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REDUCING BARRIERS TO CAPITAL FORMATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JUNE 12, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–29 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

SPENCER BACHUS, Alabama 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

LYNN A. WESTMORELAND, Georgia 

BILL HUIZENGA, Michigan 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

KEITH ELLISON, Minnesota 

MELVIN L. WATT, North Carolina 

BILL FOSTER, Illinois 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

DANIEL T. KILDEE, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 12, 2013 .................................................................................................... 1 

Appendix: 

June 12, 2013 .................................................................................................... 35 

WITNESSES 

WEDNESDAY, JUNE 12, 2013 

Coulson, R. Cromwell, President and Chief Executive Officer, OTC Markets 

Group .................................................................................................................... 4 

Ferraro, Joseph, General Counsel, Prospect Capital Corporation ....................... 6 

Hansen, Shane B., Partner, Warner Norcross & Judd LLP ................................ 8 

Langevoort, Donald C., Thomas Aquinas Reynolds Professor of Law, Georgetown University Law Center ............................................................................... 11 

Weild, David, Senior Advisor, Grant Thornton LLP ............................................ 10 

APPENDIX 

Prepared statements: 

Huizenga, Hon. Bill .......................................................................................... 36 

Coulson, R. Cromwell ....................................................................................... 37 

Ferraro, Joseph ................................................................................................. 67 

Hansen, Shane B. ............................................................................................. 75 

Langevoort, Donald C. ...................................................................................... 93 

Weild, David ...................................................................................................... 97 

(1) 

REDUCING BARRIERS TO 

CAPITAL FORMATION 

Wednesday, June 12, 2013 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 1:10 p.m., in room 

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

Members present: Representatives Garrett, Hurt, Huizenga, 

Grimm, Stivers, Fincher, Mulvaney, Hultgren, Ross; Maloney, 

Sherman, Himes, and Carney. 

Ex officio present: Representative Hensarling. 

Also present: Representative Duffy. 

Chairman GARRETT. This hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises will come to 

order. The hearing is entitled, ‘‘Reducing Barriers to Capital Formation.’’ 

I welcome the esteemed panelists for your testimony. But before 

we do that, I will recognize myself for 5 minutes. 

Today, we are here to discuss the important topic of reducing 

barriers to capital formation for America’s small businesses. Startup companies and small businesses are literally the backbone of 

our economy, generating literally millions of jobs in the United 

States every year. Yet, these companies often find it difficult to 

raise the capital they need to successfully launch and grow their 

businesses. 

So last spring, Congress passed the bipartisan Jumpstart Our 

Business Startups Act, the JOBS Act, for short, to enhance capital 

formation and reduce regulatory burdens for American startups 

and small businesses. And although it is far too early to judge the 

ultimate success of the JOBS Act, early indications are that the 

law is working. 

First, since April 2012, around 600 companies have elected 

Emerging Growth Company (EGC) status under the Act, with 

about a third of these companies listed or pending a listing on 

NASDAQ or the New York Stock Exchange market. IPOs got a 

strong start in 2013. 

Second, more than 90 percent of EGCs that publicly filed their 

first registration statements since 2012 elected to use at least one 

accommodation under the JOBS Act, with certain IPO on-ramp accommodations being particularly popular. 

2 

Third, according to an April 2012, Small Business Access to Capital Survey, one in five respondents indicated that they are more 

likely to seek outside investors as a result of the JOBS Act. 

And, fourth, with the short-term interest rates near zero, the 

JOBS Act has benefited investors, providing more options to put 

their money to work. Many companies have gone public under the 

JOBS Act to outperform peer companies that did not. 

But notwithstanding these positive trends, the full potential of 

the JOBS Act remains largely unrealized today, as the SEC continues, unfortunately, to delay mandatory rulemaking to implement many of the law’s most important and beneficial provisions. 

Of course, this delay really comes as no surprise to those of us who 

have followed the SEC’s priorities in the past. Indeed, year after 

year, the SEC seems to place promoting capital formation, which 

is a key component of the agency’s mission, near the bottom of its 

agenda. 

For example, last year the SEC tabled the JOBS Act rulemaking 

to prioritize issues and rules under the Dodd-Frank Act for companies to disclose their use of conflict minerals as well as rules requiring the disclosure of payment of government entities by companies engaged in resource extraction. While these rules may have 

commendable goals, they fall outside of the SEC’s core expertise, 

and they appear to do very little, if anything, to protect investors, 

make the U.S. markets more fair and efficient, and promote capital 

formation. At worst, they do the opposite. 

While the SEC has for years received valuable recommendations 

on how to promote access to capital for small businesses from its 

own Government-Business Forum on Small Business Capital Formation, and its Advisory Committee, the agency so far has acted 

on only a small number of these recommendations. 

So with all this in mind, I was pleased to hear Chairman White 

reaffirm to this committee last month that she is committed to 

prioritizing the completion of mandatory JOBS Act rulemaking as 

soon as possible, and I hope that her commitment carries over to 

other efforts to facilitate small business capital formation. 

Today, America’s startups and small businesses continue to encounter difficulties accessing U.S. capital markets to finance their 

business, and the cost of these companies going and staying public 

remains very high. 

On top of this, over the past 5 years the Obama Administration 

has unleashed a record amount of burdensome red tape that has 

disproportionately increased the cost of doing business for smaller 

companies compared to their larger peers. As a result, many small 

businesses have been forced to do what? Cut back on hiring and 

employee benefits at a time when our economy and those employees can least support it. 

And so as our country continues to go down a path of slow economic growth and persistently high unemployment, it is more important than ever that we continue to reduce burdensome government regulations on small businesses and enhance our ability to 

obtain capital at a reasonable cost. 

So I look forward to hearing from our panel this afternoon on 

ways that Congress and the regulators, as well as market participants, can continue to build on the JOBS Act, including, among 

3 

other things, efforts to modernize the regulatory regime governing 

business development companies, to increase liquidity in the shares 

of publicly traded small and mid-cap companies, and to promote 

more research analyst coverage for small cap companies. 

With that, I yield back my time, and I recognize the gentleman 

from California for 5 minutes. 

Mr. SHERMAN. Mr. Chairman, thanks for holding these hearings. 

For most of what the average American would call a small business, getting expansion capital means getting a loan. And that is 

the purview, chiefly, of another subcommittee, but I should address 

it for a minute. 

First, we should commend the Fed for keeping interest rates low 

at this critical time in our economy. Because if you are trying to 

get enough money to open a second restaurant, you are trying to 

get a loan, and if you are able to get the loan, it will be a lower 

interest rate than it would be otherwise, and your customers now 

think that their home is worth more than their mortgage, and they 

are actually able to come to that restaurant. Whereas, a few years 

ago, my constituents wouldn’t go to a restaurant unless there were 

golden arches in front of it. 

Second, we ought to pass the bill to allow credit unions to make 

small business loans, and we ought to be pushing the regulators of 

commercial banks to not turn up their noses at small business 

loans. 

We had, in this room, Jamie Dimon come in and say he had to 

send tens of billions of dollars to London where, as you will remember, it was eaten by a whale, because he couldn’t find businesses 

here in the United States to lend it to. One of the very few things 

just about all sides of all aisles agree on here is that we all know 

of 100 small businesses which need capital. I am talking about the 

really small businesses that aren’t even thinking of going public. 

As to those thinking of who are going public, a key thing is whatever we can do to minimize legal and accounting fees and the other 

costs of going public, one of those things would be not to require 

audit rotation beyond the standards already found in the accounting profession because that can, in some cases, double the audit 

fee, which is a significant portion of the cost of being a small publicly traded company. 

Finally, as to the SEC prioritization of regulations, I think we 

ought to give the regulators a break here. They cannot look at one 

statute and say, ‘‘That is a good one, I will do that one first,’’ and 

look at another statute and say, ‘‘That is a bad one.’’ 

It is possible the Chair believes that minimizing legal and accounting fees for businesses going public is more important than 

saving lives in Eastern Africa, where they are beset with conflict 

mineral issues. Others would reach the other conclusion. And the 

regulators simply have to follow the laws we pass. I don’t think the 

SEC should refuse to enact regulations to implement laws just because the chairman voted for them and I voted against them or 

vice versa. 

With that, I yield back. 

Chairman GARRETT. The gentleman from Virginia is recognized 

for 2 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

4 

Thank you for holding today’s hearing on Reducing Barriers to 

Capital Formation. One of the most important functions of this 

committee is to promote initiatives to increase access to capital for 

our small businesses and startups. Last Congress, this subcommittee led the way in the enactment of the JOBS Act. Among 

other things, the JOBS Act allowed emerging companies to tap capital in the public markets without enduring some of the most burdensome regulations which inhibit their ability to grow. 

Despite the SEC’s ability to fully implement the JOBS Act in a 

timely fashion, we are already seeing the positive impact of the 

law, as 83 percent of IPOs after the JOBS Act’s passage were 

emerging growth companies. We, however, can still do more to remove costly and unnecessary regulatory impediments that are restricting companies from accessing capital in the public and private 

markets. 

I have heard from innovative biotech companies in my district, 

Virginia’s Fifth District, that the overall regulatory burden which 

disproportionately impacts small or public companies is the primary motivator in their decision to stay private. We must look at 

solutions to eliminate and streamline regulations to create an environment that is more efficient and conducive for long-term economic growth. 

I appreciate this committee’s continued focus on ensuring that 

our small businesses and startups have the ability to access the 

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

that our local communities need, that my Virginia’s Fifth District 

needs. I look forward to the testimony of our distinguished witnesses, and I thank them for their appearance today. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

In looking around, I think that is the end of opening statements, 

which is great, because it means we can talk to the experts now 

and hear your opinions. 

Without objection your full written statements will be made a 

part of the record. You will be recognized for 5 minutes for a summary. The lights in front of you, of course, advise you as to 5 minutes, 1 minute, and your time is up. 

With that, I will begin on the left here. 

Mr. Coulson, you are recognized for 5 minutes. 

STATEMENT OF R. CROMWELL COULSON, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, OTC MARKETS GROUP 

Mr. COULSON. Thank you, Chairman Garrett, Ranking Member 

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

Coulson, and I am CEO of OTC Markets Group. I appreciate the 

opportunity to testify. 

As an operator of public marketplaces for smaller companies, and 

being a smaller publicly traded company ourselves, in our own 

right, I hope I can provide the committee with greater insights into 

barriers to capital formation that should be removed. 

We are all here because we recognize the value of public trading 

to small growing companies and the U.S. economy. The visibility, 

valuation, liquidity, capital, and trust that public trading provides 

5 

can create some of the most successful and sustainable companies 

in the capitalist system. 

We have provided 15 concrete suggestions in our written testimony that together will make our public markets more open, more 

transparent, and more connected for smaller public companies, 

while reducing the complexity and cost. 

Our marketplaces, like all public markets, are better informed 

and more efficient when there is transparency of trading activity 

and availability of company information. We work with brokerdealers in the trading process, and we have completely changed 

what was once an opaque marketplace. Now, the broker-dealers 

trading out of our markets are the same electronic broker-dealers 

trading NASDAQ and New York Stock Exchange Securities. 

But we also work with a wide range of companies. We need to 

engage them to provide better information for investors. And we 

have designed a system of tiered marketplaces to separate the 

highest quality companies from the lowest, and also to clearly warn 

investors when there is less information. 

The JOBS Act, particularly through ending the ban on general 

solicitation and new, more inclusive capital raising, takes great 

strides towards achieving the type of transparency our markets 

need to thrive. We can do more, though, to reduce barriers to capital formation by thoughtfully enhancing our public secondary markets. 

Capital has greater value if it is liquid and transferable. A carefully crafted tick size pilot program applicable to quotes and orders 

but not trades could provide a much-needed improvement to small 

company liquidity and value. Equity markets in the United States 

are the most regulated of all our financial markets. Our antifraud 

provisions already give regulators a broad sword when they see 

wrongdoing. But regulators should think like investors. Give investors the information they need to make intelligent decisions, but let 

them make choices. 

Our limited resources should be used to protect investors by driving transparency and smartly targeting the biggest problems, not 

just creating the longest regulatory filings or the largest number of 

enforcement cases. We urgently need more transparency of the people behind SEC reporting companies that are being widely promoted on the Internet. These advertisements of penny stocks, without any information about the people promoting them, makes a 

mockery of our regulatory system. 

Our promotion disclosure regulations were written for an era 

when promotion was done through the mail. It needs to be updated, because we have interesting biotech companies, smaller 

manufacturing companies, and community banks that are traded 

on our markets which are drowned out by these other companies. 

We want equality of regulation. There should be margin eligibility for all higher quality public companies, not just exchangetraded companies. This will help the community banks, giving 

them greater access to capital. We also want consistent disclosure 

of institutional holdings and insider trading in non-exchange-listed 

securities. 

With market structure, we should be careful not to be governed 

by fear. Markets, like all U.S. industries, need diverse choice and 

6 

healthy competition to promote growth and innovation. Some use 

the term ‘‘fragmentation’’ to paint a picture of a broken marketplace in need of repair. ‘‘Fragmentation’’ may sound dark and dangerous, but it is just a spin doctor’s word used by those losing market share to more dynamic competitors. 

When NASDAQ was a market for small companies, it was not a 

centralized stock exchange, but an automated quotation system 

with fragmented trading connected by transparency. Promoting 

competition efficiency is what drives a successful small company 

marketplace. It would be a step in the wrong direction to create 

monopoly stock exchanges or any attempt to create a trade-out rule 

or regulation that would mandate centralized trading on stock exchanges. 

Thank you, again, for inviting me to testify. While the issues I 

discuss may seem diverse, each is a vital component to reducing 

barriers to capital formation by creating better informed and more 

efficient financial marketplaces. I look forward to discussing these 

and other ideas with you. 

[The prepared statement of Mr. Coulson can be found on page 37 

of the appendix.] 

Chairman GARRETT. Likewise. Thank you. 

Next, Mr. Ferraro is recognized for 5 minutes. 

STATEMENT OF JOSEPH FERRARO, GENERAL COUNSEL, 

PROSPECT CAPITAL CORPORATION 

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

members of the subcommittee, thank you for the opportunity to testify today. 

My name is Joseph Ferraro, and I am general counsel to Prospect Capital, a leading provider of capital to job-creating small and 

medium-sized companies in the United States. Prospect is a publicly traded business development company, or BDC. Our company 

completed its initial public offering in July 2004, and since then we 

have invested more than $5.5 billion in over 175 small and medium-sized companies to expand their businesses, hire workers, 

construct factories, and achieve other important objectives. 

Our capital has helped create thousands of American jobs over 

the years, and our capital is much needed in this critical period of 

high unemployment and economic uncertainty. 

In 1980, Congress enacted amendments to the Investment Company Act of 1940, authorizing BDCs to facilitate financing of small 

and medium-sized businesses. Financing these companies requires 

significant and time-consuming due diligence activities and rigorous credit analysis that has become uneconomical for traditional 

banks, and involves transaction sizes too small for many other capital providers. Put simply, a BDC is a lender to, and an investor 

in, small and medium-sized businesses that might not otherwise receive financing. 

Today, our industry is composed of about 40 publicly traded 

BDCs, collectively managing $39.1 billion in assets. Our industry 

believes that modest changes to our securities laws can greatly enhance the ability of BDCs to serve the capital needs of small and 

medium-sized companies without undermining investor protections. 

7 

These changes have been recommended by bills introduced by Representatives Mulvaney, Velazquez, and Grimm. 

First, a BDC must invest at least 70 percent of its assets in socalled eligible assets, namely public micro-cap and private companies. But current law excludes financial services companies from 

qualifying as eligible portfolio companies. Thus, no more than 30 

percent of a BDC’s assets can be invested in financial services companies. 

This outdated limitation makes no sense. Financial services is a 

sector that encompasses a wide array of companies, including community banks, leasing companies, factoring firms, and automobile 

financing companies. These companies have a capital magnifying 

effect that results in more capital flowing into small and mediumsized businesses. How? Because such companies themselves frequently serve the needs of other smaller companies. 

Further, BDC investments in small to medium-sized American financial services businesses are consistent with the principal purpose for which Congress created BDCs—to provide capital and assistance to small, developing businesses that are seeking to expand 

and create American jobs. The law should not artificially limit a 

BDC’s ability to provide capital to such companies. 

Second, current law limits a BDC’s investment in investment advisors. Although the SEC routinely provides administrative relief 

from this prohibition though exemptive relief orders, the process is 

very time-consuming and expensive. The pending bills would repeal 

this prohibition, in essence codifying existing practice and ending 

the needless spending of shareholder resources to seek administrative relief. 

Third, BDCs, like other companies that regularly raise capital 

through security issuances, rely on pre-filed shelf registrations—filings that allow a company to be pre-positioned to issue additional 

securities. Because shelf registrations contain financial information 

that becomes outdated, companies are allowed to incorporate by 

reference in their shelf registrations subsequent financial reports. 

However, BDCs are not allowed to take advantage of this commonsense approach and instead must annually update shelf registrations each time new quarterly information is reported. This should 

be changed. 

Fourth, in 2005 the SEC modernized the issuance process especially for frequent securities issuers, reducing costs and making the 

process more efficient. However, BDCs were excluded from these 

commonsense reforms. Our industry is a frequent issuer of securities. For example, Prospect has raised some $2.5 billion since our 

IPO in 2004 through more than 26 public offerings. There is no 

public policy justification for BDCs being left behind when the SEC 

modernized these rules. 

Fifth, the pending bills offer other reforms that can assist BDCs 

in raising and deploying capital. For example, these bills allow 

some easing of the leverage limits imposed by current law on BDCs 

to allow more flexibility on how a BDC constructs its own balance 

sheet. 

In conclusion, business development companies are an important 

source of capital for small and medium-sized companies. With some 

commonsense reforms, it is possible to increase the capacity of 

8 

BDCs to support job-creating American businesses without in any 

way undermining the strong investor protections or costing taxpayers a dime. We applaud the efforts of Representatives 

Mulvaney, Grimm, and Velazquez, and urge the committee to act 

favorably on BDC reform legislation. 

I would be pleased to answer any questions you may have. 

[The prepared statement of Mr. Ferraro can be found on page 67 

of the appendix.] 

Chairman GARRETT. I thank you. 

Next, from Warner Norcross, Mr. Hansen, you are recognized for 

5 minutes. Good afternoon. 

STATEMENT OF SHANE B. HANSEN, PARTNER, WARNER 

NORCROSS & JUDD LLP 

Mr. HANSEN. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the Capital Markets Subcommittee. 

Thank you for this opportunity to explain how and why today’s 

one-size-fits-all system of securities broker-dealer regulation adversely impacts and unnecessarily increases the costs incurred by 

business owners for professional and business brokerage services to 

sell, buy, or grow their small and medium-sized businesses in privately negotiated transactions. 

My comments today are primarily focused on H.R. 2274, the 

Small Business Mergers, Acquisition, Sales, and Brokerage Simplification Act of 2013, a bipartisan bill introduced by Congressman 

Huizenga, with Congressmen Higgins and Posey. 

The public policy considerations supporting this legislation go 

back to 2005, with the publication by the American Bar Association 

of a report and recommendations of the Private Placement BrokerDealer Task Force which is available on the SEC’s Web site. A 

similar recommendation was made by the final report of the SEC 

Advisory Committee on Smaller Public Companies in 2006, which 

is also available on the SEC’s Web site. 

Appropriately scaling Federal regulation of merger and acquisition brokers has been among the top recommendations in the 2006, 

2007, 2008, 2009, 2010, and 2011 SEC Government-Business Forums on Small Business Capital Formation. Indeed, in January 

2012, then-SEC Chairman Mary Schapiro acknowledged these concerns in a response to a bipartisan congressional letter and a Senate committee’s question for the record, both attached to my written statement. Despite this, in more than 6 years the SEC has not 

made this small business issue a rulemaking priority and is unlikely to do so in the absence of a congressional directive. 

Let me describe for you the business context of this issue. Each 

of you has in your districts likely hundreds, perhaps thousands, of 

small and medium-sized business owners who sooner or later will 

want to prepare for and sell their business. They will want professional business brokerage services to help them. Similarly, back in 

your districts you likely have hundreds, perhaps thousands, of entrepreneurs committed to owning their own businesses, or larger 

companies wanting to grow their businesses through acquisitions. 

These potential buyers want professional assistance finding and 

screening potential sellers. These buyers and sellers are represented by counsel and often assisted by accountants. They rely 

9 

upon written representations, warranties, covenants, and remedies 

in their negotiated contracts for their protection. 

Capital formation, business growth, jobs creation, and preservation by small and medium-sized businesses are all facilitated with 

business brokerage services. For example, the acquisition of one 

business by another enables the combined business to expand and 

to accumulate investor capital in more diversified, often financially 

stronger business enterprises. Small business sellers and buyers 

simply cannot afford to hire a registered investment banking firm, 

whose fees typically start at $500,000. And there are no registered 

investment bankers in most small communities. 

So today, Federal securities laws and rules regulate Main Street 

M&A brokers the same way as they regulate Wall Street investment banks handling public company transactions. Compliance 

costs are necessarily passed on to the business buyers and sellers 

in order for the M&A broker to stay in business, and small firms 

only handle a few transactions each year but must maintain ongoing regulatory compliance at all times. 

H.R. 2274 would direct the SEC to create a simplified system of 

M&A broker registration through a public notice filing, and would 

require delivery to clients of disclosures about M&A brokers similar 

to those requirements applicable today to investment advisors. The 

bill would direct the SEC to review and tailor applicable rules to 

fit this smaller business context. 

In conclusion, regulatory reengineering is urgently needed, even 

as recognized by the SEC. The perception of public protection 

through today’s broker-dealer regulation is illusory because in fact 

thousands of small, unregistered M&A firms do business across the 

country. The rules are simply not clear in how they apply to them 

and do not fit. Today’s one-size-fits-all broker-dealer regulation is 

simply too costly for small and medium-sized businesses to afford, 

so they either go without professional advice or hire cheaper unregistered firms. This congressional directive to adopt a regulatory solution will ultimately free up the SEC’s resources to better protect 

our public markets and passive investors. 

I urge you to support H.R. 2274, and I look forward to your questions. 

[The prepared statement of Mr. Hansen can be found on page 75 

of the appendix.] 

Chairman GARRETT. Thank you. 

At this point, I will yield to Mr. Huizenga. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

I appreciate that. I came in from the House Floor—where we 

were moving along our package of derivatives bills—just as Mr. 

Shane Hansen was starting. Important things are happening here 

in the Financial Services Committee. 

But I want to thank Shane for bringing this issue to my attention a while ago, now, and it was a great meeting and a great opportunity for us to begin to work together. I think, as he has aptly 

pointed out, the proposal that is before us is going to significantly 

reduce the regulatory compliance costs, which currently exceed 

$150,000 initially and $75,000 annually. The SEC has not taken 

this recommendation in the past. And I think it is time that we do 

this legislatively. 

10 

As we know, approximately $10 trillion of privately owned Main 

Street, mom-and-pop type businesses will be sold or closed as Baby 

Boomers age. That is a tremendous amount of transfer of wealth 

that is going to be happening. I think how we handle that is very 

important for our future generations. I appreciate everything that 

this committee is doing to help ease that. 

So thank you, Mr. Chairman. 

With that, I yield back. 

Chairman GARRETT. Thank you. I appreciate that. 

Mr. Weild, you are now recognized for 5 minutes. Thank you for 

being with us this afternoon. 

STATEMENT OF DAVID WEILD, SENIOR ADVISOR, GRANT 

THORNTON LLP 

Mr. WEILD. Thank you. Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee, thank you for inviting 

me to speak today about an issue of great importance to America, 

how to reduce barriers to capital formation, particularly for small 

companies, which are the growth engine of the U.S. economy. 

My name is David Weild. I oversee Capital Markets at Grant 

Thornton, LLP, one of the six global audit, tax, and advisory organizations. I was formally vice chairman of the NASDAQ stock market, with responsibility for all of the listed companies. I also ran 

the equity new issues business of a major investment bank for 

many years. 

U.S. capital markets, once the envy of the rest of the world, have 

undergone a profound transformation in less than a generation, 

leaving small business investors and the U.S. economy much worse 

off. I will quickly share several shocking statistics confirmed by a 

study that I recently coauthored for the Organization for Economic 

Cooperation and Development (OECD). U.S. markets have lost 

nearly half of all listed companies from their peak in 1997. The 

United States has suffered 15 years of consecutive lost listings 

from the U.S. stock markets. The U.S. small IPO market has suffered a catastrophic failure, falling from first place in small IPOs 

to 12th among the 26 largest IPO markets. On a GDP-weighted 

basis, we are now 24th, ahead of only Mexico and Brazil. 

The U.S. IPO market should be producing 5 to 10 times the number of IPOs it has produced over the past 13 years. We estimate 

10 million additional U.S. jobs would have been created during this 

timeframe. Notably, in our work for the OECD comparing the top 

26 IPO markets, low-cost electronic markets with inadequate tick 

sizes are harming IPO markets in other areas of the world as well. 

After-market support is the biggest single obstacle to resurgence 

in the U.S. IPO market for small companies. The collapse in tick 

sizes from 25 cents to 1 cent, a result of regulatory and structural 

changes since 1997, is gutting the infrastructure of smaller brokerdealers, research analysts, and capital support that is essential to 

take small companies public and support them in the aftermarket 

once they are public. 

Ultimately, while lower tick sizes have benefited short-term, 

high-turnover traders through lower transaction costs, long-term 

fundamental investors in small cap stocks have lost liquidity and 

investment opportunities and are thus much worse off today. The 

11 

U.S. stock markets are now essentially governed by a one-size-fitsall framework, with 1 cent tick sizes for every stock, regardless of 

share price, market capitalization, or liquidity. Only big brands 

and large companies can sustain adequate visibility with investors 

in today’s market. Small cap stocks need broker-dealers to support 

their liquidity, sales, and equity research in order to sustain active 

markets. 

U.S. capital markets have lost their way, but as my written testimony elaborates, we can take proactive and immediate steps to 

overcome the structural challenges faced by the U.S. stock markets 

and promote capital formation for small companies. 

First, we applaud passage of H.R. 701 by an overwhelming vote 

of 416–6, and we encourage swift Senate adoption of this bipartisan 

bill that requires the SEC to finalize Regulation A-plus rulemaking 

by October 31, 2013. Reg A-plus will provide a less complex registration process, a higher offering limit of $50 million, and increase investor protections. This is an important catalyst by which 

small companies can now go public, grow, and contribute to job creation. However, we urge Congress to also consider the need for 

Blue Sky exemptions, or we fear this Regulation A-plus will not be 

utilized. 

Second, we strongly urge an immediate SEC pilot program of at 

least 5 years in length to let emerging growth companies and small 

cap companies trade with higher tick size increments. Higher tick 

size increments will increase liquidity and capital formation for 

small companies by increasing the incentives required to fuel investments in equity distribution sales and aftermarket support. As 

markets realign, share performance and returns on investment will 

improve, all while laying the foundation for increased IPOs, economic growth, and job creation. 

Third, we encourage the creation of a new parallel stock market 

exempt from Regulation NMS for public companies under $2 billion 

in value. Adequate aftermarket support is a continuing challenge 

for small companies. This new market would give issuers a choice 

in markets, proper balance between intermediaries, issuers, and 

their investors, and usher in a return to the business of underwriting and supporting small cap companies. 

Thank you for the opportunity to present information on such an 

essential topic. I am pleased to answer any questions. Thank you. 

[The prepared statement of Mr. Weild can be found on page 97 

of the appendix.] 

Chairman GARRETT. Thank you very much. 

Finally, from Georgetown University Law Center, Professor 

Langevoort, you are recognized for 5 minutes. 

STATEMENT OF DONALD C. LANGEVOORT, THOMAS AQUINAS 

REYNOLDS PROFESSOR OF LAW, GEORGETOWN UNIVERSITY 

LAW CENTER 

Mr. LANGEVOORT. Chairman Garrett, Ranking Member Maloney, 

I am pleased to testify today on the vitally important topic of capital formation and investor protection. With the JOBS Act more 

than a year old, we still await rulemaking by the SEC on many of 

its key provisions. 

12 

However, the JOBS Act does not exhaust the possibilities for innovations in capital raising and secondary trading that can make 

our financial markets more robust and opportunities for honest entrepreneurship more compelling. 

The SEC’s Advisory Committee on Small and Emerging Companies has made a number of recommendations for additional 

changes that, if appropriately crafted, could be a positive step forward, including a more sensible disclosure regime for small and 

emerging issuers, those companies with a smaller footprint in our 

markets, our economy, and our society. 

While I do not agree with all of their suggested exemptions, 

there is much room for adjustment. As the Advisory Committee 

also recommends, we can also do more to facilitate the evolution of 

fair and efficient secondary trading markets for both nonpublic 

companies and smaller public companies, recognizing, however, 

that if that evolution turns sharply in the direction of larger and 

more robust accredited investor-only markets, the adverse implication for our public markets could be profound. 

Regulatory reform efforts should continue, but it is essential that 

this be done with due regard for investment protection. No amount 

of regulatory reform can eliminate the uncomfortable truth that 

small business capital formation is difficult because small business 

is very risky and the cost of capital high. 

While inefficient regulation raises the cost of capital, good regulation lowers it. Investor trust is closely tied to capital formation 

and economic growth. Although that trust has proven resilient over 

time, it is not something that can be taken for granted. If it hits 

some tipping point and recedes because there is too much perceived 

risk of opportunism and abuse, capital formation will be damaged 

by poorly crafted innovations, not enhanced. 

For all the honest entrepreneurs who deserve a better shot at 

marketplace funding, there are opportunists who not only threaten 

the financial well-being of targeted, sometimes vulnerable investors 

but take funds away from legitimate enterprise, pollute the reputation of our markets generally, and create no jobs except for perhaps 

in boiler room operations. No innovations in capital raising will 

work unless the help investors tell the difference between good promoters and bad, as well as between good business plans and dubious business plans. Otherwise, this is just gambling, from which 

smart investors know to stay away. 

I would commend to you the SEC’s Investor Advisory Committee 

as another bipartisan voice worth listening to as its members reach 

consensus. Although there are many imperatives in crafting good 

rules to promote entrepreneurship and capital formation, two are 

paramount. One is that we recognize the role of retirement savings 

as an at-risk target, the threat to which neither aging Americans 

nor our economy generally can afford. The other imperative is the 

need for greater transparency in so-called private markets so that 

there can be better oversight and surveillance in the otherwise 

dark spaces where investments are aggressively promoted and sold. 

I commend members of the subcommittee for their attention to 

these important challenges. 

Thank you. 

13 

[The prepared statement of Professor Langevoort can be found on 

page 93 of the appendix.] 

Chairman GARRETT. Thank you. 

Again, I thank the panel for their testimony. At this time, we 

will go to questioning, and I will recognize myself for 5 minutes. 

Let’s begin with one area, and that is the area of research analysts. I will throw it out to maybe Mr. Weild and Mr. Coulson, I 

guess. 

First of all, would you agree on the basic premise that when it 

comes to research analysts—I think you will agree, there is less 

availability of research analysts for small businesses than there are 

for large businesses. 

Mr. WEILD. Absolutely. 

Mr. COULSON. Yes. 

Chairman GARRETT. If that is the case, it makes it harder for 

smaller cap companies to grow and be able to sell and get into the 

equity markets and sell their shares. 

Mr. WEILD. Yes. 

Mr. COULSON. Absolutely. 

Chairman GARRETT. I will set the premise here, and maybe I will 

give you the answer. Do you think this came about due to the 

SEC’s 2003 global research analyst settlement agreement? 

Mr. WEILD. I believe that it was already in process, dating back 

to the Order-Handling Rules and Reg-ATS and the collapse of the 

economic incentives to support small cap companies and have a 

way to pay for that research. 

Chairman GARRETT. Give me a date, then. 

Mr. WEILD. That was 1997 and 1998. But I think it was obfuscated by the bubble. The dot.com bubble was in full form at that 

point in time. When you fast-forward to decimalization in 2001, 

people were already starting to shed research analysts, research 

compensation. 

Chairman GARRETT. Mr. Coulson? 

Mr. COULSON. From what I hear from investment bankers, they 

are very nervous about having banking related to the research 

process. And it creates a dynamic, even for big companies, because 

we have some of the largest ADRs in our marketplace, globally, 

and they say the large banks, because equity trading is funding research now, restrict which institutions they send it to. So tier two 

and tier three institutions don’t even see some research from big 

banks because you have to send it to the ones who pay for the trading. And if it is driven by investment banking, paid for or equally 

funded with proper oversight and controls, it is used more broadly 

to support the knowledge of the firm in that space. I think on Wall 

Street, we have always had conflicts. We have ways of dealing with 

conflicts, rather than just ban an activity and cut off the funding 

for it. 

Chairman GARRETT. I am getting slightly different things here. 

Mr. WEILD. They are both accurate. Excuse me. When we study 

actually—about 80 percent of commissions are generated by the top 

100 institutional investors in the market, which are skewed very 

large cap and high turnovers. So, consequently, that small cap research product really doesn’t have a home because it tends to be 

consumed by smaller and smaller institutions that don’t have the 

14 

liquidity constraints of the big firms. That is all a product of this 

hyper-efficient, low-cost penny tick size market, which means there 

is really no way to make money as an investment bank from supporting specialists in investment in small cap companies. 

Mr. COULSON. The smaller investment banks do not have the 

trading business today. It has gone to the more electronic, larger 

transaction firms. So the business relationship they have with 

smaller companies is based on investment banking. 

Chairman GARRETT. So, even if we solve the conflict issue somehow or other—you used words like ‘‘proper regulation’’ or something like that—that the settlement agreement tried to address or 

did address, are both of you saying that in and of itself—I hear 

your points on the tick size and what have you. Is that not enough 

to try to address this problem? 

Mr. COULSON. No. 

Chairman GARRETT. Okay. 

Mr. COULSON. I think it is a great start, but I also think we need 

to solve the liquidity issue for smaller companies by—the tick study 

is one approach. 

Chairman GARRETT. So maybe the question should be this, then: 

Is this conflict issue in addressing the settlement issue an essential 

part of it? In other words, we have to address the tick size, and 

there are a couple of other things we are going to pull out of this 

panel, although all my time is focused on this one issue. This, 

though, has to be addressed as part of that process, is that correct? 

Mr. WEILD. It is an important part of that process, yes. 

Mr. COULSON. It is one of the key things that needs to be done. 

Mr. WEILD. Chairman Garrett, I believe that the key part is liquidity. It is not necessarily even research. It is capital commitment to small cap stocks to facilitate liquidity and having a mechanism whereby brokers can actually earn a return on facilitating institutional liquidity. Because institutions have increasingly cut allocations to small cap stocks because of the loss of liquidity. And 

that is not necessarily related to the research problem. It is related 

to market making. 

Chairman GARRETT. I get that. I will close on this: That is why 

we had the panel up in New York to try to begin the overall discussion on market structure reform similar to what this panel has 

talked about there. So, that goes to the larger issue. 

Thank you for your testimony. 

The gentleman from Connecticut is recognized for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman, and thank you to all the 

witnesses for coming in front of this robust committee today to talk 

about this topic, which clearly has drawn the interest, at least on 

my side of the aisle. 

I, for one, have been following the IPO market pretty closely 

prior to the creation of the JOBS Act. And I think it is a really important topic of conversation. 

Of course, over the last couple of years, people have made every 

argument conceivable for why the IPO market over the years has 

declined. Some people say it is Sarbanes-Oxley. Some people say it 

is NMS. Other people say it is order handling rules. Other people 

point to the economy. 

15 

There is actually some pretty dramatic data coming out about 

the U.S. IPO market in the year 2012. IPOs—this is by dollar volume—in the Asia-Pacific were down 40 percent. In Europe, they 

were down 64 percent. In the United States, they were up by 17 

percent, such that the United States IPO volume represented just 

less than half—43 percent—of global IPO issuance. That would 

suggest perhaps that the story we hear from the other side of the 

aisle that overwhelming U.S. regulation is going to crush our markets is perhaps not entirely factual. But it is also intriguing. What 

drove that? Was this in fact a difference of regulation relative to 

Europe and Asia Pacific? Was this in fact different order handling 

rules? Can somebody explain to me the incredible sort of volatility 

in issuance volumes and the out-performance of the United States 

IPO market? 

Mr. WEILD. Yes, sir. We interact with international companies 

because we have 1,500 ADRs on our marketplace. So we see the 

largest and the smallest. In Europe, the economy is what is driving 

that dynamic right now. The financial markets there are very depressed. We talked to the IROs of the largest companies. That said, 

the dynamic when I meet an interesting small public company, it 

is most likely listed in Toronto or London or on the Australian 

stock exchange because they have created processes which are a lot 

more friendly. And that is what I keep hearing from companies— 

from smaller companies especially—and we will see U.S. companies. We had a company that is in the payment business that went 

public on the Aim to Raise Capital, came back to our marketplace 

to re-enter the U.S. markets, and then they upgraded to NASDAQ 

at the turn of the year. Small companies find it friendlier to go 

overseas from the United States. And international companies— 

Mr. HIMES. Let me stop you there, because I have limited time, 

and I have two other categories of questions. One is, as public policymakers, how do we know when we have that balance right? I 

used to do IPOs many, many years ago, and I know they are darn 

expensive things to do. Gross spread is still 7.5 percent. By the 

way, I would like to talk about that. For 20 years, I have been paying attention, and gross spread for an IPO is 7.5 percent. I am sort 

of fascinated by that consistency. But it is an expensive thing to 

do. That doesn’t include lawyers’ fees. Pretty soon, you are getting 

up to 10 percent of your volume of issuance. 

How do we know that our system is set up such that the companies that go public via IPO, set aside these are risky companies we 

are talking about and what that implies for retail investors, how 

do we know when we have struck the right optimal balance? Do we 

just look at Canada and Europe and say, we are doing less $50 million IPOs than they are? How do we know? 

Mr. WEILD. Congressman Himes, those markets—I am going to 

recommend to you the paper that we wrote for the OECD. I think 

it is entitled, ‘‘Making Stock Markets Work for Economic Growth.’’ 

But we looked at, say, 26 IPO markets. The ones that Cromwell 

ticked off all have higher tick sizes to the percentage of share price 

for smaller capitalization stocks. There are aftermarket incentives. 

And the multiple regression that we ran actually explains, based 

on economic incentives, about 70 percent of IPO production globally. 

16 

Mr. HIMES. Can I stop you there? Because I am going to run out 

of time. That was my third category of questions. Maybe I will have 

a chance to come back for some others. 

Can you, in the 45 seconds remaining, give us a sense for why 

increasing the tick size would in fact promote more smaller IPOs? 

This is not a regulatory thing. This would essentially be moving 

money from one group of third parties to the other. Can you sort 

of explain that and why that would be helpful? 

Mr. COULSON. Market-structured penny tick size creates a market structure that competes almost exclusively on cost of trading. 

And in microcap markets, you need value creation, which is sales, 

promotion, marketing of stories, telling of the stories. You need to 

capital to facilitate institutional-size liquidity. Those are primary 

ingredients. You need research. That is value creation. There is no 

economic model to support value creation. So, as a consequence, we 

go to the lowest common denominator and compete on price alone. 

That is catastrophic for stocks that trade episodically: big buyer, no 

seller. It works fine for large cap stocks. So this is the reason we 

take this model and we apply it to everything, and it disenfranchises the entire small company ecosystem. 

Mr. HIMES. Thank you. I note my time is up. Maybe I will get 

a chance to ask more questions later. But I appreciate the answer. 

Thank you. 

And thank you, Mr. Chairman. 

Mr. COULSON. Just one quick point is, because talking about the 

structure of what, hopefully, tick size would incentivize is more displayed liquidity by intermediaries. If you have a small company 

stock that trades 30 times a day—that is once every 1,000 seconds—you need intermediaries. 

We have a world where, yes, we have displayed prices. And the 

average community bank in my marketplace has a spread of 19 

cents, trades at $17. But it is kind of like stores in Cuba. The 

prices are low, but you can’t buy anything. How do we fill the 

shelves up with liquidity again? How do we reignite liquidity, so an 

inventor says, ‘‘Hey, I can buy something in here.’’ Instead of, ‘‘If 

I buy something, the price yo-yos up. When I am filled, it goes back 

down.’’ 

And the tick study is a good start. But I can’t explain it to you 

in 15 seconds because I need to sit down with you and your staff 

and go through the market structures and go through some of the 

things we have seen. We used to have increments in our market. 

We saw more displayed liquidity by intermediaries. I think it is a 

great experiment. 

Chairman GARRETT. Thank you. 

Mr. Fincher is recognized for 5 minutes. 

Mr. FINCHER. Thank you, Mr. Chairman. 

I thank the panel for being with us today. Something we have 

been focused on in my short time of being here in the second term 

is jobs, jobs, jobs—trying to get more people into the workplace to 

get our economy moving. Mr. Carney and I, last year or I guess the 

year before, sponsored the JOBS Act. And this was something that 

has been very good. 

I have a couple of questions, but I am going to read a statement 

first: ‘‘Since April 2012, shares of U.S. companies that have gone 

17 

public under the JOBS Act are generally outperforming those that 

did not; a 28.9 percent average stock price appreciation from offered price for JOBS Act companies compared to 13.1 percent for 

non-JOBS Act companies. From April 2012, to January 2013, U.S. 

companies that have gone public under the JOBS Act have outperformed the Russell 2000 Growth Index, which is up 11 percent 

over that period.’’ 

Just a couple of questions, and I will end with a simple one: Why have small company IPOs, under the $250 million market cap, declined since 2004? And the second question, aside from the SEC’s 

failure to fully implement the JOBS Act, what do you believe are 

the largest factors explaining why many companies are still sitting 

on the sidelines and not going public? If you could answer the second one first? 

Mr. Coulson, I will start with you. 

Mr. COULSON. So on why are companies sitting on the sidelines? 

Because they are scared of the cost and complexity. It is not just 

when you go in today. They think it gets raised every time you are 

a public company and some big company does something wrong 

from corporate governance, you need to hire more consultants. 

There is a dynamic. Big companies are owned by index funds. We 

have to have a different corporate governance system for them. 

Small companies, we should design our markets to fit intelligent 

investors, so there is information availability, because investors 

aren’t forced to own them. They get to buy and sell them. And how 

do we get that efficient information out, but not creating this compliance? 

One of our recommendations is that we wait on XBRL for smaller public companies because we are hearing from SEC reporting 

companies it is going to $35,000 to a vendor every year and take 

up their finance committee time. So, those are things we can do reduce the complexity. And XBRL is a great idea. Everybody thought 

it was smart. But we have created this cost on smaller companies. 

Number two, why are we seeing fewer IPO’s and smaller companies? One, we have a very successful private capital-raising marketplace. And the JOBS Act, when the SEC votes—and I have 

heard they are going to vote rather soon on removing general solicitation—we are going to really change this wall between private 

capital raising and public capital raising. We are changing the 

check-at-point-of-sale rather than blocking out all this transparency about capital-raising activity in the markets. And this is 

going to make going public be more of a continuum. Companies 

suddenly aren’t dark everything because they are scared of breaking their capital raising because they put their annual report on 

their Web site, and that we start seeing more disclosure and companies start trading. That is how it used to be, but our markets got 

broken up. 

The second piece, which I am not sure we can fix that easily, is 

some of the numbers from when the IPOs were higher, were smaller, riskier IPOs on NASDAQ; the Stratton Oakmont, the boiler 

room movie guys. Those were NASDAQ securities, which most people don’t remember. But those raised the numbers. What happened 

was, the firms got overloaded with regulation on sales practices. So 

they said, ‘‘We don’t really want to sell to individual investors anyVerDate Nov 24 2008 18:55 Dec 02, 2013 Jkt 081764 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\81764.TXT TERRI
18 

more. We just want to sell privately to accrediteds who are more 

sophisticated.’’ And that dynamic is even if you do a private placement, those securities, if you make them tradeable after they have 

come to rest, after they have been seasoned for a year, that capital 

becomes more valuable and thus companies will have a lower cost 

of capital if you make a security tradable. Because securities are 

based. They are property. 

Mr. FINCHER. One final question, Mr. Hansen, for you and anybody else who wants to respond in 40 seconds, in your opinion, 

what regulation or law has inhibited capital formation for businesses the most? What one? 

Mr. HANSEN. I would say, in the context of raising capital, it 

would be limitations on the ability to generally solicit investments, 

but which needs to be carefully constructed to protect investors. On 

the M&A side, I would tell you that formation of capital comes 

from mergers and acquisitions of businesses, and the broker-dealer 

regulation inhibits that by forcing very small firms into a very expensive system of regulation. 

Mr. FINCHER. Thank you very much. 

I yield back, Mr. Chairman. 

Chairman GARRETT. I now recognize Mr. Ross. 

Mr. ROSS. Thank you, Mr. Chairman. 

I appreciate that. 

Back when the Advisory Committee on Small and Emerging 

Companies did their recommendations, on January 6, 2012, they 

recommended the Commission take immediate action to relax or 

modify the restrictions on general solicitation, as you referred to, 

Mr. Coulson. We passed the JOBS Act and required it to be done 

by July 4th. Unfortunately, the SEC missed that deadline. Unfortunately, this becomes endemic, not only with the SEC but with any 

agency under the jurisdiction of Dodd-Frank, that we are having 

these deadlines just lapse. 

I guess my question is, to what extent has this impacted not only 

capital markets but also just some sense of certainty in business 

planning for the business environment out there, when the JOBS 

Act, under the Regulation D of general solicitation restrictions 

being removed, not being done? 

Mr. Coulson? 

Mr. COULSON. I was speaking to a CEO who has a publicly traded company. They are not SEC-reporting, but they have $100 million in revenues and they own restaurants. And he was reaching 

out to me, saying, ‘‘I have been raising capital privately from 

friends and family. We have been growing the business. But we 

have an opportunity to expand. When is the JOBS Act going to 

take place? When is Reg A-plus going to come? Because I want to 

use that.’’ 

I keep hearing about it. That is the story I keep hearing, that 

this is going to change capital raising for small companies. 

Mr. ROSS. So, they are sitting on the sidelines. In other words, 

investment capital is waiting. 

Mr. COULSON. They are constrained. 

Mr. ROSS. Let me ask you this, then. Do you feel that there is 

sufficient capacity of investment capital out there to meet what 

19 

hopefully is a pent-up demand for those who are entrepreneurs or 

businesses that want to put it to use? 

Mr. COULSON. It is going to change and open up capital raising 

because now the rules of privacy for private capital raises, you can 

only talk to pre-existing relationships. You can’t have any publicity 

around it. So much capital is stuck, sitting there. There will be 

some dumb ideas financed because of the transparency. 

Mr. ROSS. But isn’t that what the market does? 

Mr. COULSON. And it will be so much better if we, not only investors, but the press and the public see what is going on in capital 

markets. If we stop having this one tier of markets, where things 

take place publicly, and then you have everything else taking place 

in private. Unless you are Dr. Evil, you would really like to finance 

your company publicly. 

Mr. ROSS. I am going to poll each one of you on this, because I 

only have 2 minutes left. Mr. Sherman from California referred to 

this. Put it down on my level. When I go back home and I see 

mom-and-pop investors, and see my developers that are looking for 

investment capital in order to expand their business or to start 

their development, and they go to the banks and because of their 

restrictions, there is nothing in the equity markets. So, they go to 

a credit union. 

What is your opinion, if I would just poll you, we have this issue 

of whether we should raise the commercial lending capacity for 

credit unions. How do I tell my people back home, ‘‘Just wait, the 

JOBS Act will pass? We will have more investment capital out 

there for you. You don’t need to go to a credit union.’’ But in the 

meantime, they are waiting. So what is your opinion on expanding 

the commercial credit limit for credit unions? 

Mr. COULSON. It is another great access to capital. But debt is 

different than equity. And they should all be there and companies 

should decide. Equity has a lot of advantages because it is perpetual. You don’t go bankrupt issuing equity. 

Mr. ROSS. But entrepreneurs have to act. They don’t have the 

luxury of waiting for equity financing. And they need the liquidity 

so they will go to debt financing. 

Mr. COULSON. The JOBS Act was filled with great ideas for all 

levels of creating equity. But it just hasn’t happened. We are all 

waiting. 

Mr. ROSS. Mr. Ferraro, anything to add? 

Mr. FERRARO. Congressman, I look at that issue in the context 

of my own company because business development companies are 

in the business of providing that debt. We do both debt and equity. 

But really, being a lender is the bread and butter. We are here 

today promoting legislation that is all about increasing opportunity, increasing the category of investments in financial services 

companies that we can freely invest in. Some of the legislation concerns leverage limits, a lot of registration parity and reform. So 

getting to your question, essentially, those kinds of reforms that we 

are in favor of, that is the other avenue. I hope you tell them to 

visit a BDC. 

Mr. ROSS. Message delivered. I believe my time has expired, so 

I will yield back. 

Chairman GARRETT. Mr. Stivers is recognized for 5 minutes. 

20 

Mr. STIVERS. Thank you, Mr. Chairman. 

My first question is for Mr. Coulson. You listed 15 recommendations in your testimony. Do you know, are there proposals out there 

for—I know for several of them, there are, but there were a bunch 

that I wrote question marks next to. Are there folks working on 

many of these ideas or any of these ideas that you know of? I know 

a couple of folks who are working on some of these ideas. 

Mr. COULSON. They are working on some of the proposals. The 

SEC has a draft rule filing—I haven’t seen it, so I don’t know if 

it is good or bad—to better regulate SEC transfer agents. We proposed that the SEC have better disclosure around promotion on the 

Internet, which hurts all capital raisers. We did it 7 years ago. 

There were 200 comments in favor of it, but there has been nothing 

but silence. 

So these are areas where getting them to act—and I am a plumber of electronic markets. My goal is to connect broker-dealers so 

they trade things efficiently. My goal is to connect companies to 

putting information on the Internet so it is freely available and the 

market can make informed choices. But I can’t if these pieces of 

plumbing from broad ranges of the JOBS Act to small things such 

as marginability for a community bank shares—we have 600 community banks. When one of them leaves NASDAQ, there is no 

change in that company. Why shouldn’t that security be 

marginable? It is an asset in our economy. 

Mr. STIVERS. That makes a lot of sense. I did appreciate in your 

testimony where you talked about benefits of publicly traded markets, visibility liquidity, valuation capital and trust. And the fact 

that now we are basically encouraging, by how complicated we are 

making things, capital to go other directions. And I think that is 

the gist of this hearing. 

Mr. Weild, I wanted to talk about your proposal for the change 

in the tick size. I believe Mr. Duffy may be working on something 

like that. I don’t want to preempt him. But it seems like that would 

help a lot of small companies. 

Mr. WEILD. It will help not just public companies, companies 

going public, but it will help the private markets as well because 

this is the equity food chain or the supply chain, if you will. And 

by having a hole blown out of the IPO market, we don’t have capital then coming back into the private markets and then reinforcing 

itself. All of these rules which allow us to get out and promote or, 

if you will, market stocks, what they will do is they will help with 

the reallocation of assets from larger capitalization companies into 

smaller capitalization companies, which is where the job formation 

lives. And innovation lives. So it is a very healthy thing in the aggregate if you look at it in macro terms. 

Mr. STIVERS. I used to work for a securities firm, and one of the 

things I did was IPOs. I worked there for 5 years. The IPO market 

is very cyclical. And when somebody comes out and has a successful offering, either two or three lookalikes come out after it. I also 

know in the conversation with Mr. Himes earlier, he was trying to 

get at that issue. That seems to me to be part of the issue as well. 

But clearly, you need a few successful offerings for other people to 

then come behind them. And I think that is part of the problem 

with some of the smaller companies right now, too, because someVerDate Nov 24 2008 18:55 Dec 02, 2013 Jkt 081764 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\81764.TXT TERRI
21 

body has to be first. And nobody—a lot of people don’t want to be 

first in the marketplace. 

Mr. WEILD. And IPO markets are always cyclical. They still are. 

They always were. But the new cycles, the new highs— 

Mr. STIVERS. Are not as high. 

Mr. WEILD. —are lower than the old lows. That should tell you 

something. Banks are losing money in the aftermarket for small 

companies, so they don’t support the companies. The deals break 

issue price at higher rates because they are not getting supported, 

which shuts the IPO window. And somebody had asked the question before, why do these sub-$250 million market value companies 

not go public? And they are rational. It is because the success rates 

of IPOs have gone lower and lower, even for larger capitalization 

companies that been cut in half over the last 15 years, because of 

the lack of support. 

Mr. STIVERS. So your proposal for a secondary market system for 

some of those smaller companies that serve as alternative exchange, would that be similar to kind of what the pink sheets have 

been? Or tell me how you— 

Mr. WEILD. No. I think actually increasingly everything has been 

subject to the same sort of trading regulation. And what we were 

really encouraging was a governance structure that put investment 

banks, institutional investors, and issuers, they gave them all a 

seat at the table and actually focused exclusively on the needs of 

small cap markets and small cap investors, small cap issuers, just 

so that you created that core discipline, which I think is generally 

lacking, because if you go to the SEC and you listen to a lot of the 

debate, it is totally overwhelmed by large cap data, S&P 500 data. 

And that I think is really leading us astray. 

Mr. STIVERS. It overwhelms the small companies for sure. 

Mr. WEILD. Absolutely. 

Mr. COULSON. And just a point, we bought and killed the pink 

sheets with technology and transparency. So that old opaque 

phone-base is—and we have changed that. So it is not a pink 

sheets type market. Our marketplace looks a lot more like 

NASDAQ. 

Mr. STIVERS. I understand it is a lot more transparent, and it is 

realtime. 

Mr. COULSON. Like NASDAQ, when it was a marketplace for 

small companies. 

Mr. STIVERS. I am out of time. 

Thank you, Mr. Chairman, for your indulgence. 

Chairman GARRETT. The gentleman is welcome. And the gentleman yields back. 

The gentleman from California. 

Mr. SHERMAN. I think, Mr. Weild, it was you talking about the 

greater tick sizes. A company could decide to make sure that its 

shares were worth $5 rather than $50, just by issuing 10 times as 

many. Would that in effect give them a higher tick, because the 1 

cent would be on a $5 rather than a $50 per share basis? 

Mr. WEILD. It is an excellent point. And the answer is it would, 

except that in the United States, because the practice of Wall 

Street is to prohibit solicitation on stocks under $5 a share and 

keeping those stocks on margin, every issuer wants to keep their 

22 

stock above $5 a share. So, unlike other foreign markets where people will actually trade their stocks or split them down to 50 cents 

or $1 so that 1 penny on a dollar share price would be 1 percent 

incentive, in the United States, that option is effectively eliminated 

by the practice of the market from issuers. So, it doesn’t work in 

the United States. 

Mr. SHERMAN. So you could do it at $10 a share, but you have 

to keep your shares at well above $5, because they could always 

go down. You could do a stock split to go from 50 down to about 

10 as long as you are confident— 

Mr. WEILD. Right. And that has why a 10 cent tick size on a $10 

share price would be the equivalent of what we see in foreign markets that makes them work with a dollar share price with a penny 

tick size. That is why having higher tick sizes is the easiest way 

to fix this problem in the United States. 

Mr. COULSON. So if you are the CEO of a community bank, are 

you going to say, ‘‘Oh, I need a higher tick size, so I am going to 

have my stock be at $3, and then my depositors will think I am 

economically distressed?’’ We should have proper tick sizes based— 

Mr. SHERMAN. I realize there is some belief that if the share is 

selling for $50 per share, the company is stronger than if it is selling for $8 or $5 per share. That is just psychological. There is no 

basis for it. But we all can’t have shares with the value of Berkshire Hathaway. 

Is there anyone here on the panel who thinks that the greater 

tick size would be harmful to investors? At first blush, it would 

seem to, since it is in effect, more cost. Jack wants to sell the 

shares. Bob wants to buy them. And the transactions cost is greater. 

Yes? 

Mr. COULSON. If you are looking at cost based on where was the 

inside quote at the time of trade, it would look like it is more cost, 

because the way markets work now is intermediaries use what is 

called a tail trading strategy. They move the price the bid offer up 

and down as investors come in and out. So if you thicken it up a 

little bit—and we don’t agree with having tick sizes as widely 

spread as they are today. We just think you should organize them. 

If a community bank has a 19 cent spread today at $17, the debate 

is whether it is a nickel or dime increment, not a 25 cent increment. I have seen when we had increments—we used to have increments of below a dollar of half a penny—we saw much more proprietary liquidity stack up. And, that was a good thing for investors. 

Mr. SHERMAN. So, it is counterintuitive. But you think investors 

do better with a 5 or 10 cent tick rather than a 1 cent tick—minimally, or incrementally? 

Mr. COULSON. It is based on price and velocity. We really 

shouldn’t care if it is a $1 stock or a $100 stock, just to have increments that organize. They don’t sell Picassos at Sotheby’s in penny 

increments— 

Mr. SHERMAN. Let me try to get in one more question, because 

we are all focused here on publicly traded companies, which most 

businesses aren’t and don’t even aspire to be. 

23 

Mr. Ferraro, you are investing in companies that are smaller. 

What is missing, in my area at least, are loans that yield 6 to 12 

percent. In other words, if you are creditworthy enough to get yourself a 5 percent loan, I have four bankers out there in the hallway 

who will make a loan to you right now. But if you are not quite 

that creditworthy, nobody will make you the loan. What is the typical rate of interest that you charge when you are not getting an 

equity kicker? 

Mr. FERRARO. Typical rates of interest—our rates can range anywhere from 8 to 12 to 14 percent. It really all depends on the opportunity at hand, the health of the company involved. 

Mr. SHERMAN. Do you insist on full collateralization? 

Mr. FERRARO. I’m sorry? 

Mr. SHERMAN. Do you have to have as much collateral as you 

borrow? Or do you borrow against A, it is a good company or here 

is the hard asset? 

Mr. FERRARO. All different levels. Collateralized loans. Whatever 

is appropriate in the situation. 

Mr. SHERMAN. If you set up an office in the San Fernando Valley, 

make sure it is in the west or southern portion of that valley. I 

yield back. 

Mr. FERRARO. That is what we like to do. 

Chairman GARRETT. Mr. Huizenga is now recognized. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Mr. Hansen, I do appreciate you for staying on message about 

H.R. 2274, when my colleague Mr. Fincher had asked what your 

one thing is. And I do want to get to that. I want to ask everybody. 

But if you could, really quickly, this has been a recommendation 

from the SEC working group and forum for a number of years. I 

think 2006 was the first time it came up. Why has the SEC not 

taken this recommendation? Why do we find ourselves at a point 

now where we need to use a legislative tool? 

Mr. HANSEN. I think that is a great question. I think the answer 

is essentially that the SEC has a long to-do list that is directed by 

Congress. And so, it is focused on those types of priorities, which 

to some extent reflect national crises with which they have had to 

deal. In the area of M&A brokers, small businesses, medium-sized 

businesses, this is not an area where there have historically been 

issues. There haven’t been frauds. The parties rely upon their lawyers. They negotiate transactions. And they are not relying upon 

Federal securities laws for those protections. 

So I think it is not perceived as an urgent issue, except it is be- cause there are estimated to be $10 trillion of privately held companies in the process of being sold as Baby Boomers retire. And as 

a result of that, these sellers and buyers each need professional advice. It is an urgent issue. So, I think it does necessitate Congress 

stepping in to say, ‘‘We need to simplify this.’’ 

Mr. HUIZENGA. All right. Thank you. Here is what I would like 

to do in the remaining 3 minutes. I would like to quickly hear from 

each one of you. What do we need to do next? We have one piece 

of legislation that we are talking about. I think, Mr. Ferraro, you 

have talked about a couple of other pieces. 

And I know, Professor Langevoort—it takes a Dutch guy to know 

a Dutch name—you had said in your testimony that the JOBS Act, 

24 

we need to have some more patience, we don’t want to rush this, 

is kind of how I am interpreting what was there. But I am curious, 

what can we do next, to have a next step so that we can continue 

some momentum here? And I would like to have everybody try to 

give us a quick— 

Mr. LANGEVOORT. Sure. I think you have heard actually from a 

number of people. We need to transition to a much more open and 

efficient market for small companies, which is going to take a large 

number of steps, much longer than we have today; that we are 

going to have to rearticulate what disclosure demands be put on 

smaller and medium-sized companies. I think if we can get competing platforms for smaller companies, get it fair and open so that 

investors are attracted to it, it is probably the next best step. I 

think we have to see what the JOBS Act will bring when the SEC 

acts. I think that will be soon. But I think that new market is our 

next— 

Mr. HUIZENGA. There are a lot of us hoping they will act soon 

on that. 

Mr. Weild? 

Mr. WEILD. It is essential to get tick sizes up, and it is essential 

to get the JOBS Act implemented and to worry about what can go 

right and come back and fix it around the edges if you have to 

course-correct. But the paralysis is just killing people. We have 20 

percent of kids in the United States living below the poverty line. 

And if you read Professor—I am trying to think of his name— 

Moretti’s book, ‘‘The New Geography of Jobs,’’ there are five service 

sector jobs created for every technology job. There is a multiplier 

effect at stake here. So, we have to get moving. 

Mr. HANSEN. I would add that while you were looking at issuerrelated questions on capital formation, you should not overlook the 

fact that the service providers, the broker-dealers, the M&A brokers, the private placement type brokers or finders who are raising 

capital or need to raise capital, would want to be compensated for 

raising capital. They don’t enjoy any type of exemption that the 

issuers do. An issuer may have an exempted registration, but it is 

still a security. It still takes a registered broker-dealer, if they are 

going to get paid, to raise the capital or to sell the business. So I 

think that what you need to look at is the fact that the service providers in this marketplace, private as well as public, also have concerns that need to be addressed. 

Mr. FERRARO. Congressman, I think you need to bring BDCs 

from 1980 into 2013. And the suite of legislation that is currently 

on the table does that. Predominantly, we are removing arbitrary 

barriers to investment in certain kinds of investment areas to financial services. It is a much different universe today than it was 

back then. On top of that, I would also highlight from our legislative agenda the offering reform. Items, simple items such as incorporation by reference, which most every other public company in 

America can do, saving money on attorneys, money on accountants, 

all costs that get passed on either in the form of the percentage on 

the loans that we are charging or less of a dividend that can be 

distributed to our shareholders. There is no need for any of that. 

And it is an area where I think having legislation is the most effective and efficient means forward. 

25 

Mr. HUIZENGA. I know my time has expired, so it is up to the 

chairman here. 

Chairman GARRETT. The gentleman yields back. 

I now recognize the gentlelady from New York. 

Mrs. MALONEY. I thank the chairman for yielding, and I apologize to my colleagues and the chairman; there were three bills out 

of the Financial Services Committee that were on the Floor being 

debated, and I wanted to be part of that debate. 

Chairman GARRETT. So, you wanted to be down there to support 

those? 

Mrs. MALONEY. I was. I did support them. I want to welcome all 

the panelists today, particularly Joe Ferraro, who is from the great 

City of New York. And my colleague, Mr. Sherman, said he wanted 

him to open up an office in California. I am very pleased that Mr. 

Grimm and I have him in the great City of New York. 

Welcome, and thank you for being here. 

Mr. FERRARO. Thank you. 

Mrs. MALONEY. Regarding the business development companies, 

has the BDC community asked the SEC to modify any of its rules 

to accommodate the concerns that you have expressed here today? 

And if so, which ones? 

Mr. FERRARO. It has. Colleagues at Ares and Apollo have already 

talked to the SEC about some of their legislation. Our legislation 

is relatively new, and we are planning to talk to the SEC in the 

next couple of weeks about those pieces. And there is a lot in there 

where—going back to comments I had made previously, there is 

much that would benefit by congressional action versus anything 

like the SEC rulemaking. For example, the reforms that we are 

proposing to open up what is called the 30 percent basket in the 

business and basically make investments in financial services not 

captive to that limitation is something that really needs congressional action more than SEC action. 

On the SEC action side, there have been in particular offering 

reform ideas on the table. Incorporation by reference, electronic 

road shows, just simple things from which many other companies 

in the public space already benefit. And there is something where 

the rulemaking hasn’t happened, and if we are at the table now to 

further reform BDCs both in those areas and others that are mentioned in the written testimony, it just makes sense and it is more 

efficient to get it all done now in this process. 

Mrs. MALONEY. Some of the changes that you have mentioned 

can be done by SEC action, correct? 

Mr. FERRARO. They can. I point to the offering reform for that. 

I think the SEC has always been very responsive to us. I think 

what happens is the particular division of the SEC that deals with 

business development companies also oversees hundreds of mutual 

funds. And there are just constraints on resources and time. So it 

just makes more sense to do it this way. 

Mrs. MALONEY. And is it necessary—aside from the time constraints on the SEC—for Congress to legislate these changes? 

Mr. FERRARO. I believe it is, yes. 

Mrs. MALONEY. So they cannot be done by the SEC? They have 

to be done by Congress? 

Mr. FERRARO. Many of them cannot be done by the SEC alone. 

26 

Mrs. MALONEY. Would anybody else like to comment on some of 

the really salient barriers to small business growth that you feel 

are there? 

Mr. COULSON. Just two quick points. The promotion proposal of 

transparency of the people behind it; if we don’t fix this, the JOBS 

Act, the advertising general solicitation of securities under the 

JOBS Act, these same people will be hiding out and doing that. So 

transparency of who are the people behind offerings is really one 

of the most important things for investors, knowing who it is. 

Second, it is not this committee but taxes for smaller public companies, the easiest way to attract investors is to pay a dividend on 

your shares. But small corporate companies don’t have the efficiency of the REIT structure. And if we did that, it would be the 

silver bullet to bringing more profitable public companies and ones 

where investors could track by income rather than just future potential. And that is something to talk to your colleagues about because that really would change the dynamics for smaller public 

companies because they are squeezed between the debt bias for interest with private equity firms. And larger global companies having much lower tax rates. My company pays a 39 percent tax rate. 

We also pay more for our tax accountants like Grant Thornton 

than we do for our auditor at Deloitte. We don’t get a great rate, 

and that is something that needs to be worked on, because the New 

York Times says large, large S&P 500 companies pay a 29 percent 

rate. And IT companies pay a 22 percent rate, so we are at a capital disadvantage. And we are also at a disadvantage of providing 

returns to our investors. 

Mrs. MALONEY. So why are you paying 39 percent when larger 

companies are only paying 29 percent? Why is that happening? 

Mr. COULSON. Sadly, we are in New York State. And I love New 

York. It has a great community of people. We are also—unlike the 

New York Stock Exchange, which developed software in Ireland, 

we develop our software in our offices in New York City, and our 

office is in Washington, D.C. So we are at a disadvantage for capital. And that is a point. It is like the REIT business has been 

hugely successful in bringing income-producing companies public. 

So why aren’t we taking that known process to smaller public companies and having a process to bring in, not only companies that 

are needing a lot of capital for growth, but companies which are 

creating income, because it flows through to the other side of the 

equation. If investors own dividend-paying securities in their retirement, they beat inflation. Debt eventually gets beat by inflation. So we should be incentivizing equity. It makes our system 

more stable. It makes our financial statements more true because 

you can tell the income a company is paying. It makes our marketplaces more efficient. And it opens the door for smaller companies 

being public. 

Mrs. MALONEY. Thank you. 

My time has expired. 

Chairman GARRETT. Thank you. 

The other Representative from New York, Mr. Grimm. 

Mr. GRIMM. Thank you, Mr. Chairman. I appreciate it. Thanks 

for holding this hearing. 

I want to thank everyone on the panel today for your testimony. 

27 

Welcome to the committee. We appreciate your input. 

I would like to try to keep it a little bit cogent. We were discussing BDCs, so, Mr. Ferraro, if I could go to you to discuss a little bit more. I have legislation, H.R. 1800, the Small Business 

Credit Availability Act—fancy terminology—to somewhat modernize the way small development companies with BDCs are regulated. I believe BDCs provide an important service for providing financing to the small and medium-sized firms that we just spoke 

about. And they often have difficulty obtaining traditional bank financing. So I see the value in that. And these are the exact kinds 

of firms that are responsible for a lot of the new job creation. 

So it is apropos, since we have discussed so much about the unemployment rate. This bill would allow BDCs to borrow more than 

they do now: $2 for every $1 of assets that they hold versus the 

current one-to-one structure. In addition, it would streamline the 

forms of procedures by the BDCs for securities offerings. I think 

you are familiar with that. And bringing them more in line with 

some of the publicly traded companies. As the VP of a BDC, what 

kind of an impact do you think that would have if implemented on 

job creation just as a whole? 

Mr. FERRARO. I think it would have a tremendous impact. Everything that you are talking about I think the entire suite of BDC 

legislation essentially says to business investment companies, go 

out, raise capital, pass that capital on to small and medium-sized 

businesses. And when you do that, not only a lot of times are you 

helping those businesses to grow when you are talking about, in 

my estimation, financial services businesses in particular, they 

then go on and help additional businesses to grow. The typical company that comes to us is looking for that level of investment that 

results in the creation of a factory, a new expansion of a warehouse, a new line of business. And because of that and the rigorous 

due diligence process that we have, we kick the tires. We say, okay, 

is this the kind of company that we believe can get there, that we 

would put our shareholders’ money behind and in turn earn our 

shareholders a good return? 

Mr. GRIMM. On that exact point, could I just expand on another 

question, since you brought it up, the companies that your company finances, what is their ability in general to access capital to 

grow their business via bank loans or capital markets? 

Mr. FERRARO. It is generally limited. I think as a lot of my colleagues have mentioned, when you are talking about small and medium-sized businesses, your traditional banks can be more hesitant 

to lend, and the sad fact is, after what we have experienced in the 

past few years, a lot of the banks just aren’t there and lined up 

to provide that kind of capital. So we service a very critical and important area of financing for these companies because they really 

can’t get the money elsewhere. 

Mr. GRIMM. I feel that a two-to-one leverage ratio is conservative 

by any standard. But can you just tell us, how does that compare 

with ratios used by other financial firms? 

Mr. FERRARO. Oh, it is very, very low. When you talk about a 

traditional bank, you might see a 12-to-1 leverage. I know people 

at different times in this hearing have talked about multiples way 

28 

beyond that, that are just stunning. Anything we are talking about 

in the reform is still highly, highly conservative. 

Mr. GRIMM. And on that note, for those who think, wow it seems 

like you are doubling. It seems like a lot of leverage, in comparison, 

I would say it is not even close to what other financial institutions 

have. It is extremely conservative. But for those naysayers, what 

level of losses would a BDC need to experience to wipe out its equity at these ratios? 

Mr. FERRARO. At those ratios, I don’t really have the numbers 

with me. 

Mr. GRIMM. Just ballpark, though, just to give an idea. 

Mr. FERRARO. I don’t want to guesstimate, but at the same time, 

it would have to be a substantial degradation of the book to quite 

a significant level. 

Mr. GRIMM. As far as you know, have we ever seen losses like 

that— 

Mr. FERRARO. No. 

Mr. GRIMM. —experienced by BDCs, even during the height of 

the financial crisis? 

Mr. FERRARO. Not to that extent, no. 

Mr. GRIMM. Okay. I see my time is just about out. Thank you 

very, very much. And thank you all on the panel. 

I yield back. 

Chairman GARRETT. Thank you. 

The gentleman yields back. 

Mr. Carney, you are recognized for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. And thank you for having this hearing today. I apologize for arriving late. I realize I may 

have missed your opening statements and a lot of the discussion 

and debate. Professor Langevoort, if I am pronouncing your name 

correctly or at least close enough, I have just a couple of questions. 

You mentioned at the beginning of your testimony a reference to 

the JOBS Act, and that some of the rules are still being completed. 

You also say in the first paragraph that all good policymaking 

takes time and can’t be rushed if it is to be done well. So it may 

be a little bit premature to ask this question. 

But I was one of the sponsors of the IPO onramp part of the 

JOBS Act. And I wonder if you could comment on what you have 

seen on that aspect of the Act itself, and whether we have any results there, recognizing that it may be too early to judge. 

Mr. LANGEVOORT. Yes. Obviously, that was self-executing, so we 

saw the first effects right away. Ernst & Young just issued a report 

on the first 12 months of onramp. So we have seen data. Perhaps 

due to our economy, factors that have nothing to do with the JOBS 

Act, you are not seeing a larger number of IPOs than you saw previously. The growth is not necessarily in emerging growth companies, even though 80-some odd percent of all of the IPOs are 

emerging growth companies. So I am going to play right into your 

hands. We will know a lot more. 

Mr. CARNEY. It is too early to tell. Sir, are you familiar with 

some of the discussion that led up to some of the provisions in that 

Act? It is my understanding, again, as part of the team that with 

my colleague, the prime sponsor, Mr. Fincher from Tennessee, it 

started out of a conference that the Treasury Department had of 

29 

people in the high-tech, primarily Silicon Valley world, Silicon Valley bank. From that, interest was generated, and there was a working group that met several times. And they came up with a list of 

ideas. What do you think, are there other ideas that didn’t become 

part of the IPO Act that we might think about now? Or what do 

you think about the ideas that became the provisions in that Act? 

Mr. LANGEVOORT. As I indicate in my testimony, I think with 

more time—and this is not, by any means, pointing any fingers— 

there could be a much more rational, comprehensive articulation of 

what we should expect in terms of governance and disclosure from 

emerging companies. I have a list of things I would have added to 

the exemptions that aren’t there. There are a couple on the list. 

Mr. CARNEY. Could we get that list? It is not in your testimony. 

Could we get a list of those? 

Mr. LANGEVOORT. I would be happy to give you a list, but I think 

they are fairly predictable. 

Mr. CARNEY. You referenced the SEC’s Advisory Committee on 

Small and Emerging Companies and a number of recommendations. I haven’t seen that. I assume that we could get our hands 

on that as well. Are they similar kinds of recommendations to what 

you have on your list? 

Mr. LANGEVOORT. There are a number of recommendations. One 

is to conform the disclosures for relatively smaller companies to the 

list that was put in the JOBS Act for emerging growth companies. 

So to some extent, it piggybacks on what you all wrote. But there 

is also a call for a more comprehensive look at what we ask for 

from smaller companies, and that goes beyond the JOBS Act. 

Mr. CARNEY. And one last question: Is there anything that gives 

you pause? At the end of your testimony, you talk about investor 

protections that give you pause in terms of—there is a balance to 

be struck here, but for sure in terms of what is required and reporting and the like as we move forward. 

Mr. LANGEVOORT. We are waiting for the rules on general solicitation. I think it was 25 years ago that I first wrote calling for the 

end on the ban on general solicitation. So, I completely support the 

effort. It is, however, going to be new territory. And there are going 

to be abuses. So we are going to find out whether the SEC has the 

capacity, the resources, whether FINRA has the capacity, the resources, to be watching this space, because for all the good that is 

going to be done, there are going to be people at risk. 

Mr. CARNEY. Thank you very much. My time has expired. I 

apologize that I don’t have enough time for questions for the rest 

of the panel, but thank you all for coming, and for your ideas and 

advice. 

Chairman GARRETT. Mr. Mulvaney, you are recognized for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Mr. Ferraro, I want to go back to some of your original testimony 

and expand a little bit on that, and some of your written testimony 

and talk about H.R. 1973, not the least of which because it is my 

piece of legislation. But I know you and I have talked about it. I 

have spoken with folks in your industry about it. Very briefly, if 

we set the stage here, you go back to the current rules, you go back 

a couple of decades, and you are limited in your ability to invest 

30 

in financial services companies, small banks, community banks, 

those types of things. My bill would seek to remove that restriction. 

Tell me why that is important. Tell me what that means to the 

BDC industry. Tell me what opportunities that creates. Tell me 

what you could do in the future that you can’t do now. If you have 

examples of things that you have tried to do in the past, but you 

can’t do because of that rule. Help us understand the practical realities of why those rules need to be changed. 

Mr. FERRARO. Sure. It will be my pleasure. What has happened 

over the past 33 years in the existence of BDCs is that the area 

of potential investment in financial services type businesses has 

itself expanded. When the BDC rules were originally enacted, there 

was just an arbitrary line put that said 30 percent of your assets 

can only be invested in certain kinds of companies. Typically, they 

are foreign or they are other types of investment companies, and 

we are not interested in changing that. But there is one area where 

there is limitation on financial services companies. I still can’t find 

the policy justifications or reasons behind it, even if you go back 

to the legislative history. The practical reality for businesses in the 

BDC space is that we have these kinds of companies that come to 

us. 

A good example is Nationwide Acceptance out of Chicago. It is 

an auto lender. A wonderful company. It creates jobs. It helps families get autos. They can take their kids to school. They can go to 

work and so on. We would like to invest in more companies like 

that. Depending upon our asset balance at a particular time, if we 

had another attractive Nationwide come to us, we may not be able 

to do that simply because that investment may be slightly over 30 

percent of our assets. And so when I have that valuable company, 

when I have that potential great investment before me, and I am 

being asked by that company, why can’t you provide capital to us, 

all I can say is, well, there is a line set that tells me that I can’t. 

And beyond that, I don’t have a great explanation as to why. 

Mr. MULVANEY. Mr. Coulson, do you want to comment on that? 

You look like you have a comment. 

Mr. COULSON. No. It is the constant regulation away of capital, 

which is frustrating, because I hear it from the community banks 

that they are always constrained on going to their best markets for 

capital, their best seekers and it is a more personal frustration 

that— 

Mr. MULVANEY. So the strong argument actually helps the community-based financial institutions as well? 

Mr. COULSON. Yes. 

Mr. MULVANEY. Does anybody know, by the way, why the rule 

was there? Does anybody have any insight? I think you are right. 

It sounds like it is random. It sounds like it is just an arbitrary 

number. Does anybody have any background on why that is? In 

fact, it strikes me—and to get back to the bill—Mr. Sherman was 

here a while ago and he wants you to come to California into his 

district and start offering your services. And knowing the little bit 

I know about his district, that might be the best way to get there. 

Mr. FERRARO. It absolutely would be, yes. 

Mr. MULVANEY. Thank you. I will yield back the balance of my 

time to the chairman. Thank you. 

31 

Chairman GARRETT. Okay. On that note, we will now turn to Mr. 

Duffy for maybe the last word. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Unemployment right now stands at 7.6 percent. This has been 

one of the longest and toughest recoveries since the Great Depression. We are having a jobs issue in America, and it is affecting our 

families. Many of them want to get back to work. They want to 

make a better living. They want to get more dollars into their family coffers. 

The greatest way to generate jobs in America is to make sure 

that our small businesses and our startups are growing and expanding and creating those jobs, the small businesses that are the 

best generators. If our small businesses don’t grow, neither do our 

American jobs. Recently, our small cap companies have had a difficult time accessing capital and, therefore, growing their businesses. Capital issues for small cap companies, I would argue, have 

coincided with decimalization. If we want a vibrant job market and 

job growth, we need to have a vibrant market for our small cap 

companies. 

So, I want to ask the panel as a whole kind of a two-part question. One, do you all agree with the SEC Chairman that one tick 

size doesn’t fit all? And do you agree that we should implement a 

tick size pilot program to determine if wider trading spreads would 

improve liquidity for small cap companies and increase economic 

incentive for investors? We have held a long conversation about 

this. But I would like everyone to weigh in on what you think 

about those issues. Mr. Coulson? 

Mr. COULSON. I completely agree. We need liquidity. We have 

changed our marketplace into a series of orders instead of intermediaries. And the idea that marketplaces should just be these 

nice investors lining up and matching and never have a liquidity 

provider is a mistake. We need broker-dealer participation in the 

marketplace providing liquidity, and we need to incentivize it, but 

we also need to make sure that the tick sizes are not too wide. We 

can’t artificially widen spreads. That would be a step backwards. 

But if we organize the marketplace, and we have increments that 

reflect the trading velocity. 

We have Fannie Mae and Freddie Mac trades on our marketplace. Fannie Mae trades 78,000 times in one day. It doesn’t need 

tick sizes. That would be bad. But for companies that trade 100 

times a day, they need organization. They need liquidity. And if we 

start seeing—because we also have a little different viewpoint. 

With tick sizes, because it will give a little more profitability to 

market makers, we should have them show larger sizes. And that 

way, we get a multiplier effect of more liquidity displayed. And if 

we do that, we are guaranteed the tick sizes will succeed. FINRA 

lowered our displayed sizes in our marketplace. And we saw liquidity go away. 

Mr. DUFFY. I want to make sure I get to everyone. So, I will go 

down the line. 

Mr. FERRARO. Congressman, I will respectfully defer to my colleagues. I don’t believe the BDC community has established an 

opinion on this one. 

Mr. DUFFY. Fair enough. 

32 

Mr. HANSEN. I would generally defer to them, too, except to observe the fact that small business issuers as well as small investors 

rely upon there being available research about these companies. 

And you would need have a way of funding that. I think the unintended consequence, as described by the other witnesses, has 

been— 

Mr. DUFFY. Do you believe that the tick size would address that 

issue? 

Mr. HANSEN. It could. And on that, I will defer to the other experts in the markets. 

Mr. DUFFY. Mr. Weild, I think I know where you stand on this, 

but— 

Mr. WEILD. Clearly. But I will tell you that everybody understands that at zero tick size, the entire stock market implodes. So 

at a penny tick size, one size fits all is idiotic. When we had quarter points for large cap stocks, it charged investors too much 

money. Now we have 1 penny tick sizes, one-size-fits-all. It is a disaster. It is catastrophic for the small cap markets. So I couldn’t 

agree more with the Chairman of the SEC or with your views on 

getting higher tick sizes into smaller capitalization companies to 

jump-start the U.S. economy. 

Mr. DUFFY. Mr. Langevoort? 

Mr. LANGEVOORT. Yes. Interference with free market is to be preferred, again. But we do need to incentivize this activity. Finding 

the right balance is the key, and a pilot program is the right way 

to do that. 

Mr. DUFFY. Thank you all for the answers. I want to go to an 

issue that the gentleman from California brought up, Mr. Sherman. 

He was talking about how the higher cost of these transactions 

might affect our investors and traders. But isn’t it fair to say that 

if there is no liquidity, these trades aren’t happening, and therefore, there are no investors to be heard? And illiquid stocks don’t 

help investors. They don’t help the companies. They don’t help the 

economy, and therefore, if we can improve the liquidity, we are improving the market for our investors’ companies and the economy. 

Mr. COULSON. Liquidity is a virtuous circle, and we now have an 

incentive for—if you are a liquidity provider and intermediary, you 

don’t provide the liquidity on the bid offer. You provide the liquidity at the tail end of an investor coming into the market. So we 

would be changing the liquidity provider model so there is more 

displayed liquidity on the bid offer. And what you would see is, if 

you see a bid offer with liquidity on both sizes, you are much more 

likely to take the offer or hit the bid, because you see enough liquidity to do what you want to do. And that creates the virtuous 

circle. And also, if there is displayed liquidity in my marketplaces, 

other broker-dealers, if there are 2,000 shared offered, other 

broker-dealers will compete and sell 5,000 shares at that price 

point. So we have competition with displayed liquidity, which again 

multiplies the liquidity. So if we only have 100 shares there, there 

is nothing to multiply. 

Mr. DUFFY. My time has expired. But just quickly, stay tuned. 

We are going to draw up a bipartisan bill that will provide us a 

pilot program to expand our tick sizes. And hopefully, we will see 

33 

the end result as an end positive. I yield back the remainder of my 

time. 

Chairman GARRETT. On that bipartisan note, we bring this hearing to an end. I want to thank all the witnesses once again for not 

only your testimony today, but for your written testimony as well, 

which has already been reviewed by our staff. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

With that, this hearing is adjourned. 

[Whereupon, at 2:55 p.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

June 12, 2013 

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OPENING STATEMENT OF REP. BILL HUIZENGA 

House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises 

Hearing on Reducing Barriers to Capital Formation 

June 12,2013 

Chairman Garrett and Ranking Member Maloney, thank you for holding this important hearing to discuss 

ways to reduce barriers to capital formation. 

The mission of the Securities and Exchange Commission is to protect investors, maintain fair, orderly, 

and efficient markets, and facilitate capital formation. As part ofthat mission, the SEC was mandated by 

law to conduct an annual forum focusing on small business capital formation. 

The SEC Government-Business Forum on Small Business Capital Formation has held an annual 

gathering since in 1982. The purpose of the Forum is to "provide a platform to highlight perceived 

unnecessary impediments to small business capital formation and address whether they can be eliminated 

or reduced." 

Since 2006, the SEC's Forum has highlighted the merger and acquisition broker (MAB) proposal as one 

of its top recommendations to help small businesses. The MAB proposal would address securities 

regulation of business brokers and merger and acquisition advisors who are in the business offacilitating 

the purchase and sale of privately held companies. This proposal would significantly reduce their federal 

regulation compliance costs, which can initially exceed $150,000 and after that, cost $75,000 per 

additional year. However, the SEC has not acted on this recommendation. 

That is why r, along with Reps. Brian Higgins and Bill Posey, introduced H.R. 2274, the Small Business 

Mergers, Acquisitions, Sales, and Brokerage Simplification Act. This bipartisan bill would reduce the 

regulatory costs incurred by the buyers and sellers of smaller privately held companies for professional 

business brokerage services. 

It has been estimated that approximately $10 trillion of privately owned, main-street mom and pop type 

businesses will be sold or closed as baby boomers retire. Business brokers playa critical role in 

facilitating private business mergers, acquisitions, and sales of these main-street companies. By 

simplifying the regulation and reducing the cost ofthese business brokerage services, these privatelyowned companies would be able to safely, efficiently and effectively be able to sell their company while 

preserving and protecting jobs at these companies. 

Mr. Chairman, I look forward to hearing from our distinguished panel. 
37 


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TESTIMONY OF R. CROMWELL COULSON 

PRESIDENT AND CEO OF OTC MARKETS GROUP INC. 

BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT 

SPONSORED ENTERPRISES 

COMMITTEE ON FINANCIAL SERVICES 

HEARING ENTITLED "REDUCING BARRIERS TO CAPITAL FORMATION" 

JUNE 12, 2013 

INTRODUCTION 

Chairman Garrett, Ranking Member Maloney and members of the Capital Markets and 

Government Sponsored Enterprises subcommittee, my name is R. Cromwell Coulson, 

president, CEO and director of OTC Markets Group Inc., operator of the OTCOX®, OTCOB® 

and OTC Pink® marketplaces where 10,000 U.S. and global securities trade.' I appreciate the 

opportunity to testify before the subcommittee today on the topic of "reducing barriers to capital 

formation," As an operator of public marketplaces for small companies and a publicly traded 

small company in our own right, I hope I can provide the committee with greater insight into 

barriers to capital formation that should be removed. 

Our self-interest in changes to regulation is very clear. We want more openness so our public 

markets are more inclusive, we want better transparency so our public markets are better 

informed, and we want more connectivity so our public markets are more efficient. Finally, we 

want to remove unneeded regulatory burdens in order to reduce the cost and complexity 

imposed on smaller public companies. 

We have the following recommendations to members that will help accomplish these goals: 

1 eTC Markets Group Inc. (OTCQX; OTeM) operates Open, Transparent and Connected financial marketplaces for 

10,000 U.S. and globa! securities. Through our eTC Unk® ATS we directly link a diverse network of broker-dealers 

that provide liquidity and execution services for a wide spectrum of securities. We organize these securities into 

marketplaces to better inform investors of opportunities and risks - OTCQX®, The Best Marketplace with Qualified 

Companies; OTCQB®, The Venture Stage Marketplace with U.S. Reporting Companies; and OTC Pink®, The Open 

Marketplace with Variable Reporting Companies. 

Our data-driven platform enables investors to easily trade through the broker of their choice at the best possible price 

and empowers a broad range of companies to improve the quality and availability of information for their investors. To 

leam more about how we create better informed and more efficient financial marketplaces, visit 

www.otcmarkets.com. 

OTC Link® ATS is operated by OTC Link® LLC, member FINRAISIPC and SEC regulated alternative trading system. 

OTC Marl<ets Group Inc. 

304 Hudson Street, 3rd Floor 

New York, NY 10013 

E info(a:otcmarkets,com 

T +12128964400 W otcmarkets,com 
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1) Demand that the SEC complete rulemaking on Title II, Title III and Title IV of the Jobs 

Act in a timely manner, without overly complicated or costly barriers to companies 

raising capital under these new regulations. 

2) Update Securities Act Section 17(b) to require increased disclosure of stock promotion 

activity and greater transparency into the people behind it. 

3) Improve the share issuance process through better regulation of transfer agents and 

more thoughtful information exchange between transfer agents, broker-dealers and the 

Depository Trust Company (OTC). 

4) Require that insiders and affiliates that buy or sell non-SEC reporting companies publicly 

disclose transaction information in a manner similar to SEC Forms 3, 4 and 5. 

5) Bring more transparency to holders of non-exchange traded securities by expanding 

Section 13(f) of the Exchange Act to require that institutional investment managers 

disclose their holdings of all publicly traded equity securities. 

6) Implement a quote and order price increment (tick size) pilot for all publicly traded small 

companies. The pilot should include increased minimum displayed size requirements for 

broker-dealer proprietary quotes and orders. 

7) Reject any attempt to create a "trade-at rule" that would require orders to be routed to 

the best publicly displayed price. Such a rule would effectively reduce choice and 

innovation, decrease competition between market centers and impose increased and 

unnecessary costs on investors. 

8) Support diverse choice and healthy competition among trading venues, and reject any 

regulation or policy that would lead to giving a "centralized trading monopoly" to the 

listed stock exchanges or any other trading venue. 

OTC Markets Group Inc. 304 Huds.on Street. 3m Roar New York. NY 100'!3 

E info@otcmarkets,com 

T -+-1 212896 4400 W otcmarkets.com 
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9) Make margin-eligible all non-penny stocks that are actively traded on "established public 

markets" and make the SEC responsible for determining the margin eligibility of all 

equity securities. 

10) Make all non-penny stocks that are actively traded on "established public markets" 

exempt from state Blue Sky secondary trading restrictions. 

11) Update the SEC definition of penny stocks to take into account interim capital raises. 

12) Allow companies to transparently pay market makers in order to initiate quotations in 

securities, provide tighter spreads and make more liquid markets. 

13) Allow smaller SEC reporting companies to opt out of XBRL filings until the cost is vastly 

reduced. 

14) Remove antiquated Section 17B of the Exchange Act. 

15) Institute a 25% corporate tax rate and deductibility of dividends for publicly traded 

smaller companies. 

Of course, we need our marketplaces to be well regulated, but it is important to acknowledge 

that the U.S. equity markets have the most regulated trading of all our financial markets. The 

broad anti-fraud provisions in Section 10(b) of the Exchange Act and its related rules already 

give regulators a broad sword against those who seek to commit fraud and other crimes in the 

securities markets. 

Before I begin, I would like to give some background on the history of our company as it will 

provide context to our testimony. In 1997, lied a group of investors to acquire OTC Markets 

Group's predecessor business, the National Quotation Bureau. At the time, trading was a 

largely phone-based process with little price transparency, electronic connectivity or information 

availability on the companies that traded. This made for an opaque and inefficient market with 

high transaction costs and little liquidity. 

ore Markets Group Inc, 304 Hudson Street, 3rd Floor 

New York. NY 10013 

E info@otcmark.ms,com T +12128964400 W otcrnatkets.com 
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It is easy to forget that less than twenty five years ago there was no consumer Internet brimming 

with information about companies and people, no Yahoo! Finance with a wealth of information 

and no online brokers for investors to trade electronically. Company brochures, financial 

statements and investment advice were distributed in paper through the mail, and stock prices 

were obtained through a phone call or visit to a broker. Clearly, times have changed, and we 

must update our securities laws to reflect these changes so investors and markets are 

empowered with more information when they analyze, value or trade securities. 

OPENING PUBLIC MARKETS TO MORE COMPANIES AND INVESTORS 

At OTC Markets Group we operate Open, Transparent and Connected marketplaces, and our 

mission is to create better informed and more efficient financial marketplaces. We started 

transforming our marketplaces with a real-time quotation service for broker-dealers to provide 

price transparency and best execution in off-exchange securities. We also developed the 

website that became www.otcmarkets.com. to give investors around the world instant access to 

high-quality financial data. 

In 2003, we launched our electronic trade messaging platform, which later became OTC Link® 

ATS, operated by OTC Link LLC, our wholly-owned subsidiary and an SEC registered 

alternative trading system and FINRNSIPC member broker-dealer. The launch of electronic 

trading in 2003 kicked off a series of changes in technology, transparency and regulation that 

has transformed trading into our modern, efficient electronic system with transparent and wellregulated2 broker-dealer trading. We have a diverse community of broker-dealer liquidity and 

execution providers showing their best quotes and orders and directly interacting with each 

other across our network. In short, we create the data technology plumbing for securities 

trading by market makers and agency brokers. 

Ten years later, our marketplaces are home to 10,000 U.S. and global securities that traded a 

combined dollar volume of $135 billion in 2012, including over 3,000 ADRS and ordinary shares 

of global companies that are also listed overseas and primarily follow SEC Rule 12g3-2b by 

providing their home country disclosure in English, over 3,000 SEC registered companies 

current in their reporting, and over 600 community banks that report to their U.S. banking 

regulator. We also have hundreds of smaller U.S. companies that are exempt from SEC 

2 See attached Regulation of Trading Summary 

OTC Markets Group Inc. 304 Hudson Street. 3rd FIOOl' 

New York. NY 10013 

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W otcmario:ets.com 
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reporting because of their smaller number of shareholders but use our services to publicly 

distribute their disclosure to investors. OTCOX, our best marketplace with qualified companies, 

had a dollar volume of $22.9 billion last year and an aggregate market capitalization of $1.3 

trillion. 

The leading electronic broker-dealers that trade NYSE and Nasdaq securities also use their 

technology to trade OTCOX, OTCOS and OTC Pink securities, with the result that the investor 

trading experience is now almost identical. The extensive market data, company data and 

security information provided by our platform and our Issuer Services business can be found at 

most of the major online brokers, market data vendors and financial portals, including 

Sioomberg, Reuters, Schwab, E*Trade, TD Ameritrade, Scottrade and Yahoo! Finance. 

Since our OTC link ATS serves broker-dealer subscribers that need to deliver best execution to 

investors in a wide spectrum of securities, we see companies along a continuum, ranging from 

those that act private or have financial reporting difficulties to those that provide the highest 

level of public disclosure. We help identify these companies based on the quality of their 

financial disclosure by segmenting them into three marketplaces - OTCOX, our best 

marketplace with qualified companies; OTCOS, our venture stage marketplace with U.S. 

reporting companies; and OTC Pink, our open marketplace with variable reporting companies. 

Our marketplaces, like all public markets, are better informed and more efficient when there is 

transparency of trading activity and company information. We work with broker-dealers on the 

trading process, but need to engage companies to provide better information for investors. 

Smaller companies are not owned by big institutions or index funds. Stock pickers own small 

company's shares, and stock pickers are looking for quality companies, with quality 

managements and quality disclosure so they can make intelligent investment decisions. 

Transparency builds trust, and we have designed our tiered marketplaces to encourage 

companies to make more current information publicly available. As companies climb to their 

highest achievable marketplace and take advantage of services that enable them to provide 

more information to their investors, whether it be our OTC Disclosure and News Service or our 

access to our Real-Time Level 2 (OTCOX, OTCOS and OTC Pink) market data, their public 

trading becomes more informed and efficient, their shares more liquid, and they experience 

improved access to capital. 

OTe Markets -Group Inc, 304 Hudson Street, 3rd Floor 

New York. NV 10013 

E info@otcmarkets,com. T 412128964400 W otcmarkets.com 
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We have created alternative reporting standards that provide a disclosure framework for nonSEC reporting companies seeking to make adequate current information publicly available3

• 

With our OTCQX U.S. Disclosure Guidelines and our OTC Pink Basic Disclosure Guidelines, we 

provide a structure and format for a wide variety of companies to publish and distribute their 

disclosure and make it freely available on the internet4 Our services ensure company data is 

disseminated to market data distributors and financial portals, and that their financial statements 

are converted into XBRL to be made available on Yahoo! Finance5 and to financial database 

providers. Our OTCQX U.S. Disclosure Guidelines, which we follow when posting our own 

disclosure, requires an audit by a PCAOB firm and provides comprehensive disclosure for 

investors in a non-overly complex manner. Our OTC Pink Basic Disclosure Guidelines help 

small companies meet the minimum standards of Securities Act Rule 144 and Exchange Act 

Rule 15c2-11, and the cost of our disclosure service and XBRL conversion is significantly lower 

than charges imposed on SEC reporting companies. 

We clearly label each security with its marketplace designation. Investors know that OTCQXtraded companies meet certain qualitative and quantitative standards, including minimum 

financial requirements and a management review, that they provide ongoing audited disclosure 

to investors and are sponsored by professional FINRA-member investment bank, depositary 

bank or securities law firm. Likewise, investors in companies on our OTCQB marketplace know 

that while these venture stage companies are current in their reporting to the SEC or a bank or 

insurance regulator, they may also be a shell company, financially distressed or in bankruptcy, 

and that the SEC does not review or verify the background of their management team. 

Investors in OTC Pink companies know that these companies provide current, limited or no 

information to investors, and that they are generally more speculative, smaller and/or less 

investor-focused. Recently, the SEC publicly recognized the quality of our OTCQX and OTCQB 

marketplaces by declaring them "established public markets" for purposes of establishing a 

public market price when registering securities for resale in equity line financings. 6 

In the end, whether a company trades on the NYSE, Nasdaq or the OTCQX, OTCQB or OTC 

Pink marketplaces, that company can realize all the benefits public trading provides. 

3 See: http://www.otcmarkets.comllearnlotc-company-reporting 

4 Example: http://www.otcmarkets.comlstocklOTCMlfilings 

5 Example: http://finance.yahoo.com/qlis?s=OTCM+lncome+Statement&annuaI 

6 See the SEC's Compliance and Disclosure Interpretation: 

http://www.sec.gov/divisions/corpfinlguidance/sasinterp.htm at Question 139.13. 

OTe Markets Group Inc. 304 Hudson Street. 3rd Floor New York, NY 10013 E Wo.piotcmarkets,com T +12128964400 W otcmatkets_com 
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I. CREATING BETTER INFORMED PUBLIC MARKETS 

Before discussing our specific proposals, I would like to share our inSight, as the operator of 

marketplaces for the trading 10,000 securities, and a publicly traded company ourselves, on the 

benefits of being a public company and the importance of a vibrant secondary trading market to 

the small company capital formation process. 

The Benefits of Public Trading 

We are firm supporters of the value proposition behind companies aspiring to be publicly traded, 

as it generally creates the most successful and sustainable enterprises over the long term. 

Being publicly traded provides companies with several important benefits that cannot be found 

by remaining private: 

Visibility - Being publicly traded, having a stock symbol next to your company name 

and making disclosure publicly available provides a company with a level of visibility that 

is tougher to achieve if it is private. The media is much more likely to pay attention to a 

company that is publicly-traded and public with its information - than one that is 

private. Public company status also creates a connection with investors, employees, 

strategic partners and customers that is invaluable to a growing organization. 

Liquidity - Public trading allows management to provide their shareholders with 

maximum liquidity for their shares without having to sell control of the company. 

Investors in public companies trading on NYSE, Nasdaq, OTCQX, OTCQB and OTC 

Pink can trade securities through any broker, and property is more valuable if it is 

transferable. Liquidity gives investors a choice and a realizable value for their shares, 

and allows shares to be used as collateral. 

Valuation - Public trading creates the best valuation for individual shareholders, other 

than a complete sale of the company. By making shares publicly traded, in a continuous 

market accessible through any broker, companies create a huge wealth effect as their 

investors have a readily transferable asset that can be depOSited in brokerage accounts. 

It is much easier to value a company when it is publicly traded, with widely disseminated, 

easily accessible quote and trade data, and publicly disclosed financial information. A 

public valuation also gives a company an accurate portrayal of its overall worth, and 

provides real-time feedback as the market reacts to company news and disclosure. 

OTC Markets Grouc Inc. 304 Hudson Street, 3rd Floor 

New York, NY 10013 

E info:§:>otcmarkets,com T +1212 S96 4400 W ctcmarkets.co!"(l 
44 


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Public valuation gives investors confidence in the value of the shares they hold, allowing 

them to accurately assess their personal finances and to trade their shares with 

confidence. 

Capital - Access to capital is perhaps the most obvious reason companies go public. 

Investors are much more comfortable investing in a publicly-traded company that 

provides public disclosure than one that is private, because public companies are easier 

to value and because outside investors know they can sell their shares at any time. 

Trust - Finally, publicly-traded companies can more easily convey their reputations and 

build trust with their various stakeholders. That includes investors, as well as 

employees, customers, suppliers, strategic partners, the media, regulators and the 

public. Public disclosure of company financial and other material information breeds 

trust in potential employees, vendors and customers, and public price discovery does 

the same for investors. The trust that public companies engender also makes them more 

sustainable and enduring than private companies, and public companies have built 

sustainable businesses because they are trusted and transparent, not in spite of it. 

We are testifying here because we support changes to regulation that would jumpstart the 

small-cap initial public offering (IPO) market, however we also know that a traditionallPO, or a 

reverse takeover (RTO) are not the only ways for a company to enter the public markets and 

reap the benefits of public trading. We refer to an alternative public offering (APO) that we call 

the "Slow PO." With a Slow PO, a seasoned company with an established investor base can 

slowly start to provide liquidity to its shareholders by making previously restricted shares 

available for trading in compliance with Securities Act Rule 144 or filing a Form 10 with the SEC. 

Capital raised through private placements to angel investors, private equity firms, and venture 

capital has created a huge pool of value that can be unlocked and used by companies to build 

an informed and efficient public market. 

In fact, Nasdaq went public via a Slow PO. In 2000, Nasdaq did a private placement offering to 

NASD members. When the Rule 144 holding period expired, broker-dealers began trading 

those shares on the public markets. Three years later, Nasdaq did a secondary share offering 

at $9 a share and up-listed its shares on its own market. OTC Markets Group did our own Slow 

PO in September 2009, when our previously restricted stock issued in private transactions 

OTe Markets Group Inc. 304 Hudson StI'eet, 3rd Floor 

New Vorl<. NY 10m3 

E in!'O\cpoternarkets.com T +12128964400 W otonarkets..com 
45 


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became available for trading under Rule 144. A few months later, we qualified for the OTCQX 

marketplace where our shares now trade under the ticker "OTCM." 

For a company that is serious about maximizing its visibility, raising capital, recruiting top-quality 

talent and building trust, being publicly traded can provide significant value to its business and 

its shareholders, which in turn also benefits our economy. But we must make sure that the 

costs and burdens we put on public companies do not outweigh those benefits. 

Capital Formation Relies on Investor Access to Vibrant Secondary Markets 

Public companies require informed secondary markets that allow investors to efficiently trade 

securities. Our OTCQX, OTCQB and OTC Pink marketplaces, much like NYSE and Nasdaq, 

facilitate secondary trading in securities by regulated broker-dealers. Before a company can 

effectively raise capital, potential investors need assurance that the securities they purchase will 

eventually have a value. The value of a security comes from income, appreciation potential 

and transferability. Transferability of securities is driven by liquidity, or how efficiently they can 

be analyzed, valued and traded in a secondary market. 

Once an investor buys a share of stock, they have a property right in that share just like an 

individual owner has in an iPod or a car. And just as an iPod can be sold on eBay and a car 

can be sold "pre-owned", shareholders have the right to sell their stock. A car, for example, is 

worth considerably more if it has an easily ascertainable public resale value. Similarly, an active 

secondary market in stock increases the value of that stock and makes it a more attractive 

investment. 

A quick aside into the history books will bring context to this issue. The model for modern 

secondary markets dates back to the Dutch East India Company's initial capitalization in the 

Netherlands in the early 1600s as the first company with perpetual shares. Since investors 

needed to realize value, a limited secondary market arose to handle buyers and sellers. 

However, transfer of Dutch shares was restricted by the company and limited to certain 

investors. When London traders later adopted the Dutch share markets in a more pure and 

unfettered form, the English allowed regular trading and share transfers among all investors 

OTC Markets Group Inc. 304 Hudson Street, 3rd Floor New York. NY 10013 

~ ~f~~~~~"com W otonarkets.com 
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daily.7 The resulting value creation resonated with investors and companies alike, and London 

has been the center of Europe's financial markets ever since. 

Trading models that focus on making trading of shares more restricted, keeping company 

information private and limiting trading to specified dates and a limited group of investors ignore 

the lessons learned through hundreds of years of secondary trading. Devaluing the property 

rights of investors and impeding the utility of their investments is not a path to vibrant capital 

markets, instead it unnecessarily limits the property rights of shareholders and the value of each 

investment, and makes it harder for companies to raise the capital they need to grow. 

Adequate Current Information is a Foundation of Informed Secondary Markets 

Of course, as public secondary markets become more inclusive, investors must still be 

protected. As operator of the primary public marketplaces in the smallest company space, we 

understand the importance of public disclosure and in ensuring that company insiders and 

affiliates cannot use their informational advantage to manipulate outside investors. 

We have repeatedly advocated for regulation that would increase the transparency of trading by 

insiders, affiliates and promoters, and restrict the ability of insiders to trade unless adequate 

current information, as that term is defined in the federal securities laws, is made publicly 

available. That said, the complex system of SEC reporting is not and should not be the only 

path to making high quality information publicly available. 

Our OTCQX, OTCQB and OTC Pink marketplace deSignations already incentivize disclosure by 

making it easy for investors to identify companies that make current disclosure available. 

Companies may choose how they make information publicly available and securities are clearly 

labeled by the marketplace they qualified for and the reporting standard they follow. The results 

are overwhelmingly positive for public disclosure, in that vast majority of trading takes place in 

companies that make current information publicly available, as noted in the table below. 

7 The Origins of Value: The Financial Innovations that Created Modem Capital Markets, Chapter 9, Larry Neal, 

author, William N. Goetzmann & K. Geert Rouwenhorst, editors, (2005). 

OTe Markets Group inc. 

304 Hudson Street, 3rd Floor 

New York, NY jOOn 

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In 2012, the 10,000 securities on our marketplaces traded over $135 billion in dollar volume. 

Over 95% of dollar volume traded, representing more than $128 billion, took place in securities 

that made current information publicly available and were therefore identified on our OTCQX 

and OTCQB marketplaces or on our OTC Pink Current Information tier. Companies making 

limited information available represented nearly 3% of total dollar volume, leaving just over 2% 

of dollar volume represented by companies in the OTC Pink No Information category. 

This is not to say that the OTC Pink No Info companies should not trade. In fact, some are quite 

successful operations, but they may have management teams who are not aligned with 

shareholder interests. The clearly labeled secondary trading marketplaces, where, for example, 

OTC Pink No Information companies have a stop sign next to their quotes, help warn all 

investors if the security is a speculation at best and give outside shareholders a choice to sell 

their shares to someone besides the company. 

Capital formation requires investor confidence in the issuers and in the secondary trading 

market. The investor sentiment is clear - disclosure of adequate current information protects 

investors, drives confidence, and ultimately leads to more robust capital markets. This must be 

balanced by protecting the property rights of outside shareholders to be able to transfer their 

shares in an efficient manner through a regulated broker-dealer. 

The JOBS Act 

We commend Congress on its bipartisan efforts to pass the JOBS Act. As an operator of Open, 

Transparent and Connected financial marketplaces, we support this modernization of our 

securities laws that will add transparency to the capital raising process. Transparency of 

information makes markets better informed and more efficient. 

The JOBS Act rejects the theory that private capital raising should be hidden from the public 

and adapts U.S. securities law to our interconnected world in which information can easily travel 

across the Internet and market data networks. The JOBS Act affirms that investors should be 

OTe Markets Group Inc. 

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protected based on their level of sophistication and wealth at the point of sale, but that all 

investors benefit from public availability of information about companies and the trading of their 

securities. 

These important changes are going to bring sunlight into the previously dark worlds of private 

securities offerings under the SEC's Regulation D and Rule 144A, while creating new 

opportunities for transparent capital raising by U.S. and global companies. Lifting restrictions on 

the distribution of information regarding 144A securities also means these securities may be 

transparently traded on our marketplaces by broker-dealers, for their own accounts and on 

behalf of other Qualified Institutional Buyers (QIBs), leading to improved price formation and 

greater secondary liquidity. The JOBS Act will allow more companies to make more disclosure 

publicly available. Where before a company raising capital under Reg. D, would have been 

restricted from posting their annual report on their website due to general solicitation concerns, 

the JOBS Act making available general solicitation, Regulation A+ (Reg. A+) and crowdfunding 

will incentivize companies to make their disclosure publicly available to access capital. 

The JOBS Act has already had a significant impact for some companies, such as community 

and regional banks, and we're hearing from others in our community that are looking to take 

advantage of future rulemaking when it is complete. 

For example, since the passage of the JOBS Act, over 100 community and regional banks have 

taken advantage of the higher shareholder threshold to deregister with the SEC, resulting in 

significant cost savings and the elimination of duplicative reporting for many. Paul Garrigues, 

CFO of Coastal Banking Company, Inc., a $475 million Florida-based bank with 2.6 million 

shares outstanding and 622 shareholders, estimates that his bank is saving $150,000 to 

$200,000 a year in attorney's fees and other costs as a result of its deregistration and delisting 

from Nasdaq in May.8 The company now trades on our OTCQB marketplace, and has elected 

to continue publishing its quarterly and annual audited financial statements on our website, 

www.otcmarkets.com. and for distribution to investors, market data providers and brokerdealers who trade OTCQX, OTCQB and OTC Pink securities. Meanwhile, Coastal Banking's 

stock price has risen from $4.50 to $7.00 and its average daily trading volume has increased 

8 '"Deregistered and Delisted? No Worries,'" CFO Magazine, April 2013. http://www3.cfo.com/articie/2013/3/capitalmarkets.Jobs-act-otc-stock-markets-deregister-delisting-sec. 

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304 Hudson Street 3rt! Roor New York NY 10013 

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from 400 to 2,000 shares year-over-year. Other banks report similar positive results, and OTC 

Markets Group is working with them to make sure that when they deregister they continue to 

make publicly available the quality company information, audited financial statements and 

transparent trading to which their investors have become accustomed. 

That said, we do think it is important for the SEC to hasten its work on writing the remaining 

rules, particularly relating to Title II, general solicitation and advertising in certain private 

offerings, Title III, crowdfunding, and Title IV, the offering exemption known as Reg. A+. While 

we understand the need to balance haste with thoughtful consideration in rulemaking, in this 

case of Title II, the SEC has received many thoughtful comments and it is time to make 

decisions and publish final rules. Time is of the essence in this matter as the delay is restricting 

access to capital. Numerous companies on our marketplaces have said they are urgently 

awaiting this rulemaking so they can make important financing decisions in their businesses. 

Since the changes to capital raising are significant, the final rule will need to allow for 

adjustments with the benefit of time and experience. These changes will present a risk of abuse, 

just as with any new rulemaking. That risk can be addressed when it arises, particularly since 

most potential abuses are already illegal under the numerous other anti-fraud provisions within 

SEC rules. Meanwhile, it is the SEC's responsibility - and its mandate - to write a rule as soon 

as possible. 

We would like to reiterate recommendations we made in our comment letter to the SEC, dated 

October 8,20129

, relating to the need for publicly available price information on securities for 

which general solicitation and advertising is permitted. We proposed that the Commission make 

two additional steps: 1) Require that when conducting capital raising under Rule 506 using 

general solicitation, the company must directly or indirectly make adequate information publicly 

available in accordance with the standard under Securities Act Rule 144. 

As we stated in our letter: 

"Rule 144 includes a definition of adequate current public information that would 

be appropriate for use in conjunction with trading of Rule 144A, Rule 506 and 

other private securities by affJ1iates of the issuer, Such a requirement would 

incentivize disclosure by non-reporting issuers, and would dramatically increase 

9 http://www.sec.govicommentsis7-07-'12is70712-149.pdf. 

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the amount and quality of disclosure available to investors and regulators. 

Moreover, the increased disclosure incentivized by these rules may reduce 

instances of fraud under Exchange Act Rule 10b-5, which applies to the 

purchase and sale of any security. 

Under Rule 144, issuers not reporting to the SEC must make publicly available 

basic financial information. This standard requires disclosure of essential 

information regarding the issuer and its securities, including the issuer's current 

financial statements and capital structure. The simplified Rule 144 disclosure 

provides the basic information and transparency that allows all potential investors 

to easily analyze a company's general financial condition before engaging in 

further diligence or a transaction. 

When a security trading on the OTC Markets Group platform participates in 

active promotion without having adequate current information disclosed to the 

market, we flag it with a skull and crossbones symbol to warn investors of a 

potential public interest concern. Investors armed with current public information 

are not only in a better pOSition to analyze, value and trade securities, they are 

also less susceptible to fraud. With the end of the prohibition on general 

solicitation, the mandatory public disclosure of the information required under 

Rule 144 would protect the additional investors that may be presented with the 

issuer's offering information." 

2) Extend the SEC's implicit approval of price dissemination in Rule 144A securities to Rule 506 

and to other security types. Again, as we stated in our letter: 

"The widespread dissemination of prices for Rule 144A, Rule 506 and other 

private securities supports capital formation, better informs investors and 

provides the Commission and other securities regulators with a valuable tool to 

fight fraud. Widespread transparency of prices and basic current information 

regarding the issuer empowers investors, analysts, the press and regulators with 

information on current valuations and trading activity. This openness creates a more efficient and reliable capital formation process. By enacting the JOBS Act, 

Congress recognized the importance of public availability of information to the 

capital raising process and the value of increased transparency in the operation 

of healthy capital markets. " 

As a final point on the JOBS Act, I want to reinforce the value of Title IV, Reg. A+, to many of 

the small companies that trade on our marketplaces. The current Regulation A (Reg. A) 

provides an exemption from SEC reporting requirements for certain public offerings of up to $5 

million. With the rising costs of preparing the disclosure required for a Reg. A offering and 

bringing the offering to investors, the $5 million limit has proven to be a nearly universal 

deterrent. With Reg. A+ raising the exempted offering limit to $50 million, many more 

companies will reap a direct capital raising benefi!. This will include many of the community 

banks traded on our marketplaces and smaller companies disclosing audited financial 

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statements. The immediate tradability of the shares issued in a Reg. A+ offering is a big benefit 

that will increase the valuations at which companies can raise capital and provide a path to 

public trading. 

The implementation of Reg. A+ is about more than just the offering limit, however. "Blue Sky" 

laws that govern offering restrictions in each U.S. state and jurisdiction are uncoordinated and 

can present a significant roadblock to capital formation using Reg. A+. Subjecting companies to 

Blue Sky laws will undermine and negate the benefits of Reg. A+. To ensure that Reg. A+ 

provides the path to capital that Congress clearly intended in the JOBS Act, it must also provide 

that Reg. A+ offerings are not subject to state Blue Sky laws. Similarly, the success of Reg. A+ 

depends on the SEC defining the term "qualified purchasers" to be more inclusive than the 

current definition of "accredited investors." Qualified purchasers should include financially 

sophisticated individuals that may not have obtained the wealth to be accredited investors, such 

as employees of the issuer and those that meet the current requirements applied to brokerdealer customers trading stock options. A Reg. A+ prospectus will require audited financials 

and be subject to SEC review, which makes it inherently more transparent and more regulated 

than a private offering and leads to the logical conclusion that a Reg. A+ offering should be 

available to at least as many, if not more, investors as a Rule 506 private offering. 

Reducing Fraud in Small Company Trading 

Our position in the market makes us hyper-aware of the risks of fraud, particularly in the 

microcap space. We applaud the SEC's past and recent efforts to suspend trading in microcap 

securities that present a heightened risk of fraud. Fraud in the trading of small company 

securities hurts investor confidence in small companies and ultimately impedes the capital 

formation process. 

Last year, the SEC ordered 10-day suspensions on 672 microcap and shell'o securities. We 

analyzed those suspensions focusing on the dollar volume of trading in each of the suspended 

securities for the 90 days leading up to their suspension. The suspensions included only 16 

companies that were current in their reporting to the SEC. Yet, those 16 securities accounted 

10 Recent SEC suspensions of groups of shell companies have included operating companies with high stock prices 

that have chosen to go dark and disenfranchise outside shareholders. The SEC enforcement staffs lack of analysis 

and understanding will assist in these companies efforts, as removing the public trading will make shareholders 

dependent on the company as the only bidder. We would recommend the SEC enforcement staff engage in 

fundamental research and stock analysis before suspending any companies. 

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for the vast majority, nearly 80%, totaling $230 million, of the total dollar volume of all 

suspended securities in the 90 days prior to their suspensions. We urge the SEC staff, in 

seeking to demonstrate their enforcement oversight, to focus on the quality of enforcement 

actions and not just the total number of suspensions. 

Analysis of SEC Suspensions 

Clearly, the majority of the problem in the small/micro-cap fraud arena - in terms of dollar 

volume and, thus, investor losses - involves companies that are current in their reporting to the 

SEC. Unfortunately, a company with little revenue and no assets can be an SEC reporting 

company with minimal cost and effort. The SEC needs to recognize this all too easy path to 

fraud and take pro-active steps to focus on the companies that are causing the largest investor 

losses. We should encourage the SEC to focus their limited enforcement efforts on the most 

highly promoted SEC reporting micro-cap companies that are heavily advertised on the Internet. 

These companies and their brazen promotional activities make a mockery of the regulation of 

our securities markets. 

In 2007 we instituted a "caveat emptor" policy under which we place a "Skull and Crossbones" 

icon next to the trading symbol of stocks for which unsolicited SPAM emails are sent or that 

have engaged in promoting their securities without making adequate current information 

available to investors. Since instituting the caveat emptor program, we have seen a clear 

reduction of promotion and spam in OTC Pink No Information companies, and this is one of the 

main reasons why the majority of promotion takes place in SEC reporting companies. 

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Focus on the People Behind SEC Reporting Companies 

A logical place for the SEC to begin a ramped-up enforcement effort is with increased 

transparency and scrutiny of the officers, directors, affiliates and major shareholders of SEC 

reporting companies. This type of review would also allow the SEC to tie a shareholder list back 

to any future promotional or other potentially fraudulent activity in which those holders may 

engage. Currently, the SEC does not engage in background checks of company officers and 

major shareholders as part of the SEC registration process, or when reverse mergers are 

announced in 8K filings. Nor does the SEC request or review the shareholder lists of SEC 

reporting companies or the history of share issuances from SEC registered transfer agents, 

which leaves them limited in their ability to identify companies with questionable officers, 

directors, affiliates and shareholders for further scrutiny and monitoring. 

Better Transparency of Promoters 

In conjunction with increased focus on the shareholder lists of SEC registrants, we strongly 

support increased regulation to provide for better transparency of the people behind stock 

promotion activity. We submitted a rule proposal to the SEC several years ago that would 

require increased disclosure associated with any stock promotion material under SEC Rule 17b, 

with the goal of exposing and preventing unlawful and fraudulent activities by stock promoters 

and their sponsors." 

One example is the current 17b disclosure from one promotional website that advertises via 

links on major news and financial websites: 

"TheAmericanSignal.com has been retained by an unrelated third party 

for promotional and advertising services intended to increase investor 

awareness of Nano Labs Corp. (''Nano'). The common shares of Nano 

trade on the OTC Bulletin Board under the ticker symbol "CTLE". As of 

the date of posting of this disclaimer, TheAmericanSignal.com has 

received six hundred fifty thousand US dollars from an unrelated third 

party for performing these services." 

This type of disclosure does not provide valuable information or serve to prevent fraud. This 

and other promotional web sites that widely advertise their links at the bottom of financial portals 

11 The Petition for Rulemaking, dated April 24, 2006, is available on the SEC's website at 

http://www.sec.gov/ruleslpetitionslpetn4-519.pdf. 

Public comments to our Petition for Rulemaking were overwhelmingly positive, and are also available on the SEC's 

website at http://www.sec.gov/comments/4-519/4-519.shtml. 

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and media web sites harm investors with their lack of useful disclosure. Investors should have 

the information to identify the people behind the promotional web site and those who are paying 

the website so much for promotion of this SEC reporting company. 

I encourage you to ask the SEC why our rule proposal, or similar regulation, has not been 

enacted. Transparency of promoters will make it easier for investors to avoid questionable 

characters, broker-dealers to identify customers they should scrutinize and regulatory 

enforcement to target the bad guys. Lack of transparency and enforcement against highly 

visible intemet-based promotions allows the image of our public markets and the capital raising 

process for all small companies to be harmed. 

Better Regulation of Transfer Agents 

Unlawful activity can also be curbed by better regulation of transfer agents and the share 

issuance process. Transfer agents can playa critical role as the caretakers of a company's 

shareholders and key gatekeepers against fraudulent issuances of securities. While the vast 

majority of transfer agents are lawful, there is a small subset that causes significant problems in 

the system. In the micro-cap market, problems are created when "clean" certificates are issued 

to insiders or promoters in violation of registration requirements and then the shares are illegally 

sold in the public market. Unfortunately, the licensing regime for SEC registered transfer 

agents, who supervise the share register, is nearly nonexistent. The only requirement to 

become a transfer agent for SEC-reporting companies is to register with the SEC or a bank 

regulatory agency'2 via a simple online form. The SEC form itself takes an estimated 1.5 hours 

to complete and asks only for the registrant's name, address, names of the control people and 

any regulatory actions against them. Once submitted, it is effective automatically after 30 days 

unless the SEC finds cause for concem. Compare this to the SEC's Form S-1 for registration of 

a class of securities, which takes an estimated 972.32 hours to complete and possibly months 

to approve, and you get some indication of the lack of scrutiny paid to the transfer agent role. 

Increased licensing requirements, background checks and inspections would likely root out 

those allowing many of the fraudulent stock issuances. 

12 From what we have seen, the problematic transfer agents register with the SEC. We suspect lhis is because bank 

regulators are typically more hands-on overseers of bank lransfer agents. 

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The SEC should require transfer agents retain and provide to broker-dealers information on the 

issuance, ownership and transfer history of shares. Currently, transfer agents issue "clean" 

certificates that have no restrictive legend when directed by the company. They do not identify 

ifthe shares are currently owned, or were ever owned, by an affiliate ofthe issuer. 

Subsequently, the broker-dealer who receives those certificates from a customer has no 

indication if the holder is an affiliate of the issuer and no information regarding the issuance and 

transfer history of the shares. Placing information sharing requirements on transfer agents in 

these securities would allow broker-dealers and regulators to more quickly identify promoters 

and prevent this type of micro-cap fraud before investors are harmed. 

The uncertainty created by the lack of regulation of transfer agents and inefficiency in the share 

issuance process are among the main reasons DTC has made it very hard for small companies 

to gain eligibility. The lack of available information regarding share history makes DTC uneasy 

about potential problems when it attempts to allocate shares among participant accounts 

following a transaction. This lack of clarity along with DTC's apparent disinterest in finding a 

solution has harmed numerous small companies. Many broker-dealers will not trade securities 

that are not DTC eligible, as they find it too arduous and cost-prohibitive to facilitate transactions 

in these shares. Investors in those shares are left without an efficient trading option, which 

devalues the company's shares in the market. With a devalued share base, companies face an 

uphill battle when seeking to raise capital from new investors or when borrowing against their 

market value. Transfer agent regulation and improved communication with DTC would rectify 

what has become a significant inefficiency in the market. 

13(f) Disclosure of Securities Holdings 

Another benefit of public secondary markets is the ability for companies and their investors to 

learn who has taken an interest in them. Section 13(f) of the Exchange Act protects that 

important benefit. Under Section 13(f), an institutional investment manager is required to 

disclose its holdings in securities listed on a national securities exchange. Unfortunately, 13(f) 

does not include a similar requirement relating to non-exchange listed securities. Institutional 

investment managers disclose these holdings only on a voluntary basis, leading to inconsistent, 

unreliable information being made available to the market. 

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304 Hudson Street 3rd Floor 

New York, NY 10013 

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In April, we submitted a comment letter to the SEC 13 in which we advocated amending Section 

13(f) to require disclosure of holdings in all publicly traded securities. We noted that issuers of 

securities on our OTCQX, OTCQB and OTC Pink marketplaces are unable to determine which 

institutions hold their securities. With the JOBS Act increasing the number of shareholders of 

record a company must have before being subject to mandatory SEC reporting, disclosure of 

share ownership will become an increasingly important issue. Expanding the scope of Section 

13(f) to require institutional investment managers to report holdings of all securities traded on 

the OTCQX, OTCQB and OTC Pink marketplaces would rectify eXisting problems and create a 

valuable pool of data for issuers, investors and regulators. 

Disclosure of Insider Transactions 

Insiders and affiliates transacting in non-SEC registered securities should be required to make 

timely public SEC filings of those transactions in a manner similar to the SEC's Forms 3, 4 and 

5 when trading through a broker-dealer or engaging in private transactions involving publicly 

traded securities. Promoters should also be considered affiliates that need to file Forms 3, 4 

and 5 when trading the securities of SEC reporting companies. Prior to depOSiting shares or 

initiating trades with a broker-dealer, insiders, affiliates and promoters should be required to 

provide written notification of their affiliation with the issuer or be liable for antifraud and 

recession of the transactions. This information will be useful for investors to understand when 

insiders are trading, for regulators to monitor markets and for broker-dealers to know their 

customers. Broker-dealers cannot fulfill their roles as gatekeepers if they do not have 

transparency into the identities of the affiliates of publicly traded companies. 

II. CREATING MORE EFFICIENT PUBLIC MARKETS 

Tick Size & Small Company Liquidity 

Many securities regulators have interpreted the language and intent of the laws that created the 

national market system (NMS) as a mandate to favor agency trading by broker-dealers over 

principal trading with customers. The NMS laws passed by Congress include discussion of the 

opportunity for investors' orders to be executed without the participation of a dealer. This has 

led to regulations that continually undercut the profitability of market making and supplying 

liquidity as a service. It is no surprise that we now suffer from a lack of displayed liquidity in 

13 The full text of our comment letter is available at http://www.sec.gov/comments/4-659/4659·13.pdf. 

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many smaller companies and a perception that market makers are being regulated out of 

existence 14 by securities regulations. 

Regulators often seem to forget that the NMS laws also asked the SEC to assure economically 

efficient execution of securities transactions and fair competition among brokers and dealers, 

among exchange markets, and between exchange markets and markets other than exchange 

markets. We strongly agree that regulation should not favor any business model. There should 

be no favoritism of brokers over dealers or exchanges over non-exchange markets. Instead, 

consumers of liquidity and execution services should make those choices. 

The issue of decimalization, or tick size, is the perfect example of an issue that requires a 

balanced approach. Congress, through the decimalization study and solicitation of industry 

expertise mandated by the JOBS Act, clearly understands the need to review the effects of 

decimalization and to incentivize market makers to build liquidity in small and mid-cap company 

stocks. 

We support the need for a pilot program implementing tick size reform, as it could help restore a 

balance that incentivizes market making to create more liquidity for investors. The pilot program 

must be structured properly in order to attain the desired results. We support proposals for a 

long-term pilot to allow for proper data collection and analysis, and the involvement of the SEC 

and the securities industry in evaluating the impact of such a pilOt. Beyond those structural 

concems are five main themes to a successful tick size pilot: 

1. Any tick increment program should include securities traded on our OTCQX, OTCQB 

and OTC Pink marketplaces. Our marketplaces have thousands of small companies 

that can benefit from improvements in displayed market liquidity. 

2. Tick increments should not artificially widen spreads. Many smaller, relatively illiquid 

companies are already subject to bid/ask spreads far above the one penny limit. A 

company with a natural 10 cent spread should not be forced to operate with a 20 or 25 

cent spread just to push the outer boundaries of tick size on broker-dealer behavior. 

Securities at different price and trading activity levels tend to maintain similar natural tick 

14 The number of market makers has declined by approximately 113 since 2005. 

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sizes, making it possible to determine the appropriate tick size for each price and trade 

activity"band." Regulations should not create tick sizes that are unnaturally wide, 

frustrating investors and ultimately removing liquidity from the market. In the past, our 

OTC Link ATS had quote increments until changes in FINRA rules made them 

unworkable. What we observed when we had increments was increased display of 

larger sizes by broker-dealers. When increments are lowered, displayed size reduces 

as any display of size is easily out bid by a penny for 100 shares. 

3. Broker-dealers should display greater proprietary liquidity to enhance the larger tick 

sizes. The implementation of tick size reform should come hand in hand with larger 

minimum displayed sizes for broker-dealer proprietary quotes. For example, at price 

points that currently require display of quotes for 100 shares 15 or more, broker-dealer 

proprietary quotes should be displayed only when they are for a minimum of 500 shares. 

Customer agency orders will glean the benefit of tick size reform, but the real impact on 

liquidity in small and mid-cap companies will come from increased broker-dealer 

proprietary quotes. FINRA is currently operating a tier size pilot program for securities 

traded in our marketplaces, which lowered the minimum displayed quote size at many 

price points in an effort to increase the display of customer limit orders. While FINRA 

has not yet released its academic study of the pilot program, it is clear from our data that 

broker-dealers have reduced displayed proprietary quote sizes in line with the new 

minimum tier sizes, resulting in a loss of liquidity in the affected securities. We have also 

seen broker-dealers displaying fewer priced quotes when they have no customer orders 

on their books because of increasing "air gaps" cause by smaller displayed sizes and 

lack of proprietary quotes. Tick size reform can easily remedy this problem by raiSing 

the minimum displayed size for broker-dealer proprietary quotes in securities with 

mandated larger tick sizes. Tick size reform on its own will be a valuable tool for 

increasing liquidity. Combining tick size reform with larger minimum displayed sizes for 

proprietary quotes would lead to a faster, tangible result for the small and mid-size 

companies that need it most. 

4. Tick size reform should apply to quotes and orders, but not trades. Requiring trades to 

occur only at specific tick sizes could have several negative effects on investors and the 

15 To encourage the widest participation, smalier share sizes should remain for customer orders. 

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broker-dealers that these rules are intended to incentivize. Investors currently benefit 

from lower access fees and price improvement when there is choice on where trades are 

executed. This leads to lower costs for investors with marketable orders, incentivizing 

them to trade. Requiring trading only at specific price increments would harm investors 

by eliminating the possibility of price improvement. A rule requiring trading at specified 

tick sizes or a "trade at" rule that forces trades to go to the venue with displayed prices 

would limit competition for order flow and provide no corresponding benefit for 

consumers of liquidity, potentially negating the beneficial effects of a change in tick size 

policy. The taker of liquidity is the one who sets market prices, and we should not adopt 

a "trade at" rule that would regulate what bid or offer the taker must interact with. 

5. The default market wide quote and order increments should be set by price and trading 

activity. Publicly traded companies should have a chance to opt out if they do not want 

tick increments or opt back in by notifying their primary national stock exchange or A TS 

market operator. 

With tick size reform, we expect investors will see more displayed liquidity on the bid and offer. 

This will lead to a multiplier effect of competing liquidity providers willing to provide larger 

execution sizes at the bid and offer to attract order flow. Increased liquidity will lead to a higher 

willingness of many investors to trade and be filled on the bid and offer or better, leading to a 

higher quality investor experience. 

Fragmentation is Good for Transparent and Connected Financial Markets 

When the national stock exchanges discuss the increase in trading volume taking place on 

other venues, they use the term "fragmentation" to paint a picture of a broken marketplace in 

need of repair. In fact, "fragmentation" is just a spin-doctor's word used by those on the losing 

side of diverse choice and healthy competition. Trading on multiple broker-dealer internal 

systems, crossing networks and A TSs provides benefits to investors and actually drives 

liquidity. 

The competition among trading venues in our financial markets mirrors a change taking place in 

every industry: the shift from a three-tier model of producer, distributor and retailer to a 

networked model where consumers and producers connect directly through public and private 

networks. The shift towards networks allows buyers and sellers to meet more easily. For 

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example, investors in Apple, Inc. stock can purchase shares from a broker who places 

traditional buy orders on an exchange. In addition, that broker may use a network to connect 

directly to brokers who are selling Apple stock, or it can internalize the order and provide 

liquidity directly to the investor without another intermediary. The network model creates 

efficiencies for investors by providing a choice of trading partners and forcing intermediaries to 

add value in price, speed or execution quality or potentially be left out of the trade. Market 

"fragmentation" has actually improved the market. 

The trend towards networks has been enabled by the SEC's adoption of Regulation NMS, which 

allowed investors to shop for the best liquidity supplier and ensured that broker-dealers matched 

the best publicly displayed price. As a result, the U.S. financial markets support a wide variety 

of trading models that provide efficient service to institutional and retail investors. Attempts to 

curb this innovation, such as proposals for a "trade-at" rule, will remove tangible benefits from 

the market and ultimately harm the capital raising efforts of companies that seek to reach all 

types of investors. 

As supporters of diverse choice and healthy competition for trade executions, we also strongly 

disagree with some suggestions by stock exchanges that trading in smaller companies should 

only take place on one exchange. Any attempt to create a monopoly on trading, through 

congressional mandate, SEC regulation or otherwise, is a restriction on the rights of 

shareholders to dispose of their property. The idea that we should mandate trading rights to 

one exchange, ATS or broker-dealer to improve liquidity is ludicrous and goes against all we 

have learned from history. 

When Nasdaq was primarily a market for smaller companies, it was not a centralized stock 

exchange. In those days, Nasdaq was an automated quotation system and the quotes on it 

came from hundreds of OTC market makers across the country acting as individual market 

centers. Investors and broker-dealers benefitted from the fragmented Nasdaq network-based 

model, and that directly lead to Nasdaq successfully fostering small company trading. 

We are strong believers in the network model for small company trading, and our OTC link A TS 

has over 130 broker-dealers that act as market centers, providing diverse choice for buyers and 

sellers. As Nasdaq proved many years ago, the OTC network model promoting competition and 

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efficiency is what drives a successful small company marketplace, and it would be a step in the 

wrong direction to centralize all small company trading on one monopoly exchange. 

Margin Eligibility 

Any discussion of the value of efficient secondary markets requires an exploration of the 

different ways in which that value is created. One of those ways is margin eligibility, or the 

ability for securities to be used as collateral in a margin account. Margin eligibility creates a 

wealth effect for security holders. Holders of marginable securities can access the value of their 

holdings by borrowing against them, which increases the utility of owning those securities and 

ultimately encourages investors to purchase them. This creates a credit multiplier effect as 

more shares can be used to access credit, and shareholders are able to access capital without 

having to sell their shares. The effect of margin eligibility on an investor's willingness to 

purchase a security, particularly the smaller companies that trade on our marketplaces such as 

the 600 community banks, should not be understated. Employed properly, margin eligibility can 

have a direct impact on small company capital formation. 

Again, a quick history of the issue will inform the discussion. Traditionally, the Board of 

Governors of the Federal Reserve System would publish a quarterly list of stocks trading on the 

OTC market that were deemed "marginable" based on certain standards. That practice ceased 

in 1999 when the Board determined that all stocks on the NASDAQ Stock Market were 

marginable. Since that time, the responsibility for determining margin eligibility of non-exchange 

listed shares has been abdicated by the Federal Reserve, and small companies have suffered 

from their securities not being an asset that brokers can lend against collateral. More recently, 

the SEC's Division of Trading and Markets has filled the void and provided guidance on the 

margin eligibility of certain foreign securities. The SEC, as the primary regulator of the securities 

markets, should in our view have authority over margin eligibility of equity and other classes of 

securities. 

We propose that the SEC make marginable any equity security that is not a "Penny Stock" as 

that term is defined in Rule 3a51-1 under the Securities Exchange Act of 1934 (the "Exchange 

Act") for which the issuer makes adequate current information publicly available under Rule 144 

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and is actively traded on an established public market'6. Adequate current information and 

active trading on an established public market will ensure that margin eligible securities are 

easily valued and traded. The Penny Stock standards include thresholds relating to stock price, 

net tangible assets and revenue. Instituting these standards would ensure that securities 

subject to the SEC's Penny Stock Rules do not inadvertently gain marginable status, while 

giving investors in qualified small companies access to the added value, and investment 

incentive, that margin eligibility provides. 

It should be noted here that the definition of Penny Stock could also use some updating. 

A company may be exempt from classification as a Penny Stock if it meets certain net tangible 

asset (NTA) thresholds, but only based on its most recently audited financial statements. Since 

most companies are audited only annually, the Penny Stock rules fail to take into account a 

company that does not meet the NTA threshold as of its audited year-end, but shortly thereafter 

completes a capital raise and increases its NTA significantly. Under the current rules, that 

company could remain classified as a Penny Stock until its next annual audit. Altematively, if 

the Penny Stock rule allowed exemptions for NTA based on quarterly financial statements, a 

company that completes a capital raise and meets all of the required financial standards for 

exemption would not be forced to needlessly accept a misleading Penny Stock designation 

while it waits for the calendar to turn. 

Thoughtful expansion of margin will increase the availability of credit for investors in small 

companies and the pool of capital for small companies. The 600 community banks on our 

marketplaces are a great example of companies that will benefit from margin eligibility. 

State Blue Sky Secondary Trading Restrictions 

Non-penny stocks that are actively traded on "established public markets" should be made 

exempt from state Blue Sky secondary trading restrictions. There is an antiquated patchwork of 

state restrictions for secondary trading that is a compliance nightmare for broker-dealers and 

smaller companies. While companies listed on exchanges are exempt from Blue Sky laws for 

both primary offerings and secondary trading, securities on our marketplaces are not. Many 

states have implemented the Uniform Securities Act of 200217 or its predecessor to a varying 

'6 As noted above, our OTCOX and OTCOB marketplaces have been deemed established public markets by the 

SEC. 

'7 See: http://uniformlaws.org/Act.aspx?title=Securities%20Act 

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extent. other states have developed their own set of requirements, and there are some states 

such as Alabama that have no process for an non-exchange traded issuer comply with Blue Sky 

laws for secondary trading without engaging in a primary offering. State Blue Sky restrictions 

create a complex web of compliance costs that add little to oversight of secondary trading and 

apply needless restrictions on investors who are trading through full service brokers and 

investment advisors. 

Issuer Payments for Market Makers 

The SEC is starting to approve exchange programs allowing payments by ETF issuers to 

market makers. This reverses a longstanding ban on these types of payments. However, the 

small companies that need it the most are still banned from contracting with market makers to 

provide more displayed liquidity and continuous bids and offers at an appropriate spread. 

These activities should be allowed as long as there is public disclosure and appropriate 

regulatory oversight. 

The outright ban on payments to broker-dealers limits small company access to the public 

markets. SEC Rule 15c2-11 and FINRA Rule 6432 require that broker-dealers review and 

supply to FINRA certain information before initiating quotations in a new equity security. 

Broker-dealers have an economic incentive to initiate these filings if they have investor interest 

in trading the security, or a significant investment banking or advisory business with the issuer 

or major shareholders. However, since broker-dealers cannot be paid to perform due diligence 

and make these fillings with FINRA, smaller companies without these pre-existing relationships 

are often unable to find a broker-dealer willing to sponsor them. The outright ban on a service 

for which there is clearly a demand and need for has led to many small companies not being 

able to legally purchase these services, and a black market of secret payments to those that 

skirt the rule. 

Restricting smaller companies access to public markets, harming the quality of their markets 

and incentivizing illegal activity should not be the goal of our securities laws. By allowing 

companies to pay for market making services, the quality of markets and the quality of review 

before initiating quotations can be improved. FINRA Rule 5250 Payments to Market Makers 

should be changed to remove the ban on payments and require they be publicly disclosed by 

the issuer and the company as well as reported to FINRA. 

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Delay X8RL Filing for Smaller Companies 

We see vendors charging small companies $35,000 per year and up for XBRL conversion at 

SEC reporting companies. For smaller companies that amount of outside costs, plus the 

internal resources required to make accurate X8RL fillings is not worth the current benefit they 

receive, as their financial information is already in the vast majority of financial databases and 

portals. Until the cost and complexity is reduced, we propose that XBRL fillings not be required 

of SEC reporting companies traded on our marketplaces. 

Remove Section 178 of the Exchange Act (or Modernize it to Include ATSs) 

The venues available for the quoting and trading of penny stocks have drastically advanced in 

the nearly quarter-century since Congress enacted Section 17B of the Exchange Act in 1990 to 

create price transparency in penny stock trading. With the development and success of OTC 

Link ATS and the OTCQ8 and OTC Pink marketplaces, it no longer makes sense to require a 

regulator like FINRA or a national securities exchange to operate a penny stock marketplace. 

When Section 178 was enacted, the market for penny stocks was diSjointed at best, and 

commercial enterprises were not providing an electronic facility for publishing or disseminating 

quotes in those stocks. Congress correctly determined that the market for penny stocks 

suffered from a lack of reliable and accurate quotation and last sale information available to 

investors and regulators. Given the state of the penny stock market in 1990, Congress 

reasonably concluded that it was in the public interest to require the creation and operation of 

an "automated quotation system" for penny stocks, and that the system should be operated by a 

registered securities association or a national securities exchange. It should be noted that in 

1990 the regulatory category of ATS did not exists and FINRA's predecessor, the NASD, as still 

operating NASDAQ. 

Fast forward to 2013. Over 99% of priced quotes, including nearly all priced quotes in penny 

stocks, take place on the OTC Link ATS trading system. The system created in response to 

Section 17B's mandate, FINRA's OTC Bulletin Board, is left with less than 1% of priced quotes. 

The information that Congress rightly sought access to in 1990 is now provided seamlessly and 

electronically to any investor or regulator with internet access. Market data from broker-dealer 

activity on OTC Link ATS is widely disseminated through a multitude of market data distributors, 

financial portals and the internet. 

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Moreover, OTC Link A TS is a highly regulated trading system. It is operated by OTC Link LLC, 

a FINRA member broker-dealer and SEC registered Alternative Trading System. NYSE's 

ArcaEdge ECN is also registered as and ATS, and many other ATSs are being created to trade 

private securities. Commercial enterprises have stepped in to provide this service and there is 

no need to 

The private sector has stepped in and negated the need for Section 17B. Congress has an 

opportunity to remove this antiquated section of the Exchange Act or at least modernize it to be 

more inclusive of the systems that have and will provide innovation in the future. If FINRA 

wants to continue to operate the OTC Bulletin Board to provide an alternative choice to its 

member firms like they do with their Alternative Display Facility (ADF) that should be an option, 

but the time has passed and there is no longer a need for the Congressional mandate or the 

extra complexity that arises from Section 17B. 

A Note on Taxes 

While it is not this Committee's focus, I would like to share with you some data regarding the 

inherent expense and unfairness of the tax system for smaller U.S. based companies. 

According to the NY Times, the average S&P 500 Company pays a combined federal and state 

tax burden of 29.1 % 18 (the average IT company pays 21 %). OTC Markets Group paid a tax 

rate 39% last year. We also have costs of tax compliance; we pay more to our tax accountants 

at Grant Thornton LLP than we do in audit fees to our independent auditor Deloitte & Touche 

LLP. It is time we simplified the tax code and made the U.S. tax rate and complexity 

competitive with global tax rates. It is unfair that larger companies pay significantly lower tax 

rates than small companies and it is unsafe for our economy that we incentivize debt over equity 

with lower effective tax rates. We could easily incentivize smaller companies to go public in the 

U.S. if we allowed smaller publicly traded companies with over 100 shareholders to have a 25% 

tax rate and deduct dividends 19 Tax efficiency has created an incentive for REITs to be public 

and we can do the same thing for America's smaller companies. 

18 http://www. nytimes. comJinteractiveJ2013/05/25/sunday-review/corporate-taxes.hlml? _r=O 

19 Dividends should be deductible like interest payments and the receiver should be taxed at the same rate as interest 

payments. For more infonnation about the debt bias see my Op Ed at Forbes.com: 

http://www.forbes.com/sites/greatspeculations/2012/12/07/tax-code-rewards-debt-penalizes-dividendsl 

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Conclusion 

The Dutch invented the modem corporation with perpetual capital and tradable shares, but it 

was the English who introduced fewer restrictions on transferability and took the lead in Europe 

and the world. There are vigorous and growing markets for small company shares in Canada, 

the United Kingdom and Australia. It has been reported that the China Securities Regulatory 

Commission (CSRC) has identified expanding the New Third Board, a nationwide OTC market, 

as its primary task this year. 20 While I cannot tell if the reports are true, I can confirm that I was 

invited to speak at a CSRC conference focused on creating a Chinese OTC market five years 

ago. There over 80 regulators peppered me with questions about how our marketplaces had 

developed. Today, American markets are the world leaders, but we cannot rest on our laurels. 

The competition for ideas, people, companies and capital is global. 

Our public markets must be as open, transparent and connected as possible to deliver the value 

of being a public company to the largest number of companies and their investors. 

Thank you again for inviting me to testify. While the issues I discussed may seem diverse, each 

is a vital component to reducing barriers to capital formation by creating better informed, more 

efficient marketplaces. I look forward to responding to your questions. 

20 hltp:lfwww.markelwatch.comfstoryfexcitement-over-new-china-stock-market-board-2013-05-20. 

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Testimony of Joseph Ferraro, 

General Counsel, Prospect Capital Corporation 

before 

The House Subcommittee on Capital Markets 

and Government Sponsored Enterprises 

on 

"Reducing Barriers to Capital Formation" 

June 12, 2013 

Mr. Chairman and Members of the Committee, thank you for the opportunity to testify 

today. My name is Joseph Ferraro and I am General Counsel to Prospect Capital 

Corporation, a leading provider of capital to job-creating small- and medium-sized 

companies in the United States. 

I. Prospect Capital Corporation 

Prospect is a publicly-traded business development company. A business development 

company is a closed-end investment company that focuses on investing in small- and 

medium-sized private companies rather than large public companies. Our company 

completed its initial public offering in July 2004, and since then we have invested more 

than $5.5 billion in over 175 small- and medium-sized companies. Prospect is a growing 

company whose operations utilize over 75 employees in 5 locations New York, Chicago, 

Houston, San Francisco and Westport, Connecticut. 

Prospect invests primarily in first-lien and second-lien senior loans and mezzanine debt, 

which in some cases include an equity component. Our flexible mandate allows Prospect to 

provide capital to small- and medium-sized companies for re-financings, leveraged 

buyouts, acquisitions, recapitalizations, later-stage growth investments, and capital 

expenditures. 

Small- and medium-sized companies use capital from Prospect to expand their businesses, 

hire workers, construct factories, and achieve other important objectives. Prospect's 

portfolio is diversified across a wide variety of industries - about 50 in total - including 

manufacturing, industrials, energy, business services, financial services, food, health care, 

and media. The small- and medium-sized companies we finance employ more than 

100,000 American workers in nearly every state in the nation. 

From the perspective of our shareholders, our investment objective is to generate both 

current income and long-term capital appreciation through debt and equity investments. 

10 East 40th Street, 44th Floor New York, NY 10016 • Tel 212-448-0702 • Fax 212-448-9652 • www.prospectstreet.com 
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2 

Prospect seeks to maxlmlze returns and minimize risk for our investors by applying 

rigorous credit analysis to make and monitor our investments small- and medium-sized 

companies. 

We are proud of our track record supporting scores of small- and medium-sized companies 

that we have helped grow over time. In the current calendar year we have already closed 

more than $1.1 billion of investments, and we have closed about $3 billion of originations 

in the past twelve months. Our capital has helped create thousands of American jobs over 

the years, and our capital is much needed in this critical period of high unemployment and 

economic uncertainty. 

II. Business Development Companies 

In 1980, Congress enacted amendments to the Investment Company Act of 1940 

authorizing business development companies (BOCs). Congress wanted to facilitate 

private finance investment at a time when, much like today, bank balance sheets were 

reeling from a period of economic largesse in the 1970s, and small- and medium-sized 

American businesses faced limited credit options. In response, Congress authorized a 

publicly traded, closed-end fund structure, the sole intent of which was to facilitate private 

finance investment to small- and medium-sized American businesses while offering such 

homegrown businesses significant guidance and counseling concerning management, 

operations, business objectives, and policies. Put simply, a BDC is a lender to and investor 

in small- and medium-sized businesses and has stepped into a role commercial banks have 

largely abandoned - lending to small- and medium-sized American businesses that might 

not otherwise obtain financing to grow. 

BOCs must invest at least 70% of their assets in so-called "eligible assets." The most 

common type of "eligible assets" are private and "micro-cap" public American companies. 

These investments must be privately negotiated and the BOC is required to offer 

managerial assistance to these companies in which the BOC invests to meet specific 

business challenges. 

Small- and medium-sized American companies generally face difficulty in meeting their 

capital needs. 

And why is that? 

On the one hand, generally such companies are too small to afford the expense of directly 

accessing the public debt and equity markets. On the other hand, their capital needs are 

frequently too large to be well served by SBA programs or small community banks. These 

small- and medium-sized companies generally require $10 million or more in incremental 

financing. 

Financing these companies requires significant time and energy by the lender or capital 

provider, including due diligence activities and rigorous credit analysis that have become 

uneconomical for traditional banks, with transaction sizes that are too small for many 

other capital providers. 
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Thus, for small- and medium-sized companies BOCs represent a very important source of 

capital. Our industry today is composed of about 40 publicly traded BOCs collectively 

managing $39.1 billion in assets with an aggregate market capitalization of $26.4 billion. 

BOCs have become an integral part of the credit markets. Over the nine-year period from 

2004 to 2012, BOCs' total loan balances grew from $2.4 billion to $21.8 billion. As a 

percentage of the leveraged loan market, BOCs today represent about 4.1 %, up from 2.2% 

in 2004. And the companies for which our industry has provided capital employ millions of 

American workers. 

BOCs are heavily regulated. They are public companies that are subject to the Securities 

Act of 1933 and file an election with the SEC to also become subject to the Investment 

Company Act of 1940. Thus, BOCs are transparent vehicles both for investors and for 

small- and medium-sized American companies seeking capital. For example, BOCs file the 

same periodic reports with the SEC as any other public company, while also being subject 

to the additional regulatory constraints of the Investment Company Act of 1940. 

The shareholders of BOCs, many of them retirees on a fixed income, receive the investor 

protections of our securities laws while having an opportunity to participate in the types of 

investments that otherwise are only available to deep-pocket investors through private 

partnerships. BOCs also offer advantages to the companies that are in need of investment 

capital to grow. For many of the companies in which a BOC invests, traditional sources of 

financing like bank lending or public offerings are unavailable. For these companies, BOCs 

offer an alternative source of capital that is subject to public disclosure and transparency. 

In summary, BOCs provide substantial benefits to the American economy, including the 

opportunity for the investing public to invest in smaller growing businesses and the 

opportunity for such small- and medium-sized companies to obtain much-needed 

financing. 

III. Common Sense Modernization 

Mr. Chairman and Members of the Committee, we believe that modest changes to our 

securities laws can greatly enhance the benefits offered by BDCs to the American economy 

and allow BOCs to better serve the capital needs of small- and medium-sized companies. 

These changes have been recommended by legislation introduced by Representatives 

Mulvaney (H.R. 1973), Velazquez (H.R. 31) and Grimm (H.R. 1800). Our industry already 

helps to create many American jobs, and if Congress modernizes some of the rules under 

which we operate I believe that we will be able to create many, many more. 

We appreciate not only the efforts of these Members and those of you who are cosponsoring their bills, but also this Committee's actions in prior years to modernize the 

rules under which BOCs must operate. Your bipartisan efforts have made BOCs more 

efficient and the regulations that we operate under more responsive to the needs of both 

our investors and the small- and medium-sized companies that we serve. This was true in 

the "National Securities Markets Improvement Act of 1996" when Congress modified the 

definition of eligible portfolio company and made other adjustments to the original 1980 
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4 

law. And it was true in 2004 and 2005 when this Committee moved legislation to further 

improve the definition of eligible portfolio companies. 

Today, I would like to urge the Committee to consider some additional steps that can be 

taken to help make BDCs even more robust capital providers to small- and medium-sized 

companies, thereby helping with American job creation in this period of high 

unemployment. As suggested by the bills I have referenced above, a few modest reforms to 

our securities laws can help every BDC more effectively achieve their purpose without 

undermining investor protections. 

(1) Further Update the Definition of Eligible Portfolio Company 

Registered investment companies are allowed to invest in financial services companies, 

including community banks, leasing companies, factoring firms, and automobile financing 

companies. However, as described above, BDCs must invest at least 70% of their assets in 

"eligible portfolio companies." When Congress created BDCs, it focused on industry and 

services, but excluded financial services companies from qualifying as "eligible portfolio 

companies." Thus, no more than 30% of a BDC's assets can be invested in financial 

companies. This limitation makes no sense decades later given the substantial growth of 

financial services as a leading job provider in the American economy since 1980. Financial 

services companies employ millions of American workers and have a capital magnifying 

effect that results in more capital flowing into small- and medium-sized American 

businesses. 

A policy that limits BDC investments in small- and medium-sized financial services 

companies runs counter to the objective of helping attract capital for the benefit of smalland medium-sized American companies. In fact, frequently such companies in turn serve 

the financial services needs of other, smaller companies. For example, we have one 

company in our portfolio called Nationwide Acceptance. Based in Chicago, Nationwide 

provides capital to Americans with modest means in order for such individuals to purchase 

automobiles that those individuals need to get to and from work, drive their children to 

after-school activities, and pursue their individual transportation freedoms. BDCs should 

not have limits on providing capital to such important companies. Financial service 

companies serve a vital role in our economy and should be encouraged, not stifled. 

Financial businesses that are subject to the current law limitation are comprised of a wide 

array of companies: community banks, insurance and reinsurance businesses, asset and 

investment advisors, real estate businesses, industrial loan companies, consumer financing 

businesses, credit card receivables companies, business inventory and receivables 

financing companies, automobile financing businesses, equipment financing bUSinesses, 

companies making loans to purchase livestock feed and farm products, companies owning 

or holding oil, gas or mineral leases or royalty interests, and many more. Again, these types 

of companies amplify the amount of capital made available to small- and medium-sized 

American businesses and American consumers, thereby helping with economic stimulation 

and job creation at no cost to the federal government. 
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The original justification for Congress back in 1980 limiting a BOC's level of investment in 

financial companies is not clear. I believe that this old part of the law is painfully 

antiquated and arbitrary. BOC investments in small- to medium-sized American financial 

services businesses are consistent with the principal purpose for which Congress created 

BOCs - to provide capital and assistance to small, developing businesses that are seeking to 

expand and create American jobs. 

H.R. 1973, the "Business Development Company Modernization Act", would eliminate this 

outdated limitation, bring small- to medium-sized American financial services businesses 

into the family of "eligible assets," and by doing so remove an artificial and unnecessary 

obstacle to their growth and increase the flow of BOC dollars into such new and expanding 

American businesses. 

(2) Update 1940 Act's limitations on owning investment advisors 

The Investment Company Act of 1940 prohibits a BOC from acquiring more than 5% of any 

class of equity securities or more than 10% of the total debt securities of (or invest more 

than 5% of its assets in) any company that directly or indirectly derives more than 15% of 

its consolidated gross revenues from securities-related activities including acting as a 

registered investment advisor. Thus the 1940 Act limits the ability of a BOC to invest in 

investment advisers. 

Prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act 

of 2010, an investment adviser having fewer than 15 clients could generally avoid 

registration under the Investment Advisers Act of 1940, and BOCs could and did invest in 

unregistered investment advisers. BOCs typically used this flexibility to form and manage 

captive investment advisers that would manage investments on behalf of third party 

investors or the BOC itself, permitting stockholders in the BOC to benefit from the stream 

of advisory fees generated by such investment advisers. Following implementation of the 

Dodd-Frank Act, which repealed this registration exemption for "private advisers," BOCs 

owning (or wishing to acquire) a registered investment adviser must apply to the SEC for 

exemptive relief. Although the SEC has provided administrative relief from this prohibition 

through several exemptive relief orders, the process is very time consuming and expensive. 

The three pending BDC bills would modernize the statute by repealing this prohibition and 

end the needless spending of shareholder resources to seek administrative relief. In 

essence, it simply codifies existing practice, removes unnecessary costs and levels the 

playing field between those BDCs that have been granted exemptive relief and those that 

have not. Changing the law here also reflects that asset management companies are no 

riskier, and arguably less risky, than many other parts of the economy. Such companies 

also employ plenty of American workers, and their growth should be encouraged rather 

than discouraged. 
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6 

(3) Modernize and Re-examine the Restrictions on How BDCs Raise Capital 

Both H.R. 1800 and H.R. 31 offer some common sense reforms on how BDCs raise capital in 

the market. Reducing the cost of raising capital benefits both BDC shareholders and the 

small- and medium-sized American companies in which they invest. 

(A) Shelf Registration Forms 

BDCs, like other companies that regularly raise capital through securities issuances, rely on 

pre-filed "shelf registration" - a securities filing that allows a company to be pre positioned 

to issue additional securities. Because shelf registrations contain financial information that 

becomes outdated as companies publicly report their most recent financial information, 

companies are allowed to incorporate by reference in their shelf registrations subsequent 

financial reports. However, BDCs are not allowed to take advantage of this common sense 

approach, and instead we must manually update our shelf registration statements each 

time we report new quarterly information. This slows down the timetable for a BDC to 

access the capital markets and adds the unnecessary expense of lawyers, accountants and 

printers to the securities offering process. 

Why must BDCs replicate the information in duplicative public filings at needless cost and 

with no known investor benefit? 

Why must we file the electronic equivalent of reams of duplicative paper? 

Dr. Seuss' Lorax famously asked: "who speaks for the trees?" The pending legislative 

initiatives properly ask: "who speaks for common sense?" 

These measures require the SEC to reform the forms and instructions for shelf registrations 

to treat BDCs like other companies eligible to use shelf registration statements. BDCs 

currently must copy and paste entire documents over and over again into filings, thereby 

requiring armies of lawyers, accountants, and printers. Every other type of public company 

in America has more streamlined rules reflecting the electronic age. BDCs should have 

access to the same streamlined filing benefits. 

(B) Offering Reform 

BDCs can only offer additional capital to small- and medium-sized American companies 

when we can increase our own capital. Our industry is traditionally a frequent issuer of 

new securities offerings to raise such funds. For example, Prospect has raised some $2.5 

billion since our IPO in 2004 through more than 26 public offerings. 

In 2005 the SEC modernized the issuance process for frequent issuers, reducing costs and 

making the process more efficient. However, BDCs were excluded from these common 

sense reforms, with a promise that the issue would be revisited. Some eight years later 

nothing has happened. This situation has not benefited the capital needs of small- and 

medium-sized companies, nor has it provided any beneficial investor protections. It is time 
73 


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that our business development companies have the same access to the capital markets as 

enjoyed by other publicly traded companies. 

For example, the offering reforms recognize companies that are "Well-Known Seasoned 

Issuers" or "WKSls." These are companies that generally are frequent issuers in the public 

markets and have significant market capital size. Generally, WKSIs can take advantage of 

new, liberalized rules relating to communications with investors and the registration 

process. Unfortunately BOCs were explicitly excluded from the definition ofWKSI without 

any explanation or rationale. 

In fact, BOCs are the only industry disadvantaged by offering reform. 

How? 

Offering reform allows issuers greater freedom to communicate with prospective 

purchasers. One such method that is allowed is a recorded electronic road show that is 

played on a delayed basis. Before offering reform, BOCs and other issuers relied on a series 

of no-action letters issued by the SEC to use electronic road shows. As part of the reform, 

the SEC withdrew the electronic road show no-action letters. As a result, BOCs are no 

longer permitted to use or disseminate recorded copies of electronic road shows and were 

not made eligible for the new modernized communication rules. 

There is no public policy justification for BOCs being left behind when the SEC modernized 

the rules that govern how companies can raise capital in the public markets, nor to have an 

otherwise constructive modernization effort inadvertently turn the clock back on our 

industry. 

(C) Other Reforms 

H.R. 31 and H.R. 1800 also offer other reforms that can assist BOCs in raising and deploying 

capital to small- and medium-sized American companies. For example, these bills provide 

some easing of the leverage limits imposed by the Investment Company Act of 1940 on 

BOCs. The leverage limitations suggested by these bills remain very conservative but 

provide more leeway for BDes to have a greater ratio of debt to asset valuation on their 

balance sheets. These changes underscore the importance of ensuring that BOCs have 

adequate access to capital themselves, so they can redeploy funds to support the small- and 

medium-sized companies that they serve. The proposed leverage limitations are still far 

more restrictive than what banks and insurance companies are allowed to enjoy. 

IV. Conclusion 

In conclusion, business development companies are an important source of capital for 

small- and medium-sized businesses. With some common sense reforms it is possible to 

increase the capacity of BOCs to offer capital to job-creating American businesses without 

in any way undermining the strong investor protections afforded by the Investment 

Company Act of 1940. 
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We applaud the efforts by Representatives Mulvaney, Grimm, and Velazquez and urge the 

Committee to act favorably on BDC reform legislation to expand capital access and remove 

inefficiencies in the current regulatory rules. Our industry and our economy, with its still 

unacceptably high unemployment rate, require action by the Committee in a manner that I 

have presented to you today without costing the government and taxpayers a single penny. 

Again, I greatly appreciate the opportunity to testifY today and would be pleased to answer 

any questions that you may have. 
75 


81764.040

ALLIANCE Of MERGER AND ACQUISITION ADVISORS 

United State House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

Hearing Entitled "Reducing Barriers to Capital Formation" 

Room 2128 Rayburn House Office Building 

June 12, 2013 

Written Statement by 

Shane B. Hansen, Partner 

Warner Norcross & Judd LLP 

Submitted as counsel for and on behalf of the 

Alliance of Merger & Acquisition Advisors 

200 East Randolph Street, 24th Floor 

Chicago, Illinois 60601 

With respect to H.R. 2274 

The Small Business Mergers, Acquisitions, 

Sales, and Brokerage Simplification Act of 2013 

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Written Statement by 

Shane B. Hansen, Partner 

Warner Norcross & Judd LLP 

With respect to H.R. 2274 

The Small Business Mergers, Acquisitions, 

Sales, and Brokerage Simplification Act of 2013 

June 12,2013 

Introduction 

Chairman Garrett, Ranking Member Maloney, members of the Capital Markets 

Subcommittee, thank you for this opportunity to explain how and why today's "one size fits all" 

system of regulating securities broker-dealers adversely impacts and unnecessarily increases the 

costs that business owners incur to sell, buy, or grow their small and mid-sized businesses 

through privately negotiated mergers, acquisitions, business combinations, and sale transactions. I 

This legislation represents the culmination of more than six years' effort to work cooperatively 

with the staff of the Securities and Exchange Commission ("SEC' or "Commission"), through its 

Division of Trading and Markets, and with state securities regulators through the North American Securities Administrators Association ("NASAA"), to craft a regulatory solution. As quoted 

below, even the SEC recognizes the need to address this small business issue, but it has been unable to make this a rulemaking priority and, in the absence of a Congressional mandate, is unlikely to do so any time soon. 

The purpose of the Small Business Mergers, Acquisitions, Sales, and Brokerage 

Simplification Act of 2013, H.R. 2274 (the "Small Business Brokerage Act"), is to appropriately 

scale federal regulation of securities broker-dealers with respect to privately negotiated business 

sales, mergers, and acquisitions ("M&A"). It would enhance public protections for business 

sellers and buyers by clarifying and creating relevant regulatory requirements while addressing 

these critically important small business considerations: 

.:. An estimated $10 trillion of privately owned businesses will bc sold or 

closed as baby boomers retire . 

• :. Jobs are preserved and created when new entrepreneurs and other companies acquire and grow existing businesses . 

• :. Business brokers playa critical role in facilitating private business mergers, acquisitions, and sales. 

I This written statement is submitted by Shane B. Hansen as legal counsel for the Alliance of Merger & Acquisition Advisors 

C'AM&AA''), a national professional association of more than 900 M&A brokers and associated members headquartered in Chicago, Illinois. More information about the AM&AA is available on its website at http://\vw\v.amaaonline.com!.This effort is 

supported by the International Association of Business Brokers ("'lEBA"), including the M&A Source. a national professional 

association of business brokers headquartered at 3525 Piedmont Road, Building Five, Suite 300, Atlanta, Georgia, 30305. More 

information about the IBBA and the M&A Source is available on their websites at: http://v.'\v\\'.ibba.org/ and 

hltp:l/w\vw.masource.ore:!. Fourteen regional professional associations ofM&A and business brokers also support this effort, 

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.:. Simplified and appropriately scaled regulation of business brokerage services will reduce costs and better protect business owners. 

Public Policy 

Page 2 

The public policy considerations supporting this legislation began in 2005 with 

the American Bar Association, Business Law Section, Report and Recommendations of the Private Placement Broker-Dealer Task Force, available on the SEC website at www.sec.gov/info/ 

smallbus/2009gbforum/abarcport062005.pdf. A similar recommendation was made the next 

year in The Final Report of the Advisory Committee {to the SEC] on Smaller Public Companies, 

also available on the SEC's website at www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf 

Following the issuance of these independent and unbiased reports, working drafts of proposed 

rules to accomplish these recommendations were developed by the Alliance of Merger & Acquisition Advisors ("AM&AA"), with the support of the International Association of Business Brokers ("IBBA"), and submitted to the SEC and NASAA in 2007 and 2008. A proposal to appropriately scale federal regulation of M&A intermediaries and business brokers ("M&A brokers") 

has been among the top recommendations in the 2006, 2007, 2008, 2009, 2010, and 2011 Government-Industry Forum on Small Business Capital Formation hosted by the SEC 

(http://sec.gov/info/smallbus/sbforum.shtml).This topic was not on the 2012 agenda, which is 

set by the SEC. The SEC has been studying these issues, as acknowledged by former SEC 

Chairman Schapiro, but has not engaged in rulemaking. 

In December 2011, a bipartisan group of eight Congressmen wrote to then SEC 

Chairman Schapiro asking about the status of the recommendations from past SEC-Government 

Small Business Capital Formation Forums. Chairman Schapiro's response to the Congressmen, 

attached to this statement, was encouraging. She gave the following response to a similar "question for the record" following her December 20 II Senate testimony: 

The staff of the Division of Trading and Markets, which is primarily responsible for administering the regulation of brokers and dealers, is analyzing the 

SEC's rules and regulations that apply to business brokers. The Division staff is 

developing options that it could recommend that the Commission consider to revise those regulations in light of the role that business brokers play in the purchase, sale, exchange or transfer of the ownership of privately owned businesses. 

The Division staff is also revisiting existing guidance about whether certain business brokers must be registered with the SEC as brokers in order to determine 

whether the Commission or the staff should provide further guidance in this area. 

We are mindful of the importance of considering both the burdens on small businesses' capital formation arising from our regulatory requirements and the benefits of those requirements to investors and other market participants. 

Despite this encouragement, in more than six years the SEC has been unable to 

make this small business issue a rulemaking priority and will be unlikely to do so without a Congressional directive. A solution is urgently needed as more baby boomers retire, many of whom 

must choose between finding a buyer or closing their businesses. More jobs would be preserved 

and created by facilitating business mergers, acquisitions, and business combinations of small 

and mid-sized companies at a lower cost for professional services. Let me emphasize, these are 

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Page 3 

not publicly traded companies, but these are the companies largely responsible for innovation 

and fueling economic growth in the U.S. 

Business Context 

Each of you has in your district hundreds, and more likely several thousands, of 

business owners who, sooner or later, want to sell their small and mid-sized businesses. They 

will want and need professional assistance preparing their business for the sale, valuing their 

business, talking about potential human resource issues when ownership and control of their 

business is changing, marketing the business, finding and screening potential buyers, talking 

about possible sale transaction structures, preparing for prospective buyers' due diligence, assessing buyers' competing offers, and consulting on a wide range commonly recurring business 

transition issues. The sellers will also be advised by their lawyers and accountants performing 

their customary legal, tax, and account services, but whose training, experience, and skills typically do not include the consulting services previously mentioned. 

Similarly, back in your districts, there are hundreds, and more likely several thousands, of entrepreneurs committed to owning their own business, as well as larger companies 

wanting to grow by adding product lines, production capacity, intellectual property, or expanding 

geographically. These potential buyers want and need professional assistance finding and 

screening potential sellers; assisting with and assessing their due diligence investigation into 

each potential seller's business; advising about possible purchase terms and conditions; anticipating issues with staffing, intellectual property, and other commonly recurring business transition 

issues; financial modeling and advising about possible financing alternatives and their impact on 

profitability; and working with the lawyers and accountants employed by the buyers for their 

customary legal, tax, and accounting services. Sometimes these buyers are sophisticated and 

well-funded venture capital or private equity groups "in the business" of buying start-up and 

smaller companies. 

These are the kinds professional services provided to small and mid-sized business sellers and buyers by M&A brokers. M&A brokers and their firms are themselves small 

businesses, ranging in size from solo practioners to perhaps a dozen or more professionals and 

support staff. M&A brokers come from diverse business and financial backgrounds, such as 

commercial real estate, accounting, law, finance. and business management, and many have extensive study, training, experience, and professional education in a broad range of business management consulting, human resources, financial, accounting, and tax matters. You likely have 

hundreds of M&A brokers in your districts as they can be found in both small towns and urban 

centers. Typically, lawyers and accountants do not provide the kinds of business marketing and 

consulting services just described. 

Typically, small and mid-sized businesses organically build wealth through many 

years of hard work, innovation, and jobs creation. Very small businesses have an "owner life 

cycle" that is affected by the owners' death, sickness, burnout, or other economic opportunities 

(e.g., a sale). At this conclusion of the business ownership lifecycle, the business either continues under new owners or it closes, ending its economic contribution, and the employment and 

associated commerce it has created for the communities where it has operated. Mid-sized companies are similarly, though typically not as immediately, impacted by the owners' or managements' changing personal circumstances. M&A brokers are the bridge that enables many small 

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Page 4 

and mid-sized businesses to continue with fresh energy and momentum. M&A brokers help protect the wealth accumulated by the exiting owner through a well-advised sale, while enabling 

new owners to maintain the economic viability, jobs and commerce that the exiting owner had 

created, most often bringing fresh ideas, new energy, and commitments to grow and improve. 

Capital formation, businesses grown and saved, and jobs created and saved by 

small and mid-sized businesses are all facilitated when sellers and buyers can obtain costeffective professional advice and assistance with the transfer of ownership through stock sales, 

mergers, and other business combinations. For example, the acquisition of one business by another enables the combined business to expand and accumulate investors' capital in a morc diversified, often financially stronger, busincss enterprise. Even when a business seller receives 

the buyer's cash, instead of the buyer'S stock, that cash is often reinvested in another business 

enterprise. 

Today, federal seCUrItIes laws and rules regulate "Main Street" M&A brokers 

handling privately negotiated "sale of business" transactions the same way as "Wall Street" investment bankers handling transactions involving publicly traded companies. Most of those 

compliance costs must be passed on to the business buyers and sellers in order for the M&A brokers to stay in business, thus unnecessarily making their professional services unaffordable. 

These compliance-driven costs are unduly high in light of the inherent safeguards protecting the 

buyers and sellers in these privately negotiated transactions. 

These types of M&A transactions are negotiated between sellers and buyers by 

their lawyers and M&A brokers. The parties negotiate and the lawyers document their representations, warranties, covenants, rights, and remedies. Buyers conduct extensive due diligence on 

the sellers' businesses. Buyers will actively own, operate, and directly manage their business 

entities following the closing; they are not unsophisticated passive investors. These are vastly 

different circumstances than investment bankers handling M&A transactions involving public 

companies, or passive investors relying upon information provided through SEC filings. These 

sellers and buyers do not rely upon federal or state securities laws for their protection; rather, 

they rely upon the fully negotiated transaction-related agreements created by their lawyers. 

Legal Background 

Very small business sale transactions are commonly accomplished through the 

sale of the business's assets in exchange for cash, which is generally not subject to securities 

regUlation. However, even the sale of business assets can become a securities transaction under 

some circumstances if it involves an "earn-out" or the buyer's giving its promissory note to the 

seller, each of which may be regarded as "securities" under federal and state securities laws. 

Moreover, when for a variety of reasons the ownership of a privately held business is transferred 

by means of the purchase, sale, exchange, recapitalization, repurchase, issuance, merger, consolidation, or other business combinations involving stock or other securities, then federal and one 

or more state securities laws appll to the parties, the transaction, and regulate the transactionrelated activities of the M&A broker. 

2 See, e.g., SEC Rule 145. Reclassification o/Securities, Mergers, Consolidations and Acquisitions of Assets. 

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Page 5 

Since the U.S. Supreme Court's opinion in Landreth Timber Co. v. Landrelh/ the 

federal securities laws have been applied to the offer and sale of a business regardless of whether 

the transaction involves the sale of one or all of the outstanding shares of a company's securities. 

When an intermediary is brokering the sale of businesses involving securities, the intermediary 

often comes within the broad definition of a "broker" under the Securities Exchange Act of 1934, 

as amended ("Exchange Act"). The Exchange Act generally requires the intermediary to be registered and regulated as a "broker-dealer" by the SEC and to be a member of, and regulated by, 

the Financial Industry Regulatory Authority ("FINRA"). Offering-related registration exemptions (e.g., SEC Regulation D) do not exempt broker registration requirements. State securities 

laws impose registration and regulatory requirements on brokers, dealers, or broker-dealers as 

those terms are similarly defined. State real estate and business brokerage licensing laws also 

apply to these activities, creating multiple layers of initial and on-going regulatory requirements, 

professional qualifications, and compliance-related costs for M&A brokers. 

"Broker" Status 

Section 3(a)(4)(A) of the Exchange Act defines a "broker" broadly as "any person 

engaged in the business of effecting transactions in securities for the account of others". Section 

15(a)(I) of the Exchange Act provides, in pertinent part, that: 

It shall be unlawful for any broker or dealer ... to make use of the mails 

or any means or instrumentality of interstate commerce to effect any transactions 

in, or to induce or attempt to induce the purchase or sale of, any security ... unless such broker or dealer is registered in accordance with subsection (b) of this 

section. 

15 U.S.c. § 780. This proscriptive language applies not only to either purchases or sales, but 

also to solicitations intended to result in purchases or sales whether or not a transaction ultimateIyoccurs. 

The SEC's Guide to Broker-Dealer Registration4 provides guidance about and 

various examples of "broker" status. According to the Guide, each of the following individuals 

and businesses may need to register as a broker, depending on a number of factors: 

"finders," "business brokers," and other individuals or entities that engage in 

the following activities: 

o Finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual 

funds, including hedge funds) or other securities intermediaries; 

o Finding investment banking clients for registered broker-dealers; 

o Finding investors for "issuers" (entities issuing securities), even in a "consultant" capacity; 

o Engaging in, or finding investors for, venture capital or "angel" financings, including private placements; 

l Landreth Timber Co. v. Landreth, 471 U.S. 681; 105 S. Ct. 2297 (May 28,1985). 

4 Available on the SEC's website at http://\\''\vw.sec.2ov/divisionsimarkctrcglbdguide.htm#JI. 

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o Finding buyers and sellers of businesses (i.e., activities relating to mergers 

and acquisitions where securities are involved); 

* * * 

Page 6 

The SEC looks at the activities that the intermediary actually performs and the Guide lists some 

of the questions that, in the staff's view, bear upon whether an intermediary is acting as a broker: 

• Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction? 

• Does your compensation for participation in the transaction depend upon, or is 

it related to, the outcome or size of the transaction or deal? Do you receive 

trailing commissions, such as 12b-J fees? Do you receive any other transaction-related compensation? 

• Are you otherwise engaged in the business of effecting or facilitating securities transactions? 

• Do you handle the securities or funds of others in connection with securities 

transactions? 

In the staff's view, a "yes" answer to any of these questions indicates the intermediary may need 

to register as a broker (which encompasses registration as a dealer and hence is commonly referred to as a "broker-dealer,,)5 SEC registration as a broker also requires membership in 

FINRA. A similar analysis is applied under state securities laws, which all define "broker" in 

essentially the same terms. 

In recent years, the SEC's application of these criteria through various enforcement cases and no-action letters has focused upon the presence of transaction-based compensation-a "hallmark of broker-dealer activity''';. Transaction-based compensation, including success fees and commissions, is generally contingent on the outcome and is often measured by the 

consideration exchanged in the transaction. This type of incentive compensation creates inherent 

confl icts of interest that the SEC considers to be a paramount concern in protecting investors. 

Other forms of compensation may satisfy the "engaged in the business" element in the "broker" 

definition, but typically carry somewhat less weight when there is no incentive or "salesman's 

stake" tied to the transaction's outcome (thus helping lawyers and accountants to distinguish 

their role and fees in an M&A transaction). While old SEC no-action letters implied that a mere 

5 For additional factors relevant to private equity funds, venture capital funds, business development companies, and similar issuers see, Speech, A Few Obsen1ations in the Private Fund Space" David W. Blass, Chief Counsel. SEC Division of Trading and 

Markets (AprilS, 2013), available at: http://.www.sec.gov/news/speechl2013/spch0405I3dwg.htm (the "Blass Speech''). 

6 See Order Exempting the Federal Reserve Bank o/New York, Maiden Lane LLC and the ltfaiden Lane Commercial Mortgage 

Backed Securities Trust 2008-1 from Broker-Dealer Registration, SEC Release No. 34·61884 (April 9, 2010). See also, 1st 

Global. Inc., 2001 SEC No-Act. LEXIS 557 (May 7, 2001) (reiterating the stafTs position that "the receipt of securities commissions or other transaction related [sic1 compensation is a key factor in detennining whether a person or an entity is acting as a 

broker-dealer. Absent an exemption, an entity that receives commissions or other transaction-related compensation in connection 

with securities-based activities that fall within the definition of 'broker' or 'dealer' ... generally is required to register as a brokerdealer." (internal citations omitted)). 

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Page 7 

introduction of the parties might be permissible7

, more recent no-action letters express the SEC 

staff s skepticism about a broader scope of involvement or the regularity of participation in capital-raising activities being present in the fact patterns presented (e.g., actively soliciting prospective investors, transmitting offering documents, or recommending an offering).8 For example, 

seeking and introducing prospective investors to different issuers in exchange for a finder's fee 

may be deemed to be engaging in the business of a broker.9 The SEC staff has publicly stated 

that the oft-cited Paul Anka no-action letterlO is to be limited to its facts I I-an issuer's use of a 

singer's rolodex without any contact between the Canadian singer and potential investors. 

While the SEC places considerable weight on the presence of transaction-based 

compensation, a number of federal district court decisions have articulated other factors to be 

considered in analyzing key aspects of the definition of "broker". In SEC v. Kenneth Kramerl2 

the court criticized the SEC for failing to provide sufficient proofs with respect to factors beyond 

transaction-based compensation. The Kramer opinion summarized various factors identified in 

prior court decisions: 

Because the Exchange Act defines neither "effecting transactions" nor 

"engag[ingj in the business," an array of factors determines whether a person 

qualifies as a broker under Section 15(a). The most frequently cited factors, identified in SE.c. v. Hansen, consist of whether a person (1) works as an employee 

of the issuer, (2) receives a commission rather than a salary, (3) sells or earlier 

sold the securities of another issuer, (4) participates in negotiations between the 

issuer and an investor, (5) provides either advice or a valuation as to the merit of 

an investment, and (6) actively (rather than passively) finds investors. See also 

Cornhusker Energy Lexington, LLC v. Prospect St. Ventures (Bataillon, 1.) (identifying as evidence of broker activity a person's "analyzing the financial needs of 

an issuer," "recommending or designing financing methods," discussing "details 

of securities transactions," and recommending an investment); S.E. C. v. Margolin 

(Leisure, 1.) (finding evidence of "brokerage activity" in the defendant's "receiving transaction-based compensation, advertising for clients, and possessing client 

funds and securities."). 

However, "[t]he factors articulated in Hansen ... [a]re not designed to be 

exclusive," and some factors (i.e., those factors typically associated with broker 

activity) appear more indicative of broker conduct than others. For example, 

SEC. v. Bravata (Lawson, J.), describes "[t]he most important factor in determining whether an individual or entity is a broker" as the "regularity of participa7 See, e.g., Mike Bantuver;s, 1975 SEC No-Act. LEXIS 2158 (1975). 

8 See, e.g, Brumberg, Alackey & Wall, 2010 SEC No~Act. LEXIS 406 (2010) a law finn could not introduce its issuer clients to 

potential investor clients in exchange for a finder's fee. 

9 For a summary of SEC no-action letters, see the Report and Recommendations of the Private Placement Broker-Dealer Task 

Force, Busines.o;; Law Section, American Bar Association, 60 Business Lawyer 959-1028 (2005), and available at 

http://sec.gov/info/smallbus/2009gbforumlabareport062005.pdf (the "ABA PPB Task Force Report') 

IO Paul Anka, 1991 SEC No-Act LEXIS 925 (1991). 

11 SEC 2008 Small Business Capital Fonnation Forum Transcript, Private Placement and M&A Brokers Panel (Nov. 20. 2008). 

12 SEC v. Kenneth Kramer, 778 F. Supp. 2d 1320,2011 U.S. Dis!. LEXIS 38968 (M.D.Fla. 2011). The SEC's initial appeal of 

the decision was dismissed by the court because final judgments had not yet been entered as to all parties. Final judgments were 

entered on February 22, 2013. 

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tion in securities transactions at key points in the chain of distribution." [S]ee also 

S.E.C. v. Kenton Capital, Ltd. (Kollar-Kotelly, J.) (describing "regularity of participation" as one of thc primary indicia of "engag[ing] in the business''). '" Cornhusker describes "transaction-based compensation" as "one of the hallmarks of 

being a broker-dealer." (stating that "[t]he underlying concern has been that transaction-based compensation represents a potential incentive for abusive sales practices that registration is intended to regulate and prevent."). In other words, transaction-based compensation is the hallmark of a salesman. By contrast, a person's 

recommending a particular investment or participating in a negotiation typically 

occurs in an array of different commercial activities and professional pursuits, including brokering. 

Page 8 

Kramer, p. 1334-1335(internal citations omitted). The court's contrasting statement above fails 

(0 note that giving investment advice for compensation usually requires registration and regulation as an "investment adviser" under federal and state securities laws. 

Importantly, the SEC has granted limited relief to M&A intermediaries and business brokers who may meet the "broker" definition through a small number of no-action letters, 

notably including Country Business, [nc., Victoria Bancroft, and International Business Exchange Corp.13 These no-action letters include a number of significant factual limitations but 

they are commonly relied upon by business brokers to conduct their activities without federal 

broker registration (states mayor may not follow the SEC staff's guidance). For example, 

among the nine enumerated factual predicates in the Country Business, Inc. letter, the entire 

business must be sold, that business must meet the "small business" definition under the Small 

Business Administration's standardsl4, and the intermediary may not talk about securities-related 

transaction structures (e.g., a purchase of stock versus a sale of assets). The SEC has also denied 

no-action relief in similar M&A contexts but without providing meaningful explanations,15 perhaps reflecting the lack of factual detail in the requestors' letters. 

If asked, many states may follow the SEC's no-action letter guidance, even 

though it is not binding on them; some states may impose their own conditions, while others may 

not grant any relief. State regulators are often unfamiliar with how the activities of an M&A 

broker differ from those of investment banking or retail broker-dealers. Some states impose specific registration and related requirements on all types of finders16 Some states have brokerdealer registration exemptions when the owner/investor qualifies as an "institutional investor" as 

the term is defined in their blue sky law or rules.17 California exempts by rule "any person who 

effects transactions in securities in this state only in connection with mergers, consolidations or 

purchases of corporate assets, and who does not receive, transmit, or hold for customers any 

IJ Country Business. Inc .• 2006 SEC No-Act LEXIS 669 (2006); Victoria Bancroft. 1987 SEC No-Act. LEXIS 2517 (1987); and 

International Business Exchange Corp. 1986 SEC No·Act LEXIS 3065 (1986). 

!4 Available on the Small Business Administration"s website at: http://\V\v\v.sba.gov/contentltable-small-business-sizc-standards. 

15 Hallmark Capital Corporation, 2007 SEC No-Act LEX[S 509 (2007); and Mike Bantuveris. 1975 SEC No-Acl LEX[S 2158 

(1975). 

16 See, e.g., Texas Administrative Code, Title 7, Chapter) 15, Section 115.11, Finder registration and activities: and Administrative Rules of South Dakota, Article 20:08. Section 20:08:03:17, Finders. 

IJ See. e.g., Section 401 (b)(1)(C) of the Uniform Securities Act of2002. 

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Page 9 

funds or securities in connection with such transactions", generally referred to as a "merger and 

acquisition specialist". 18 

Today's "One-sized" Regulatory System 

Thc burdens and costs of initial broker-dealer registration and on-going compliance with current SEC and FINRA requirements are substantial. Initial set-up and compliancerelated costs often exceed $150,000. On-going compliance costs often exceed $75,000 per year. 

Applying for and obtaining FINRA membership typically takes six to nine months, and frequently longer. There are competency exams that test on substantive material totally irrelevant to the 

professional knowledge base required to advise about M&A transactions19• Accrual-based 

GAAP accounting is required and minimum net capital must be maintained at all times regardless of the ebbs and flows of transaction-related income and expenses. Monthly or quarterly financial reporting is required prepared by specially qualified financial and operations principals. 

Annually audited balance sheets and related schedules and attestations must be filed with the 

SEC and FINRA. Anti-money laundering programs, procedures, and independent third-party 

AML testing are required, even though M&A brokers rarely, if ever, handle the parties' funds or 

securities. Membership in the Securities Investors Protection Corporation is required and membership fees are assessed, even though M&A brokers do not handle securities. The SEC, 

FfNRA, and the states charge the firm annual registration fees and membership assessments 

based on the firm's gross revenues, as well as annual registration fees for each registered representative. 

The body of existing SEC and FINRA rules impose significant requirements affecting every aspect of a broker-dealer's business ownership, staffing, marketing, operations, and 

recordkeeping. These rules have become highly complex over the years in response to, among 

other things, evolving financial markets, major securities frauds, national financial crises, and 

perceived regulatory gaps. This "one size fits all" body of regulation has been written largely to 

address investor protection in the context of retail brokerage services and investment banking 

services for publicly traded companies. Most of the SEC's and FINRA's rules and related guidance require "translation" when applied in the M&A and business brokerage context. For example, FINRA's "know your customer" and "suitability" rules must be applied to "customers" in 

the context of transactions between business buyers and sellers. Even the basic registration application, Ponn BD, does not explicitly identify either M&A or investment banking activities as 

a category of regulated activities-in Item 12 of the form the registrant must mark "Private 

placements of securities", "Other", and explain its activities in a supporting schedule. Newly 

released regulatory guidance comes from FINRA weekly and must be monitored for changes 

pertinent to the narrowly focused activities ofM&A brokers. 

All of this complexity and cost disproportionately impacts small and mid-sized 

businesses and the professional intermediaries who serve them because they typically handle 

smaller transactions that generate smaller success fees, so they are less able to spread these fixed 

costs over mUltiple transactions. The commitment of management and staff time, as well as 

largely fixed compliance-related costs, are annually required to maintain registered status regardIS See 10 CCR Section 260.204.5, 10 CA ADC Section 260.204.5, Merger and Acquisition Specialists, adopted in 1974. 

19 Content outlines for FINRA' s examinations are available on its website at http:/h.vww.tinra.org/Industry/Compliance/ 

RegistrationJQuaiificationsExams/OuaiificationsipOl1051. 

WARNER NORCROSS 9: JUDO lLP 

ATTORNEYS AT LAw 

900 fiFTH THIRD CENTER .111 lYON STR£tT, N.W. 

GRAND RAPIDS, MlCHIGA~ 49503·2487. WWW,WNJ.(OM 
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Page 10 

less of the number of securities-regulated business sale transactions closed by the M&A broker 

in any given year, which for smaller firms may be one or perhaps two per year since smaller 

M&A transactions are often cash-for-assets sales not regulated under securities laws. Substantially all of these costs are necessarily passed on to the business sellers and buyers who use the 

registered broker-dealer's services. 

These high costs drive some business sellers and buyers to engage unregistered 

M&A brokers if they want professional assistance with their transactions. Accordingly, a very 

high percentage of M&A brokers are not registered with the SEC and so, technically, are violating the registration requirements in federal securities laws today. Their registration violations 

may put their clients' transactions at risk of being rescinded if the post-closing business does not 

run as hoped or is run into the ground by the buyer. Registration violations put the M&A brokers at risk for regulatory enforcement and sanctions, as well as their livelihood, even though 

today's registration and body of regulation is largely irrelevant to their services and does little to 

protect business sellers and buyers, who protect themselves through their negotiated rights and 

remedies in M&A and stock purchase agreements. 

Regulatory Reform 

"Right-sizing" federal regulation of M&A brokers and finders has been among 

the top recommendations in the 2006,2007,2008,2009,2010, and 2011 Government-Business 

Forum on Small Business Capital Formation hosted by the SEC20 at the direction of Congress 

(the topic of M&A brokers and finders was not on the SEC's agenda for the 2012 forum). The 

Final Report of the Advisory Committee on Smaller Public Companies (2006), reached the same 

conclusion in Recommendation IV.P .6, page 81 21 , as did the Report and Recommendations of the 

Private Placement Broker-Dealer Task Force of the Business Law Section of the American Bar 

Association.22 

In light of this well-articulated need, in 2006 the AM&AA, with the support of the 

lBBA and its M&A Source, and 14 regional professional associations of M&A brokers, began 

developing and actively seeking a simplified system of "broker" registration and regulation under the Exchange Act for M&A brokers advising buyers or sellers in purchases, sales, mergers, 

and acquisitions of privately-owned companies. The AM&AA developed and presented proposed rules to the SEC staff in March 2007. The rulemaking proposal was expanded in March 

2008 to add a proposed codification of the Country Business, Inc. no-action letter into an SEC 

rule defining circumstances when no type of broker registration would be required. On a parallel 

track, the AM&AA also developed and presented proposed model state rules to NASAA to develop a coordinated and complementary system of simplified state registration and regulation in 

March 2007. The model rule proposal was expanded in March 2008 to create a model state-level 

codification ofthe Country Business, Inc. no-action letter. 

Neither the SEC nor NASAA have taken any action to address these small business issues, though significant time and attention has been paid by each of them in their consid20 Available on the SEC's website at http;//sec.gov/info/smallbus/sbforurn.shtml. 

21 Available on the SEC's website at http://sec.gov/info/smallbus!acspclacspc~finalreport.pdf. 

22 The ABA PPB Task Force Report is availab1e on the SEC's website at http://sec.gov/info/smallbus/2009gbforum/-

abareport062005.pdf. 

WARNER NORCROSS a JUDD LLP 

ATTORNEYS AT LAw 

900 FIFTH THIRD CENTER_111 lYON STREET, N.W. 

GRAND RAPIDS, MiCHIGAI'I4950J·Z487. WWW.W/iJ.COM 
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Page II 

cration and there have been discussions between them at their annual "Section 19d" meetings. 

With more than six years passing without rulemaking, and the prospect for rulemaking any time 

soon unlikely, the AM&AA and IBBA have turned to Congress to address and mandate the 

SEC's consideration these small business issues. 

The Small Business Brokerage Act (H.R. 2274) 

The Small Business Brokerage Act (H.R. 2274) would amend the Exchange Act 

by adding a new subsection to Section 15, which governs broker-dealer registration. The 

amendment would reduce the regulatory costs incurred by sellers and buyers of small and midsized privately held companies for professional business brokerage services, while enhancing 

their protection through well defined, appropriately scaled, and cost effective federal securities 

regulation. It would direct the SEC to create a simplified system ofregistration through a public 

notice filing, publicly available on the SEC's website, and would require appropriate client disclosures, pertaining to M&A brokers and their associates. The bill would also direct the SEC to 

tailor its rules governing M&A brokers in light of the limited scope of their activities, the nature 

of privately negotiated M&A transactions, and the active involvement of buyers and sellers in 

those transactions. 

Important investor protections would be preserved. Federal law would continue 

to control the capital, custody, margin, financial responsibility, recordkeeping, bonding, and financial or operational reporting requirements applicable to M&A brokers, tailored by the SEC to 

their circumstances. Statutory disqualifications would continue to apply. The SEC, in coordination with state securities regulators, would establish the content of the notice registration and disclosures, and could establish uniform and consistent standards of training, experience, competence, and qualifications for the associates of M&A brokers, presently prescribed by FINRA. 

M&A brokers would be exempt from membership in and regulation by FlNRA. Existing state 

securities laws would continue to apply. 

Being SEC-registered, an M&A broker could exchange client referrals with fullyregistered broker-dealers, thus better assuring that small business clients could be costeffectively served by appropriately regulated brokers. M&A brokers could not havc custody of 

the funds or securities exchanged by the parties. An M&A broker could not be involved in capital-raising beyond the context of M&A transactions and could not be engaged by an issuer in a 

public offering of its securities. 

Conclusion 

Regulatory reengineering is urgently needed to lower regulatory costs incurred by 

small and mid-sized privately held businesses and the M&A professionals who serve them. 

Reengineering is needed to make federal securities relevant and effective in this business context. In this context the perception of public perception under the current "one-size fits all" system of broker-dealer regulation is illusory, as there are thousands of small firms engaged in 

M&A brokerage activities who are not registered because the current body of regulation simply 

does not address the professional services they provide to small and mid-sized businesses. 

The Small Business Brokerage Act would provide a simple, but practical and 

workable, regulatory architecture for "multitudes" of M&A brokers and small business owners 

WARNER NORCROSS a JUDO lLP 

ATTORNEYS AT LAw 

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GRANO RAPIDS, MlCHICAN 49503·2487. WWW.WNJ.COM 
87 


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Page 12 

who, today, regularly conduct critical commercial transactions that are extremely valuable to our 

economy, jobs and commerce. The simplified public notice-filing system would better assure 

that information about M&A brokers is readily publicly available. The Act adds public protections that do not exist today. Mandated disclosures, including conflicts of interest, would better 

inform sellers and buyers before they engage the services of an M&A broker. The Act and relevant SEC rules will clarify the application of federal securities law in this context, and so can 

reasonably be expected to improve compliance. The Act would achieve these objectives with 

comparatively minimal set up and administrative costs. This will ultimately free-up SEC and 

FINRA resources to more effectively accomplish their statutory mandate of protecting our public 

markets and passive investors. 

A high Congressional priority has been the critical need to preserve and create 

jobs to fuel our nation's economic recovery. Today, jobs preservation and growth would be significantly boosted by assuring that retiring baby boomers, aspiring entrepreneurs, and growing 

companies can be professionally and cost-effectively advised by appropriately regulated M&A 

brokers. An estimated $10 trillion of wealth is passing between generations. Reducing the cost 

of professional business brokerage services to privately-owned companies would facilitate an 

efficient, free-flow of capital between small and mid-sized business sellers and buyers. Thank 

you for your consideration and I urge you to support H.R. 2274 in order to address this critically 

important small business issue. 

WARNER NORCROSS & Juoo llP 

ATTORNEYS AT LAw 

900 FIfTH THIRDCEHTER. 111 LyoNSTRn:r, N.W. 

GRANO RAPIDS, MICHIGAN 49503-2487 .. WWW.WNJ.COM 
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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON. D.C. 20549 

THE CHAIRMAN 

The Honorable Bill Posey 

U.S. HOllse of Representatives 

120 Cannon House Office Building 

Washington, DC 20515 

Dear Representative Posey: 

January 11. 2012 

Thank you for your December 19, 20 II Ictter in which you request information abollt the 

status of a recommendation by the SEC's Government-Business Forum on Small Business 

Capital Fonnation ("the Forum'") regarding merger and acquisition intermediaries, also known as 

business brokers. As you know, the Forum provides an annual gathering that focuses on the 

capital fonnation concerns of small business. The Forum provides a crucial platfonn for small 

businesses to highlight impediments to the capital raising process that may be unnecessary and 

develop recommendations for governmental action. As you mention in your letter. the Forum 

has recommended that the SEC adopt a rule providing "an exemption fi'om federal broker-dealer 

registration and FlNRA membership for merger and acquisition (M&A) internlediaries and 

business brokers involved in the purchase, sale, exchange or transfer of the ownership of 

privately-owned businesses, subject to the states exercising primary regulatory supervision over 

these activities under state seculities laws:' 

I have directed the staff of the Division of Trading and Markets, the Division primarily 

responsible for administering the regulation of brokers and dealers, to analyze carefully the 

Fonun's recommendation and to develop options the Commission muy consider in revisiting the 

regulations that apply to M&A intermediaries who serve small businesses. I also have directed 

the Division's stalfto revisit existing guidance about whether (here is any need for certain M&A 

intemlcdiaries to be registered with the SEC as brokers and to determine whether we should 

provide further clarity in this area. The Commission staff and I are mindful of the importance of 

weighing the burdens on small businesses' capital fOlmation arising li'OIll our regulatory 

requirements against the benefits of those regulations. 

Thank you again for your letter, Please call me at (202) 551-2100, or have your staff call 

Eric Spitler, Director of the Office of Legislative and Intergovernmental Affairs, at (202) 551-

2010 if you have any questions or comments. 

Sincerely, 

~~~ 

Mary L. Schapiro 

Chainnan 
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<!inug1'.cJ.H.' of tIp.' lllllitcll §hth~l' 

trru,;llill!Jtol!. mill 20515 

December 19, 2011 

The Honorable i\lary Schapiro 

Chairman 

Secul'Jties and Exchange Commission 

Washington, D.C. 20549 

l)Cf\1' Chainnan Schapiro, 

As Congress condnues to work to Bee that OUI' economy recovers, we continue to be vigilant to ensuring 

that regulations affecting small businesses are smart and propel'. It is essential that regulation works to 

stimulate economic growth. It J::; OUf understanding that for five yeats in a 1'o\v, the SEC's Go\'crnmcntIndu$try Forum on Small Busines$ Capital Formation has highlighted the merger and ac(]uisition broker 

(l\1.:\R) proposfli as one of its top fecommcnciMlons to help $lna11 businesses _. we urge you to consider this 

propo$~\J, 

As you know, the fdAB propm~aI would address securities regulation of business brokcl"s and merger ilnd 

ac(}uisition advlsors who are in the business of facilitating the purchase and sale of priy<ltcly held cOinpani(.'~. 

This proposal would significantly reduce their federal regulation compliance costs, which I ntn informed can 

initially exceed S150,000 and COSt S7S,OOO per year after that . 

.According to the final report fro111 the 2010 fOl"'llm} the l\L-\H proposal would eliminate unnecessary 

regulation as these priyate sales arc alread), regulated by state laws. Specifically, the MAB pmposal states: 

"The Commission should, b), rule, adopt an exemption from federal broker· dealer 

registration and FINRi\ membership for merger and aC(luisition (1'1'[&,\) intermediaries and 

business brokers involved in the purchasc~ sale) exchange or transfer of the ownership of 

priviltcly-owncd businesses, subject to the stat<:;"s exercising primal)' regulatory supervision 

over these activities 

under state securities laws,» 

\Y.,/e are aware that the SEC host{~d its 2011 GovcrnmcntMlnuustf), FOfUtn on Small Business Capital 

Formalion on November 17, 2011, and the !'v[AB proposal "'liS Ollce again on rhe agenda. We write to 

inquire about the status of tlus proposal at your agellcy. What action to datc has the SEC taken to implement 

these I'ccommended changes? 1 r the SEC has not acted 011 this yet, please tell us the timeframe the SEC is 

operating under to implement these regulations. If impcdil'nents exist thnt preclude your agency from 

publishing such a rllle~ please advise us as to the barriers precluding the regulation froll1 advancing. 

Sincerciy, 

----~- 1fllf'.tl~ ----_._._--

Brian Higgins (N -27) 

Member of Congress 
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_flit-JJJJ 4---

Allen B. West (FL-22) 

Member of Congress 

Doug 

---~~ Lamborn (CO-OS) 

Member of Congress 
91 


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Hansen, Shane 

Subject: FW: Shapiro Question for Record Response 

From: Behnam, Rostin (Agriculture) [mailto:Rostjn Behnam@ag.senate govl 

Sent: Thursday, August 16, 2012 11 :23 AM 

To: Hansenl Shane 

Subject: Shapiro Question for Record Response 

ShaneAs promised, Chairwoman Shapiro's response to the question for the record from the December, 20 II hearing. 

2) Prior to the financial crisis, the Securities and Exchange Commission made significant progress in adopting a 

rule that would have created a limitedfederal exemption for business brokers who act il1 limited roles as both 

intermediaries and advisors dur;'lg the purchase and sale of existing small businesses, In 2006, the Commission 

issued a no-action letter granting enforcement relief /0 a small business broker who acted in a limited role during a 

business sale. Small business development, which includes the purchase and sale of existing businesses, is 

paramount to developing a strong economic base. Has the SEC considered taking additional steps to codify this 

limited small business broker exemption? 

RESPONSE: The staff of the Division ofTrading and Markets, which is primarily responsible for administering the 

regulation of brokers and dealers, is analyzing the SEC's rules and regulations that apply to business brokers. The 

Division staff is developing options that it could recommend that the Commission consider to revise those 

regulations in light of the role that business brokers play in the purchase, sale, exchange or transfer of the 

ownership of privately owned businesses. The Division staff is also revisiting existing guidance about whether 

certain business brokers must be registered with the SEC as brokers in order to determine whether the Commission 

or the staff should provide further guidance in this area. We are mindful of the importance of considering both the 

burdens on small businesses' capital formation arising from our regulatory requirements and the benefits of those 

requirements to investors and other market participants. 

Take care and keep in touch, 

Russ 

Counsell U.S. Senate Committee on Agriculture. Nutrition, and forestry 

Office of U.S. Senator Debbie Stabenow, D-MI 

328-A Russell Senate Office Building, Washington DC 20510 

rost;11 behnam@ag.senate.gov I P - 202-224-20351 F - 202-228-2125 
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81764.057

SHANE B. HANSEN 

BIOGRAPHICAL SUMMARY 

SHANE B. HANSEN is a partner and co-chairs the Broker-Dealer and Investment Adviser Practice Group in the law firm of Warner Norcross & 

Judd LLP. His law practice spans more than 30 years and concentrates in 

the area of financial services regulation, primarily including federal and 

state securities and banking laws and related rules. He advises brokerdealers, M&A and business brokers, investment advisers, banks, and private fund advisers about a wide range of business, corporate, contract. 

compliance, and regulatory topics. He has substantial experience involving formations, mergers, acquisitions, and sales of financial services firms. He was recognizcd 

in The Best L{/Hyers in Americdlii, Corporate Law and Securities Regulation, 20071hrough 2012 

editions and named a "super lawyer" in the 2006, 2007, and 2009 through 2012 editions of Michigan Super LawFers"'. 

Mr. Hansen chairs the Committee on State Regulation of Securities in the Business Law Section 

of the American Bar Association (20 II-present). The committee is comprised of more than 600 

lawyers, paralegals, state regulators. and law professors from around the country. He also cochairs its Subcommittee of Liaisons to Securities Administrators in the U.S. and Canada (2007-

present), producing an annual report on state sccurities law developments. He is an active member or the ABA's Committee on Federal Securities Regulation and the State Bar of Michigan's 

Securities and Financial Institutions Committees. Other professional and associate memberships 

include the Compliance and Legal Society of the Securities Industry and Financial Markets Association (SIFMA), the Financial Services Institute (FS]), the Investment Adviser Association 

(JAA), the Financial Planning Association (FPA), and the National Society of Compliance Professionals (NSCP). Mr. Hansen graduated with honors from the University of Michigan Law 

School in 1982. He graduated with high honors from Albion College in 1979. 

Warner Norcross & Judd LLp is a full service law firm with over 220 attorneys practicing from 

offices in Grand Rapids. Southfield, Holland, Midland, Muskegon, Lansing. and Sterling 

Heights, Michigan. The firm's Broker-Dealer and Investment Adviser Practice Group is an interdisciplinary group of attorneys with experience dealing in the full range of n1attcrs and issues 

that are imp0l1ant to broker-dealers, investment advisers, financial planners, merger and acquisition intermediaries, finders, and others who may be subject to federal and state securities laws, 

rules and regulations, as well as FINRA rules, regulation, and enforcement. Client matters include corporate, contracts, formation and registration, compliance, mergers and acquisitions, as 

well as responding to examination deficiencies, enforcement, customer arbitration, and litigation. 

Other client matters include human resources, labor, and benefits, trusts and estates, and tax. The 

finn represents a wide range of clients from large to small, with various business models, and 

located in various parts of the country. 

More information about Shane and the law firm can be found on the Internet at: www.wnj.com. 

He can be reached at 616-752-2145 orshansen@wnj.com. 

1183421 !R342 9203887-1 

WARNER NORCROSS Ii JUDO LLP 

AnORNEY5 Ai LAW 
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Statement of Donald C. Langevoort, Thomas Aquinas Reynolds 

Professor of Law, Georgetown University Law Center, before the 

Subcommittee on Capital Markets and Government-Sponsored 

Enterprises, Committee on Financial Services, United States House of 

Representatives 

June 12, 2013 

I am pleased that you have invited me to testify today on the vitally 

important topic of capital fonnation and investor protection. With the 

JOBS Act more than a year old, we still await rule-making by the SEC on 

many of its key provisions. While this wait is frustrating to all who wish to 

these reforms take effect, the careful analysis of costs and benefits and 

consideration of alternatives that should infonn all good policy-making 

takes time, and cannot be rushed if it is to be done well. 

However, the JOBS Act hardly exhausts the possibilities for 

innovations in capital-raising and secondary trading that can make our 

financial markets more robust and opportunities for honest entrepreneurship 

more compelling. The SEC's Advisory Committee on Small and Emerging 

Companies has made a number of recommendations for additional changes 

that, if appropriately crafted, would be positive steps forward. The 

regulatory demands of publicness on issuers are heavy, but often warranted 

for those companies with big enough footprints in our markets, our 

economy, and our society. Companies with smaller footprints require less 

precisely because the "externalities" they generate are so much smaller. J 

1 Along with Professor Robert Thompson of Georgetown, I have written about this 

possibility in "Publicness in Contemporary Securities Regulation after the JOBS Act," 

Georgetown Law Journal, vol. 101, p. 337 (2013). We have a follow-up article in progress 

entitled "Redrawing the Public-Private Boundaries in Entrepreneurial Capital Raising," 

available at http://papers.ssrn.com/so13/papers.cfm?abstract id=2132813. 
94 


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We can limit the obligations for smaller companies to that which is truly 

value-relevant to reasonable investors. 

As the Advisory Committee also recommends, we can also do more 

to facilitate the development of fair and efficient secondary trading markets 

for both non-public companies and smaller public companies. The main 

issues have to do what level of ongoing disclosure and governance 

obligations (via listing standards) to place on the issuers whose shares are 

traded in such settings, which is not an easy task but could certainly be 

defined more coherently than the standards that apply today. You should be 

aware of some crucial policy choices here, however. If, as suggested as a 

possibility, this new market space is meant for "accredited investors" only, 

it will most likely have the effect of dampening interest in making an IPO 

precisely because it will be easier to offer shareholders enhanced liquidity 

while staying short of the new Section 12(g) trigger for regulation as a 

public company. 2 Marketplace developments that facilitate capital raising 

and secondary trading by private companies will have profound 

consequences for our public markets. 

Regulatory reform efforts should continue. But it is essential that 

this be done with due regard for investor protection, and I would commend 

to you the SEC's Investor Advisory Committee as another bipartisan voice 

worth listening to when its members reach consensus. While inefficient 

regulation raises the cost of capital, good regulation lowers it. Research in 

financial economics shows that investor trust is closely tied to capital 

formation and economic growth. 3 Although that trust has proven resilient 

over time, it is not something that can be taken for granted. If it hits some 

2 The JOBS Act allows non-exchange traded companies to avoid registration under the 

Securities Exchange Act of 1934 so long as they have fewer than 2000 shareholders of 

record, not more than 500 of which are non-accredited investors. 

3 Luigi Guiso et aI., "Trusting the Stock Market," Journal of Finance, vol. 63, p. 2557 

(2008). In March 2013, according to the "Financial Trust Index" at Northwestern 

University and the University of Chicago, the trust level in the stock market was at 19%. 

See http://financialtrustindex.orglresultswave18.htm. 

2 
95 


81764.060

horrible tipping point and recedes because there is too much perceived risk 

of opportunism and abuse, capital formation will be damaged by poorlycrafted innovations, not enhanced. For all the honest entrepreneurs who 

deserve a better shot at low-cost funding, there are opportunists as well who 

not only threaten the financial well-being of targeted-sometimes 

vulnerable-investors but take funds away from legitimate enterprise, 

pollute the reputation of our markets generally, and create no jobs. No 

innovations in capital-raising will work unless they help investors tell the 

difference between good promoters and bad promoters, as well as between 

good business plans and dubious business plans. Credible information is 

necessary to enable investors to price the risk for all issuers. Otherwise this 

is just gambling, from which smart investors know enough to stay away. 

Special markets for small and emerging companies that pay insufficient 

attention to informational needs and investor protection do not do 

particularly well for investors in the long run. 4 

Although there are many imperatives in crafting the rules to promote 

entrepreneurship and capital formation, two are paramount. One is that we 

recognize the role of retirement savings as an at-risk target, a threat to 

which neither aging Americans nor our economy generally can afford. 

Wealth tests (for example, $1 million for accredited investor status, or 

$100,000 for enhanced participation in crowd-funding) may seem large at 

first glance, but not so much if that is all that there is for a lengthy 

retirement except for Medicare and Social Security. The other is the need 

for greater transparency in so-called private markets, so that there are can be 

4 Recent research from the University of Chicago suggests that the London AIM market, 

for example, significantly underperforms firms on regulated exchanges in terms of postlisting returns and failure rates, especially where retail investor make up the majority of the 

investor base. See Joseph Gerakos et aI., "Post-Listing Performance and Private Sector 

Regulation: The Experience of the AIM," Feb. 2013, available at 

www.ssrn.comiabstract=1740809. Similarly, see Jay Ritter et a\., "Europe's Second 

Markets for Small Companies," European Financial Management, vol. 18, p. 32 (2012). 

3 
96 


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better oversight and surveillance in the otherwise dark spaces where 

investments are promoted and sold with little or no regulation.s 

Let me stress an uncomfortable truth: the main impediments to small 

business capital-raising are economic, not regulatory. Small businesses are 

very, very risky.6 Entrepreneurs rarely find the cost of equity or debt that 

rationally prices this risk to be particularly attractive. But we should 

beware of reforms driven by the desire to attract capital from less 

sophisticated investors simply because there are so many of them and they 

might be more excitable and less demanding. That story will not end well. 

Balancing capital formation and investor protection is not easy. I 

commend members of the Subcommittee for their continuing attention to 

both of these goals. 

5 See Jennifer Johnson, "Fleecing Grandma: A Regulatory Ponzi Scheme," Lewis & Clark 

Law Review, voL 16, p. 993 (2012). Professor Johnson tells of brokers who qualifY 

retirees for accredited investor status by estimating the future stream of social security 

payments over their expected lifetime and discounting to present value in search of the 

requisite $1 million. 

6 In negotiated deals, sophisticated investors demand some combination of credible 

disclosure to assess the venture, which is expensive; control rights to reduce postinvestment risk; and pricing to reflect the considerable risks that remain. 

4 
97 


81764.062

Grant Thornton 

An 

Hearing on reducing 

capital formation 

Statement of David Weild, Senior Advisor - Grant Thornton LLP 

to 

before the U.S. House of Representatives Financial Services Committee 

Capital Markets and Government Sponsored Enterprises Subcommittee 

June 12, 2013 
98 


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Hearing on reducing barriers to capital formation 

Contents 

Introduction 

Summary 

Capital markets landscape 

Ways we can promote capital formation 

Conclusion: IPOs lead to job growth 

Additional materials 

About David Weild 

About Grant Thornton LLP 

;~) 2013 Grant Thornton lLP, All rights reserved. 

Page 

2 

3 

5 

11 

14 

16 

17 

19 
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81764.064

Hearing on reducing barriers to capital formation 

Introduction 

Chairman Garrett, Ranking Member Maloney and members of the Subcommittee, thank you for 

inviting me to speak today about an issue of great importance to many Americans: how to reduce 

barriers to capital formation, particularly for small companies the growth engine of the U.s. 

economy. 

My name is David Weild. I oversee Capital Markets at Grant Thornton LLP, one of the six global audit, 

tax and advisory organizations. I was formerly vice chairman of The NASDAQ Stock Market with 

responsibility for all of its listed companies, and I ran the equity new issues business of a major 

investment bank for many years. 

Grant Thornton's Capital Markets Group provides support to companies accessing today's global 

capital markets. These companies run the gamut from private companies and entrepreneurs to venture 

capital and private equity-backed companies both small and large. 

I recently authored a study with Edward Kim and Lisa Newport for the Organisation for Economic 

Co-operation and Development (OECD)! - a study that analyzes the world's 26 largest IPO markets. 

It demonstrates that higher tick sizes (minimum price increments) are essential to bring back U.S. IPO 

markets and the associated higher rates of innovation, economic growth and job creation that are 

driven by more productive public markets. 

1 Organisation for Economic Co-operation and Development. See \1iww.OECD.org 

is.- 2013 Grant Thornton lLP. All rights reserved. 
100 


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Hearing on reducing barriers to capital formation 

Summary 

US. capital markets have undergone a profound transformation in less than a generation, leaving both 

investors and the US. economy worse off. US. public markets have lost nearly half of all listed 

companies since their peak in 1997. While there were 8,823 exchange-listed companies in 1997, at the 

end of 2012 only 4,916 remained. Moreover, U.S. stock markets are now on a gross domestic 

prodnct (GDP) weighted basis some of the worst in the world, particularly for small companies. 

Despite having the world's largest GDP, the U.S. small IPO market has fallen from 1" to 12th place 

among the top 26 IPO markets. 

'Dle US. IPO market should be producing five to 10 times the number of IPOs it has produced over 

the last 13 years, but we won't see a resurgence until we address its biggest obstacle: the lack of 

aftermarket support. Regulatory and structural changes that have occurred since 1997 led to a collapse 

in tick sizes from 25 cents to 1 cent - tick sizes that used to pay for the infrastructure small companies 

need to go and stay public. The collapse in tick sizes has left small companies without aftermarket 

support, specifically the support of small broker dealers, research analysts and capital. 

The U.S. stock markets are now essentially governed hy a one-sizc-fits-all framework, with I-cent tick 

sizes for every stock regardless of share price, market capitalization or liquidity. In today's market, small 

companies can't survive - only big brands and large companies can sustain adequate visibility with 

investors. Small cap stocks require broker-dealers to support liquidity, sales and equity research, and 

those don't exist in a l-cent-tick-size world. 

Given the current structural deficiencies in the U.S. stock market, a merger or acquisition is now tile 

exit strategy of choice for many small companies that previously would have chosen to go public. When 

these companies sell their businesses because they can't raise capital effectively through the IPO 

market, jobs are generally lost, not gained. 

I present today three ways that we can promote capital formation for small companies. 

Encourage the SEC's full and timely inlplementation of the Regulation A + provisions of the JOBS 

Act, and Senate adoption of RR. 701 that provides a due date for inlplementation of Regulation 

A +. \X1hiIe we wait for the JOBS Act provisions to be enacted, entrepreneurs' access to capital is 

limited, and job creation and economic recovery have been put on hold. Grant Thornton has been 

particularly supportive of Title IV - commonly referred to as Regulation A + - which increases 

from $5 million to $50 million the cap on public issues of stock utilizing the SEC's Regulation A 

if) 2013 Grant Thornton LLP. All rights reserved, 
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Hearing on reducing barriers to capital formation 4 

exemption. Regulation A + will allow small companies to issue securities through a registration and 

disclosure process that is less complex, time-consuming and expensive. As the U.S. continues its 

struggle to emerge from the Great Recession, the higher offering limit and increased investor 

protections make Regulation A + an important catalyst by which small companies can go public, 

grow and contribute to job creation. For these reasons we support passage of H.R. 701, a bill that 

would require the SEC to ftnalize rulemaking for Regulation A+ by October 31, 2013. We arc 

encouraged that the House of Representatives has already passed this bill by an overwhelming vote 

of 416-6 and hope the Senate follows suit. 

2 We support an SEC pilot program of at least ftve years in length to let Emerging Growth 

Companies (EGCs) (sub-$1 billion in revenues) and small cap companies (sub-$2 billion in equity 

market value) expand their tick sizes and regenerate the infrastructure to support small cap stocks. 

Grant Ibornton believes higher tick size increments will increase liquidity and capital formation for 

small companies by increasing the aflern1arket incentives required to fuel investments in equity 

distribution, sales and aftermarket support. As markets realign economic incentives and refocus 

distribution on long-term investors - not on short-term traders share performance and returns 

on investment will improve _. all while laying a foundation for increased lPOs, economic growth 

and job creation. 

3 We also support the creation of a new, parallel stock market for public companies under $2 billion 

in market value. Adequate aftermarket support is a continuing challenge for small companies, and 

this new market could allow higher commissions to provide incentives for small investment firms 

to return to the business of underwriting and supporting small-cap compauies. While established 

markets would continue to operate as they do today, this solution would give issuers a choice in 

markets. 

If> 201.3 Grant Thornton LLP. All rights reserved, 
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Capital markets landscape 

US. capital markets have lost their way. They've undergone a profound transformation in less than a 

generation from the heights where they were the envy of the other world markets to the current 

depths where they're effectively closed to more than 80% of the companies that need them: small 

entrepreneurial companies. 

Our small company market failure is now reverberating across our economy. 

IPOs have decreased since the mid-1990s 

In the early 1990s, we witnessed over 520 IPOs per year in the U.S., 80% of which were small deals 

raising less than $50 million. Just 20 years later, that average has dwindled to fewer than 130 

transactions annually, with just 113 in 2012. Of that 113, only 14 were small deals.2 

Public company listings peaked in the US. in 1997, with 8,823 exchange-listed companies. At the end 

of 2012, there were only 4,916 - a massive decline of 44.3%.3 In fact, since the peak, the U.S. has 

suffered 15 conseclltive years oflost listings. As the world's largest economy, the US. should be 

producing five to 10 times the number of IPOs it has produced over the past 13 years. 

According to our OECD study, U.S. stock markets are now - on a GDP-weighted basis - some of 

the worst in the world, particularly for small company IPOs. In the 19905, the US. was the top-ranked 

IPO nClarket for both small and large IPOs." Today, despite having the world's largest GDP, the US 

ranking for small IPOs has fallen to a dismal 12,h place - worse than many much smaller 

economies that offer more appropriate (higher) aftermarket incentives. 

2 Source: Weild & Co., Grant Thornton LLP and Dealogic. Excludes closed-end funds, REITs, LPs, SPACs and 

other non-operating company financial vehicles. 

'Ibid. 

, To determine which IPO-producing nations have been gaining or losing ground, in terms of the number of 

small and large domestic IPOs they have produced, we examined the relative rankings of 26 jurisdictions 

(£\ustralia, Brazil, Canada, Chile, China, France, Germany, Hong Kong, India, Indonesia, Israel, Italy,Japan, 

Malaysia, Mexico, Norway, Poland, Saudi .-\rabia, Singapore, South Korea, Spain, Taiwan, Thailand, Turkey, the 

United Kingdom and the United States) for three different time periods (1996 to 2000, 2001 to 2005, and 2008 to 

2012). We found that countries with higher than average tick sizes as a percentage of share price in smaller stocks, 

such as Australia and Canada, have significantly increased their relative ranking in the number of small IPGs. The 

U.S., which was once in first place for the number of deals under $50 million USD from 1996 to 2000, and now 

has low tick sizes as a percentage of share price, has fallen to 12,h place for small IPGs a decline of 11 

positions that is among the largest moves, up or down, for the 26 jurisdictions we studied . 

• 2) 2013 Grant Thornton LLP. AU rights reserved~ 
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United States 

... Deal Size < $50 Milliol1 USD -Dea! Size" $SO Million USD 

1996--2000 Rank 2001·2005 Rank 2008·2012 Rank 

",.................... " ~""' "}!101 •••••••••• #11 

'. #12 ... v~ ......... ...... ~ ... ., .. *" ...... ., •..... ",. .. .. 

\X1hilc the 11'0 decline is most extreme in the U.S., the world supply of IPOs has also suffered a 

material decline with the proliferation of electronic markets. Work by the OECD shows that the global 

number of IPOs has declined from over 2,000 per year in the early 1990s to less than 750 IPOs in 

2012. Two-thirds of this decline comes from outside of the U.S. 

The IPO market is not in recovery 

While the JOBS Act has made it easier for small companies to go public, the lPO market has not 

recovered, as some news reports would have us believe. The media has focused on a handful of high 

profile, large transactions, but the actual pace of lPO activity is not much better this year than last. 

Therc were 113 corporateS IPOs in 20126 111cre have been 66 corporate lPOs through May 2013, 

matching last year's pace of 63 as of May 2012. During May 2013 Dealogic tracked 28 totallPOs, 

which the media touted as a sign of a healthy IPO market. Seven of them, however? were closed-end 

funds, REITs and SPACs, leaving just 21 corporate IPOs. 

And small company Ipos remain an endangered species. Only six of the 66 deals in 2013 raised less 

than $50 million -- not unlike year-to-date May 2012 when only seven of 63 deals were under 

$50 million. Moreover, as of year-to-date May 2013, deal size averaged $272 million, compared to $164 

million at this same time in 2012 (excluding d1e $16 billion Facebook 11'0). 

Factor in that we are enjoying a Bull Market in eqnities, buoyed by the Federal Reserve's stimulative 

monetary policy, and the number of IpOs to date can only be seen as disappointing. We aren't 

surprised, because the underlying infrastructure remains damaged, as evidenced by the lack of small 

issuers tapping the market Despite the good intentions of the JOBS Act in creating "on-ramps," U.S. 

5 "Corporate" IPOs are IPOs of operating companies. We exclude IPOs that are strictly financial vehicles, 

including closed-end funds, REITs, SPACs and LPs. 

6 Source: Dcalogic. 

'8 201:j Grant Thornton LLP, AU rights reservedc 

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Hearing on reducing barriers to capital formation 

capital markets still need the "highways" the economic infrastructure that can support small 

companies in the aftermarket. That aftermarket support can be brought back through higher tick sizes. 

Structural and regulatory changes to U.S. capital markets have impacted IPOs 

As we have mentioned in previous testimony to this Committee, structural and regulatory changes to 

U.S. stock markets have been exceptionally harmful to capital formation. The U.S. was once the 

greatest capital formation engine in the world, but it has been reduced to a shadow of its former 

productivity because of the elimination of nearly all of the economics that once fueled the growth of 

the ecosystem. 

Since 1997, the U.S. stock market has suffered a devastating decline in the numbers of small IPOs - a 

result of SEC-implemented regulations r1lat put in motion a decade-long erosion of the U.S. capital 

formation and support infrastructure on which small companies relied. The structural and regulatory 

changes that began with new Order Handling Rules in 1997, continued with Regulation Alternative 

Trading System (ATS) in 1998 and Decimalization in 2001, and culminated with Regulation National 

Market System (NMS) in 2005 set in motion a dramatic shrinkage in trading spreads and tick sizes in all 

stocks. 

Smaller tick sizes undermined U.S. small-company IPOs 

~ 

o 

!!:. ,0" <Ii 

::) 00' 

~ :: so ... o 

e !if 40~. 

1: 

& 

:: 10~ 

: 

"'" 

• u ~ _ • w _ _ • m _ ill ~ _ _ w _ _ ~ 

Sources: Grant Thornton LLP, Weild & Co. and Dealogte 

Da!a 1I\clude corporat@lPO$a'$ofDecember31>2012.excludu';g funds, REITs, SPACs and lPs 

4;1' Transactions 1<lIslno 

at least $50 million 

• Transactions raisirlg 

less than SSO I'Ill!tlon 

- Transactkms raising 

S50 million, adJUsted 

forCPI 

The collapse in tick sizes from 25 cents to 1 cent significantly changed the stock market structure that 

paid for the infrastructure of small broker dealers, research analysts and capital support required to take 

small companies public and to support them in the aftermarket (once they are public). This 

infrastrucmre is analogous to the system of highways - with roads, on-ramps, bridges, tunnels and 

tolls required to support commerce. 

@2013GrantThornton LLP. All rights reserved. 
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Hearing on reducing barriers to capital formation 

Economic infrastructure supporting U.S. capital markets 

Stakeholders: 

• Roads - Trade execution venues (e.g .. NYSE) 

• On-ramps - Investment banks 

• Bridges - Market-makers committing capital 

• Tunnels.,- Analyst and broker support to investors 

Economic incentives: 

• Tolls - Tick sizes and commissions 

that support the markers operations 

and upkeep 

In the same way that a city's infrastructure cannot be maintained without adequate capital to support it, 

an equity market must also be supported with adequate economic incentives in order to maintain 

vibrancy. Investment banks acting as primary underwriters (or book runners) today lose money 

supporting small company IPOs after they go public. Many investment banks have gotten out of the 

book-run IPO business, and weak capital commitment from investment banks remains a serious 

impediment to small businesses accessing U.S. capital markets. Small compauies need salesmen, traders 

and analysts to create liquidity for their securities, but today, computers have taken the place of these 

people, thereby decreasing the visibility of small cap stocks. 

The U.S. stock markets are now essentially governed by a one-size-fits-all framework, with 1-cent tick 

sizes for every stock regardless of share price, market capitalization or liquidity. One-size-fits-all is a 

poor basis for regulation. One-size-fits-all stock market structures will underperform markets that are 

optimized separately to the needs oflarge cap and small cap stocks and their respective constituencies. 

Large cap stocks arc inherently liquid and benefit from the interest of many investors looking to buy 

and sell the stocks at the same time. By contrast, small cap stocks typically arc less liquid, with 

asymmetrical- or one-sided - order-book markets. OnIy big brands and large compauies can sustain 

adequate visibility witll investors in today's market. Small cap stocks require broker-dealers to support 

liquidity, sales and equity research in order to sustain active markets. 

The market changes also favored short-term rapid trading over long-term fundamental investing. 

Hedge funds and other hyper-trading institutions have become the dominant force in the I-cent tick 

size market at the expense of long-term fundamental investors and liquidity providers 

(intermediaries). \'V1,en trading interests overwhelm fundamental investor interests, price distortions 

occur, the marketing of indiv .. idual stocks is displaced by derivatives (including exchange-traded funds), 

and capital forn1ation and allocation becotne less effective. In turn, economic cycles are made more 

extreme, and long-term economic growth may be stunted. 

Ultimately, while lower tick sizes have benefitted short-term, high-turnover traders through lower 

transaction costs, long-term, fundamental investors are worse off today. The paradox is that smaller 

spreads and tick sizes have undermined the very infrastructure and services required to take new small 

companies public and sustain tl'0se stocks in the aftermarket. 

The U.S. economy is also worse off as a result of the regulatory and market structure changes affecting 

the U.S. capital markets. We offer compelling evidence in our OEeD paper that the primary 

determinant of long-term sustainability of IPO markets and, as a consequence, an important driver of 

economic growth is the relative size of aftermarket incentives. Specifically, low aftennarket incentives 

(deflned as tick sizes that are less than 1% of share price for sub-$500 million market value stocks) and 

low numbers of small public companies lead to low levels of 11'0 activity. Broker-dealers - who are 

© 2013 Grant Thornton LLP. AI! rights reserved. 
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Hearing on roducing barriers to, formation 

the facilitators of capital formation - must have adequate iuceutives in order to support small 

company 11'0 activity. Higher tick sizes and larger numbers of small public companies combine to 

sustain the critical mass infrastmcture and services required to support a vibrant domestic [PO market. 

That vibrant market will, in turn, generate jobs, economic grmvth and tax receipts. 

The U.S. is among the least productive IPO markets globally due to poor aftermarket 

incentives (tick sizes) 

1. AU!otraUa 14.Mexico 

2.. Br.ull lS.N:orwa.y 

3.Oanada 16,PQJ.tnd 

4-Chlna H. saudi ArAbia 

S.france IS. Singapore 

'€i. Germany t-9South Korea 

1. HDngKong lO.spaln 

8.lndia 21.Taiwan 

9.lndooesiIM 22.T11ailaild 

10.krael 2J.Turtey 

U,ltaJy 24.Unff<!dK~ 

U,lapan Z5..Unit.@dSt:(:¢i\<t; 

H.Matavs-ia 

..•. ~(h ~(;I', 

Pt.'1H,r\>l$c 'l.-4,j t~'lwtl\"~ ~<Ah w~h '< $!£U Mi!lk'l" If W\I,I<et VJke tv",!;») 11'')\ h\Ol\(1.': '~l"'iN~:;' 1 , of Sfj,lIf vfi(O;~ 

Small companies today face unsuitable options 

Given the current stmctural deficiencies in the u.s. stock market, a merger or acquisition is now the 

exit strategy of choice for many small companies that previously would have cbosen to go public. \X'hen 

these companies can't raise capital effectively through the 11'0 market and must look to a sale of their 

business, generally job loss i$ the result. 

It's not uncommon to hear suggestions that the decrease in numbers of 11'Os is a misplaced concern, 

because alternative sources of capital can take the place of the 11'0 market. In fact, these challenges 

offer no compelling data to back up their claims. The two most prominent theoties maintain that the 

private equity market or the equity private placement markets have displaced the IPO market in fund 

raising. 

These arguments, however, don't hold up considering that 1) the private equity industry is largely 

confmed to positive cash flowing companies (not venture capital companies), and 2) venture-capital 

backed I1'O exits are depressed despite unprecedented amounts of venture capital invested, while the 

"gestation period" time-to-IPO for venture-backed companies more than doubled from 4.5 years in 

All 
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Hearing on reducing barriers to capital formation 

1998 to 9.6 years in 20087 Finally, the JPO Crisis Task Force was led by Kate Mitchell, a former 

National Venture Capital Association (NVCA) chairman. Clearly, if the venture capital industry in Ole 

United States had been enjoying "alternatives," it would not be spending its time trying to fL" the IPO 

market 

7 NVC..\. 4-Pillru: Plan to Restore Liquidity in the U.S. Venture Capital Industry, April 29/30, 2009, see slide 7 at 

http://www.slideshare.net/NYC\/nvca-4pillar-plan-to-restore-liquidity-in-the-us-venhlre-capital-industry1360905. 

© 2013 Grant Thornton llP. All rights reserved. 

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Hearing on reducing barriers to capital formation 11 

Ways we can promote capital formation 

Fully implement the Regulation A+ provisions of the JOBS Act 

We commend Congress for its bipartisanship in passing the JOBS Act and paving the way for 

improved capital formation. The JOBS Act was an important fIrst step to encourage small businesses to 

access U.S. capital markets, spur innovation, generate new jobs and revitalize the U.S. economy. 

However, many of the regulations required to implement the job-creating provisions of the JOBS Act 

have not yet been enacted. As a result, entrepreneurs' access to capital is limited, and job creation and 

economic recovery have been put on hold. 

Grant 111Ornton has been particularly supportive of Title IV - commonly referred to as 

Regulation A+. It increases from $5 million to $50 million the cap on public issues of stock utilizing the 

SEC's Regulation A exemption, which allows a small company to issue securities through a registration 

and disclosure process that is less complex, time-consuming and expensive. Title IV also includes 

additional investor protections, including that issuers fIle audited ftnancial statements annually with the 

SEC and comply with any other terms or conditions established by the SEC which may include 

requirements that the issuer ftle with the SEC and distribute or make available to investors an offering 

statement and post-offering periodic disclosures regarding its business operations, fmaneia! condition, 

corporate governance principles and other matters. 

Regulation A was conceived during the Great Depression and enacted as part of the Securities Act of 

1933. The current limit of $5 million - raised from $100,000 in 1 CJCJ2 is of no use to small 

companies confronted with the needs of today's economy. As the u.s. continues to struggle to emerge 

from the Great Recession, tlle higher offering limit and increased investor protections make Regulation 

A + an important catalyst by which small companies can go public, grow and contribnte to job creation. 

Unforl1lnatcly, Regulation A + is awaiting proposed mles and is lacking an implementation deadline. We 

fear that without an imposed deadline, rulemaking for Title IV will remain on hold indefinitely. Without 

implementation of Regulation A +, the original intent of Congress to accelerate job growthparticularly by improving small business access to capital- will not be realized. For tllcse reasons we 

support passage of H.R. 701, a bill that would require the SEC to fmalize ru!emaking for Regulation A+ 

by October 31, 2013. We are encouraged that the House of Representatives passed this bill by an 

overwhelming vote of 416-6 and hope the Senate follows suit 

@2013GrantThornton LLP< All right!> reserved. 
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Hearing on reducing barriers to capital formation 12 

Tick size pilot program 

The JOBS Act also delivers provisions to help small companies mitigate the costs of going public and 

better communicate with and disclose information to investors. But a third provision is needed: smaller 

companies mnst also be able to attract significantly better aftermarket support. All three conditions are 

reqnired for a vibrant 11'0 market. 

Reasonable 

cost • H,R. 3606 {IPO On-Rampj- Tille I 

• H,R. 2940 (general solicitation, Reg. 0) - TlUe II 

,H.R. 2930 IcrOW<ifunding)- Title In 

• H,R, l070tileg. A) - Tille IV 

Standard disclosure 

• H.R. 2167 (corporations: 500-2,000 s.a",holde,,) - Title V 

• H.R. 1965 (banks: 500·2,000 sh.reholders) - Tille VI 

Adequate 

aftermarket 

incentives 

Missing link 

Afterma.rket support is the biggest obstacle to resurgence in the U.s. 11'0 market. 'foday's public 

markets are overly complex and don't behave in a manner that the average retail investor understands. 

\Vithout adequate economic incentives, investment banks can't afford to compensate the salesmen, 

traders and research analysts who can provide greater transparency to investors reg;uding small 

company stocks. Instead of supporting all company sizes, U.S, market stmcmre is optimized for trading 

(not investing) primarily in large cap stocks. 

Grant Thornton believes higher tick size increments will increase liquidity and capital formation for 

small companies by increasing the aftermarket incentives required to fuel investments in equity 

distribution, sales and afterma.rket support. As ma.rkets realign economic incentives and refocus 

distribution on investors - not on traders - share performance and returns on investment will 

improve - all while laying a foundation for increased IPOs, economic growth and job creation. 

Grant Thornton specifically supports an SEC pilot program of at least five years in length to let 

Emerging Growth Companies (sub-$l billion in revenues) and small cap companies (sub-$2 billion 

in equity market value) expand tick size and regenerate the infrastructure to support small cap stocks. 

\'I/e believe a pilot program should include the follo\v~ng pa.rameters to ensure the integrity of the pilot 

and data. 

• Include companies that are EGCs and already puhlic. 

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Hearing on reducing barriers to capital formation 

• A "trade at" rule that eliminates trading rebates within the spread and requires trading at the tick 

increments. Such a rule is the surest way to ensure that the economic incentives we try to create 

through higher tiek sizes are not undermined in dark pools and through sharing arrangements. 

13 

• An annual right to elect the tick size increment, understanding that companies require some leverage 

to grow and make acguisitions or to shrink (if they sell off divisions). 

• A set of fInite tick size options, such as 5 cents, 10 cents and 2S cents. 

A pilot program would enable the SEC to gather valuable research and data to inform the debate on 

how best to structure the U.S. capital markets to support capital formation and job growth for 

companies of all sizes. We believe the SEC should fIle regular reports to Congress on Iiguidity, trading 

and analyst coverage. In order to provide the most complete story, we also recommend requiring the 

SEC to solicit and report on feedback from a broad range of securities fIrms that specialize in the 

markets for EGCs to ask why they have or have not committed capital, research or brokerage resources 

in the wake of the tick size changes, and what changes, if any, would impact these resource allocation 

decisions. 

\Vhile the SEC can and should move forward with a pilot program without Congressional action, we 

are mindful of the SEC's burden in implementing the Dodd-Frank and JOBS Acts. Should the SEC fail 

to act on its own, Grant Thornton would support a Congressional legislative response. 

Alternative exchange concept 

In order to reignite the job-creation engine that once made U.S. stock markets the envy of the world, 

we also recommend the creation of a new, parallel stock market for public companies under $2 billion 

in value. TI,e structure of this new market should be 1) exempt from Regulation NMS, 2) quote-based, 

and 3) provide for a governance structure with egual representation by market intermediaries, 

institutional investors and issuers. Most importantly, trading rules in a new market should allow higher 

commissions to provide adequate incentives for small investment fIrms to return to the business of 

underwriting and supporting small cap companies. This solution would allow issuers to choose the 

market option that makes the most sense to tl,em, while established markets would continue to operate 

as they do today. 

©2013 Grant Thornton LLP. AI! tights reserved. 
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Hearing on reducing barriers to capital formation 14 

Conclusion: IPOs lead to job growth 

J\ capital market is a multi-layered, complex ecosystem of competing and related interests. Each of the 

numerous constituents must be governed by rules and encouraged by incentives. The markets that 

succeed in balancing these many interests are the markets that will go the farthest in facilitating capital 

formation. Efficient markets need to do more than create rock-bottom trading costs for market 

speculators they also need to improve the allocation of capital and enhance long-term economic 

growth. 

If the rules become too burdensome or if the incentives become diminished for any party, the 

ecosystem will operate far below its potential efficiency. Companies will have difficulty reaching new 

investors, innovation and job creation will slow or stop altogether, and the macroeconomy will suffer. 

A vibrant capital market is the engine of a healthy economy that creates jobs. 

We estimate that, if not for the scarcity in public offerings, 3.1 million to 9.4 million additional U.S. 

jobs might have been created by companies after going public. If we assume a multiplier effect where 

higher IPO activity accounts for a like-kind number of jobs created in the private market (a 

conservative effect of only one for one), the range of 3.1 million to 9.4 million jobs created jumps to 

between 6.2 million and 18.8 million. 

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Hearing on reducing barriers to capital formation 

A major contributor to employment 

; 1,000 

£ 

.E 

2 aoo 1 

'" 

¢ " 600 ¢ '" 

.. 

. ~ 

Q. 

S 400 e 

u 

tl 

.. 

g 200 0 

'9' '92 '93 '$4 '35 '96 97 '9$ '99 '00 '0' '02 '03 '04 '05 '06 '07 'Os '09 '10 '11 

"Best estimate of the multiplier effect In the pnvate marnet ct mae cOITlp<3nes going publ!c 

In fact, the so-called multiplier effect may be much larger than we estimate above. Entico Moretti, 

Professor of Economics at the University of California, Berkeley, has estimated that as many as five 

local service sector jobs ranging from doctors and teachers to wait staff and sales clerks - are 

15 

created for every one technology and biotechnology sector job produced8 These are the very industries 

that once sought out public offerings as their preferred strategy to raise capital (and exit). 'nlis five-toone ratio of job formation has served to increase the number of employment opportunities at all skill 

levels and, ultimately, the u.s. standard of living. 

Congressional support is needed 

Congress has the power to help reverse our current situation and bring back the stock market that was 

once the envy of economies dlroUghout the world for its ability to foster U.S. economic leadership. To 

reduce barriers to capital formation, we recommend that Congress supporr the measures we oudined: 

• Encourage dle SEC's full and timely implementation of dle Regulation"\ + provisions of the JOBS 

Act, and Senate adoption ofH.R. 701 that provides a due date for inlplementation of Regulation A+. 

• Support an SEC pilot program that allows Emerging Growth Companies and other already-public, 

small-capitalization companies to opt for higher tick sizes on their stocks. 

• Support the creation of a new, parallel stock market for public companies under $2 billion in value. 

, See Enrico Moretti, 'Tbe New Geography oJJobs" (2013). 

LLP, All rights 
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Additional materials 

Making Stock Markets Wo~k to Support Economic Growth (OECD Corporate Governance 

Working Papers) 

The trouble with small tick sizes: Larger rick sizes will bring back capital formation, jobs and 

investor confidence 

June 20, 2012, testimony to the U.S. House of Representatives Financial Services Committee 

Capital Markets and Government Sponsored Entities Subcommittee 

June 8, 2012, presentation to SEC's Advisory Committee on Small and Emerging Companies 

Why are IPOs in the ICU? 

Market structure is causing the IPO crisis - and more 

A wake-up call for America 

Wall Stteet Journal OpEd entitled, "How to revive small-cap IPOs," October 27, 2011 

@2013GrantThornton LLP. All rights reserved. 

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Hearing on reducing barriers to capital formation 17 

About David Weild 

David oversees Capital Markets at Grant Thornton LLP and is the Chairman and CEO ofWeild & Co. 

(formerly Capital Markets Advisory Partners), an investment bank. 

Experience 

David is recognized as an expert in how market structure affects capital formation. His work has been 

cited by academics, regulators and lawmakers in the US and overseas and the IPO Task Force Report 

to the U.S. Treasury. He was the former vice-chairman and executive vice-president of The NASDAQ 

Stock Market, with oversight of the more than 4,000 listed companies. Prior to NASDAQ, he spent 14 

years at Prudential Securities in a number of senior management roles, including president of 

eCommerce, head of corporate finance, head of technology investment banking and head of equity 

capital markets in New York, London and Tokyo. He worked on more than 1,000 IPOs, follow-on 

offerings and convertible transactions and was an innovator of new issue systems and securities 

underwriting structures, including the use of Form S-3s to mitigate risk for small capitalization 

companies raising equity and convertible debt capital. He created the Market Intelligence Desk - or 

MID - while at NASDAQ to support issuers in their quest to better understand what was impacting 

trading in their stocks. 

Education 

David holds an MBA from the Stern School of Business and a BA from Wesleyan University. He has 

studied on exchange at TI,e Sorbonne, Ecole des Haute Etudes Commerciales and The Stockholm 

School of Economics. 

Industry participation 

David has participated in the NYSE's and National Venture Capital Association's Blue Ribbon 

Regional Task Force to explore ways to help restore a vibrant 11'0 market and keep innovation 

flourishing in the United States, and is Chairman of the International Stock Exchange Executives 

Emeriti (ISEEE) Small Business Financing Crisis Task Force. He has spoken at the OECD 

(Organisation for Economic Co-operation and Development) ",-;th the 35 member nations in 

attendance, plus the European Commission and IOSCO. David testified before the CITC-SEC Joint 

Panel on Emerging Regulatory Issues in the wake of 111e May 2010 flash crash, and has spoken at the 

SEC a number of times, including the SEC Small Business Forum, the SEC Advisory Committee on 

Small and Emerging Companies and the SEC Roundtable on Decimalization. David is often 

interviewed by the financial news media. He has served as a Director of the National Investor Relations 

Institute's New York chapter, and he is the Chairman of the Board of Tuesday's Children, the non-

<02013 Grant Thornton LLP. An rights reserved, 
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Hearing on reducing barriers to capital formation 18 

profit that serves 9/11 families, and recently expanded its charter to make its long-term programs 

available to first responders, wounded warriors, families of the fallen and those touched by other acts of 

political and apolitical terrorism (e.g., Newtown). 

Publications 

David and Edward Kim have co-authored a number of Grant Thornton studies, including Tbe trouble 

witb JJJla/llick Ji"eJ: Larger titk Jj~e.r Ivi!! bring batk ca,bitalformtllio/1, fobJ and int,e,rtor tOJ!fideltce (with Lisa 

Newport) in 2012 and 1f7 hv are IPOs in tbe feU? in 2008, Released in the fall of 2009, Market stmdure iJ 

cauJing the IPO crisis (updated by Market Jtmd,," i.r ,wl.rin~ the fPO [li.ris and mOre in 2010) and A wake-lib 

",11101' America have been entered into the Congressional Record and the Federal Register. 'Illey also 

authored Afakilt? Stock MarketJ Work to Stlppor! Economic Growtb (OECD Corporate Got'frflaJlce lI/orkill? 

Paper.f) ("'~th Lisa Newport) and the chapter, Killing the Stock Market That Laid the Golden Eggs in the 

recent book on high frequency and predatory practices entitled, Broke!l Markets, by Sal Arnuk & Joseph 

Saluzzi, published in May 2012 by l""T Press (Financial Times). 

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Hearing on reducing barriers to capital formation 19 

1~bout Grant Thornton LLP 

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<02013 Grant Thornton LLP. All rights reserved, 0