives Schweikert, Bentivolio, McHenry, 

Luetkemeyer, and Clarke. 

Chairman SCHWEIKERT. Let us call this hearing to order. 

Good morning. I have a wonderfully written opening statement 

but I was going to do something slightly different. Being someone 

who actually bathed and lived in the JOBS Act when it was individual bills moving through the system and the once we actually 

consolidated it and ran it up, think of this. In the previous years 

it really was in many ways our only really great bipartisan success. 

There was great optimism, great hope, on, April 12th, when the 

president signed it. Now we are this much time, a year beyond 

some of the rule sets, and yet I go around the country and I’ve spoken to different groups that are very optimistic and looking forward to an opportunity to use this new path of options to raise capital for small businesses. Our bottleneck right now is within the 

rule writing. I accept there are great difficulties. You have had 

leadership transitions. 

So I am going to ask for my friends who are on the Committee, 

today’s goal is not to beat up the SEC. It is to have a dialogue on 

what do you need? What are our expectations both in drafting and 

time that you are able to share with us? Are there any things we 

should be doing as members of Congress? Do you need us to provide a piece of legislation that provides more detail? Do you need 

us to stay out of your way for a while? What gets it done? In many 

ways the goal here is actually to have the positive that will come, 

I believe, once the rule sets are done and the crowdfundings, the 

Reg A’s, the others are able to start to stimulate a tier of our economy and our small business access to capital. And with that I hand 

over to the ranking member for an opening statement. 

Ms. CLARKE. Thank you, Mr. Chairman. I am going to stick to 

the script. 

I would like to welcome everyone to this morning’s hearing. For 

the past two years our nation’s economy has experienced positive 

private sector job growth. However, these gains have not been 

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enough to overcome our nation’s above average unemployment 

which currently stands at 7.6 percent. Minority unemployment for 

African-Americans and Latinos, while retreating, remains at a 13.3 

and 9.2 percent, respectively. 

These facts, along with last week’s job numbers illustrate the 

work we have yet to complete. Creating nearly two-thirds of all 

new jobs, our small businesses must remain front and center to our 

recovery. For our national economy to experience a more robust recovery, our entrepreneurs and small businesses must play their 

traditional job-creating role, and for that we must have access to 

capital. 

For entrepreneurs who have a solid business plan yet lack immediately marketable products, equity capital has been a crucial aspect of getting their businesses off the ground. Many are turning 

to crowdfunding to finance their businesses, however, the number 

of small businesses that can access capital is severely limited due 

to the prohibitions on equity investing via crowdfunding. 

In response, Congress has passed the Jumpstart our Business 

Startups or JOBS Act in 2012, which provided a new exemption 

from SEC requirements to register public offerings for equity investing via crowdfunding. This exemption has the potential to 

unlock the virtually untapped resources of millions of ordinary investors to small businesses; however, as evidenced by the rigorous 

congressional debates before passage of the act, a balanced approach to investor protection must be in place before allowing the 

general public in this inherently more risky realm of small business investing. Pursuant to the JOBS Act, the SEC was mandated 

to create rules to do just that. However, the SEC has yet to complete the rulemaking process; thus, preventing full implementation 

of the JOBS Act, missing several congressionally mandated deadlines. 

In today’s hearing, we will discuss the SEC’s delays in implementing the JOBS Act and the needs of our small business community. While no one is happy waiting for these rules to be drafted, 

we must remember that it is vitally important that the SEC strike 

the appropriate balance between investor protection and producing 

a functional system that provides the capital for small businesses 

and entrepreneurs to create jobs. 

I want to thank you again, Mr. Chairman, for holding this important hearing, and I yield back the balance of my time. 

Chairman SCHWEIKERT. Thank you, Ranking Member Clarke. 

Maybe I should have stuck with the script. 

Our first two witnesses representing the SEC, Mr. Nallengara 

and Mr. Ramsay. You are both probably very familiar with the 

lighting system. My understanding is you are going to be sharing 

your five minutes on the opening statement. When you hit yellow, 

just talk faster. 

Mr. Nallengara, please. 

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STATEMENTS OF LONA NALLENGARA, ACTING DIRECTOR, DIVISION OF CORPORATION FINANCE, UNITED STATES SECURITIES AND EXCHANGE COMMISSION; JOHN RAMSAY, ACTING DIRECTOR, DIVISION OF TRADING AND MARKETS, 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

STATEMENT OF LONA NALLENGARA 

Mr. NALLENGARA. Thank you. Good morning, Chairman 

Schweikert, Ranking Member Clarke, and Members of the Subcommittee. My name is Lona Nallengara. I am the Acting Director 

of the Division of Corporation Finance of the Securities and Exchange Commission. Joining me today is John Ramsay. John is the 

Acting Director of the Commission’s Division of Trading and Markets. 

Thank you for the opportunity to testify on behalf of the Commission. Implementing the JOBS Act is one of the Commission’s top 

priorities. As you know, the JOBS Act made significant changes to 

the federal securities laws. While certain provisions of the JOBS 

Act were effective immediately, others required Commission rulemaking. In addition, the JOBS Act required the Commission to 

conduct several studies and send reports to Congress. 

Since enactment, the Commission staff has taken steps to inform 

the industry of how the JOBS Act operates. For instance, the staff 

provided guidance about the IPO on-ramp provisions by publishing 

answers to frequently asked questions. These questions address 

such things as how emerging growth companies could use these 

new provisions, including those related to research reports, test the 

waters materials, and scaled disclosures. The staff also provided 

guidance on the amendments to the registration requirements of 

12(g) of the Exchange Act. 

With respect to rulemaking, the JOBS Act required the Commission to adopt rules that revised Rule 506 of Regulation D to allow 

general solicitation and advertising for offers and sales of securities 

under that rule and to implement a new crowdfunding exemption 

and a new exemption from broker-dealer registration for funding 

portals that facilitate crowdfunding transactions. And finally, to 

create a new exemption for offerings of up to $50 million. 

To fulfill this responsibility, we have formed rule-writing teams 

consisting of staff from across the Commission, including economists from our Division of Risk, Strategy and Financial Innovation, 

who are considering the potential economic impact of the rules we 

are considering. 

To aid the rulemaking process and increase the opportunity for 

public comment, we have allowed interested parties to submit comments and recommendations on the JOBS Act provisions through 

the Commission’s website even before we have proposed rules. The 

Commissioners and staff have participated in numerous meetings 

with a wide array of interested parties. The input the Commission 

and the staff have received in these written submissions and these 

meetings has been very helpful to the rule-writing teams as we 

consider the implementation of these mandates. 

As you may know, there has been significant interest in the provisions requiring the Commission to revise Rule 506 to allow for 

general solicitation and advertising. Under the rule proposal the 

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Commission issued last August, companies issuing securities in an 

offering conducted under Rule 506 would be permitted to advertise 

and solicit potential purchasers provided that the company takes 

reasonable steps to verify that the purchasers of those securities 

are accredited investors. 

The proposing release explains that issuers should consider the 

facts and circumstances of the transaction when determining the 

reasonableness of the steps to take to verify that a purchaser is, 

in fact, an accredited investor. Prior to and after issuing this proposal, the Commission received significant public comment, and the 

staff is now developing recommendations for the Commission’s consideration as to how to move forward on the implementation of this 

mandate. 

The JOBS Act also required the Commission to submit several 

reports to Congress. First, it required a report on how 

decimalization has impacted the number of initial public offerings. 

That report, which was submitted to Congress in July, recommended that the Commission conduct a roundtable to discuss 

the impact of decimalization. That roundtable took place in February. Second, the JOBS Act required a report on how our disclosure requirements could be modernized and simplified to reduce 

the costs and burdens for emerging growth companies. The staff is 

in the process of completing that report. And finally, it required a 

report examining the Commission’s authority to enforce the antievasion provisions of Rule 12g5–1 of the Exchange Act. That report 

was submitted to Congress in October. 

In addition, the JOBS Act mandated the Commission to provide 

information and conduct outreach to small- and medium-size businesses and businesses owned by women, veterans, and minorities 

about the changes made in the JOBS Act. The staff is working to 

develop and implement an outreach plan tailored specifically to 

these business communities. The Commission and staff continue to 

work diligently to implement the JOBS Act mandates, and we look 

forward to completing the remaining provisions as soon as possible. 

Thank you for inviting us to appear today, and we would be 

happy to answer any of your questions. 

Chairman SCHWEIKERT. Thank you. I will start with the first 

five minutes and have a couple questions. 

Mr. Ramsay, one of the big questions that I get around me, what 

should our expectations be on rule sets coming out and what do 

you think will be the first ones we see? 

Mr. RAMSAY. Thank you, Chairman Schweikert. And again, we 

appreciate the constructive tone that you have set for the hearing. 

It is very difficult for staff to create any specific expectations in 

terms of timing, and so I will not attempt to do that here. We understand there is a lot of interest. We understand that there is a 

fair amount of frustration with the pace at which the rulemaking 

process has taken. I will say that, from the people that I talk to 

within the Commission, there is a shared sense of interest in moving this forward. Our new chairman, Chairman White, indicated in 

her recent testimony that she saw this as a high priority, and so 

I will resist the urge to make any specific predictions in terms of 

timing, but certainly stress that this is a very high priority for us. 

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Chairman SCHWEIKERT. Is my being unrealistic that by October, by fall? Part of this is I feel like many of us have gone out 

around the country talking about the crowdfunding and, a year 

later I feel like I am breaking people’s hearts by getting them excited and enthused and trying to line up capital. Any window of the 

time of year? 

Mr. NALLENGARA. Chairman, those are questions that we hear 

as well from some of the same parties interested in taking advantage of these new rules. And these are important rules. These are 

important rules because you gave us a mandate, but also important 

rules because of what is underlying that mandate. What is underlying it is providing new ways for businesses, but really focused on 

small businesses, to raise capital and grow their companies, create 

jobs, and strengthen the economy. 

But what is also important about these rules is these rules are 

in many respects fundamental changes to the way private offerings 

have been conducted, and the rules—some were very specific but 

some also provide discretion for the Commission. 

Chairman SCHWEIKERT. Mr. Nallengara, in that case, what do 

you think will be the first to come out understanding the actual 

date is unknowable at this point? 

Mr. NALLENGARA. Chairman, it would be hard for me to tell 

you which would be the first to come out. Chairman White has indicated that all congressional mandates are her priority and specifically, the JOBS Act provisions are her priority. And the three 

main rulemakings that we have are the Title II General Solicitation, the Title III Crowdfunding, and the Title IV Reg A+ Rulemaking. Those are all a priority. We have issued a proposal already 

with respect to the General Solicitation provisions, so that has already been proposed, and we have received comment on that. The 

sequence of those rulemakings—that will be for the Chairman and 

the other Commissioners to determine. But the staff is working— 

we have independent rule-writing teams on each one of those and 

the staff for each one of those rulemakings is working as if their 

rulemaking is the first one to go. So the staff is working very hard 

to get these in place to get recommendations. 

Chairman SCHWEIKERT. Mr. Nallengara, is there any way I 

could organize like an X prize; the first one to get it done wins 

something? 

Mr. NALLENGARA. What would be the prize, Chairman? 

Chairman SCHWEIKERT. Exactly. 

Mr. NALLENGARA. Exactly. 

Chairman SCHWEIKERT. Last one and then I will turn to the 

ranking member. I would love some guidance because many of us 

are starting to work on what should be the next act in the, JOBS 

Act 2.0. Is there something we, as members of Congress can do in 

the way we write it, in the way we ask for rule sets, to make it 

run smoother? Do we need to provide more direction? Do we need 

to provide substantially more detail? What would make this process that our bottlenecks and the timing become compressed? What 

do we do to do this better? 

Mr. NALLENGARA. Chairman, the mandates you give us, we 

look at them as you give us—as you give them to us, and we do 

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derlying those mandates. So some of the mandates you give us, and 

even within an individual title within the JOBS Act, have specific 

requirements and some give us discretion. We look at all of those 

questions that you provide us in the rules and implement them in 

a way that, both the ones that are specific and both the ones that 

give us discretion in a way that allows us to further the purpose 

of legislation. 

Chairman SCHWEIKERT. This is more than just an academic 

discussion. It really is affecting people’s lives. The next generation 

of entrepreneurs, folks out there whose businesses, as we will hear 

on the second panel, who are trying to get to that next level where 

they can hire people and grow and help both as a nation and their 

own futures. I hope you feel the same sort of weight on your shoulders as we do on this side that yes, getting it right is important, 

but getting it done is crucial. 

Mr. NALLENGARA. Absolutely, Chairman. The staff feels that 

way and the direction from the Chairman and the Commissioners 

is to get these rules done. And that is what we are committed to 

do. 

Chairman SCHWEIKERT. All right. We may end up with a second round if we go fast enough. 

Ranking Member Clarke. 

Ms. CLARKE. Thank you very much, Mr. Chairman. 

I want to do a follow-up to the chairman’s question, Mr. 

Nallengara and Mr. Ramsay. Can you give us an idea of the work 

volume you are dealing with in concurrently developing the rules 

for the JOBS Act while still engaged and fully implementing DoddFrank? 

Mr. NALLENGARA. Ranking Member, the Commission is facing 

an unprecedented workload when you factor all of the congressionally mandated rulemakings. There are over 90 Dodd-Frank provisions that have rule-writing requirements and over 20 studies. Although we have completed 80 percent of those and 17 of those studies, there is still plenty to do. And some of the rulemakings that 

are left to do, particularly the ones in John’s division, are related 

to systemic risk. And then when you add the JOBS Act 

rulemakings, the three main rulemakings but there are ancillary 

rulemakings and studies and reports to do, that is an unprecedented level of work. And the ones related to the JOBS Act, as I 

mentioned earlier, those are fundamental changes to the way the 

capital markets—the private offering markets—will work. Those 

are mandates you have given us, but for us to implement them and 

implement them in a way that achieves the goals that you mentioned in your statement, which are to provide an efficient and effective way for small business to raise capital but at the same time 

ensure that investors feel safe and feel like they are getting a secure investment and they are investing in a real business that provides opportunity for return and growth to them, that requires us 

to make sure that we are getting the rules done right. 

That being said, we need to get them done. We appreciate that 

you gave us deadlines and those deadlines have passed, but we are 

focused on getting those rules done. 

Mr. RAMSAY. If I may, yes, Ranking Member Clarke, I think 

just from the standpoint of my division, Title VII of Dodd-Frank 

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and all the derivatives reforms, which require us essentially to 

adopt a whole new regulatory regime that did not exist before over 

a huge international market, is an effort that is consuming and has 

consumed huge amounts of resources and continues to over a period of time. And this is all mandated rulemaking as well. So we 

would ask people to understand that we do not expect much sympathy for it, and we are not really asking for any sympathy for it. 

As Lona said, regardless of what else is on our plate, we know this 

particular set of rules, as Chairman Schweikert said, is something 

that is affecting people’s lives and ability to raise capital currently; 

it ought to be prioritized accordingly and we take that to heart. 

Ms. CLARKE. Yeah. I just thought, excuse me, it was important 

to sort of put things in context. This is not happening in isolation 

of many other responsibilities and obligations of rulemakings that 

you are currently engaged in, so I think it was just sort of important for us to get a sense of the universe that you are working 

within. And, you know, I think one of the things that would be 

helpful for all of us, and maybe even for yourselves, is, you know, 

for you to sort of set a timeframe for yourselves. Maybe it is an internal timeframe but one that sort of drives this process to a timely 

conclusion given the fact that things have already passed deadlines. It is going to be important that there is some motivating factor to really get this done. 

Mr. Nallengara, some experts are concerned that a conflict of interest could arise between funding portals and the companies seeking funding, specifically financial interests of the funding portals 

could lead to more lucrative, yet risky deals receiving preferential 

treatment when presented to potential investors. How does the 

SEC plan to address this concern in the final crowdfunding regulations? 

Mr. NALLENGARA. Ranking Member, I will start with the answer and then I will turn it to John whose division has primary 

responsibility for the funding portals. But the legislation you provided us in the JOBS Act lays out a regulatory regime for funding 

portals. It provides oversight by FINRA and the rules that FINRA 

will adopt will be able to monitor and watch those activities. Funding portals are intended to be a portal between the investor and 

the companies seeking money. They are intended to present the 

picture and the idea of that entrepreneur, of that business, and let 

the entrepreneur tell the story. But also serve as a gatekeeper, 

serve as someone ensuring that both the company knows what they 

are doing but also that investors understand what they are investing in—understand the risks associated with the investment and 

also understand the security they are investing in. 

Mr. RAMSAY. Yes, Congresswoman, an awful lot of the time 

that we have been spending in our division has been devoted to 

meeting with representatives of various funding portals or of that 

part of the community that are interested in investing in the space. 

As Lona said, many of the JOBS Act provisions are intended to ensure that intermediaries for crowdfunding offerings operate in a 

way that protects investors’ funds, that takes account of the privacy interests of investors, that makes sure that investors get the 

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scription that is required, that that all takes place. These are all 

critically important provisions and I would just say that our sense 

is there is a lot of very capable, smart, creative people in this space 

who want to do the right thing and who have an interest, as we 

do, in making sure that the rules are written in a way that excludes the bad actors as much as possible because I think they 

would agree with us is my sense that nothing would undermine the 

ability to use this as a capital-raising tool faster than if the rules 

were written in such a way that they do not exclude the bad actors 

as much as possible. So that is part of the reason we want to be 

very careful about how they are written. 

Ms. CLARKE. Very well. Thank you both. Mr. Chairman, I yield 

back. 

Chairman SCHWEIKERT. Thank you, Ranking Member Clarke. 

And I would like to extend a welcome to Patrick McHenry, who 

is the chairman of the Financial Services Oversight Committee and 

I appreciate you spending a moment or two with us. 

Mr. Luetkemeyer, you are next. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I had a number of questions from some of my constituents with 

regards to the delay on issuing the Rule 506 Reg D situation. Can 

you explain what happened there? That should have been done last 

summer and here it is almost nine months later and we are still 

not anywhere near it. What is going on. 

Mr. NALLENGARA. You are correct, Congressman. You provided 

us a deadline, which was 90 days after enactment, and we did not 

meet that deadline. We did issue a proposal in August. That proposal, as I outlined in my opening remarks, provided a framework 

for the implementation of the rule. We received significant comments before and after the proposal, and the Commission is considering those comments right now. We have had some transition in 

our Chairman’s office, but our Chairman, Chairman White, has indicated that the JOBS Act rulemakings, and in particular the one 

related to 506, are a priority to be moved forward. 

Mr. LUETKEMEYER. Why would the transition of a new chairman change the ability of you to be able to do your job? How many 

people do you have working on this project? Let me start there. 

Mr. NALLENGARA. We have a number of people in my division 

who are principal rule writers. We have economists in our Division 

of Risk, Strategy and Financial Innovation. 

Mr. LUETKEMEYER. Do you have a particular group that 

works on just this rule or they work on all sorts of other rules as 

a whole? 

Mr. NALLENGARA. On this particular rule we have a group of 

attorneys in our chief counsel’s office. 

Mr. LUETKEMEYER. Is this their full-time job that they work 

on just this one rule? 

Mr. NALLENGARA. It is not their full-time job to work on just 

this rule. 

Mr. LUETKEMEYER. How much time do they spend on this 

then? 

Mr. NALLENGARA. They spend as much time as is necessary. 

Mr. LUETKEMEYER. Well, they are not spending very much if 

it is nine months later and we still have not got a rule; are they? 

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My concern is that it does not seem to have the attention of the 

SEC. And this is a real big deal because, you know, we as a Congress have not agreed on a heck of a lot over the last two or three 

or four years here. And we actually finally got to agree on something. This is a way to help small business. And we are very concerned about the lack of action here because we have small business groups out there that would love to be able to put together 

offerings, expand their businesses, buy new businesses. Entrepreneurs are sitting on the sidelines. 

I can tell you from the past two weeks of going around and talking to a lot of my constituents, they are sitting on the sidelines 

waiting to get into some of these businesses but cannot because the 

rules are not there. And I know you proposed it a long time but 

yet it was pulled. The chairman, I guess, killed the rule, so what 

is the problem with it? Why did you kill the rule once it was proposed? 

Mr. NALLENGARA. Congressman, I do not think anyone killed 

the rule. I think what you are referring to—— 

Mr. LUETKEMEYER. It was proposed and then it was withdrawn; okay? 

Mr. NALLENGARA. I think what you are referring to is at one 

point the Commission was considering moving forward on the rule 

with an adopted rule immediately, rather than proposing the rule 

for public comment and considering that comment. And just to 

frame how our rule-writing process works, almost all of our rules, 

virtually all of our rules are proposed and adopted in a manner 

where—— 

Mr. LUETKEMEYER. You withdrew your proposal; correct? 

Mr. NALLENGARA. No. No, we did not withdraw our proposal. 

The Commission considered it in August, considered a proposed 

rule. 

Mr. LUETKEMEYER. The Commission withdrew it? 

Mr. NALLENGARA. No, the Commission did not withdraw it. 

Mr. LUETKEMEYER. We do not have one. How come it has not 

gone forward. Put it that way. 

Mr. NALLENGARA. Congressman, we do have a rule proposal. 

Almost all of our rules are proposed and provide a comment period 

for the public. The public gets to look at the rules and comment 

on it, give us their ideas. 

Mr. LUETKEMEYER. When do you think you are going to get 

this one finalized? 

Mr. NALLENGARA. Our new Chairman has indicated—— 

Mr. LUETKEMEYER. Is he going to give you 90 more days? Is 

it a priority? 

Mr. NALLENGARA. She has indicated it is a priority. So if she 

has indicated it is a priority, it is a priority for us. 

Mr. LUETKEMEYER. So what is a priority? Is it 90 days or 9 

months? 

Mr. NALLENGARA. I cannot say. 

Mr. LUETKEMEYER. We are at a year on this now. I mean, it 

does not seem to be a priority of the SEC. This is a big deal. This 

is how we are going to get our economy going. I do not think you 

see the importance of your job. You help create economic activity 

in this country, sir. Your agency does. And I do not think—and now 

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you are standing in the way of it, and I think that is a big problem. 

And if you hear frustration in my voice it is there because I am 

only venting to you what is being vented to me. And I think that 

we have to find a way to get things back on track. 

I see my time is up and I appreciate you being here this morning. Thank you. 

Mr. NALLENGARA. Thank you. 

Chairman SCHWEIKERT. Thank you, Mr. Luetkemeyer. 

Mr. Bentivolio. 

Mr. BENTIVOLIO. Chairman, Ranking Member, thank you for 

holding this very important hearing. 

Our country has a jobs crisis, and in my district it breaks my 

heart to drive through industrial parks and office parks and see 

‘‘For Sale,’’ ‘‘For Lease,’’ or ‘‘Available’’ signs rather than ‘‘Help 

Wanted Signs.’’ Last year both parties recognized that the creativity and ingenuity of our citizens could be unleashed if they had 

greater access to capital. They recognized the power of start-up 

businesses to create opportunity and jobs, and the result was the 

JOBS Act. The SEC has the important job of creating rules and 

regulations that walk a fine line between creating access to capital 

and protecting investors. I have a few short questions. Thank you 

very much for being here. 

Companies that are required to file reports with the SEC are 

given deadlines; correct? 

Mr. NALLENGARA. Yes. 

Mr. BENTIVOLIO. Are there consequences for missing those 

deadlines? 

Mr. NALLENGARA. Yes. 

Mr. BENTIVOLIO. So would it be correct to say that the SEC 

understands the concept of deadlines? 

Mr. NALLENGARA. Yes, Congressman. 

Mr. BENTIVOLIO. Well, I am not sure I agree. The JOBS Act 

became law over a year ago and you have missed two important 

deadlines. One was more than nine months ago. Does the SEC believe they can miss deadlines stated in law because they are too 

busy? 

Mr. NALLENGARA. Congressman, all the deadlines that you 

provide us in the legislation that you mandate are important deadlines. We work as hard as we can to meet those deadlines. 

Mr. BENTIVOLIO. Does the SEC believe they can miss deadlines because of changes in leadership; yes or no? 

Mr. NALLENGARA. No. I am not sure the question you can answer with a yes or no, but the closest I can get is to no. How about 

that? 

Mr. BENTIVOLIO. Great. The SEC expects reporting companies 

as the regulator to respect their deadlines. Congress is your regulator. Is it fair for us to expect you to respect our deadlines? 

Mr. NALLENGARA. We do, Congressman. 

Mr. BENTIVOLIO. Well, it is debatable. And I think it is reasonable for Congress to be more than a little upset about a federal 

agency’s failure to meet the deadlines set forth in the laws we create, especially when it has a big impact on our economy and job 

creation. 

SBREP-219 with DISTILLER

11 

I have a question about the modification of Reg A, which in- creases the limit to $50 million from $5 million. There was no 

deadline in the act about this change, which is probably good for 

you or it would have been strike three. Are you in this process and 

when should we expect the rules to be finished? Can I have a date? 

Mr. NALLENGARA. Congressman, I cannot provide a date. I am 

not the one who is setting the dates. I can say that Chairman 

White has indicated that getting rules proposed and completed on 

Regulation A+ is a priority for her, so it is a priority for us. 

Mr. BENTIVOLIO. No date? No real deadline? Just when you 

get around to it? That is the impression I am getting. I am getting 

a lot of verbal moonwalking but I am not getting anywhere. 

Mr. NALLENGARA. Congressman, I cannot provide you dates 

but I can provide you that we are committed to get the rules done 

as quickly as we can. 

Mr. BENTIVOLIO. Mr. Ramsay, regarding crowdfunding, what 

are you doing to ensure the cost of compliance is not too high, especially when many investors may only want to invest $20 or $50? 

Mr. RAMSAY. Well, Congressman, in terms of the requirements 

on intermediaries I will defer to Lona on the rest of it, but I think 

that we have been, as I said earlier, talking to—have had dozens 

of meetings with people who are in this community currently to understand what practices they follow now, what best practices are 

in their area, what kinds of requirements might pose a significant 

cost burden issue for them. That certainly is an issue that we have 

been looking at closely in terms of looking at the comment letters 

that have already come in. So on issues like how do intermediaries—what do they have to do in order to protect privacy interests; what kind of arrangements can they have for holding customer funds; what obligations do they have in terms of providing 

issue disclosure and how can that be provided? A significant part 

of our focus has been on trying to make sure that that is done in 

as cost-effective a way as possible. 

Mr. BENTIVOLIO. Thank you very much. 

Mr. Chairman, I yield back my time. 

Chairman SCHWEIKERT. Thank you, Congressman. 

Mr. McHenry. 

Mr. MCHENRY. Mr. Chairman, thank you for allowing me to 

step in and visit your Subcommittee. Thank you for your leadership 

on financial services issues and your interest here, especially your 

offering within the JOBS Act the piece dealing with Reg A in particular. 

Chairman SCHWEIKERT. You had something to do with this I 

think somewhere. 

Mr. MCHENRY. Well, crowdfunding is my deep and abiding interest within the JOBS Act. Reg D rules as well. That is certainly 

something we care about. The crowdfunding piece. Certainly, you 

will have heard from me and from my staff. 

Mr. Ramsay, Mr. Nallengara, thank you for your service to our 

government. I certainly appreciate it. I am certainly aware, as 

members of Congress are, that you are the lead staff in terms of 

your divisions within the SEC. However, the SEC, with the five 

Senate-confirmed members of that board, set the agenda. In particularly the chairman sets the agenda for your agency, your very 

SBREP-219 with DISTILLER

12 

important agency, that is supposed to facilitate capital formation 

and protect investors. Of course, that is a balancing act, and I certainly do appreciate your willingness to testify today. 

But Mr. Nallengara, in terms of my colleague, Mr. Luetkemeyer’s 

questions, I do want to give you an opportunity, and there was 

some hesitation with his questions, but just to correct the record 

and make sure that this is accurate. According to my understanding, the staff recommendation to the board last summer when 

it dealt with Reg D rulemaking, the staff recommendation was to 

offer a final rule during the August SEC Commissioner’s meeting. 

Is that true? 

Mr. NALLENGARA. That was our initial recommendation. Yes, 

Congressman. 

Mr. MCHENRY. And there was a decision made to pull back and 

open back up for comments on that what then became a proposed 

rule. Is that correct? 

Mr. NALLENGARA. Yes. 

Mr. MCHENRY. Okay. I just want to make sure that is correct 

because in terms of these questions, the staff recommendation was 

for a final rule. The comments have been heard. Based on the email traffic that I have now received, these are documents that 

have been provided to Congress. That was clearly the case and the 

then chair, Chairman Shapiro, had an enormous pullback and a 

huge change of approach based on being contacted by the consumer 

federation lobbyists. I wrote a letter to Mary Shapiro to that regard 

at the end of last year, and I am certain that you all are aware 

of that. So, I just want to make sure that record is corrected. 

Mr. Ramsay, in terms of intermediaries when it comes to 

crowdfunding, broker-dealers are allowed to participate and there 

are pure intermediaries that are allowed as well under the law. I 

just want to confirm that the intention is to time the rulemaking 

for both those entities is the same. The date will be the same for 

both those different types. 

Mr. RAMSAY. Yes, Congressman. I believe that is the intent. 

The registered broker-dealers, since they are already registered as 

broker-dealers would not need any further authorization. Firms 

who would be operating as funding portals would need to register 

with the Commission and with FINRA. We have been working 

closely with FINRA to make sure that their program will be in 

place so, as you say, firms will be in a position to choose which of 

those paths they want to go down. 

Mr. MCHENRY. So there is a cap on the amount—and back to 

you, Mr. Nallengara—in terms of the rulemaking, SEC has to write 

rules when it deals with capping individual investors, the amount 

that they can invest in a crowdfunding offering; right? 

Mr. NALLENGARA. Yes. 

Mr. MCHENRY. And so looking at the cost of crowdfunding offerings, this is a tricky issue based on what the final senate language 

came back with, with a cap of $2,000 or 5 percent of a person’s income. It is segmented out. Is the SEC looking at having a very simple way of tracking individuals’ crowdfunding investments? 

Mr. NALLENGARA. Congressman, that is a question that we 

have received from many of the crowdfunding or the future 

crowdfunding participants asking how are they going to be able to 

SBREP-219 with DISTILLER

13 

track investments because that cap is intended to be across any 

crowdfunding investment you made. There are a number of ways 

to proceed. One of the ways that proponents have recommended to 

us is self-certification. You tell the issuer, you tell the 

crowdfunding portal how much you may have invested. That is 

something we are certainly considering and certainly that is what 

the Commission will consider as well. 

Mr. NALLENGARA. So that is on the table as one of the ways 

to implement that provision. 

Mr. MCHENRY. Are there other ideas on the table? 

Mr. NALLENGARA. Well, I mean, as part of our rulemaking, 

when there are choices we need to consider all the choices. We need 

to look at those choices and look at the costs and look at the benefits of every choice. And I know you all want us to do that. So we 

will do that. 

Mr. MCHENRY. Yes. I, in particular, want you weigh both the 

costs and the benefits. Yes. I have been a major proponent of that. 

But thank you for acknowledging it. 

Mr. Ramsay, I am sorry. 

Mr. RAMSAY. No. So Congressman, with respect to costs on 

funding portals, certainly, on questions of how do you—how does 

one ascertain whether the investors are within the limits or not, 

it certainly has been an important focus of our discussions with 

them and the rule-writing efforts to think of those costs. We are 

certainly cognizant of the concern that, if there were a significant 

new structure that would be required to be put in place, that they 

would have to fund it in order to do that, that that could create 

some significant costs that would deter them from participating. 

Mr. MCHENRY. Thank you. Thank you both for your service, 

and thank you for testifying. We have the acting chair testifying 

next week to the Oversight Subcommittee on Financial Services, 

Elise Walter, so we will follow up on some of these questions there. 

I know that your staff sitting behind you will pass that along I am 

sure. 

Chairman Schweikert, thank you so much for your graciousness 

in allowing me to sit in, and thank you for your leadership. 

Chairman SCHWEIKERT. Chairman McHenry, is this the nicety 

language? I am still working on that southern thing. 

Mr. MCHENRY. The bowtie is southern enough; right? 

Chairman SCHWEIKERT. Patrick, thank you for giving us some 

of your time. It is appreciated. 

We are now heading towards the lightning round. My understanding is it was last year court ruled that they were not particularly happy with how the SEC was doing its cost benefit analysis; 

is that correct? 

Mr. NALLENGARA. I think, Chairman, you are referring to the 

proxy access decision. 

Chairman SCHWEIKERT. Yeah, actually, it is on top of my desk 

and I wish I had grabbed it. I know it was D.C. Circuit, which 

would be everything. 

Mr. NALLENGARA. Right. I think from that decision our Commission, led by our economists in our Division of Risk, Strategy 

and Financial Innovation and our General Counsel’s office, put out 

SBREP-219 with DISTILLER

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new guidance on how we are supposed to conduct our economic 

analysis. 

Chairman SCHWEIKERT. Where I am heading is what has that 

done to the timeline internally within the process? 

Mr. NALLENGARA. I think the role of economic analysis in our 

rulemaking has always been there. What we have done with the 

new guidance is we have put a framework around it, and we have 

provided it to everyone. It is on our website. The questions we ask 

and the considerations we make with respect to costs and benefits, 

with respect to identifying the baseline, with respect to identifying 

the regulatory fix or the market failure that your mandates are 

trying to achieve, all of those questions were questions we asked 

in our rulemaking before. What we have now done is formalize 

them in the form of that guidance. 

Chairman SCHWEIKERT. And that puts you in compliance with 

what you believe the D.C. Circuit requested? 

Mr. NALLENGARA. We think the guidance that the Commission 

has provided related to our economic analysis keeps us in compliance with what the APA requires for our rulemaking. 

Chairman SCHWEIKERT. This is going to be probably closer to 

a statement than a question. One of the reasons parts of the JOBS 

Act that I believe are really important, whether it be within the 

crowdfunding, some of the broker-dealer solicitation mechanics, is 

when I look at small business, it is not only the business side of 

the ledger but there are also small investors. We have this habit 

of, in particular even the design of our Committee, we fixate on 

business as we should. But if I do not have a million dollars—actually on one of the definitions, you know, when we start saying, 

okay, you get to be a qualified investor, qualified to assess the risk 

and could bear such risk. If I am the young electrical engineer, I 

may not have accumulated my million dollars to be a qualified investor, but I am an expert in that. So if I am going to invest in 

a business that is doing that, it is my fear you are bifurcating the 

society. You are polarizing parts of the society. Here is the folks 

that are there, they get to be qualified, they get to know what is 

out there, they get to invest. Because you have not met a threshold 

that is defined by wealth, you do not get to participate. One of my 

great hopes that things like crowdfunding actually created a much 

more egalitarian access to participate in ultimately the American 

dream. So this is more than just the access to capital for businesses. This is the access to financial security and growth for a 

huge portion of our nation’s population. 

Ranking Member. 

Ms. CLARKE. Thank you, Mr. Chairman. 

Along those lines, Mr. Ramsay, sophisticated investors typically 

have protections in place and distribute their funding over time to 

protect their financial interests. Due to the nature of crowdfunding, 

investors are less likely to be sophisticated and lack the ability to 

negotiate similar protections. What steps has the SEC taken to address the shortcoming of the crowdfunding model as regulations 

are being drafted? 

Mr. RAMSAY. I appreciate the question, Congresswoman. 

I think there are a number of measures that are in the legislation which will be important parts of the rules that we provide in 

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15 

this area to make sure, number one, that investors are given very 

clear risk disclosures; that intermediaries take steps in order to 

make sure that they fully understand all of the risks that are provided; that they receive appropriate disclosure from the issuers 

that allow them to evaluate the investment in a reasonable way. 

It’s particularly important that the customers’ funds and securities 

are adequately protected. In this regard, the legislation was clear 

that broker-dealers who are fully registered are able to handle customer funds and securities. Funding portals would not by themselves. They need to have a separate bank escrow agent to hold 

those funds. We think that is an important protection as well. Certainly, making sure that customers’ personally identifiable information is protected and that their privacy interests are protected as 

well. All of these are respects in which we are trying to make very 

sure, as I said before, that this is a capital-raising tool that investors will want to use because we are very concerned that, if there 

is, particularly at the outset, bad experience in a few significant 

cases, that that could deter people from using this mechanism, and 

that is something that would not be in accord with what the congressional intent is. 

Ms. CLARKE. Mr. Nallengara, clearly much of the debate over 

crowdfunding regulation comes down to investor protection versus 

access to capital for small business, again, along the lines of the 

chairman’s rationale. Has the SEC investigated current platforms, 

like Kickstarter for predictors of fraud to incorporate into the equity-based crowdfunding rules? 

Mr. NALLENGARA. Ranking Member, we have had the opportunity to meet with a number of non-securities-based crowdfunding 

proponents. There are a number. Kickstarter is one, but we have 

met with a wide variety of them. And what we found, what we 

learned is that the evidence of fraud or the existence of fraud on 

those platforms is very low. The ability for people participating in 

the offerings, the crowd, their ability to comment on a potential 

campaign, as they call them is a remarkably powerful way to determine whether this idea is something that is viable. And that will 

be a part of the rules that the Commission proposes. An ability for 

the crowd and to provide the wisdom of the crowd, as crowdfunders 

like to refer to it, to provide their idea on whether this is a good 

business, whether it is viable, whether it has a real opportunity for 

success. And that vetting by the crowd has been very powerful in 

the non-securities-based crowdfunding. And the crowdfunding proponents are hoping that will be the diligence tool for investors. So 

you will have people who are smart in that area be able to look at 

what this business venture is offering and be able to ask questions 

and be able to give their views on whether that is a viable opportunity. 

Ms. CLARKE. Mr. Chairman, I have one final question. 

The JOBS Act explicitly mandates an effort by the SEC to reach 

out to the minority veteran-owned small businesses. Can you give 

us an update on this ongoing process? 

Mr. NALLENGARA. Yes, Ranking Member. Our Office of Minority and Women Inclusion, as well as my division, and in particular, 

our Small Business office, are focused on implementing that mandate. So there are a number of ways we hope to do that. Our 

SBREP-219 with DISTILLER

16 

OMWI office has a number of ways which, through Commission activities, we reach out to those communities. We are going to piggy 

back on those same outreach efforts and use those as opportunities 

to explain what the JOBS Act will bring. Much of this effort will 

come when we get the rules in place so there is something to talk 

about that is more tangible, but we are beginning that process. And 

we have a number of ways through our Small Business office 

where we provide information and discuss what the JOBS Act has 

done. And as the rules come online we will be able to be more 

meaningful in that regard. 

Ms. CLARKE. Thank you very much, Mr. Chairman. I yield 

back. 

Chairman SCHWEIKERT. Thank you, Ranking Member. 

You touched on one thing there. I will encourage you in more 

simple language. I love the idea of there are crowdfunding platforms; that there is also associated, absolutely open discussion, 

whether you refer to it as blogs, where if I am an expert in that 

area, if I am not, if I am just, passing by, but that access to information, it is sort of the new world of ratings. I mean, how many 

of us these days before we buy a product go on and look at customer reviews. It is sort of the new era of egalitarian access to reviews and information. 

Gentlemen, thank you for your time. I appreciate it. As you start 

to get windows on timelines, I know a number of members on the 

panel would be just elated to hear it. 

And with that we will seat our second panel. Thank you. 

I am going to do each introduction. So I will introduce Ms. Peters, have her give her testimony, and we will actually work our 

way down the line. 

So shall we now call the second panel up? I do not know if you 

heard it before. The lighting system is a five-minute clock, as is 

sort of the humor around here. When you see yellow, just talk faster. 

I would like to introduce the second panel of witnesses here with 

us today. 

First up we will have Jean Peters, managing director of Golden 

Seeds, Angel Capital Network. Jean Peters is an angel investor 

based out of Richmond, Virginia. Through Golden Seeds Angel Network, Ms. Peters invests her own money and time to support 

women-owned entrepreneur start-up business. Jean also serves as 

a board member for the Angel Capital Association which she is testifying on behalf of. Welcome to the Committee. We actually look 

forward to hearing what you have to say. 

Ms. Peters. 

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STATEMENTS OF JEAN PETERS, MANAGING DIRECTOR, GOLDEN SEEDS; WILLIAM KLEHM, PRESIDENT AND CEO, 

FALLBROOK TECHNOLOGIES; KEVIN RUSTAGI, CEO, EVOLUTIONS OF NOISE; JAMES J. ANGEL, ASSOCIATE PROFESSOR, MCDONOUGH SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY 

STATEMENT OF JEAN PETERS 

Ms. PETERS. Thank you, Chairman Schweikert, Ranking Member Clarke, and the Subcommittee members. Thank you for inviting the Angel Capital Association to speak. 

I am Jean Peters. I am a managing director of Golden Seeds, the 

fourth largest angel group in the country. Our 280 members collectively have funded more than $50 million in equity to 60 womenled startups. Golden Seeds is a charter member of the Angel Capital Association on whose behalf I am testifying today. 

ACA is the world’s leading association of accredited angel investors. We have 200 angel groups from across the continent and there 

are 8,500 individual angel members. We share the Committee’s 

concern with the length of time the SEC is taking for rules, but 

also with the substance of the prepared rules. 

So let me briefly describe angel investing. By definition, angels 

are accredited investors who invest from our personal pocketbooks. 

Most are former entrepreneurs, or were successful in business, and 

we want to help others up that ladder. We invest in the most primal point of capital formation—small business startups with high 

growth potential. 

We also speak for the 250,000 accredited investors across the 

U.S. who already fund startups each year. These are just a subset 

of 8 million people who meet that definition and are an untapped 

source of capital that could become active. 

Angels are the only source of equity for most startups and supply 

up to 90 percent of all outside equity for seed-stage companies according to the Kauffman Foundation. In fact, angels fund 20 times 

as many startups as venture capital. In 2011, angels provided $23 

billion of capital to 66,000 startups, while VCs put a couple of billion into 1,800 startups in total. 

Angels work for Main Street, not Wall Street. And angel-funded 

companies are crucial for job growth. According to the Census Bureau, startups make up less than 1 percent of all companies, but 

they create 10 percent of all new jobs in a given year. Without 

angel funding, these companies would never get off the ground. 

We bring disciplined due diligence and deep experience to the 

table. We have to. Capital comes out of my own pocket. We understand that what we do is highly risky and extremely illiquid. We 

give our time and expertise without compensation and often without liquidity for 8 to 10 years. We do this to make a return, but 

we also do it to give back, to keep up with our industries, and because entrepreneurs value what we do. 

So this brings me to a key part of the JOBS Act, Title II, which 

ends the ban on general solicitation for issuers who sell securities 

only to accredited investors, angels. 

We understand entrepreneurs desperately need capital. Companies that could get bank loans or at least small business credit 

SBREP-219 with DISTILLER

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cards are now shut out. So the potential for crowdfunding and general solicitation are exciting. We also understand that these vehicles have high risks for the unwary, and we appreciate the efforts 

to safeguard those risks. But the rules provide the issuer to take 

reasonable steps to verify that investors are accredited. The problem is the SEC has not provided any clarity on what those steps 

are. Instead, they say they will determine that on a case-by-case 

basis. 

This lack of any safe harbor leaves investors and entrepreneurs 

in a deeply uncertain position. The ACA surveyed its investors who 

said they are likely to not invest if they have to turn over financial 

records to entrepreneurs. Their lawyers are telling them not to invest. This would cause a dramatic slowdown in angel funding. We 

recommend that the final rules specify safe harbors. 

At last fall’s SEC Forum on Small Business Capital Formation 

there was a unanimous recommendation to make reputable angel 

groups a safe harbor for general solicitation. 

Angels have a history of disciplined due diligence, deal screening, 

governance, and almost total absence of fraud. As investors enter 

this class, the ACA will lead in providing those professional standards. We will be the adult supervision for crowdfunding and general solicitation and social networks. We will be there when companies that crowdfund need that extra capital. We will be the sorting 

mechanism for these startups that are most promising. We will ensure that companies seeking funding are legitimate, appropriately 

structured, managed, and valued, and that will mean that the innovation that is now bubbling up on every professional district and 

job-seeking community will stand the better chance for success for 

the entrepreneur, for its employees, and for the investor that is 

willing to take that risk. 

I thank you. 

Chairman SCHWEIKERT. Thank you, Ms. Peters. That is interesting. 

Bill Klehm, the next witness with us is—do you prefer Bill or 

William? 

Mr. KLEHM. Bill is fine. 

Chairman SCHWEIKERT. Bill Klehm is CEO of Fallbrook Technologies. Fallbrook Technologies is an automotive company focused 

on the development and manufacturing of energy-efficient vehicle 

transmissions. I actually spent some time on the Internet looking 

at some of your technology. It is fascinating what you have accomplished. Prior to joining Fallbrook, Bill served in various executive 

positions in the automotive industry with Visteon. 

Mr. KLEHM. Excuse me, Visteon. 

Chairman SCHWEIKERT. Visteon Climate Control Systems at 

Ford Motor Company. Bill is testifying on behalf of CONNECT, a 

San Diego-based California innovation trade organization. 

Bill. 

STATEMENT OF WILLIAM KLEHM 

Mr. KLEHM. Thank you. Good morning, Chairman Schweikert 

and Ranking Member Clarke, as well as other Committee members. 

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First of all, thank you for the invitation to be here. It is an honor 

to appear before this Committee today and testify on the challenges 

those of us have raising capital for early stage innovative new companies in the face of this financial and regulatory environment. I 

commend you for calling this hearing to check up on the status of 

the JOBS Act implementation to ensure the goals of the JOBS Act 

get accomplished, namely to increase access to capital for America’s 

innovators. 

My name is Bill Klehm. I am the Chairman and CEO of 

Fallbrook Technologies. I have served as Fallbrook’s CEO since 

2004 and have over 20 years of automotive-related experience. 

We are a private company based in San Diego, California and 

Austin, Texas. We manufacture and market proprietary continuously variable transmission products and support our global partners in the design and development of our proprietary transmission 

technology. 

Fallbrook currently holds over 500 patents and 15,000 patent 

claims. Our mission is to deliver the best performing, most 

versatile and most reliable mechanical power transmissions on the 

planet. We employ 133 people in the U.S., including approximately 

25 of the best transmission engineers in the sector. 

We have passed the commercial test of physics and economics. 

We have partnered with worldwide industry leaders, including national leaders like Allison Transmission of Indiana, Dana Holding 

Corporation of Ohio, and TEAM Industries of Minnesota. Our proprietary variable transmission technology is potentially applicable 

to any product that uses a transmission. It replaces conventional 

transmission technology that uses gears to transfer raw power to 

managed power. 

As you might imagine, transmissions are ubiquitous. They are in 

virtually every electromechanical system today on the planet. The 

most obvious examples are motor vehicles, but they exist everywhere. The range of applications should give you a sense of the size 

of the opportunity we are trying to address. Today, for the market 

opportunities that we are currently investing in, it is about a $30 

billion market opportunity for us. Our technology allows the next 

generation transmissions to increase fuel efficiency, reduce emissions, and improve overall vehicle performance, serving as an important function in protecting the environment. 

Our great country prides itself on entrepreneurship and innovation. In my opinion, Fallbrook is the poster child for those values. 

From an idea starting in San Diego in 1998 with negligible revenue 

through 2009, to over $43 million in revenue last year and all that 

money being poured back into the business to help it grow sounds 

like a good start, but the maze in which small business and innovative companies must navigate to acquire capital is becoming increasingly challenging. We have an opportunity to grow faster and 

drive innovation faster. The only thing preventing us today is access to affordable capital. Our ability to access capital is the most 

significant challenge we face as a business. I personally spend 50 

percent of my time on it. 

With additional capital we could expand our manufacturing base 

in Texas, build out our engineering and development team which 

would create new high-tech jobs, accelerate our product developSBREP-219 with DISTILLER

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ment and partnership opportunities. It is important to note that 

expansion would also have a significant impact outside of our particular company in that both our suppliers and customers would 

also benefit from that job growth. This Committee should remember that high-tech engineering and manufacturing jobs are the kind 

of jobs this economy needs, not only because they enhance America’s competitiveness but they also pay above average wages compared to other sectors. That is why Congress’s bipartisan work to 

pass the JOBS Act was so important and why regulatory hurdles 

should not slow us down now. The jobs and innovation will materialize once the JOBS Act is fully implemented. 

The changes enacted by the JOBS Act will make acquiring capital less challenging for America’s new innovators. The current 

Regulation A cap of $5 million is outdated and unworkable, and 

Congress was absolutely right to modernize that for today’s innovation climate. 

To meet our needs at Fallbrook an incremental $5 million round 

simply would not fund the type of development and growth we are 

targeting at Fallbrook. Additionally, the opportunity cost to file a 

registration statement with the SEC, including legal accounting 

fees and printing costs for a company our size amounts to hundreds 

of thousands to millions of dollars. Middle and large cap companies 

that raise public equity benefit from their scale of the transactions 

relative to their administration costs but small and emerging companies across this country in various tech sectors are robbed of that 

benefit until the Reg A rules are implemented. This means that 

new well-paying jobs are not created, new technologies sit dormant, 

and new products do not affect lives for the common good. 

The changes in the JOBS Act will enable Fallbrook to accelerate 

our development and commercialization, driving innovation growth, 

which creates jobs. 

Thank you very much. 

Chairman SCHWEIKERT. Thank you very much, Mr. Klehm. 

Our next witness is Kevin Rustagi, CEO of Evolutions of Noise 

and cofounder of Inc. Magazine’s 2012 Coolest College Startup, 

Ministry of Supply. 

Mr. RUSTAGI. Yes, that is correct. 

Chairman SCHWEIKERT. Kevin graduated from MIT Technology in 2011 with a degree in mechanical engineering. Prior to 

graduating, Kevin cofounded Ministry of Supply, a dress shirt company with MIT classmates in 2010. Kevin is currently CEO of Evolution of Noise, a product development company that is working on 

several new customer products, including a re-engineering of business cards using laser etching. 

Mr. RUSTAGI. That is correct. 

Chairman SCHWEIKERT. I was teasing Kevin earlier that when 

I run into someone as brilliant as he is at his age I am always fearful I am going to wake up one day and be working for you. 

Kevin, share with us. 

STATEMENT OF KEVIN RUSTAGI 

Mr. RUSTAGI. Good morning, Chairman Schweikert, Ranking 

Member Clarke, members of the Subcommittee. I am so glad to be 

SBREP-219 with DISTILLER

21 

meeting with you and that you will take the time to hear my testimony. 

As Chairman Schweikert mentioned, I graduated from MIT in 

2011 with a degree in mechanical engineering focused on product 

design. My senior year I got into Stanford Business School. I have 

deferred that for three years to work on interesting new high-tech 

and high-growth startups. I have had experience with different 

types of funding, family and friends’ loans, angel investors, and 

most recently donation crowdfunding through Kickstarter.com. 

The company I last founded, Ministry of Supply creates high-tech 

business apparel for men. I am actually wearing one of the shirts 

right now. I just want to talk a little bit about on what we did on 

Kickstarter. Our goal was to raise $30,000 last July. You have to 

meet or exceed that goal to maintain those funds. We raised in a 

little over a month a grand total of $429,000. 

The JOBS Act will greatly increase an entrepreneur’s chance of 

success by going beyond things like crowdfunding and really talking about crowd investing when you need further access to capital 

as we did, and I will talk about it today. 

With Kickstarter, it is very interesting. For consumer-packaged 

goods what I focus in, it has really become a preorder destination. 

And what was phenomenal about our product and service is that 

we did what in the start-up world is known as ‘‘going viral.’’ So our 

global viral PR strategy enabled us to get over 100,000 views of our 

videos with preorders from over two dozen countries. 

Unfortunately, what ended up happening afterwards, what was 

so exciting is we had so much funding that we began to rapidly 

scale a supply chain and hire new employees. However, the money 

that we were offered from multiple investors around the world, 

many of whom were smaller investors, we were unable to take 

based on lack of legal precedent and vetting tools. We experienced 

the deep irony of having a great business opportunity and having 

to turn investors away. 

I just want to delineate the difference between equity-based and 

donation-based. Donation-based crowdfunding is a great opportunity. However, it is not nearly as reliable as equity-based as dictated through the JOBS Act. One of the interesting things as well 

with high-tech hi-growth startups is dilution. When you have a limited number of investors, say an angel investor community, surrounds the entrepreneur or venture capital associations, you deal 

with smaller potential valuations. Simply, the entrepreneur is subject to whatever valuations the market will bear, given the number 

of investors they have. If you open it up to the crowd, I believe this 

will have a leveling smoothing effect that will enable further 

growth. 

The timing of the JOBS Act is very important with regards to 

the global stage. MassChallenge, a Boston-based startup competition—it is one of the largest in the world—actually received applications last year from 35 countries. MassChallenge, like the marketplace, is judged solely based on traction and market adoption. 

Competition is now a highly global democracy. It is very important 

that America matches the speed of global competition. I believe the 

JOBS Act will help us do that. 

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I believe also that crowd investing would be used. There are limitations on other types of investing. Angel investing, you are talking 

about connections in the liquid market surrounding the entrepreneur. Venture capital, it is the idea of being ‘‘proven.’’ They reject 98 percent of startups that walk in their door. In crowd donation you are really dealing with the time window. Does your product exactly match that window? As far as I know in terms of entrepreneurs that I have met over the past six years, given new effective crowdfunding tools we would make quick use of them. 

In conclusion, crowd investing within the JOBS Act clearly demonstrates or will demonstrate America’s continued commitment to 

developing the next generation of small businesses and startups. It 

remains vital to consider all elements of supporting startups, especially other items that are caught up in legislation, including the 

Startup Visa. 

New businesses are very difficult ventures to undertake. There 

are a ton of risks, and I have found, as well as my colleagues, that 

we spend a lot of our time fund-raising as Bill mentioned. 

As I have noted, I have used a variety of tools to create new ventures, both for product design and business development. My hope 

is that my colleagues and I can continue to create new ventures in 

a way that leads and inspires the world. I eagerly await the day 

that I can fully utilize crowdfunding and crowd investing to help 

create successful new ventures. 

I thank you for this opportunity to explain the concerns of the 

startup community and welcome any questions. 

Chairman SCHWEIKERT. Kevin, thank you for sharing with us. 

I would like to yield to the ranking member. Ranking Member 

Clarke. 

Ms. CLARKE. Thank you very much, Mr. Chairman. 

It is my pleasure to introduce James Angel. He is an associate 

professor of finance at Georgetown University’s McDonough School 

of Business. He currently is on leave where he is serving as a visiting associate professor at the Wharton School of the University 

of Pennsylvania. He specializes in the structure and regulation of 

financial markets and has expertise in the IPO process and capital 

formation. Dr. Angel’s current academic research focuses on market 

regulation and he has previously testified before Congress about 

issues relating to the design of financial markets. He holds degrees 

from Cal Tech, Harvard, and Cal Berkeley. Welcome, Mr. Angel. 

STATEMENT OF JAMES J. ANGEL 

Mr. ANGEL. Thank you. It is an honor to be here, and I want 

to thank the Committee for taking the time to investigate this 

very, very important topic. 

Now, as you know, the JOBS Act was passed in reaction to the 

twin crises we face. First, there is the jobs crisis of the Great Recession, but there is also a crisis in capital formation. The most obvious symptom of this is what is happening in our public equity 

markets. We have less than half as many public companies as we 

used to have 15 years ago. 

You may have heard of the Wilshire 5000 index that represents 

all the U.S. exchange-listed companies. Well, guess what? There 

are no longer 5,000 companies there. There are no longer 8,000 like 

SBREP-219 with DISTILLER

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there used to be. Now there are less than 3,600 companies in the 

Wilshire 5000. Our markets have been steadily shrinking. 

Now, there are many contributing factors to this crisis, and I 

would be more than happy to sit down with any of you or your staff 

and go into it in a lot of detail, but it is something that was one 

of the things that was addressed in the JOBS Act with many of 

these contributing factors. 

Now, and I want to thank Congress for really doing such a good 

bipartisan job of addressing many of these different factors. You 

know, there is no one silver bullet that affects everything. But 

many of the parts of the JOBS Act make it easier to avoid becoming a public company because of the burdens we have placed on 

public companies. Well, that is fine for smaller companies, but I 

think we really need to pay attention to also fixing the public markets and not just making it easier to avoid the public market. 

Now, a lot of the stuff in the JOBS Act could have very easily 

been done by the SEC on its own authority. The SEC has very 

broad rulemaking authority, very broad exemptive authority. They 

could have done almost everything in the JOBS Act by themselves 

without needing an act of Congress. So the real question to ask is 

‘‘Why did they not?’’ How is it that this specialist agency, which is 

tasked with making this tradeoff between consumer protection, economic growth, competition, capital formation, market efficiency— 

they are told to make the right tradeoff. How is it that they have 

consistently failed over the years to do this? And it is not the fault 

of any one commissioner or any one staff member. Congress really 

needs to take a look at the big regulatory picture and say ‘‘Why is 

this agency not getting it right? Why did we have to step in with 

this very precise law and here a year later why did we have to grill 

these staff members as to why they have not implemented the law? 

Well, if you think about it for a minute, the SEC had long ago 

decided that they did not want to do any of the things the law said, 

so it is not really a surprise that they have been dragging their 

feet. And indeed, despite their protestations that it is a high priority, they have been spending their time on other things that were 

not mandated by Congress in either Dodd-Frank or the JOBS Act. 

For example, they just released a 377-page rule finding on Regulation SCI, which yes, it is an important area. No doubt about it. But 

it is not one of the things that Congress mandated with specific 

deadlines to get done now while we have 11 million people standing in an unemployment line. 

So anyhow, let us look at the other issues here, like 

crowdfunding. Simple idea. And yes, there are serious consumer 

protection concerns there. We do not want the fraudsters running 

in and ripping off Aunt Sally. But we do not want to study it to 

death either. No matter what they do, they are never going to get 

it perfect. No human is going to do that. There will be unintended 

side effects that nobody has thought about. And like good regulators, they are paralyzed by the fear that that is what is going to 

happen. 

Now, there is a common sense solution to this. The common 

sense solution is to put out interim temporary rules, learn from the 

experience, and then fix it. They are not going to get it right the 

first time or even the second time. So we need to adopt an attitude 

SBREP-219 with DISTILLER

24 

of innovation, try it, see what works, and when we find a problem, 

fix it. 

The same thing on tick size. Again, another technical matter I 

would be more than happy to sit down with you or your staff to 

talk about the pros and cons. But one thing we know is that the 

optimal tick size is not the same for every company. So the real 

public policy question is not, oh, let us study it for five years. No, 

the real question is who decides? Do we let the SEC come up with 

a ‘‘one tick fits all’’ policy like they did in Rule 612? I do not think 

that is the right approach. Who has the incentive to get it right? 

The issuers do. So why do we not let the companies themselves fix 

it? 

So anyway, thank you very much, and I look forward to your 

questions. 

Chairman SCHWEIKERT. Thank you. I hope you will forgive me 

for throwing this in but I find this just fascinating what you are 

all doing. 

Kevin, something I have been trying to partially get my head 

around and also I am trying to encourage the SEC and others is 

let us say you and I have an equity crowdfunding platform. 

Mr. RUSTAGI. Great. 

Chairman SCHWEIKERT. If you were designing it or your personal experience of out there raising money using technology, is access to information, you know, my comment before of affiliated 

blogs, how would you do that? Because if I am a believer that information is the ultimate regulator and vetter, what would you do? 

Mr. RUSTAGI. So I completely agree, Chairman Schweikert, that 

information is key. So this is very important. With Kickstarter we 

had over 1,000 conversations with different potential customers 

given that it is a preorder facilitator. So if we were to make and 

create a crowdfunding platform, there would have to be a couple 

things that we would do. One, we would have to have transparency 

about who is involved in the company, especially at the managing 

partner level. For instance, if Bill is going to go on a crowdfunding 

platform and create a company, a cupcakery as was mentioned in 

the briefing here, we would have to know who is his main baker, 

who are any past financiers, as well as who is really managing the 

team. Specifically, I completely agree with the idea of a blog detailing progress about the company and also basic financials. 

Chairman SCHWEIKERT. Okay. Ms. Peters, when you are actually out there working with your Angel Network—just as a side 

question and this sort of passes back to what Kevin was just saying—information on the management, the individuals, when you 

are weighing, how much are you all investing in the concept or investing in the people? 

Ms. PETERS. Well, with startups, a lot of time there is no revenue. There is a very nascent business model and you are really 

investing in the jockey very much. And so angels do get together 

in groups and we do a very substantial amount of due diligence. 

We end up looking at everything, from management capabilities, 

from the competitive arena, from past history of the management. 

We do reference checks. Angel Capital Investing and Accredited Investor investing is not something you do on PayPal. I mean, it is 

negotiated. You work very closely with the companies. We go on 

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their boards and we offer advice. We offer strategic advice. We 

spend time with those companies throughout their history. 

So transparency is just imperative. We require information rights 

with any company that Golden Seeds invests in and most angel 

groups do that. 

Chairman SCHWEIKERT. Thanks, Ms. Peters. 

Mr. Angel, being someone who is actually very interested in the 

tick size mechanic. Not only seeing the crisis of the number of publicly traded equities out there, but also how the curve seems to be 

pulling further and further out. The big caps are traded and the 

smaller ones are orphans. Obviously tick size, are we to the point 

now where I need to try to put together a bipartisan piece of legislation and drive it through our process? Because many of us have 

had the discussion of do you do a sliding scale? Do you just allow 

the company, the exchange, the interested parties to basically pick 

a tick and say, hey, we are going to be a five cent, we are going 

to be a 10 cent. The last part of that is would you go 5 to 25? How 

much range would you create? 

Mr. ANGEL. Why thank you. Thank you. 

For those watching on TV who are not as familiar with the tick 

size, the tick is the minimum price variation. Now, you can trade 

a stock right now at $10 or $10 and a penny, but you cannot trade 

it at $10 and a half penny. And it sounds like a very technical 

issue, and it is, but what that really indicates is how much you 

have to pay to jump ahead of other people who are bidding the 

same price you want to pay. So if right now other people are out 

there bidding $10, if you want to jump to the front of the line you 

have to bid $10 and a penny. 

Now, it sounds very technical. It sounds like a minor thing, but 

it has a big impact on the way people trade. And the real question 

is what is the optimal tick size? I have published papers with 

mathematical formulas of this and it is really a function of many 

different things—everything from the size of the company to how 

many people know about it, and it is not the same for every company. So if we try to have a ‘‘one formula fits all,’’ we would miss 

a lot of stuff and we probably would not get it perfectly right. So 

I am of the opinion that the best thing to do is to ask who has the 

right incentive? That is what good economic analysis is all about. 

It is not about did the SEC properly manage or properly count how 

many paperclips will be used in implementing a law or a rule; it 

is the question of did they get the economics right to make the 

right tradeoff between consumer protection, capital formation, market efficiency, and competition. 

Now, if you make the tick too wide, that puts a floor on the bidask spread. That is a transaction cost. So if you make the tick too 

wide you are driving up costs. That is going to hurt the stock price. 

On the other hand, if you make the tick too small you are not providing enough protection to people who provide liquidity in the 

market and that will hurt the stock price. 

Chairman SCHWEIKERT. Would you use a sliding scale? Would 

you use a volume adjustment? Would you just allow the company 

and the Exchange to pick a number and then review it on velocity 

of trade? 

SBREP-219 with DISTILLER

26 

Mr. ANGEL. Right. I would let the companies pick their own tick 

size because they have the incentive to get it right. It is their stock 

that is being traded, and if they get the wrong number they should 

have the flexibility to experiment with different stock. 

Chairman SCHWEIKERT. We may be calling you because I am 

frustrated on this one and maybe actually trying to draft—— 

Mr. ANGEL. Happy to assist. 

Chairman SCHWEIKERT. Mr. Klehm, you have a great interest in what we refer to as the Reg A. You know, it is now a $50 million 

offering, a simplified process, and as you and I have talked about. 

The $50 million allows you to be on the big exchanges and the 

great hope of then becoming a covered stock where researchers are 

following you, which makes additional offerings possible. In a company like yours with the growth and the technology and the capital 

intensive you need, is $50 million an appropriate threshold? 

Mr. KLEHM. We are actually a capital light business. So we run 

a mix of intellectual property licensing as well as manufacturing. 

So the business model that we employ has the flexibility to be able 

to do all those things. So a $50 million capital raise—so for the 

first time in nine years my angel investors, my 203 angel investors, 

I do not have to go out and raise money because we are going to 

be a cash flow positive business this year. So this is the time to 

raise money. But what we will require money for is that next jump 

in growth. We went from $8.7 million in revenue to $43 million in 

revenue in one year. 

Chairman SCHWEIKERT. Tell us where you are going. Let us 

say you had the 50 million in new capital. You were able to go— 

what does that do to your employment base? What does that 

change in your local economy? 

Mr. KLEHM. So for us we have relied on licensing and contract 

manufacturing. We have small manufacturing in Austin, Texas, 

and what this would allow us to do is to expand that manufacturing base. So as I think about the business, I think about the 

business as a triangle. So the base of the business is the manufacturing and creating of products, so that covers the expenses for the 

business. Then the licensing, we go into markets that we are not 

organized or capitalized to be able to address, like full-blown automotive transmissions. We license those to other markets. But for 

the markets that we can get our great return for our shareholders 

and be very economically efficient, we would look to manufacture 

that. So the capital we would look to employ is to bring that manufacturing capability in-house and build manufacturing jobs. 

Chairman SCHWEIKERT. Okay. Thank you, Mr. Klehm. 

Ranking Member Clarke. 

Ms. CLARKE. Thank you, Mr. Chairman. This testimony is truly 

fascinating. I want to thank all of you for your testimony here 

today. 

My first question is for Dr.—is it Angel or Angel? 

Mr. ANGEL. You can call me Jim. 

Ms. CLARKE. Well, thank you. Excuse me. 

The JOBS Act included some investor protections, including restrictions on the amount ordinary investors can invest in each company based on income levels. As you know, the SEC has grappled 

with balancing capital raising by small businesses with investor 

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protections in the past. In your opinion, are investment caps 

enough to protect investors with limited wealth and financial 

knowledge from crowdfunding issuers? 

Mr. ANGEL. By itself, no. Whenever you have money, money attracts flies just like garbage attracts fleas. And so that is why there 

are other good things in the JOBS Act, for example, that require 

criminal background checks of the people running these operations 

because we do not want the fraudsters to come in, set up bogus operations, sell them on the Internet, and run away with the proceeds. So definitely this is something that is contemplated in the 

Act, and we just need to move forward with it. 

Ms. CLARKE. I want to follow up on a question from your written testimony. You pointed out the challenges public companies 

face with regards to possible litigation and how that can be a disincentive for private companies to go public. Given that litigation 

can at times be an investor’s only recourse, how would you mitigate 

that concern for private companies who may want to go public? 

Mr. ANGEL. Well, one thing is that Congress and the SEC can 

create various safe harbors for disclosure in that whenever something bad happens to a company that not only do the stockholders 

suffer because the price goes down, but then the strike suits come 

in and basically the shareholders end up suing themselves and 

paying twice. So better safe harbors I think are one very important 

thing. But you are right. We need to strike a balance and that is 

a tricky thing to do. 

Ms. CLARKE. Let me thank you. 

To Mr. Rustagi, as someone who has successfully used the 

Kickstarter platform to raise capital for your small business, what 

recommendations would you make to the SEC to ensure that new 

equity-based crowdfunding rules are workable for both investors 

and issuers? 

Mr. RUSTAGI. So I think that is really interesting. With 

Kickstarter, what happens is a lot of it is centered around the companies themselves and the videos that create. And so as Chairman 

Schweikert was mentioning, a lot of it is very review-based. So 

there is a lot of back and forth there. 

I think the SEC would have to create something very simple. If 

they were to—just from the company’s perspective or from the investor’s perspective, I would want a lot of that regulation bottled 

up into the crowdfunding or crowd investing platforms themselves. 

It is imperative that the system is very, very simple. The biggest 

thing in startups is time. So the longer something takes, the longer 

the process takes, the more you spend on legal, the less likely it 

is that you are to use that. And so a lot of friends and colleagues 

of mine have been coming to me asking about Kickstarter advice, 

because it is such a simple and elegant tool. There is a large 

backend for the companies and there should be for investors as 

well. 

Ms. CLARKE. And my final question to you is what is high-tech 

apparel? 

Mr. RUSTAGI. That is the eternal question. 

So we create synthetic materials that have specific properties. So 

the easiest one to explain is the dress shirt that I am wearing. So 

a regular dress shirt has issues with wrinkling and holds moisture; 

SBREP-219 with DISTILLER

28 

this one does not. So it has special properties, like you can wear 

it for four or five days because it does not smell. It has an antimicrobial coating. It has a phase-change material inside of it, 

which is the same thing used in space suits. So it can hold your 

body heat, store that, so if you are out on a hot day it will pull that 

heat away. And if you go into a cool environment it will release it 

back to you. So it is basically, as the blog dog tech crunch put it, 

a magic shirt. 

Ms. CLARKE. The magic shirt. 

Thank you Mr. Chairman. 

Chairman SCHWEIKERT. It just sets your mind a racing, does 

it not it? 

Mr. Bentivolio. 

Mr. BENTIVOLIO. Thank you very much, Mr. Chairman. I think 

it is more appropriately named the ‘‘smart shirt.’’ 

Mr. RUSTAGI. Thank you. 

Mr. BENTIVOLIO. It is a very good idea. 

Actually, my questions are for Ms. Peters. I am sorry I was not 

here to hear your initial testimony, but I got the gist of it and I 

have a few quick questions. 

A startup. Somebody wants to raise money for a good idea what 

they think is a good idea, they should put together a business plan 

I am assuming. Do you help them with that? Do you have a format 

or a style? 

Ms. PETERS. There are a number of tools that startups use. 

There are some technological systems that they can go on that 

show them what they need to do, how to put up an executive summary, a business plan. They need a business plan for their business. I mean, we do not write that for them. If they are not capable 

of writing that, that is one of the signals we would have about how 

likely they are to succeed. They need to be able to understand and 

provide us with financials and financial projections and the basis 

for those projections. 

So there are a whole array of templates that you can see on the 

Angel Capital Association site for entrepreneurs. There are a number of other sites that do that as well. These have been around for 

many years. Then also, entrepreneurs come through economic development, through incubators in their towns, through accelerators, 

through tech transfer offices of colleges and universities, and frankly, a lot of the schools that used to promote their MBAs are now 

promoting their masters in business entrepreneurship, not administration. So you are finding entire course curriculum around how 

to create a startup and develop the sources of capital that you 

need. 

Mr. BENTIVOLIO. That is great. That is great. 

One other thing, Mr. Rustagi? 

Mr. RUSTAGI. Rustagi. 

Mr. BENTIVOLIO. In another Committee we were discussing 

military uniforms. Is there any chance you could get involved with 

us on that, in developing a smart uniform? 

Mr. RUSTAGI. I could speak with my former partner about it. 

There is an SBIR out about a year and a half ago that we were 

going to apply to, but certainly. Yeah. 

Mr. BENTIVOLIO. That would be great. 

SBREP-219 with DISTILLER

29 

And just one last question. How can I get you to come to my district and give a seminar on how to do a startup? 

Mr. RUSTAGI. My e-mail is just my full name at gmail.com. 

Mr. BENTIVOLIO. Great. Thank you very much. Thank you. I 

yield back my time, Mr. Chairman. 

Chairman SCHWEIKERT. Oh, it is not fair. We wanted to get 

him to our district first. 

Mr. BENTIVOLIO. He is going to be sought after. 

Chairman SCHWEIKERT. Thank you. This was one of those 

unique occasions. I have sat through hundreds of hearings from my 

time in the state legislature to here in Congress. As a collection of 

witnesses, you are singularly the most interesting group I think I 

have ever had in front of me. It is rare for me to look out and say 

I would love to sit down and have a coffee with each one of you. 

So thank you for joining us today. You may find that we may send 

you some questions to put into the record, so let me make sure I 

do the proper closing. Okay. 

And with that I ask unanimous consent that the members have 

five legislative days to submit statements and supporting materials 

for the record. Without objection, so ordered. The hearing is now 

adjourned. 

[Whereupon, at 11:42 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

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Testimony on "JOBS Act Implementation Update" 

by 

Lona Nallengara, Acting Director 

Division of Corporation Finance 

and 

John Ramsay, Acting Director 

Division of Trading and Markets 

U.S. Securities and Exchange Commission 

before the 

Subcommittee on Investigations, Oversight and Regulations 

Committee on Small Business 

U.S. House of Representatives 

April 11, 2013 

Chairman Schweikert, Ranking Member Clarke and Members of the Subcommittee: 

We appreciate the opportunity to testifY today on behalf of the U.S. Securities and 

Exchange Commission (Commission) regarding the Jumpstart Our Business Startups Act (JOBS 

Act). Implementation of the JOBS Act is one of the Commission's top priorities, and our 

testimony will discuss the efforts of the Commission and staff since enactment of the JOBS Act 

last year. 

The JOBS Act made significant changes to the federal securities laws, including: 

changing the initial public offering process for a new category of issuer, called an 

"emerging growth company," by, among other things, permitting certain of these 

companies to submit draft registration statements for review on a confidential basis, 

providing exemptions for such companies from various disclosure and other requirements 

for up to five years following their initial public offerings and relaxing certain restrictions 

on communications by issuers and their underwriters; 

requiring the Commission to modify the prohibition against general solicitation and 

general advertising in Rule 506 of Regulation D and Rule 144A under the Securities Act 

of 1933 (Securities Act); 

requiring the Commission to implement exemptions under the Securities Act for 

crowdfunding offerings and for unregistered public offerings of up to $50 million; and 
31 

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increasing the number of holders of record that triggers public reporting under Section 

12(g) of the Securities Exchange Act of 1934 (Exchange Act) and increasing the number 

of holders that permits deregistration and suspension of reporting under the Exchange Act 

for banks and bank holding companies. 

The JOBS Act also required the Commission to conduct several studies and prepare 

reports to Congress. In addition, the JOBS Act mandated that the Commission provide online 

information and conduct outreach to small and medium-sized businesses and businesses owned 

by women, veterans and minorities about the changes made by the new statute. 

As you know, certain provisions of the JOBS Act became effective immediately upon 

enactment, while others require Commission rulemaking. These rulemaking mandates are in 

addition to a significant volume of Commission rulemaking required by the Dodd-Frank Wall 

Street Reform and Consumer Protection Act. 

The Commission staff has taken steps to inform the industry about the operation of the 

JOBS Act, beginning immediately after enactment. On the day of enactment, for example, staff 

in the Division of Corporation Finance provided information on the Commission's website that 

explained how emerging growth companies could submit draft registration statements for 

confidential non-public review as permitted by the JOBS Act. I On the same day, the staff 

received the first confidentially-submitted registration statement from an emerging growth 

company that used these new procedures. 

Soon after enactment, the staff prepared and posted on the Commission's website 

answers to what the staff anticipated would be interpretive and implementation questions that 

companies and their advisors would have regarding the initial public offering "on-ramp" and the 

changes to the requirements for Exchange Act Section 12(g) registration and deregistration. The 

See http://www.sec.gov/divisions/comfin/cfannouncementsldraftregstatements.htm. 

2 
32 

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staff has continued to provide guidance, including by providing answers to frequently asked 

questions about the JOBS Act and its effect with respect to rules relating to research and research 

analysts and about the crowdfunding and other provisions of the JOBS Act.2 In addition, the 

staff has discussed and answered questions relating to the provisions of the JOBS Act with 

companies, their advisors and other interested parties at conferences and seminars. 

For the JOBS Act provisions requiring Commission rulemaking, rule writing teams have 

been formed consisting of staff from across the Commission, including economists from the 

Division of Risk, Strategy and Financial Innovation (RSFI). As discussed below, these teams 

have been working on rulemaking recommendations, including the assessment of their potential 

economic impact, for the Commission's consideration. 

To aid the rulemaking process and increase the opportunity for public comment, the 

Commission established a page on its website through which, prior to the issuance of proposed 

rules, interested parties are able to submit comments on the various provisions of the JOBS Act. 3 

Since the webpage was established last April, a wide range of interested parties have provided 

helpful feedback and insights relating to the Commission's implementation ofthe JOBS Act, and 

these comments are publicly available on the Commission's website.4 Commissioners and staff 

also have participated in meetings with a wide array of interested individuals and groups 

regarding the implementation of the JOBS Act.s The input the Commission and the staff have 

See http://www.sec.gov/divisionslcorpfinlguidance/cfijobsactfaq-title-i-general.htm. 

http://www.sec.gov/divisions/corpfin/guidance/cfijobsactfag-12g.htm. 

http://www.sec.gov/divisions/marketregltmjobsact-researchanalystsfaq.htm. 

http://www.sec.gov/divisions/marketregltmjobsact-crowdfundingintermediariesfag.htm and 

http://www.sec.gov/divisions/marketreglexemption-broker-dealer-registration-jobs-act-faq.htm. 

See http://www.sec.gov/spotlightljobsactcomments.shtml. 

See id. 

As of April 8, 2013, the Commission has received 221 comment letters relating to the provisions in Title I, 77 

comment letters relating to the provisions in Title II, 188 comment letters relating to the provisions in Title III, 

3 
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received through these written submissions and meetings has been very helpful to the rulemaking 

teams as they work to comply with the JOBS Act's mandates. 

Below is a more detailed description ofthe efforts taken to date to implement the various 

provisions of the JOBS Act. 

Title I 

Title I of the JOBS Act created a new category of issuer called an "emerging growth 

company," which is defined as a company with total annual gross revenues ofless than $1 billion 

during its most recently completed fiscal year. Only companies whose first registered sale of 

common equity securities occurred after December 8,2011 may be considered emerging growth 

companies. A company retains its status as an emerging growth company until the earliest of the 

following: 

• the last day of its fiscal year during which its total annual gross revenues are $1 billion or 

more; 

• the date it is deemed to be a large accelerated filer under the Commission's rules; 

• the date on which it has issued more than $1 billion in non-convertible debt in the 

prev ious three years; or 

• the last day of the fiscal year following the fifth anniversary of the first registered sale of 

its common equity securities. 

As referenced above, emerging growth companies may confidentially submit draft 

registration statements to the Commission prior to the company's initial public offering date. All 

such submissions and amendments to those submissions must be filed publicly no later than 21 

19 comment letters relating to the provisions in Title IV, 22 comment letters relating to the provisions in Titles 

V and VI and four comment letters relating to Title VII. The comment file for each title provides information 

about JOBS Act-related meetings in which the Commission and the staff participated. See 

http://www.sec.gov/spotlightljobsactcomments.shtml. 

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days before the date the issuer conducts a road show, as that term is defined in Securities Act 

Rule 433. 

Under Title I, emerging growth companies can take advantage of scaled disclosure and 

other requirements, including with respect to the Commission's financial statement and selected 

financial data requirements and certain executive compensation disclosures. Emerging growth 

companies are exempted from the audit of internal controls required under Section 404(b) of the 

Sarbanes-Oxley Act of 2002 and from any potential future rule the Public Company Accounting 

Oversight Board issues with respect to mandatory audit firm rotation or the auditor reporting 

model. (n addition, under Title I, emerging growth companies cannot be required to comply with 

any new or revised financial accounting standard until the date that a non-issuer would be 

required to comply. 

Title ( also makes important changes with respect to communications around securities 

offerings, the provision of research and securities analyst communications. The law provides a 

Securities Act exemption for emerging growth companies and persons authorized to act on their 

behalf to "test the waters" for an offering by communicating with potential investors that are 

qualified institutional buyers or institutional accredited investors prior to or following the filing 

of a registration statement. In addition, Title I provides an exemption under the Securities Act 

for the issuance of research reports before, during and following initial public offerings and other 

offerings for emerging growth companies by underwriters engaged in such offerings. It also 

prohibits the Commission and national securities associations from adopting or maintaining 

rules: 

• restricting, based on functional role, which associated persons of a broker-dealer, or 

member of a national securities association, may arrange for communications between a 

securities analyst and a potential investor; 

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• restricting a securities analyst from participating in communications with an emerging 

growth company's management team that also are attended by any other associated 

person of a broker-dealer, or member of a national securities association, whose 

functional role is not that of a securities analyst; and 

• restricting broker-dealers, or members of a national securities association, from 

publishing or distributing research reports or making public appearances with respect to 

the securities of an emerging growth company within a specified time period after the 

emerging growth company's initial public offering or prior to the expiration of a lock-up 

agreement. 

The provisions of Title I were effective upon enactment without Commission 

rulemaking. 6 As noted above, immediately following enactment ofthe JOBS Act, the staff 

developed and published procedures for emerging growth companies to submit draft registration 

statements for confidential non-public review. 7 The staff has continued to work to simplif'y that 

process, and, since October 2012, companies have been required to submit their draft registration 

statements electronically on the Commission's EDGAR system. 8 To date, the Commission has 

received approximately 175 confidentially-submitted draft registration statements for non-public 

review as permitted under Title I. As noted above, through the issuance of responses to 

frequently asked questions, the staff has provided guidance on the application of Title I in light 

ofthe Commission's existing rules, regulations and procedures. The staff is continuing to work 

with companies and practitioners when questions arise concerning the application of Title I. 

Title I also required the Commission to submit two reports to Congress. Section 106(b) 

required that the Commission, within 90 days of enactment of the JOBS Act, conduct a study and 

report to Congress on the transition to trading and quoting securities in one penny incrementsalso known as decimalization - and the impact decimalization has had on the number ofinitial 

See http://www.sec.gov/comments/jobs-title-i/general/general.shtml for comments on Title L 

See http://www.sec.gov/divisions/corpfin/cfannouncementsldrafiregstatements.htm. 

See http://www.sec.gov/divisionsicorofin/cfannouncementsldrsfilingproceduresIOI512.htm . 

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public offerings since its implementation. 9 Section 106(b) also permitted the Commission, ifit 

determined that the securities of emerging growth companies should be quoted and traded using 

a minimum increment of greater than $0.0 I to designate, by rule, a minimum increment for 

emerging growth companies that is greater than $0.0 I but less than $0.10. 

The report to Congress on the staft's study under Section 106(b) was submitted on 

July 20, 2012. 10 In conducting the study, the staff reviewed empirical studies regarding tick size 

and decimalization, considered the views expressed about market structure at a June 2012 open 

meeting of the Commission's Advisory Committee on Small and Emerging Companies and 

surveyed tick size regimes in non-U.S. markets. Based on the review, the staff found that 

"[a]lthough mandating an increase in tick sizes to levels greater than those that are presently 

dictated by market forces may provide more incentives to market makers in certain stocks, the 

full impact of such a change, including whether or not an increased tick size would indeed result 

in more IPOs, and whether there would be other significant negative or unintended 

consequences, is difficult to ascertain." 11 The staff, therefore, recommended at that time that the 

Commission should not proceed with rulemaking to increase tick sizes, but should consider the 

steps needed to determine whether rulemaking should be undertaken in this area in the future. In 

this regard, the report noted the staffs belief that the Commission should solicit the views of 

interested parties on the broad topic of decimalization, how to best study its effects on initial 

public offerings, trading and liquidity for small and middle capitalization companies and what, if 

See http://www.sec.gov/comments/iobs-title-i/tick-size-study/tick-size-study.shtml for comments on Section 

106(b) ofTitle I. 

10 See http://www.sec.gov/news/studies/20 12ldecimalization-OnO 12.pdf. 

11 Id. at 22. 

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any, changes should be considered. The staff also recommended that a roundtable be convened 

to determine how to best structure a potential pilot program. 

In February 2013, the staff held a roundtable to discuss the impact of decimal-based stock 

trading on small and middle capitalization companies, market professionals, investors and U.S. 

securities markets. 12 The staff is still considering the comments received at the roundtable, 

including those suggesting that the Commission evaluate the current "one-size-fits-all" approach 

to tick size through the implementation of a pilot program that would alter the minimum tick size 

for a control group of stoeks of different types of companies. Although panelists expressed 

different views on the impact of tick sizes on initial public offerings, research coverage and 

market liquidity, most panelists supported the idea of a pilot program to empirically test the 

effects of increasing tick sizes to greater than one penny for the less-liquid stocks of smaller 

capitalization companies. 13 As a result, the staff is consulting with the exchanges and other 

interested parties to consider how a pilot program, if one were to be implemented, could be 

structured to best inform the Commission of the policy choices in this area. 

Section 108 of the JOBS Act required the Commission, within 180 days of enactment of 

the JOBS Act, to conduct a review of Regulation S-K to determine how it may be modernized 

12 

IJ 

For further information about the decimalization roundtable, see 

hnp:!!www.sec.gov!spotlightldecimalization.shtml. 

A cross-section of panelists expressed support for instituting a pilot program for a subset of small and middle 

capitalization companies. Some panelists focused on the impact of spreads on trading activity and believed it 

was possible that a larger tick size may result in more liquidity for the securities of small and middle 

capitalization companies, while other panelists drew a connection between tick size and the availability of 

research and initial public offerings. A smaller number of panelists questioned the utility of a pilot program, 

believing that it may not be able to generate data that would measure the impact of wider spreads on initial 

public offerings for small and middle capitalization companies. Others have expressed concerns that there 

could be negative consequences ofan increased tick size, such as increased costs to investors or increased overthe-counter trading. 

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and simplified to reduce the costs and other burdens for emerging growth companies. 14 The 

Commission also is required to transmit a report to Congress on this review, including specific 

recommendations. The Commission's staiTis in the process of preparing its recommendations 

and is working to complete the review in the near future. 

Title II 

Title II of the JOBS Act requires the Commission to revise the Rule 506 safe harbor of 

Regulation 0 15 from registration to allow general solicitation or general advertising for offers 

and sales made under Rule 506, provided that all securities purchasers are accredited investors. 

The rules the Commission adopts pursuant to Title II must require issuers to take 

"reasonable steps to verifY that purchasers of the securities are accredited investors, using such 

methods as determined by the Commission." Title II also states that Rule 506 will continue to be 

treated as a regulation issued under Section 4(a)(2) of the Securities Act, and that offers and sales 

under Rule 506 as revised will not be deemed public offers under the federal securities laws as a 

result of general solicitation or advertising. 

The Commission also is required to revise Securities Act Rule 144A 16 to provide that 

securities sold under the revised rule may be offered to persons other than qualified institutional 

14 See http://www.sec.gov/comments/jobs-title-ilreviewreg-sklreviewreg-sk.shtml for comments on Section lOS of 

Title 1. 

15 

16 

17 CFR 230.506. Rule 506 of Regulation D under the Securities Act is a non-exclusive safe harbor under 

Section 4(a)(2) (formerly Section 4(2» of the Securities Act, which exempts transactions by an issuer "not 

involving any public offering" from the registration requirements of Section 5 of the Securities Act. Under 

existing Rule 506, an issuer may offer and sell securities, without any limitation on the offering amount, to an 

unlimited number of "accredited investors," as defined in Rule 50 I(a) of Regulation D, and to no more than 35 

non-accredited investors who meet certain "sophistication" requirements. The availability of the existing safe 

harbor is subject to a number of requirements and is conditioned on the issuer, or any person acting on its 

behalf, not offering or selling securities through any form of "general solicitation or general advertising." 

17 CFR 230.144A. Rule 144A is a non-exclusive safe harbor exemption from the registration requirements of 

the Securities Act for resales of certain "restricted securities" to qualified institutional buyers, or QIBs. 

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buyers, including by means of general solicitation or advertising, provided that the securities are 

sold only to persons reasonably believed to be qualified institutional buyers. 

The Title II rulemaking was required to be completed within 90 days of enactment of the 

JOBS Act. In August 2012, the Commission issued for public comment proposed rules to 

implement Title II. 17 Under the proposed rules, companies issuing securities in an offering 

conducted under Rule 506 of Regulation D would be permitted to use general solicitation and 

general advertising to offer securities, provided that the issuer takes reasonable steps to verify 

that the purchasers of the securities are accredited investors. The Proposing Release explains 

that, in determining the reasonableness of the steps that an issuer has taken to verify that a 

purchaser is an accredited investor, issuers should consider the facts and circumstances of the 

transaction, such as the type of purchaser and the type of accredited investor that the purchaser 

claims to be, the amount and type of information that the issuer has about the purchaser and the 

nature of the offering. The proposed rules would preserve the existing portions of Rule 506 as a 

separate exemption so that companies conducting Rule 506 offerings without the use of general 

solicitation and general advertising would not be subject to the new verification rule. 

The Commission also proposed that securities sold pursuant to Rule 144A could be 

offered to persons other than qualified institutional buyers, including by means of general 

Although Rule 144A does not include an express prohibition against general solicitation, offers of securities 

under Rule 144A currently must be limited to QIBs, which has the same practical effect. A QIB is defined in 

Rule 144A and includes specified institutions that. in the aggregate, own and invest on a discretionary basis at 

least $100 million in securities of issuers that are not affiliated with such institutions. Banks and other specified 

financial institutions also must have a net worth of at least $25 million. A registered broker-dealer qualifies as a 

QIB if it, in the aggregate, owns and invests on a discretionary basis at least $10 million in securities of issuers 

that are not affiliated with the broker-dealer. 

17 Securities Act Release No. 33-9354 (Proposing Release) 77 Fed. Reg. 54464 (August 29, 2012), available at 

http://www.sec.gov/rules/proposed/2012/33-9354.pdf. 

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solicitation, provided that the securities are sold only to persons whom the seller and any person 

acting on behalf of the seller reasonably believe are qualified institutional buyers. 18 

The comment period for the proposal ended in October 2012. There has been significant 

interest in this provision of the JOBS Act and the proposed rules. The Commission received 

more than 65 comment letters prior to issuing a proposal. 19 and has received more than 220 

comment letters on the proposal to date.2o Staff in the Divisions of Corporation Finance and 

RSFI are developing recommendations for the Commission's consideration as to how best to 

move forward with implementation of Title II. 

Title II also amends Section 4 of the Securities Act to provide a narrow exemption from 

the requirement to register with the Commission as a broker-dealer in connection with certain 

limited activities related to Regulation D21 offerings. In February 2013, the Commission's 

Division of Trading and Markets posted on the Commission's website answers to frequently 

askcd questions about these provisions, including confirming that the exemption does not require 

the Commission to issue or adopt any rules. 22 

18 In the Proposing Release. the Commission proposed only those rule and form amendments that, in the view of 

the majority, were necessary to implement the mandate in Title ll. Commissioner Luis Aguilar dissented from 

the Commission's action, stating his view that the proposal presented a framework that was not balanced and 

did not consider the alternatives suggested by commentators. See Commissioner Luis A. Aguilar, Statement at 

SEC Open Meeting, August 29, 2012, available at https:llwww.sec.gov/news/speechI2012/spch0829121aa.htm. 

Certain of the written comments received by the Commission, both before and after the proposal, urged the 

Commission to consider and propose other amendments to Regulation D or to Ponn 0 that the commentators 

believed to be appropriate in connection with the implementation of Title II. The Proposing Release did not 

request comment on any of such recommendations, and did not address whether a proposal incorporating any of 

such recommendations in conjunction with removing the prohibition on general solicitation and advertising 

would be a reasonable alternative to the approach in the proposed rule. 

19 See http://www.sec.gov/commentsljobs-title-ii/jobs-title.ii.shtmI. 

,0 See http://www.sec.gov/comments/s7.07.12/s70712.shtml. 

17 CPR 230.500 through 230.508. 

-- See http://www.sec.gov/divisionslmarketreglexemption~broker~dealer-registration~iobs~act~faq.htm. 

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Title III 

Title III of the JOBS Act provides a new exemption from Section 5 of the Securities Act 

for offers and sales of securities through crowd funding. Crowd funding is an evolving method to 

raise capital using the Internet. Crowd funding using donation-based or reward-based models has 

been used by small and start-up businesses to raise capital to start a business or develop a 

product and by individuals or entities seeking financial contributions to support artistic and 

charitable projects or causes. An entity or individual raising funds through donation-based or 

reward-based crowdfunding typically seeks relatively small, individual contributions from a 

large number of people. 

To implement Title III, the Commission must create a new regulatory regime for issuers 

seeking to engage in crowdfunding transactions, including ongoing reporting requirements, and 

for intermediaries seeking to facilitate crowdfunding transactions. The new exemption provided 

in Title III would allow businesses to use crowd funding to offer and sell securities without 

registration under the Securities Act, subject to certain conditions. Among its many conditions, 

Title III limits the maximum amount that may be raised by an issuer and the maximum amount 

that an individual investor may invest in a 12-month period. Title III also requires that an 

offering made in reliance on the exemption be conducted through an intermediary that is either a 

registered broker or a registered "funding portal." A funding portal, which is a new entity under 

the federal securities laws, would be subject to a conditional exemption from broker registration. 

Title III includes other requirements for issuers and intermediaries, including disclosure 

obligations and restrictions on advertising the terms of the offering. The Commission also is 

required to establish disqualification provisions for certain bad actors and exempt securities 

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issued in reliance on the crowdfunding exemption from the calculation of record holders for 

purposes of Section 12(g) of the Exchange Act. 

Under Title III, the Commission was required to adopt rules implementing the new 

crowdfunding provisions within 270 days of enactment of the JOBS Act. The Commission has 

received over 180 pre-proposal submissions on the crowdfunding provisions of the JOBS Act.23 

Staff in the Divisions of Corporation Finance, RSFI and Trading and Markets are working to 

develop recommendations for the Commission's consideration. In addition, the staff published 

responses to frequently asked questions to provide guidance on the implementation of Title Ill. 24 

Title IV 

Title IV of the JOBS Act requires Commission rulemaking to create a new exemption 

from Securities Act registration, similar to existing Regulation A,25 which would allow certain 

"small issue" offerings of up to $50 million in a 12-month period. 26 Title IV specifies that the 

cxemption include certain terms and conditions, including, among others, that the securities may 

be offered and sold publicly, the securities sold under the exemption will not be restricted 

securities and issuers of the securities will be required to file audited financial statements 

annually with the Commission. The Commission may add other terms, conditions and 

requirements that it determines necessary in the public interest and for the protection of 

investors, which may include electronic filing of the offering documents, periodic disclosures by 

the issuer or disqualification provisions. Title IV also requires the Commission to review the 

" See http://www.sec.gov/commentsliobs-titie-iiiljobs-titie-iii.shtml. 

24 See http://www.sec.gov/divisions/marketregltmjobsact-crowdfundingintermediariesfag.htm. 

25 17 CFR 230.251 through 230.263. 

26 See http://www.sec.gov/comments/jobs-title-iv/jobs-title-iv.shtml for comments on Title IV. 

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offering limit under the new exemption not later than two years after enactment of the JOBS Act 

and every two years thereafter. Staff in the Divisions of Corporation Finance and RSFI are 

working to develop rule recommendations under Title IV for the Commission's consideration. 

Titles Vand VI 

Titles V and VI ofthe JOBS Act amend Section 12(g) of the Exchange Act, which sets 

forth certain registration requirements for classes of securities. 27 Prior to enactment of the JOBS 

Act, Section 12(g) and the rules issued thereunder required a company to register its securities 

with the Commission within 120 days after the last day of its fiscal year, if, at the end of the 

fiscal year, the securities were held of record by 500 or more persons and the company had total 

assets exceeding $10 million.28 

Title V amends Section 12(g) to raise the threshold for registration from 500 holders of 

record to either 2,000 holders of record or 500 holders of record who are not accredited 

investors. Title V also excludes from the calculation of the number of holders of record shares 

held by persons who received the shares pursuant to employee compensation plans, and requires 

Commission rulemaking to provide a safe harbor for the determination of whether such a holder 

is to be exc luded. 

Title VI applies only to banks and bank holding companies. [t amends Section 12(g) to 

raise the registration threshold from 500 holders of record to 2,000 holders of record, and also 

changes the threshold for exiting the reporting system from 300 holders of record to 1,200 

27 See http://www.sec.gov/comments/jobs-title-v/jobs-title-v.shtmI and http://www.sec.gov/comments/jobs-titleviljobs-titie-vLshtml for comments on Titles V and VI, respectively. 

08 See 15 U.S.C. §78/(g) and 17CFR240.12g-1. 

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holders of record. Title VI requires the Commission to write rules to implement this provision 

within one year of enactment of the JOBS Act. 

Titles V and VI were effective immediately upon the enactment ofthe JOBS Act. In the 

days following enactment, the staff prepared and posted guidance on the Commission's website 

addressing anticipated questions related to the JOBS Act changes to the requirements for Section 

12(g) registration and deregistration. To date, approximately 78 bank holding companies have 

deregistered.29 The statT is in the process of preparing recommendations for rule proposals for 

the Commission's consideration to address the new requirements of Titles V and VI. 

Title V also requires the Commission to examine its authority to enforce the anti-evasion 

provisions of Exchange Act Rule 12g5_1 30 and submit recommendations to Congress within 120 

days following enactment of the JOBS Act. Staff from the Division of Corporation Finance 

worked with staff from the Divisions of Enforcement, RSFI and Trading and Markets to review 

the anti-evasion provision in Rule 12g5-1(b)(3) and the Commission's related enforcement 

authority and tools, and, on October IS, 2012, submitted their report to Congress. 31 The staff 

concluded that the current enforcement tools available to the Commission are adequate to 

enforce the anti-evasion provision of Rule 12g5-1 and determined not to make any legislative 

recommendations regarding enforcement tools relating to Rule 12g5-1 (b )(3). 

09 This reflects filings made with the Commission, which does not include deregistrations by banks that report to 

banking regulators. 

)0 17 CFR 240.12g5-1. 

JI See http://www.sec.gov/newslstudiesl2012/authoritv-to-enforce-rule-12g5-I.pdf. 

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Title VII 

Effective upon enactment, Title VII requires the Commission to provide online 

information and conduct outreach to inform small and medium-sized businesses, as well as 

businesses owned by women, veterans and minorities, of the changes made by the JOBS Act. 32 

Stafffrom the Division of Corporation Finance and the Office of Minority and Women Inclusion 

(OMWI), in collaboration with other Divisions and Offices, is leading the Commission's efforts 

in developing and implementing an outreach plan tailored to these business communities. For 

example, OM WI is expanding the content of existing programs for small, minority-owned and 

women-owned businesses to provide information about the JOBS Act and its potential benefits 

for businesses. The staff is working to finalize an outreach plan that complements and augments 

the content of existing outreach programs, providing targeted, user-friendly communications and 

developing a longer-term strategy for engagement at conferences and community events. 

Conclusion 

While there is still much to be accomplished, the Commission and the staff have made 

progress on, and continue to work diligently in, implementing the JOBS Act mandates. By 

providing interpretive guidance on the JOBS Act provisions that became effective upon 

enactment, the staff enabled interested parties to begin immediately using a number of the 

provisions of the JOBS Act to achieve their business objectives. The staff has either completed 

or is in the process of completing the studies mandated by the JOBS Act. The Commission and 

staff are moving forward on the various rulemakings required by the JOBS Act. We look 

forward to completing the remaining provisions as soon as practicable. 

32 See http://www.sec.gov/comments/jobs-title-viiljobs-title-vii.shtml for comments on Title VII. 

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U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS 

HEARING: 

JOBS ACT IMPLEMENTATION UPDATE 

TESTIMONY 

JEAN PETERS 

BOARD MEMBER, ANGEL CAPITAL ASSOCIATION 

MANAGING DIRECTOR, GOLDEN SEEDS ANGELS 

APRil 11, 2013 

Chairman Schweikert, Ranking Member Clarke and subcommittee members, thank you for 

inviting the Angel Capital Association to speak on the progress of the JOBS Act. 

My name is Jean Peters, and I am a managing director of Golden Seeds, the country's 4th largest 

angel group. Our 280 members are among the most active angels in the U.S. Collectively, we have 

funded more than $50 million of equity over the past 8 years in 60 women-led startups. Golden Seeds is 

a charter member of the Angel Capital Association, on whose behalf I am appearing today. 

ACA is the world's leading professional association of accredited investors. We have 200 angel 

groups from across the continent and their 8,500 individual members. 

ACA has watched, waited and worked with the SEC to help promulgate successful rules. We 

know the process is complex, but recent jobs statistics underscore the need for a fluid flow of angel 

capital to startups, and we share the subcommittee's concerns over the delay by the SEC in laying out a 

clear playing field which promotes investment opportunities, protects investors and creates jobs for 

Americans. 

Angels Fund Majority of Early Stage Deals 

let me briefly describe angel investing: Angels are accredited investors whose capital comes 

from our personal pocketbooks. Most are former entrepreneurs, or were successful in business - and 

want to help others up that ladder. We invest at the most primal point of capital formation -- small 

startups with high growth potential. 

These companies come out of university research, local business incubators and economic 

development efforts. They reflect the entrepreneurism that is addressing the business, education and 

health care challenges we face as a nation today. 

ACA also speaks for the 250,000 accredited investors across the country who fund startups each 

year. And, these are just a subset of the 8 million-plus people who meet the accredited investor 

definition and could become active. 

That is the intent of the JOBS Act - to broadly expand capital access for the startup economy, 

and to give investors new opportunities to support this growth. 

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Angels are the only source of capital for most startups, and supply up to 90% of outside equity 

raised by seed-stage companies after they exhaust any resources from friend and family, according to 

Kauffman Foundation estimates. 

In fact, angel investors fund 20 times the number of seed-stage companies than venture capital. 

In 2011, angels invested $23 billion dollars in 66,000 early-stage companies, while VCs put a few billion 

into 1,800 startups, plus $20 billion in 2,000 later stage companies. 

Angel-funded companies are in every state and industry sector. They are crucial for job growth. 

According to Census Bureau data, startups comprise less than 1% of companies, but generate 10% of 

new jobs in any given year. 

Without angel funding, these businesses would simply never get off the ground. 

Angel Groups Take Professional Approach 

Startup investing is a disciplined and long-term process. Angels bring careful due diligence, 

negotiations and experience to the table. 

We have to: angel capital comes from our own pockets. We are not investing other peoples' 

money. We invest our own, and more often than not use our successes to fund the next round of 

startups. 

We understand that what we do is highly risky and extremely illiquid. Angels give time and 

expertise, without compensation, and often without liquidity for 8 to 10 years. We do this to make a 

return - but also to give back, to keep up with our industry -- and because start-ups value what we do. 

As a result of the thoughtful work of angel groups, the strong growth in angel financing over the past 

decade has remained Virtually free of fraud or abuse. 

Rule SOGe will allow issuers to advertise 

This brings me to a key part of the JOBS Act - Title Two, which ends to the ban on general 

solicitation for issuers who sell securities only to accredited investors. 

ACA well understands that entrepreneurs have a desperate need for capital. Companies that 

once could get bank loans, or at least a small business credit card, are now shut out. So, the potential for 

both crowdfunding and general solicitation to fuel investment is a crucial and exciting development. 

We also understand that these new vehicles come with risks for the unwary - just like any other 

investment, from a public stock to a home mortgage. We appreciate that Congress and the SEC want to 

safeguard small investors, in particular, from that risk. 

But, the proposed rule requires issuers using solicitation to "t~ke reasonable steps to verify" 

that investors are accredited. This is problematic, because the SEC has not prOVided clarity on what are 

"reasonable steps." Instead, the SEC says it will determine whether the test has been met "on a case by 

case basis." 

This leaves both investors and entrepreneurs in a deeply uncertain position. 

In a survey of members, ACA identified that angels are likely to not invest ifthey find a 

cumbersome, expensive verification process acting as a "gate" against the extraordinary work that 

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angels do. And, many legal experts have advised their clients through alerts not to invest in advertised 

offerings if there is no safe harbor. 

This lack of safe harbors could cause a dramatic slowdown in angel funding - the exact opposite 

of Congressional intent. 

ACA recommends that the final rule ensure that startups and accredited investors can act with 

confidence. At last fall's SEC Forum on Small Business Capital Formation, the advisory group 

unanimously recommended that "membership in a reputable angel group" be made a safe harbor. We 

encourage the SEC to take this approach, and suggest that the professionalism of ACA membership 

serve as a benchmark standard. 

We recommend additional safe harbors, including a detailed self-certification questionnaire that 

would give further assurance - an approach ACA already employs. 

Conclusion 

Angels have a long history of adhering to disciplined due diligence, deal screening, term sheets 

and corporate governance. As more accredited investors come into this class, ACA will play an 

expanding role in helping high-growth startups and investors intelligently and successfully come 

together. 

ACA will continue to provide adult supervision in this shifting landscape of social media, general 

solicitation, and the nascent conduit of crowdfunding. 

We will be there when companies that are crowd-funded need additional capital. 

We will continue to be the primary sorting mechanism for those startups that are most 

promising. 

We will help ensure that companies seeking funding are legitimate, appropriately structured, 

managed and valued. 

Angel groups can provide a substantial barrier to the types of hazards that might face accredited 

investors - and others trying to sift through advertising or crowdfunding to identify great entrepreneurs 

and startups. 

And that will mean that the innovation now bubbling up in every congressional district and jobseeking community will stand a far better chance of success for the entrepreneur, for its employees, and 

for the investor willing to take that risk. 

Thank you very much. 

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SUPPLEMENTAL INFORMATION FROM THE ANGEL CAPITAL ASSOCIATION 

U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS 

HEARING: 

JOBS ACT IMPLEMENTATION UPDATE 

APRIL 11, 2013 

National Angel Investing Landscape 

Angel investors are high-net-worth individuals as defined by the Securities and Exchange Commission, 

who provide money for start-up firms with growth potential. Many angels started, built and sold their 

own companies and are now in a position to invest their money and equally important, their time and 

expertise, in new or early stage businesses. 

The nation's leading expert on entrepreneurship, the Ewing Marion Kauffman Foundation, estimates 

that angel investors may be responsible for up to 90% of the outside equity raised by start-ups after the 

capital resources of founders, friends, and family are exhausted. These firms rarely have the collateral 

to receive bank loans and they are generally too small and too young to receive venture capital. 

The University of New Hampshire's Center for Venture Research estimates that angels invested $22.5 

billion in 66,230 companies in 2011. 

One of the trends in the field over the last decade is the growth of angel groups, in which investors join 

together to invest in and mentor companies, pooling their capital to make larger investments and 

developing best practices for investing and mentoring. ACA estimates there are more than 350 angel 

groups, located in every state, more than a three-fold increase from about 100 groups ten years ago. 

The HALO Report, the leading assessment of angel investing nationwide, describes the investments 

angel groups made in 2011: 

Median round size of $700,000 

• 58% of investments were in health care/life sciences and I nternet/IT sectors 

• Two-thirds of the investment rounds were syndicated, often with multiple angel groups 

• Investments were distributed broadly across the country - two-thirds of the deals were 

outside of traditional startup equity centers of California and Boston. 

Angel investors are proud to be an important resource for the startup companies that have created the 

large majority of net new jobs in the United States over a 2S year period. Angel-backed companies have 

been some of the most prolific job creators and innovators in recent times: Google, Facebook, and 

Starbucks are just a few examples. 

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Thousands more companies supported by angel groups and individual angels are less known, but 

significant in the innovative products and jobs they have created. 

For example, Golden Seeds, which has 280 members from more than two dozen states, has invested in 

technology, life sciences, retail and other sectors in companies including: 

• Cognition Therapeutics, a Pennsylvania-based novel drug discovery company developing 

a potential cure for Alzheimer's 

Crimson Hexagon, a Boston-based company that provides social media monitoring and 

analytics 

Flixmaster, a Colorado-based company that provides a technology platform for dynamic 

video editing 

Risk and Angel Investment 

Returns to Angel Investors in Groups, the first ever dataset and analysis of angel group returns, 

confirmed what many investors thought about their success: 

52% of all exit returns less than the capital the angel had invested in the venture (with 35% of all 

exits losing all of the money invested) 

7% of the exits achieved returns of more than ten times the money invested, accounting for 7S% 

of the total investment dollar returns 

31% of the exits returned the investment between 1 and 5 times the investment. 

The study, which looked at 1,137 exits from angel investors connected to angel groups in many areas of 

the United States, also provided data to support that best practices in angel investment lead to better 

results for investors and the entrepreneurs they invest in. This includes matching investor expertise with 

the company, mentoring and monitoring of company progress, and conducting due diligence in 

reviewing investment opportunities. 

It is conventional wisdom that small business is responsible for the majority of net new job creation in 

the country in any given year. A growing body offocused research, using the Census Bureau's Business 

Dynamics Statistics database, dramatically illustrates that it is a smaller subset of dynamic, high-growth 

startups that make up the vast majority ofthat job growth 

According to a Kaufman study, these so-called "gazelle" firms (ages three to five years) comprise 

less than 1% of all companies, yet generate 10% of all new jobs in any given year. 

• A similar study from the National Bureau of Economic Research using the same database, found 

that, after controlling for age of a small business, startups account for almost 20% of gross job 

creation in any given year. 

These are exactly the businesses that angel investors - and mostly only angel investors -- invest in. 

The true shift in job creation has moved away from publicly-traded companies to the realm of startups 

that are funded almost entirely by private capital. 

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Sources 

www.sec.gov/answers/accred.htm 

Ewing Marion Kauffman Foundation, Why Entrepreneurs Need Angels - and How Angels ore 

Improving, Kauffman Thoughtbook, 2005. 

www.angelresourceinstitute.org/halo-report, Angel Resource Institute, Silicon Valley Bank, and 

CB Insights 

John Haltiwanger, University of Maryland, Ron Jarmin, U.S. Bureau of the Census, and Javier 

Miranda, U.S. 

Bureau of the Census, Business Dynamics Statistics: An Overview, 2009. 

Robert Wiltbank, Willamette University, and Warren Boeker, University of Washington, Returns 

to Angel Investars in Groups (published by the Kauffman Foundation, 2007. 

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,MWm1 

ANGEL CAPITAL ASSOCIATION 

December 11, 2012 

Ms. Elizabeth M. Murphy, Secretary 

US Securities and Exchange Commission 

100 F St NE 

Washington, DC 20549-1090 

Subject: Proposed Rule Eliminating the Prohibition against General Solicitation and General 

Advertising in Rule 506 

Dear Ms. Murphy: 

As the Commission continues to work on rules related to general solicitation, the Angel Capital 

Association (ACA) appreciates the opportunity to provide further comment on your proposed Rule 

S06(c) for offerings that use general solicitation and to offer suggestions for what should constitute 

"reasonable steps to verify" accredited investor status, so that issuers and investors can act with 

confidence within specific non-exclusive "safe harbors" when seeking to complete a financing for these 

high-risk, high-growth startups. 

Per our earlier letters, ACA believes: 

The final rule should provide more clarity on what constitutes "reasonable steps" in 506(c) offerings 

in which natural persons are involved ("angel" investments), and should establish safe harbor 

standards on which issuers may rely when using Rule 506(c). If not clearly articulated, the 

uncertainties that are inherent in the proposed rule have the potential to chill investment by angels 

- the exact opposite of Congressional intent. 

There is not a current issue regarding angels' compliance with accredited investor standards. The 

SEC's report, "Capital Raising in the US: The Significance of Unregistered Offerings USing the 

Regulation D Exemption" (Ivanov and Bauguess, February 2012) underscores the lack of fraud. 

If the verification process is too costly, complex, time-consuming, and/or violates investor privacy, 

issuers and investors face an intractable dilemma in determining whether to take advantage of this 

innovative change to the Act. Both sides could be frozen into inaction by a lack of clarity or safe 

harbor provision in 506(c) rules. This would clearly be a missed opportunity that the JOBS Act 

recognized. 

Rules for safe harbors should be simple and compliance should not require additional costs for 

investors, and should minimize costs and burdensome administrative difficulties for issuers. 

Recommendations for safe harbors were previously suggested in comment letters by ACA and others. 

We recommend the Commission consider including multiple examples in a final rule in order to ensure a 

robust capital pool for startups and that none of the safe harbors are exclusive. We endorse those safe 

harbors that take advantage of existing resources, such as public data and minimum investment size as a 

presumption of accreditation. 

In this letter, we want to explore further two ideas that would provide safe harbor, while ensuring 

simplicity, continued angel investment, and the requisite protection of investors and issuers: 

10977 Granada Lane, Suite 103 Overland Park, KS 66211 (913) 894-4700 www.angeicapitalassociation.org 
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Use of an expanded investor suitability questionnaire - The existing form has worked well for a 

generation of startups funded by accredited investors using Rule 506(b), so should be the basis of a 

gOing-forward solution for Rule S06(c). There should be a simple solution that involves adding a few 

questions to the existing accredited investor questionnaire to clearly meet the "reasonable assurance" 

intent ofthe JOBS Act. If the investor completes an answerto anyone ofthe following questions, the 

issuer should have reasonable belief the investor is accredited (noting that the Commission may want to 

formalize the language of the concepts presented below): 

Have you made at least one equity investment of $25,000 or more in a given Rule S06 offering in 

the past three years? If yes, please state the year and name ofthe issuer for one investment. 

Have you invested in three or more private investments of any size? If yes, please include the 

year and issuer name for any three such investments. 

Are you a member of the Angel Capital AssOCiation, either as an individual or through a 

membership in your angel group? ACA could provide a "proof of membership" letter or card to 

individuals who belong to ACA directly or to one of its member angel groups that could be 

submitted with the form. 

• If you do not meet the criteria of any of the preceding questions, please provide an independent 

reference to support that you meet the wealth or income definitions of an accredited investor. 

Provide name, contact information and type of entity (with check boxes for type - brokerdealer, attorney, insurance broker, certified financial planner, bank, etc.) 

Membership in ACA - During the SEC's November 1Sth Government-Business Forum on Small Business 

Capital Formation, participants in the "Exempt Securities Offerings" breakout session recommended 

that "membership in reputable angel groups" should be established as a reliable safe harbor. We 

endorse this proposal and believe that membership in groups that are part of ACA and have access to 

our best practices materials and other extensive resources should be presumed to meet this safe harbor 

standard. Membership in ACA would be a straightforward and simple means for categorizing a 

reputable angel group. In addition individual angels who belong to ACA but are not aSSOCiated with an 

angel group are also required to meet accreditation standards and should be included in this safe harbor 

provision. 

ACA is uniquely positioned to appreciate the important balance of a healthy capital pool and protection 

from fraud. Members of ACA member angel groups must be accredited investors. This requirement is a 

core part of the ACA membership application and agreement for all group and individual members. 

More importantly, member groups are essentially self-pOliCing - angel groups are comprised of local 

associates who are familiar with their members' financial acumen and capacity. Our members take 

advantage of professional development and best practices training. They know each other and 

strengthen relationships among individual investors and also across angel organizations for syndication 

purposes. Issuers, promoters and investors who act badly are not welcome. 

ACA promotes active member participation in all parts of the investment process. With ACA's 

educational partner, the Angel Resource Institute, we offer a comprehensive combination of seminars, 

conferences, webinars, and other training on everything from investment screening, due diligence, 

participation in portfolio company boards, mentoring and preparation for exit. We have established a 

code of conduct for individual investors and angel groups. We promote good processes and guidelines 

for groups to select and document new members and are continually refining best practices and 

educating angel investors. 
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Thanks for your consideration of these non-exclusive safe harbors, which we believe will help ensure a 

vital and robust early-stage investing environment as contemplated by the JOBS Act. If we can provide 

any additional information or clarification, please do not hesitate to contact the Angel Capital 

Association. 

Regards, 

Marianne Hudson 

Executive Director 

10977 Granada lane, Suite 103 Overland Park, KS 66211 (913) 894-4700 www.angelcapitalassociation.org 
55 

Testimony of 

William G. Klehm III 

Chairman and CEO of Fallbrook Technologies 

on behalf of CONNECT 

U.S. House of Representatives 

Committee on Small Business 

Subcommittee on Investigations, Oversight and 

Regulations 

Hearing on 

JOBS Act Implementation Update 

April 11, 2013 

Good Morning Chairman Schweikert and Ranking Member 

Clarke. It is an honor to appear before the committee today and 

testify on the challenges those of us raising capital for early stage, 

innovative new companies face in this financial and regulatory environment. I commend you for calling this hearing to check up on 

the status of JOBS Act implementation to ensure the goals of the 

JOBS Act, namely to increase access to capital for America’s 

innovators, get accomplished. 

I am Bill Klehm, Chairman and CEO of Fallbrook Technologies. 

I have served as Fallbrook’s CEO since 2004 and have over 20 

years of automotive related experience. I have held several positions with management responsibilities in the automotive business, 

including finance, marketing, sales, product development, and 

manufacturing operations. 

We are a private technology company based near Austin, Texas 

and San Diego, California, dedicated to improving products relying 

on mechanical transmissions. We both manufacture and market 

proprietary continuously variable transmission products, and support our global partners in the design and development of our proprietary transmission technology. 

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Fallbrook currently holds over 500 patents and pending applications worldwide. 

Our mission is to deliver the best performing, most versatile and 

most reliable mechanical power transmissions in the world. We believe the next generation of transmissions including our technology 

will be less expensive and more effective. 

We employ 133 people in the U.S., including approximately 25 of 

the best engineers in the transmission sector. 

We have secured major partnerships with global players in the 

automotive sector to design and develop applications of our transmission technology. We have passed the commercial tests of physics 

and economics and have partnered with industry leaders like Allison Transmission of Indiana, Dana Holding of Ohio and TEAM Industries of Minnesota. Our proprietary continuously variable transmission technology is potentially applicable to any product that 

uses a transmission. It replaces conventional transmission technology that uses gears to transform raw power to managed power 

with a mechanism that seamlessly provides an unlimited number 

of ratios within its ratio range. 

Transmissions are ubiquitous in anything that has a power 

source, from your bicycle or vacuum to the most obvious example, 

the motor vehicle. That range of applications should give you a 

sense of how big an opportunity we have in front of us—more than 

$30 billion in just the markets we are active in today. Our technology allows next-generation transmissions to increase fuel efficiency, reduce emissions, and improve overall vehicle performance. 

We’ve grown from negligible revenue in 2009 to more than $43 

million last year. And that is money that we are investing back 

into the business to grow. This is a good start, but we have an opportunity to grow faster and to drive innovation faster. The only 

thing preventing us from doing this is affordable capital. Our ability to access capital is one of the MOST significant challenges we 

face. I spend over 50 percent of my time on it. 

We have raised more than $15 million in capital. Our early investors were angels from California, individuals that recognized the 

benefits our technology could bring to the mechanical transmission 

sector. VC investors from California came in next, followed by a VC 

from Switzerland and more recently corporate investors from Canada, Indiana and Ohio. 

The maze through which small innovative companies, like 

Fallbrook, must navigate to acquire capital is becoming increasingly challenging. Our great country prides itself on entrepreneurship and innovation. Fallbrook is a poster child for those values. 

From an idea in San Diego in 1998 to the launch of our first commercial product, right through to the automotive development 

agreements we signed last summer. 

With additional capital we could expand our manufacturing base 

in Texas and build-out our engineering and development team 

which would create new high technology jobs to accelerate our product development and partnership opportunities. We also believe 

there would also be a significant impact on new job opportunities 

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within both our suppliers and end user customers, such as automobile manufacturers. This committee should remember that hightech engineering and manufacturing jobs are the kinds of jobs this 

economy needs because not only do they enhance America’s competitiveness, but they pay above the average salary and wages compared to other sectors. That is why Congress’ bipartisan work to 

pass the JOBS Act was so important and why regulatory hurdles 

shouldn’t slow down the jobs and innovation that will materialize 

once the JOBS Act is fully implemented. 

The changes enacted by the JOBS Act will make acquiring capital less challenging for companies like Fallbrook, specifically the 

Regulation A change which simply raises the limit on capital a 

company can currently raise from $5 million to $50 million. Regulation A is already law and is already enforced by the SEC. But the 

$5 million cap is outdated and unworkable and Congress was absolutely right to modernize the cap for today’s innovation climate and 

to provide more access to capital for America’s innovators. 

To meet our needs, an incremental $5 million round is simply not 

sufficient to fund the type of development and growth that we are 

targeting at Fallbrook. Under the status quo, to raise more than 

$5 million we are required to file a registration statement with the 

SEC. The opportunity cost of that filing, including the legal and accounting fees and printing costs, is significant for a company of our 

size, amounting potentially to hundreds of thousands of dollars. 

Mid and large cap companies that raise public equity benefit from 

the scale of their transactions relative to the cost of the registration 

statement. But innovative companies all across the country in various tech sectors that are the size of Fallbrook are robbed of that 

benefit until the JOBS Act Regulation A rules are implemented. 

This means that new, well-paying jobs aren’t created, new technologies sit dormant, and the public misses out on new products 

that could change their lives or advance the common good. 

The changes in the JOBS Act will increase access to capital for 

companies like Fallbrook. They will enable us to accelerate our development and commercialization; driving innovation and growth, 

which creates jobs. New jobs will be created not only local to 

Fallbrook but also across the nation within the supply and customer chain both upstream and downstream of our proprietary 

technology. Fallbrook’s technology can have a meaningful impact 

on the mechanical transmission market, using energy more efficiently through the art of simplicity. Fallbrook is not the only company that will benefit from Reg A implementation. I know of several other companies ready to utilize this new option for accessing 

capital. I encourage the sub-committee to help us in this goal by 

ensuring the full and speedy implementation of the changes proposed by the JOBS Act. Thank you Mr. Chairman, Ranking Member and Committee Members. 

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Continuously Variable Planetary Transmissions - A New Technology 

Fallbrook Technologies Inc. (Fallbrook) has created a new, scalable transmission that can improve the performance and 

efficiency of just about any machine with a transmission. For example, this technology can improve vehicle fuel economy, 

increase wind turbine performance while reducing costs, and even help bicyclists take on steep hills. With the use of 

rotating and tilting balls between the input and output components of a transmission, Fallbrook Technologies has created 

the NuVinct' continuously variable planetary transmission (GVP). 

NuVinci CVP: Revolutionizing Mechanical Transmission-Based Products 

Instead of the traditional gear and clutch mechanisms found in conventional transmission, the NuVinci continuously 

variable transmission can change seamlessly through an infinite number of speed ratios between maximum and minimum 

values. The technology is applicable to products that use a transmission, including bicycles, electric vehicles, outdoor 

power equipment, agricultural equipment, automobiles and wind turbines. 

How does a CVP work? 

The NuVinci transmission uses a set of rotating balls between the input and output components of a transmission that tilt 

and vary the output speed of the transmission. Tilting the balls changes their contact diameters with the discs, which 

varies speed smoothly and seamlessly. As a result of its infinite number of ratios within its range, the NuVinc; GVP 

improves acceleration, performance and powertrain efficiency over conventional transmissions. 

Advancing Public Policy Objectives 

Improving Fuel Economy: The NuVinci GVP is designed to reduce energy consumption through its seamless speed 

changing characteristics, allowing the power input of any fuel driven engine to operate in its most efficient speed range, 

leading to improved performance and reliability, as well as reduced fuel costs. 

Promoting Renewable Energy Deployment: In wind turbine applications such as those being developed by Fallbrook's 

spin-off company Viryd Technologies, GVPs are designed to lower the cost of electricity and make small wind turbines 

affordable and easier to deploy and maintain. We believe this will help move America towards its goal of 20% wind power 

by 2030. 

Government Role in Meeting the Technology Potential 

The innovation is here, however government support is critical to help bridge the gap from R&D to commercialization and 

to provide industry a driver to integrate these cutting-edge transmissions into a new wave of efficient machines. 

See NuVincitechnology videos on the Fallbrook website: www.fallbrooktech.comlnuvinci-Iechnology. 
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Who We Are 

Fallbrook Technologies Inc. is a technology development company headquartered in Cedar Park, Texas and has its 

primary operations and product development activities also located in Cedar Park with employees and other operations in 

China and Europe. Fallbrook has a comprehensive patent portfolio of 500 patents and pending applications worldwide 

that has previously been named the #1 patent portfolio in the transportation sector by The Patent Scorecard 'M. 

Fallbrook received the 2012 North American Frost & Sullivan Growth Capital Investment Opportunity Award in the 

Powertrain Market. Frost & Sullivan stated: "The Company exhibns all the features of a superior market participant that 

deserves close attention from investors looking for opportunities." 

Other awards: 

Real-World Implementation 

The CVP is widely applicable technology. Fallbrook is targeting the following key markets: 

.. Automotive-class applications 

- Primary transmissions 

- Variable speed accessory drives (DeltaSeries"') 

.. Electric vehicles (including low-speed/urban vehicles) 

.. Bicycles and other 2 wheelers 

.. Stationary and off-road equipment 

.. Industrial equipment 

.. Wind turbines 

In Production Now: 

In 2007, Fallbrook introduced the first continuously variable transmission for bicycles now in its second 

generation (NuVinci N360TM). 

In 2011, Fallbrook introduced an intelligent automatic shifting system NuVinciHarmony'" incorporating the 

N360. 

In March 2011, Fallbrook acquired the business of Hodyon, which now operates as a wholly-owned subsidiary, 

manufactures auxiliary power units (APUs) and sellsldistributes them via a US-based dealer network to the heavy 

truck industry. 

Auxiliary power units (APUs) are used on by the heavy duty trucking industry to 

replace idling the trucks main engine during a driver's down time. APUs are small 

diesel or battery powered idle reduction devices that provide the truck's sleeper 

compartment with heating, air conditioning, and 110v hotel type power. A heavy-duty 

log-haul truck spends an average of 2,400 hours per year idling during non-driving 

down time, burning an average of one gallon of diesel fuel per hour. A diesel APU 

burns an average of .25 gallons of diesel fuel per hour, significantly reducing fuel 

consumption and diesel emissions. 

In an independent evaluation, Southwest Research Institute confinmed that a CVPenhanced APU will provide up to 24% additional fuel savings versus conventional 

APUs. 

Production of a next generation NuVinci CVP-enabled APU is planned. 
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Recently Signed License Agreements; 

Signed an exclusive licensing agreement for commercial vehicles and certain off-highway primary transmissions 

with Allison Transmission Holdings Inc. (NYSE: ALSN) 

Signed an exclusive licensing agreement for automotive and certain off-highway primary transmissions with 

Dana Holding Corporation (NYSE: DAN). 

Signed an exclusive licensing agreement with Team Industries, Inc. for use of NuVinci CVP technology in North 

America and Europe for electric and gasoline light vehicle applications. 

Growth Plans; Fallbrook is currently developing a number of additional applications of NuVinci technology for other 

markets with near-term commercial potential. Licensing agreements and/or product launches for one or more entries in 

each of the following markets are planned for during the period 2012 to 2014: 

NuVinci De~aSeriesTM continuously variable accessory drives (CVADs) for automotive (car and truck) 

alternators, air conditioning compressors and superchargers. 

Industrial equipment where use of the NuVinci CVP will allow energy source to operate at its most efficient 

point, resulting in energy savings while providing variable torque and variable speed output 

Lawn care equipment where the NuVinci CVP will replace hydrostatic drives and offer improved performance 

and reduced noise. 

Small wind turbines in which the NuVinci CVP will provide a variable drive speed to match wind speed with the 

input speed needed by the generator, capturing more of the power available from the wind and reducing 

reliance on expensive voltage-regulation power electronics. 

For more information and contacts, visit www.fallbrooktech.com. 

William G. Klehm III 

Chairman and CEO 

William G. Klehm III is the Chairman and Chief Executive Officer of Fallbrook Technologies Inc. ("Fallbrook"). Fallbrook 

is a technology development company that manufactures advanced mechanical transmission-based products and, 

through a wholly owned subsidiary, manufactures and sells Dynasys 1M auxiliary power units (APUs). Fallbrook's core 

technology is its traction-based NuVlnci® transmission - a new class of continuously variable transmission well suited 

for applications in many mechanical devices that have a transmission or require speed variation. NuVinci technology 

may be used to optimize system efficiency and reduce fuel consumption and emissions. 

Mr. Klehm joined Fallbrook in April 2004 with over 20 years of automotive-related experience. He has held several 

positions with management responsibilities in the automotive business, including finance, marketing, sales, product 

development, and manufacturing operations. Under his leadership, Fallbrook has grown from six employees to over 150 

and taken the Company from startup status to $43.2 million in revenue in 2012. To fund that growth, Mr. Klehm has led 

various private funding rounds totaling $115 million and most recently established major technology licensing 

agreements with Allison Transmission Holdings Inc., Dana Holding Corp., and TEAM Industries, Inc. 

Prior to joining Fallbrook, Mr. Klehm served as the President and General Manager of Newgen Results Corporation, an 

automotive customer relationship management firm. He has also served as President and SBU Director for Visteon 

Climate Control Systems Ltd., collaborating on the development and launch ofVisteon's Aftermarket Division. He 

started his career with Ford Motor Company in 1985 and held a variety of posts within the Ford Customer Service 

Division where he was responsible for developing and executing the marketing/growth strategy for its customer service 

parts business. 

Mr. Klehm holds a BA in Management and Marketing from Northwood University and also participated in the Harvard 

Business School Executive Education Programs. 
61 

‘‘JOBS Act Implementation Update’’ 

Testimony of 

Kevin Rustagi 

CEO 

Evolutions of Noise 

April 11, 2013 

Before the 

Small Business Committee 

United States House of Representatives 

The Honorable David Schweikert, Committee 

Chairman 

The Honorable Yvette Clarke, Ranking Member 

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Good morning, Chairman Schweikert, Ranking Member Clarke, 

and members of the Committee. It is an honor and privilege to be 

here today to share my experiences and knowledge with the committee. 

My name is Kevin Rustagi, and I am an American entrepreneur 

and product designer. 

As an alumnus of the Massachusetts Institute of Technology, I’ve 

had the privilege of working with firms such as Apple on the 

iPhone 5 and GE during my undergraduate career. Over time, the 

entrepreneurship community at MIT drew me to the world of hightech, high-growth early stage startups. I opted for a multi-year deferral from Stanford Business School to explore startup opportunities. 

Since then, I have been a student of the modern economy and 

sought to start ventures using highly mobile labor and capital. As 

such, I have experience with loans from family and business partners, angel investing with accredited investors, and most recently, 

donation-based funding through Kickstarter.com. I am also an active member of the young startup community, acting as a sounding 

board in the early venture space. 

A recent company that I co-founded, Ministry of Supply (MoS0, 

creates high-tech business apparel for men and held the record in 

the fashion category on Kickstarter for the latter half of 2012 by 

taking pre-orders for our new space-age dress shirts. Our goal was 

$30,000. In 33 days, we raised over 14 times that for a total of 

$429,000. Since inception, we have created 14 new jobs. 

Though new technologies such as viral marketing and rapid 

prototyping are highly effective, the need for accessible funding and 

backing remains as pertinent and challenging as ever. 

Today, I aim to discuss how funding has played a role in my ventures as of late, and how access to new methods of fundraising, as 

cited in the Jumpstart Our Business Startups Act, or the JOBS 

Act, would greatly increase every entrepreneur’s chance of success 

in starting new ventures, thereby stimulating the creation of new 

jobs and economic growth. 

Kickstarter and ‘going viral’ 

Kickstarter is one of the web’s primary curated crowd-donation 

sites, and is known for taking only a 5% cut of donations to a 

project. As with MoS’s high-tech dress shirts, the site has in part 

evolved into a pre-order destination for new consumer products. 

Despite its focus on early creative projects, launching on 

Kickstarter requires substantive concept development. For example, multiple prototypes are generally required for market adoption. 

Started in late 2010, MoS raised angel funding before going on 

Kickstarter to increase our odds of success. We waited one-and-ahalf years to launch on Kickstarter, engaging a viral PR strategy 

using social media to raise awareness. Surprisingly effective, our 

story was featured online in Australia, India, Sweden, China, and 

the United States, sparking pre-orders in over two-dozen countries. 

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With global traction and roughly 100,000 views of our videos, we 

experienced what is known in the startup world as ‘going viral’. 

Involuntarily rejecting crowd-investors 

As a young company, we used the money from pre-orders to feverishly grow, but we required further funding to build a new supply chain and hire new employees. Given the buzz from 

Kickstarter, we had multiple offers from investors around the 

world. However, many were smaller investors (in the $1,000– 

$15,000 range). Absent sufficient regulation, legal precedent, and 

vetting tools, we experienced the deep irony of having to turn them 

away. 

Albeit ultimately fruitful, the company’s continued search for 

angel funding has taken valuable time away from vital product and 

business development. 

The difference between equity-based and donation based 

funding 

Donation-based funding remains the holy grail of early stage 

ventures, due to its ability to help bootstrap a business without dilution. Crowd donation is based on goodwill; equity based funding 

is based on a mutual higher expected value. 

While donation-based is ideal, real-world constraints necessitate 

a more continuous stream of funding, especially in environments 

with disjointed demand and a difficult path to profitability. Equitybased funding is simply a much more reliable model because there 

is a higher tangible monetary benefit for both the venture and the 

investor. 

Different levels of funding are required for different 

stages 

One of the greatest challenges entrepreneurs face with funding 

is dilution. If they are forced to sell shares when their company is 

worth less, they give up more shares. If I need to raise $200,000, 

but my company is worth only $40,000, I would be forced to give 

up half of my company that I can’t get back. This not only impacts 

founders, but also all future stakeholders. 

When companies have to pursue angel funding in a less robust 

market, as we did with our interest in consumer products, they are 

subject to often-difficult negotiations with potential investors. 

There is now less of the pie to be shared. Crowd investing would 

allow for a smoothing effect here, balancing the playing field. 

The timing of the JOBS Act and the global stage 

The startup community is very excited about the JOBS Act. Colleagues of mine are eager to test out models that will allow them 

to work on their projects. Crowd investing would allow entrepreneurs to take on projects with greater ease. 

MassChallenge, a Boston-based startup competition, has been 

recognized by the White House as a key partner in the Startup 

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64 

America initiative. Last year, 1,237 companies applied for 125 finalist spots, garnering free office space and a summer program 

with mentors with several companies receiving a cut of $1,000,000 

in prize money. They received applications from 35 countries. 

MassChallenge, like the marketplace, is judged solely based on 

traction and market adoption. Competition is now a highly global 

democracy. America must stay competitive. 

Supporting a culture of entrepreneurship and innovation 

America holds a nearly unparalleled legacy of entrepreneurship 

and innovation. My grandfather, Merton Purvis, was one of over 

1,200 PhDs at Bell Labs at its peak in the 1960s—widely considered to be one of the most innovative organizations in modern history. Since then, startups have taken its place as America’s innovation engine. Support for startups must match the speed of global 

competition. 

Programs like Startup Chile provide funding to startups willing 

to locate in Chile for 7 months, demonstrating the rest of the 

world’s desire for the latest new high-tech and high-growth jobs. 

Other nations are at the forefront, while America demurs. Sound 

regulation for the JOBS Act will change that. 

Would crowd investing be used? 

In short, yes. Angel investing’s limitations are connections and 

the liquid market. In venture capital, it is the idea of being ‘proven.’ In crowd-donation, too long before or after a certain stage of 

development, and the donation community may not accept your 

story. Moreover, crowd investing provides a unique tool. The entrepreneurs I have met over the past 6 years are extremely resourceful and, if given effective new crowd-funding tools, would make 

quick use of them. 

Conclusion 

Crowd investing within the JOBS Act demonstrates America’s 

continued commitment to developing the next generation of small 

businesses and startups. It will provide a real opportunity to 

strengthen the economy from the ground up. It remains vital to 

consider all elements of this, including items that are still caught 

up in legislation, especially the Startup Visa. 

New businesses are difficult ventures to undertake, and anything 

that safely and effectively puts the advantage in the hands of the 

innovator is greatly desired and beneficial to the economy. Crowd 

investing through the JOBS Act will be a unique and exciting way 

to promote new businesses. 

As I’ve noted, I have used a variety of tools in creating new ventures, both for product design and business development. My hope 

is that my colleagues and I can continue to create new ventures in 

a way that leads and inspires the world. I eagerly await the day 

that I can fully utilize crowd funding and crowd investing to help 

create successful new ventures. 

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I thank you for this opportunity to explain relevant concerns of 

the startup community surrounding the JOBS Act and crowd investing. 

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Testimony of 

James J. Angel, Ph.D., CF A 

Georgetown University McDonough School of Business 

and 

The Wharton School of the University of Pennsylvania 

on 

JOBS Act Implementation 

House Committee on Small Business 

April!l,2013 
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Key points: 

• The JOBS Act was passed in response to the twin crises of the Great Recession and the crisis in 

capital formation in the United States. There are now have approximately half as many U.S. 

exchange-listed companies as there were 15 years ago. 

Most of the JOBS Act could and should have been done by the SEC under its own volition. 

Congress should study why the SEC did not act and seek ways of improving the SEC's 

effectiveness in understanding of the big economic picture and adopting economically sound 

regulations. 

The SEC has missed numerous Congressional rulemaking deadlines while devoting substantial 

resources to non-Congressionally mandated rulemaking activities. 

The SEC should adopt temporary interim rules for crowdfunding and analyze the results while it 

prepares permanent rules, rather than engage in endless contemplation. 

The SEC should permit issuing companies to select their own tick size. Issuers have the 

incentive to get it right because it is their stock that is affected. 

Many of the features of the JOBS Act make it easier for companies to avoid becoming public 

companies. The regulatory focus should be on fixing the public markets rather than making it 

easier to avoid them. 

The SEC needs more resources in order to do its job properly. The SEC's cumulative budget 

since its founding is less than investors lost from one Bernie Madoff. 

Given the past misallocation of resources, Congress needs to monitor the SEC carefully to make 

sure that it hires people with the appropriate financial and technical qualifications instead of more 

inexperienced lawyers. 

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Introduction: The need for the JOBS Act 

My name is James J. Angel and I am an associate professor of finance at the McDonough School of 

Business of Georgetown University. This year I am a visiting associate professor at the Wharton School 

of the University of Pennsylvania.' I study the operation and regulation of financial markets and have 

been following the JOBS Act since its inception. 

The JOBS Act was enacted in reaction to the twin crises affecting our country - the crisis in capital 

formation signaled by the continuing decline in the number of exchange-listed US public companies, and 

the massive unemployment stemming from the Great Recession. The number of U.S. public companies 

listed on our exchanges has been shrinking steadily for the last 15 years. We have gone from 7,337 U.S. 

companies traded on our exchanges in January 1997 to only 3,626 at the end of December 2012, a loss of 

over 50%.' We are not creating enough new public companies through initial public offerings (IPOs) to 

replace those that are lost to attrition. 

Number of US Exchange-listed Public 

Companies 

8,000 

7,000 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

-

Jan-97 Ocl·99 Jul·02 Apr-OS Jan-08 OCI-l0 Jul-13 

In short, our public capital markets are no longer nurturing the smaller dynamic companies that represent 

our economic future. This decline in the U.S. public equity markets represents a crisis in capital 

, I also serve on the boards of the Direct Edge stock exchanges (EDGX and EDGA). My views are strictly my own 

and do not necessarily reflect the views of Georgetown University, the University of Pennsylvania, Direct Edge, or 

anyone else. 

2 These numbers are for U.S. public companies listed on NYSE, NASDAQ, and AM EX, not including foreign 

ADRs or Exchange Traded Funds (ETFs). Data are from the Center for Research in Securities Prices (CRSP). 

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formation. We have made it so difficult and burdensome to be a U.S. public company that fewer 

companies are going public. By closing off the public markets, we restrict the opportunities for growing 

companies to raise needed capital for growth and for venture investors to harvest their investments. This 

means less capital investment. less growth, and fewer jobs. 

There are multiple drivers to this trend, and much debate over the causes. A non-exhaustive list includes: 

Compliance costs 

One ofthe main drivers of this trend has been the increasing compliance costs that we have placed on 

U.S. public companies but not on private companies. Regulations continue to require ever more extensive 

disclosures of public companies but not private ones. For example, recent regulations require companies 

to provide expensively audited reports on the use of "conflict minerals" from the Democratic Republic of 

the Congo in their supply chains, even if they purchase no such minerals from the Congo. 3 However, 

private companies that do business in the dark in the Congo have no such disclosure requirements. 

Even before the conflict minerals requirements, the creeping nature of required disclosures has resulted in 

longer and longer required annual reports on Form 10-K. From 1995 to 2010 the median number of 

words in a 10-K filing has increased from 18,450 to 29,653, a 61 % increase. 4 

Median Number of Words in Annual 

lO-K Reports 

35,000 

30,000 

25,000 

20,000 

15,000 

10,000 

1995 

• 

1997 

• • 

. ... 

1999 2001 

• • • 

• • • • • 

2003 2005 2007 2009 

Costs rise commensurately with this increase in disclosures. The following chart demonstrates that the 

median audit and audit-related fee paid by a U.S. exchange listed company quadrupled from $205,620 in 

] See the 356 page final rule at http://www.sec.gov/rules/finaI/2012/34.67716.pdf 

4 This is based on the word count data found on Li Feng's web site, http://webuser.bus.umich.eduJfengi. 

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2001 to $800,608.' A large part of this is the result ofSarbanes-Oxley requirements, which are applied 

to public but not private companies. 

$900 ,000 

$800 

$700 

$600 

$500 

$400 

$300 

$200 

$100 

,000 

,000 

,000 

,000 

,000 

,000 

,000 

,000 

$-

2000 

Median Audit Fees 

• • • • 

• 

.... • 

2002 2004 2006 2008 

• • 

, 

2010 2012 j 

The bottom line is that we have made it so expensive to be a public company that smaller companies can 

no longer cost-effectively access the public equity markets. Growing companies have no other choice but 

to go to the private equity market. 

Litigation risks 

Although all companies in this country are targets for abusive lawsuits, public companies have an extra 

"sue me" sign painted on their backs. Any bit of bad news affecting a company can lead to a series of 

"shareholder" lawsuits. This leads to a double penalty for the real shareholders, who suffered from the 

original bad news as well as the costs of dealing with the litigation. Approximately 6% of exchangelisted firms are sued each year.6 Over the course of two decades, there are better than even odds that a 

public company will be the target of such litigation. This added risk is yet another reason for firms not to 

go public. As one CEO of a private firm explained to me "If [ go public, [ get sued." 

5 Data on audit fees obtained from Audit Analytics. 

6 According to the Stanford Securities Class Action Clearing House, there were 152 lawsuits filed in 2012 and 

comparable amounts in previous years. Dividing the 152 lawsuits by the 3,626 public companies at the end of20 12 

gives a hazard rate of 6.3 7%. http://securities.stanford.eduJ The Clearing House also concluded that previous 

attempts by Congress to reign in such litigation such as Private Securities Litigation Reform Act of 1995 had little 

effect. Their web site states "The absolute number of issuers sued does not appear to have changed dramatically 

since passage of the Act, once the effects of the !PO Allocation Litigation are excluded." 

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Market structure cbanges 

The United States used to have a very different structure for trading small cap stocks. The old NASDAQ 

dealer market operated a very different market mechanism from the auction market used on the NYSE 

and the AMEX. A series oftechnological, economic, and regulatory changes have led to a U.S. market 

structure that is the essentially the same for all exchange-listed companies. Many of these changes were 

well-intentioned and have resulted in a market structure for large-cap companies that works extremely 

well. However, it is by no means clear that the best market structure for large-cap companies is the same 

as for small-cap companies. 

We should encourage innovation and experimentation in the market structure for smaller companies. We 

should allow the exchanges to adopt different mechanisms for different types of stocks. However, the 

SEC staff has been extremely reluctant to let exchanges try anythi ng really different. The result is a "one 

market fits all" approach that does not fit our small companies well. 

The JOBS Act also provided a very important nudge to the SEC to re-examine the issue of the tick size. 

Section 106 required the SEC staff to study the issue and explicitly authorized the SEC to set different 

tick sizes for emerging growth companies.' The "tick" is the minimum price increment at which stocks 

trade. 8 For example, our markets will allow an investor to place an order to buy Microsoft at $25.00 or 

$25.0 I, but not $25.000 I. When our markets switched from trading in fractions to decimals, the tick size 

fell from 12.5 cents to I cent for most stocks. This was enshrined in SEC Rule 612: 

This sounds like a narrow technical issue, and it is, but it is one that is very important to the trading of 

stocks. '0 The optimal tick is not zero, and it is different for different firms, even with the same price 

level. 11 For example, the Bank of America (BAC) is a $12 bank stock that trades an average of about 

150 million shares per day. New Jersey Bancorp (BKJ) is a $12 bank stock that trades an average ofless 

7 This authorization to set tick sizes appears to be redundant, as the SEC already sets tick sizes in Rule 612. To the 

best of my knowledge no one has ever challenged the SEC's authority to set such rules. 

8 I testified on this issue before the House Commerce Committee's Subcommittee on Finance and Hazardous 

Materials on April 16, 1997. The subject was HR 1053, The Common Cents Stock Pricing Act of 1997. 

, Rule 612 -- Minimum Pricing Increment, reads 

a. No national securities exchange, national securities association, alternative trading system, vendor. or 

broker or dealer shall display, rank. or accept fi'om any person a bid or offer. an order. or an 

indication of interest in any NMS stock priced in an increment smaller than SO. 0 I if that bid or offer. 

order. or indication of inleresl is priced equal to or greater than $1. 00 per share. 

10 For more details, see my comment letter to the SEC on tick size, http://www.sec.gov/comments/iobs-title-i/ticksize-study/tick-size-study-l.pdf. 

11 For a mathematical model of the optimal tick size, see Angel, James J., 1997, Tick Size, Share Prices, and Stock 

Splits, Journal of Finance 52: 655-681. 

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than 2,000 shares per day. Yet they both have the same tick size of$.OI, thanks to the "one-tick-fits-all" 

approach of SEC Rule 612. Bank of America would probably be better off with a tick size of one half 

penny, while the trading in New Jersey Bancorp would benefit from a wider tick size. 

The SEC staff actually met the deadline for studying the issue. 12 Their study was basically a review of 

previous literature on tick size changes, and a call for more study. The SEC also held a roundtable on the 

issue, and is apparently planning a pilot program to examine the impact of different tick sizes. 13 As an 

academic I love pilot studies, because they give me lots of data to play with. 

However, the real public policy question is "Who decides the tick size?" The SEC? The exchanges? The 

issuers? Given that the optimal tick size is different for different companies, I am of the opinion that the 

issuers themselves should pick their tick sizes. If the issuers pick the wrong tick size, the liquidity (and 

thus the share price) of their firms will suffer, so they have the best incentive to get it right. If the tick 

size is too big, a higher than optimal bid-ask spread will drive up investor's transactions costs and lead to 

a lower stock price. If the tick size is too small, the stock will suffer from illiquidity and the share price 

will also suffer. The issuers themselves should have the flexibility to experiment with different tick sizes 

in order to discover the right tick size. 

Collapse of dotcom bubble 

Clearly, the dotcom bubble had an impact on our capital markets. However, there were only 

approximately 500 dotcoms that went public, so the decline in the number of U.S. companies listed on 

our exchanges is not an artifact of the bubble. 

Overall market conditions 

Clearly the mediocre performance of the equity markets in recent years has led to a challenging 

environment. However, there was a recovery in the middle of the last decade before the onset of the 

Great Recession, and stock prices have since recovered and reached new highs. Although the entire 

world has experienced similar overall economic conditions, the other countries have not experienced the 

same precipitous decline in the size of their public equity markets. 

The rise of private equity 

Some argue that there is less need to go public because ofthe growth of the private equity industry. 

However, much of the growth ofthe private equity has been driven by the closure of the public equity 

market to smaller issuers. In short, smaller firms have no place else to go, and private equity firms have 

stepped in to fill the gap for a price. The closure ofthe public equity option gives growing companies 

fewer potential sources of capital. 

12 http://www.sec.gov/news/studies/20 12!decimalization-OnO 12.pdf 

13 http:Uwww.sec.gov!news!press!2013!2013-16.htm 

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The shutting down of the public equity markets for smaller firms has created lucrative opportunities for 

the private equity firms that are not available to ordinary investors and the mutual funds we invest in. 

The JOBS Act and SEC authority 

The JOBS Act makes numerous changes to U.S. regulatory policy. It relaxes disclosure requirements for 

smaller companies, reduces restrictions on marketing activities in securities offerings, provides a 

regulatory framework for crowd funding, and calls for various studies. 

Almost all of these provisions are things that the SEC could and should have done on its own. The SEC 

has abundant legislative authority to set rules and to exempt smaller companies from various rules. 14 The 

question that Congress should be asking is "Why hasn't the SEC exercised its powers to do this on its 

own?" What is wrong with the structure, culture, and operation of the SEC that led to this, and what 

should be done about it? 

For example, Congress had to step in to assert that it was legal for emerging growth companies to '"test 

the waters" to see if investors were interested in a public offering before the company went to the expense 

of filing a formal registration statement with the SEC. In its FAQ on the JOBS Act, the SEC staff points 

out that accepting nonbinding indications of interest for any firm is not a violation of Rule 15c2-8( e), and 

that the rule only applies once a registration statement has been filed with the SEC, past regulatory 

behavior had left the impression that such testing the waters risked unpleasant sanctions from the SEC. 15 

JOBS Act deadlines 

The JOBS Act specified that the SEC should adopt rules to facilitate crowdfunding within 270 days of the 

enactment of the legislation. A year has gone by, and the Commission has not even published proposed 

rules. What it has done is put out a chilling message saying that crowdfunding is illegal until the SEC 

decides to make it legal by adopting the rules. 

14 Section 36 of the Securities Exchange Act of 1934 gives the Commission very broad exemptive authority. 

15 http://www.sec.gov/divisions/marketregitmjobsact-researchanalystsfag.htm 

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On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was 

signed into law. The Act requires the Commission to adopt rules to 

implement a new exemption that wit! anow <:rowdfunding. Until then, we are 

reminding issuers that any offers or sales of securities purporting to rely on 

the <:rowdfunding exemption would be unlawful under the federal securities 

laws. 

http:/..www.sec.gov/Spotltghl;jobsact/crowdfundmgexemptlon.htm 

Mod!f'ed: 04/23/2012 

Just a few days ago, on April 9, 2013, more than a year after the passage of the ACT and more than three 

months after the missed deadline for rules, Crowdcheck held a conference here in DC at which an SEC 

staffer spoke. At the Q&A part of the presentation, he was asked whether the SEC would have adopted 

the required regulations by the second anniversary of the Act, more than 15 months after the deadline. 

The staffer could not say. Apparently the regulations are on such a slow track at the Commission 

that it is questionable whether companies that are starving for capital will be able to access 

crowdfunding more than 15 months after the Congressional deadline. 

The Commission is also very far behind on many of the rulemakings required under Dodd-Frank. 

However, the Commission has taken on itself to devote substantial resources to rulemakings in other areas 

that Congress did not deem important enough to mention in either Dodd-Frank or the JOBS Act. These 

endeavors include efforts to change the money market fund industry, and its 377 page proposal on 

Systems Compliance and Integrity.'6 

One reason for the SEC's hesitancy with regard to rule writing has to do with the legal risk that its rules 

will be overturned due to faulty cost-benefit analysis. The courts have rightly struck down some SEC 

rules because of faulty cost-benefit analysis. Rather than providing a solid economic justification for its 

rules, the SEC's cost benefit analyses were a perfunctory afterthought buried near the end of its rule 

proposals. Although the SEC claims to have learned its lesson and promises to do a better job of 

economic analysis, it remains to be seen whether a lawyer-run agency like the SEC has really changed. I? 

The culture of a large organization like the SEC is very hard to change. 

Another possible reason for hesitancy is the fear of making a mistake. With some rules, it is indeed better 

to take additional time to get them right rather than fast. By spending more time to study and rellect on a 

rule, it is plausible that a rule will be better for the delay. However, with an economy facing massive 

unemployment, such a leisurely approach is not appropriate as delay is costing jobs. Congress 

16 http://www.sec.gov/rules/proposed/2013/34-69077.pdf 

17 http:Uwww.sec.gov!news!testimony!2012!ts041712mls.htm 

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appropriately gave the SEC a 270 day deadline for adopting crowdfunding rules which the agency has 

inappropriately ignored. 

It is clear that the SEC did not take extra time because it was intently studying the issue. It took the extra 

time because it was not studying the issue. For example, on July 26, 2012, a conference was held on 

crowdfunding at the Georgetown University Law Center in order to discuss crowdfunding and the JOBS 

Act.'s This event was within walking distance of the SEC headquarters. A number of noted academics 

and practitioners were there, and the SEC was invited. Yet nobody from the SEC thought the topic was 

important enough to show up. (One staffer did show up in the afternoon after I contacted one of the 

Commissioner's offices and pointed out how embarrassing it was to the Commission that nobody from 

the Commission was in attendance.) This pattern of ignoring the intellectual contributions happening 

outside the Commission is one of the reasons that the Commissions economic understanding of markets 

has suffered. 

However, the delay in adopting the required crowdfunding rules stems from more than just the fear that 

the rules will be overturned. The Commission has shown a pattern of antipathy towards the idea of 

crowdfunding from the beginning and is in great danger of killing the idea through regulatory delay and 

overregulation. 

The concept behind "crowdfunding" is quite simple: Let small companies raise small amounts of capital 

with a minimum of expensive regulatory requirements. Limiting the amount that anyone investor can 

invest to a modest amount limits the risk to that investor. The SEC basically ignored a rulemaking 

petition in 2010 to permit small offerings of up to $100,000 with a maximum of $1 00 per investor'9. The 

SEC received over JOO comments supporting the petition. 20 

To be sure, there are some serious issues with respect to crowdfunding. The first is investor protection 

from fraud and abuse. Hucksters could raise funds for dubious enterprises and then just disappear. 

However, such frauds would still be criminal violations. The second concern is that of disclosure, both at 

the initial offering and afterwards. Will investors have sufficient information to decide whether to invest 

in such offerings, either in the primary or the secondary markets? The third issue is the quality of trading 

in the secondary market. Will investors in such tiny offerings have the ability to sell at a fair price when 

they need to sell? Will the secondary market be rife with manipulation? 

These are indeed legitimate concerns. However, fear of every conceivable bad thing that could happen 

should not stand in the way of proper experimentation to find out what actually will happen. Limiting 

the maximum investment to a modest amount limits the risk to anyone investor. 

18 The report can be found at http://www.milkeninstitute.orglpdf/crowdfundingI20827.pdf.This is an unfortunate 

pattern for the SEC. It rarely sends staff people even to local industry conferences that examine important topics on 

the regulatory agenda. This reflects a false view that there is nothing for the SEC to learn from such events. 

19 http://www.sec.gov/rules/petitions/2010/petn4-605.pdf 

'0 http://www.sec.gov/comments/4-605/4-605.shtml. I also submitted a supporting comment letter which can be 

seen at http://www.sec.gov/comments/4-605/4605-33.pdf. 

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As far as disclosure goes, as long as investors know that they will get less detailed information than they 

get from larger offerings, and that these are very high risk investments in which they could and often 

would lose their entire investment, then they should have the freedom to make such a risky investment. 

The required disclosure to investors should include a short warning indicating that it is a tiny offering and 

the investor could lose all their money. This can be done with a very simple and inexpensive "black box" 

warning label: 

For example, it could say: 

This is a risky investment. You may lose your entire 

investment! 

There may not be any market for selling these securities when you 

want to sell. 

Financial information about this investment may not be as reliable 

as the audited financial statements oflarge public companies. 

Indeed, such a simple warning label may be far more effective than a two hundred page registration 

statement that lulls an unsophisticated reader into thinking that the offering is a sound investment that has 

been thoroughly vetted by the experts at the SEC. 

However, the SEC ignored this reasonable petition on crowdfunding, so Congress stepped in with Title III 

of the JOBS Act. Title III basically provides a regulatory framework for crowdfunding deals up to $1 

million dollars with investments as large as $10,000 each, provided they are done through regulated 

crowdfunding portals. Many other restrictions and requirements are also included. 

Many of these regulations sound innocuous, but could in the hands of hostile regulators become a heavy 

millstone that seriously inhibits the use of crowd funding. For example. Section 4A(b)(4) requires issuer 

to 

"not less than annually, file with the Commission and provide to investors reports ofthe results of 

operations and financial statements of the issuer, as the Commission shall, by rule, determine appropriate, 

subject to such exceptions and termination dates as the Commission may establish, by rule; and 

"(5) comply with such other requirements as the Commission may, by rule. prescribe, for the protection of 

investors and in the public interest." 

In other words, the SEC could easily require full-blown financial reports just like it requires from IBM. 

There is a temptation for this agency which has been so unresponsive to the will of Congress to over 

regulate crowdfunding to death in the name of consumer protection. 

The concern about the quality of trading should also not prevent innovation and experimentation to 

proceed. Crowdfunding will probably be most useful in providing seed capital (so-called "angel 

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financing") for startup ventures. For example, an entrepreneur with a cool idea needs some money to 

live on so she or he can quit their day job and devote fulltime to launching the venture. The seed money 

will be spent developing the business plan and proof of concept. Such ventures will usually need 

additional rounds of capital in order grow. These additional funding rounds will often dilute the original 

investors, but may also offer exit opportunities. The exit for most of the crowdfunding investors will not 

be to sell shares into a tiny and totally illiquid secondary market, but to exit when the firm gets another 

round of financing or when the firm gets acquired. 

Crowdfunding is new, and it is unlikely that the adopted rules will be perfect no matter how much time 

the SEC spends on the rules. A more common sense approach in the midst of a recession is for the 

SEC to quickly adopt interim rules. This will allow the Commission to learn from experience how the 

rules work and will lead to more informed final rules. One very well done precedent was the SEC's 

implementation of Rule 204T during the heat of the financial crisis in September 2008. The rule 

promptly reduced the endemic settlement failures that were an embarrassment to the U.S. equity market. 

Later, after observing the success of the rule. it was made permanent." 

We should fix our public capital markets rather than make it easier to leave them. 

The Act increases the threshold to require firms to register with the SEC from 500 shareholders of record 

to 2000 shareholders of record. Note that this is shareholders of record, and not total beneficial 

shareholders. Since many if not most shareholders hold their shares in street name through a broker or a 

custodian bank, the number of shareholders of record is much smaller than the number of people who 

actually own shares. For example, suppose 500 different people own shares that are held in one 

particular brokerage firm and that brokerage firm is a participant of Depository Trust and Clearing 

Corporation, the entity that clears and settles most stock transactions in the United States. Then that 

brokerage firm would appear as the owner of the shares and count as one shareholder of record. 

This provision is a two edge sword. Rather than deal with the problems in our public capital markets, 

Congress made it easier for firms to avoid the public capital markets." It recognizes how burdensome 

SEC registration has become. and it frees thousands of firms from the requirement of SEC registration. 

Such firms still need to be SEC registrants in order to be listed on our exchanges, but their shares can still 

trade in the over-the-counter markets in the U.S. without registration. However, I think that the solution 

is not to make it easier to leave the public markets, but to fix the public markets so they are more 

attractive. 

21. Rule 204T and later Rule 204 basically require firms to deliver sold shares on the regular settlement date and 

provides for mandatory buy-ins. Alas, the Commission had received thousands of complaints in the previous decade 

about settlement failures, and tinkered around with a complicated Regulation SHO Threshold list approach to the 

problem. It took a financial meltdown for the Commission to do the obvious and simple thing - require sellers to 

deliver the stock on the settlement day - with a temporary rule. 

22 Indeed, a quick search of the Compustat database finds less than 1,400 US eXChange-listed firms reporting more 

than 2,000 shareholders in the database. 

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The SEC needs the resources to do the job right. 

Defenders of the SEC can point out that the SEC has continually suffered from insufficient resources to 

do its job well. The technical experts who truly understand financial markets and technology are not 

cheap, and the SEC has not had the resources to attract and retain enough of the highly skilled people it 

needs to do its job well. Don't get me wrong: There are a lot of intelligent, highly skilled, and dedicated 

people at the SEC. There just aren't enough of them. 

There is one statistic that shows how penny-wise and pound foolish the U.S. has been with its funding of 

the SEC. From its founding in 1934 to the present time, the cumulative budget of the SEC expressed in 

current dollars has been about $20 billion. That is less than investors lost from one Bernie Madoff or one 

Enron. 

However, the SEC has a long history of misallocating the resources that it has received. Rather than 

hiring experienced people with the financial and technical experience it needs to regulate today's complex 

high-tech markets, it has hired lots of attorneys who engage in hairsplitting minutia while missing the big 

picture. Don't get me wrong. My father and grandfather were attorneys. I actually like lawyers. They 

are interesting people and it is fun to get into intellectual debates with them. However, if you have a 

leaky pipe, you need a plumber, not a lawyer. The SEC needs to hire more market plumbers and fewer 

lawyers. 

Summary and conclusions 

In the JOBS Act, Congress told the SEC to be serious about promoting capital formation. Decades of 

well-meaning changes in our capital markets have created a market structure suited to large companies 

but not smaller companies. 

The SEC has been slow to implement important provisions of the JOBS Act. This is partly due to 

insufficient resources, both monetary and technical, as well as to foot dragging by the Commission. 

What can Congress do? 

I. Continue to hold hearings like this to let them know that Congress is watching. Grill the 

Commissioners and staffers on their performance, and why the Commission has devoted huge 

amounts of staff time to dealing with less urgent matters that were not on the to-do list that 

Congress gave them. 

2. Write letters to the agency. That gets their attention. 

3. Give the SEC sufficient resources to do its job well. The SEC is self-funded through user fees, 

so this is not a costly to the general fund. 

4. Grill the SEC regularly on the makeup of its work force. In addition to the number oflawyers 

and paralegals on staff, ask them regularly how many SEC staffers have other relevant 

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qualifications in the financial area(CFA, MBA, Ph.D., Series 7 license, etc.) and in the technical 

areas (degrees in engineering or IT). 

5. Pay attention to the culture of the Commission, and in particular its attitude toward timely and 

sensible action. 

6. Move the SEC to New York and Chicago. In those locations it will be able to draw on a labor 

pool of people who really understand financial markets. In today's economy, there are plenty of 

unemployed people with serious financial experience. They know where the bones are buried in 

our financial markets. The problem is those people are in New York and Chicago. not 

Washington DC. Locating the SEC in the heart of our financial markets will make it much easier 

for our regulators to do their job well. 

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CHRIS COLLINS 

March 26, 2013 

The Honorable Elisso Walter 

Acting Chairman 

((ongre55 of tbe ~niteb ~tate5 

jl)ousc of lacprcscntlltibcs 

~asblllgtoll, Ill/!: 20515-3227 

Securities and Exchange Commission 

100 F Street, N.E. 

Washington, D.C. 20549 

Dear Chairman Walter: 

Last year, the President signed into law the Jumpstart Our Business Startups (JOBS) Act. This bipartisan 

legislation, specifically designed to help small businesses obtain the capital they need to grow and create more 

jobs, has been stalled by the rulemaking process within the SEC. 

A pillar ofthis legislation, Title IV - Small Company Capital Formation, is especially important to job creators as 

it would amend Regulation A by raising the threshold for SEC registration requirements from $5 million to $50 

million. While businesses would still be required to file an SEC offering statement and follow state registration 

requirements, raising this offering threshold would provide significant benefits to businesses trying to raise private 

capit.1. 

The last time the threshold was raised was in 1980. Now, even with the passage of the JOBS Act almost one year 

ago, the SEC has been slow in implementing this rule and many others. Private businesses cannot wait any longer. 

A recent report by the Government Accountability Office (GAO) found: 

"The number of Regulation A offerings filed and qualified (that is, cleared) by the Securities and 

Exchange Commission (SEC) has declined significantly after peaking in fiscal years 1997 and 1998, 

respectively. In particular, offerings filed since 1997 decreased from 116 in 1997 to 19 in 2011. Similarly, 

the number of qualified oflbrings dropped from 57 in 1998 to I in 2011." 

This downward trend could be reversed, however, by implementation of Title IV of the JOBS Act. By reforming 

Regulation A and transforming it to Regulation A+, this exemption could soon become the primary tool for 

businesses to raise private capital without going public. 

Small businesses are the primary drivers of our economy. That is why Congress passed and the President signed 

into law this legislation that would give these businesses the jumpstart they need to grow our economy. I 

respectfully ask you to follow the letter ofthe law and provide a timeline on when you expect to close the 

comment period and issue a final rule. 

As a small businessman and member of the House Committee on Small Business, I know how critical capital 

formation is to private businesses. The SEC should help, not impair, job creators. I look forward to hearing from 

you on this important matter. 

I!i:' 11M. CHRlSCO~ Member of Congress 
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11ase'!' 

Statement for the Record 

Nati_1 Assodation 

for thtt 5.lf.Employttd 

Submitted to the Committee on Small Business 

United States House of Representatives 

Washington, D.C. 

Submitted by Krislie Arslan 

President & CEO, National Association for the Self-Employed 

April I!, 2013 

Legis!atlveOHlCe 

32S 7th Street, NW, SUite 250 

Washington, DC 20004 

P'202·465-2100 

F: 202·466,2123 

www.NASE.org 

The National Association for the Self-Employed (NASE) respectfully submits this official statement for the 

record on the April 1 L 2013, hearing, "JOBS Act implementation Update." The NASE represents the 22 

million self-employed and micro-business owners (10 employees or fewer), providing educational resources 

for those looking to start and grow their businesses. Founded in 1981, the association has been the sole voice 

advocating for America's small businesses in all areas ofpub!ic policy. 

On behalf of the 22 million self-employed, the NASE would like to thank Chairman Schweikert for holding 

today's hearing on the Jack activity by the Securities and Exchange Commission in promulgating proposed and 

final rules for the provisions included in the JOBS Act. The NASE strongly endorsed the JOBS Act, 

applauding Congress's bi-partisan action on legislation aimed at supporting and encouraging smal!~business 

growth. especially embracing the ability for individuals and small businesses to raise capital through 

crowd funding. 

The NASE believes that crowdfunding is an exciting avenue for both new entrepreneurs and established small 

businesses to raise needed capital to launch or grow a small business. At present. nearly 48 percent of the selfemployed and micro-businesses are utilizing personal or retirement savings to keep their businesses afloat. 

accordingly to a 2012 poll ofNASE Members. Furthennore. friends and family have been a primary source of 

funding for many new entrepreneurs. Crowd funding will bring together this age~old approach to financing 

with technology and investment practices. allowing small-business owners and aspiring entrepreneurs the 

opportunity to reach out to their communities, investors and the world to secure nccessary funding to start and 

expand their business. 

While \ve understand that the regulatory process is not designed to be expedient, the NASE struggles to 

understand ho\v it is that the Securities and Exchange Commission continues to be deaf to the growing calls to 

release at a minimum a timc!inc for anticipated action. We ask that the subcommittee uses its oversight 

responsibility to continue to hold the SEC accountable and ensure that the provisions of the JOBS Act are 

implemented through the rulemaking process without delay, Crowd funding plays an important part in helping 

small-business owners navigate challenging financial times while also opening new avenues of funding 

opportunities for America's smallest businesses. 

Respectful!y, 

Kristie 

K~ Arslan. CEO & President 

National Association for the Self-Employed