U.S. GOVERNMENT PUBLISHING OFFICE

31–459 PDF WASHINGTON : 2018

LEGISLATIVE PROPOSALS TO HELP 

FUEL CAPITAL AND GROWTH ON MAIN STREET 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

MAY 23, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–95 

( 

nshattuck on FSR297 with DISTILLER

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

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 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

nshattuck on FSR297 with DISTILLER

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT

BILL HUIZENGA, Michigan, Chairman 

RANDY HULTGREN, Illinois, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

TREY HOLLINGSWORTH, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

nshattuck on FSR297 with DISTILLER

nshattuck on FSR297 with DISTILLER

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 23, 2018 ..................................................................................................... 1 

Appendix: 

May 23, 2018 ..................................................................................................... 41 

WITNESSES 

WEDNESDAY, MAY 23, 2018 

Coffee, Jr., John C., Adolf A. Berle Professor of Law, Columbia University 

Law School ............................................................................................................ 8 

Eggers, Barry, Founding Partner, Lightspeed Venture Partners, on behalf 

of the National Venture Capital Association ..................................................... 12 

Gellasch, Tyler, Executive Director, Healthy Markets Association ..................... 14 

Hahn, Brian, Chief Financial Officer, GlycoMimetics, Inc., on behalf of the 

Biotechnology Innovation Organization ............................................................. 10 

Knight, Edward S., Executive Vice President, Global Chief Legal and Policy 

Officer, Nasdaq, Inc. ............................................................................................ 7 

Paschke, Brett, Managing Director, Head of Capital Markets, William Blair, 

on behalf of the Securities Industry and Financial Markets Association ....... 5 

Quaadman, Thomas, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 16 

APPENDIX 

Prepared statements: 

Coffee, Jr., John C. ........................................................................................... 42 

Eggers, Barry .................................................................................................... 63 

Gellasch, Tyler .................................................................................................. 67 

Hahn, Brian ...................................................................................................... 88 

Knight, Edward S. ............................................................................................ 94 

Paschke, Brett ................................................................................................... 102 

Quaadman, Thomas ......................................................................................... 112 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Huizenga, Hon. Bill: 

Written statement from California Public Employees’ Retirement System 

(CalPERS) ...................................................................................................... 125 

Written statement from Equity Dealers of America (EDA) .......................... 129 

Maloney, Hon. Carolyn B.: 

Written statement from Council of Institutional Investors .......................... 131 

Written statement from Morningstar ............................................................. 142 

Written statement from OTC Markets Group, Inc. ....................................... 144 

Written statement from Service Employees International Union (SEIU) ... 180 

Written statement from XBRL US .................................................................. 182 

nshattuck on FSR297 with DISTILLER

nshattuck on FSR297 with DISTILLER

(1) 

LEGISLATIVE PROPOSALS 

TO HELP FUEL CAPITAL 

AND GROWTH ON MAIN STREET 

Wednesday, May 23, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Present: Representatives Huizenga, Hultgren, Wagner, Poliquin, 

Hill, Emmer, Mooney, MacArthur, Davidson, Budd, Hollingsworth, 

Maloney, Sherman, Scott, Himes, Ellison, Foster, Sinema, Vargas, 

Gottheimer, and Gonzalez. 

Also present: Representative Hensarling. 

Chairman HUIZENGA. The committee will come to order. The 

Chair is authorized to declare a recess of the committee at any 

time. This hearing is entitled, ‘‘Legislative Proposals to Help Fuel 

Capital and Growth on Main Street.’’ And I now recognize myself 

for 4 minutes to give an opening statement. 

We all know that small businesses are what drive the American 

economy. These innovators, entrepreneurs, and risk-takers are critical to our country’s economic prosperity. Small businesses helped 

create more than 60 percent of the Nation’s new jobs over the past 

2 decades. So if our Nation is going to have an opportunity that 

provides opportunities for every American, then we must promote 

and encourage the success and growth of our small businesses and 

startups. 

In order to succeed, these companies need capital and credit, the 

lifeblood for growth, expansion, and job creation, yet the Government continues to construct arbitrary walls that cut them off from 

central financing, the smaller companies are caught up in red tape 

created for the largest public companies that have the financial 

means to hire lawyers, accountants, managers, and consultants to 

guide them through the sheer size, volume, and complexity of the 

Federal securities laws. 

Since becoming Chairman of this subcommittee, one of my biggest concerns is the declining number of public companies, which 

has led to fewer investment opportunities for Main Street investors. IPOs, or initial public offerings, have historically been one of 

the most meaningful steps in the lifestyle of a—lifecycle of a comnshattuck on FSR297 with DISTILLER

2 

pany. Going public not only affords companies many benefits, including access to capital markets, but IPOs are also important to 

the investing public. 

However, over the past 2 decades, our Nation has experienced a 

37 percent decline in the number of U.S. listed companies. Equally 

troubling in my eyes, we have seen the number of public companies 

fall to around 5,700. These statistics are concerning because they 

are similar to the data that we saw in the 1980’s when our economy was less than half of its current size. 

These statistics demonstrate that regulatory costs associated 

with going public is deterring new and emerging companies from 

making the decision to go public, thus preventing our capital markets from reaching their full potential. 

However, Congress has made strides in tailoring the regulatory 

environment for smaller companies, most notably when we passed, 

with strong bipartisan support, the Jumpstart Our Business 

Startups, or JOBS Act, in 2012. Signed into law on April 5 of 2012, 

the JOBS Act, which consisted of six bills that originated here in 

the House Financial Services Committee, was designed to help 

small companies gain access to capital markets by lifting burdensome securities regulation. By helping small companies obtain 

funding, the JOBS Act has facilitated economic growth and job creation. 

Even President Obama called the law a game changer for entrepreneurs and capital formation. To further quote the words of 

former President Obama, the first JOBS Act was, quote, one useful 

and important step along the journey of removing barriers that 

were preventing aspiring entrepreneurs from getting funding. I 

completely agree. 

Unfortunately, we need capital—much needed capital is unnecessarily left be—left on the sidelines right now. These small businesses make up 99 percent of all enterprises in America and employ about half of the American workforce, but they are being left 

behind as our economy continues to recover. The big are getting 

bigger, the small are getting smaller, and fewer small businesses 

are actually forming in the first place. 

Regulatory tape is preventing small businesses from realizing 

their full potential. While small and middle market business optimism hover around record levels, burdensome red tape still is their 

ability—hampers their ability to obtain important capital to grow 

and thrive. Small businesses depend on access to financing to get 

off the ground, sustain operations, manage cash, make payroll, and 

create jobs, the very financing that all too often doesn’t come 

through. 

Implementation of the JOBS Act has demonstrated that while today’s capital formation framework is better than it was 6 years 

ago, those 6 years have made clear that the JOBS Act was not just 

some magic formula. Aspects of the JOBS act, as well as JOBS 2.0, 

can and should be improved and other reforms should be implemented to further unleash innovation. 

Our hearing today will examine several legislative proposals that 

will help fuel capital and economic growth on Main Street. Many 

of those proposals were outlined in the Expanding the On-Ramp report that was released last month by the U.S. Chamber of Comnshattuck on FSR297 with DISTILLER

3 

merce for capital markets competitiveness, BIO (Biotechnology Innovation Organization), SIFMA (Securities Industry and Financial 

Markets Association), Nasdaq, National Venture Capital Association, American Securities Association, dealer—Equity Dealers of 

America, and TechNet. 

It is time for Congress to advance a broader capital formation 

agenda. Let us continue to build upon the success of the bipartisan 

JOBS Act by further modernizing our Nation’s securities regulatory 

structure to ensure a free flow of capital, job creation, and economic 

growth. It is time to get the Federal Government working to support innovation, reward hard-working Americans, and lay the 

groundwork for tomorrow’s economy. 

And with that, the Chair now recognizes the Ranking Member of 

the subcommittee, the gentlelady from New York, Mrs. Maloney, 

for 5 minutes. 

Mrs. MALONEY. I thank the Chairman for calling this important 

meeting, and welcome to all of our panelists. This hearing will consider 11 different bills designed to increase capital formation. Some 

of these bills have been considered by this committee before, while 

others are new proposals that we are seeing for the first time. 

One bill in particular, H.R. 5054, which is the XBRL bill, is 

something I have expressed strong opposition to, and I continue to 

believe this proposal will harm, not help, capital formation, especially for small companies. Structured data like XBRL has enormous potential to improve our financial markets. It is the wave of 

the future, to make them more efficient, more transparent, and 

more accessible to ordinary investors. 

Structured data puts all public companies, large and small, on a 

level playing field by making it easy for investors and analysts to 

quickly download standardized financial statements for an entire 

industry, and immediately start making cross-company comparisons to identify the best performers. This will enable investors to 

more easily identify those small companies with innovative business models that are true diamonds in the rough. 

Ultimately, this makes our markets more efficient and our economy more productive, and helps small businesses. So I am still 

very concerned about a proposal that would completely exempt over 

50 percent of all public companies from the requirement to file 

their financial statements using the efficient XBRL model. 

Another bill, H.R. 5756, would make it more difficult for shareholders to influence the management of the companies that they 

own. Currently, the shareholders can re-file a proposal, which will 

get voted on at the company’s annual meeting. If it received at 

least 3 percent of the vote the first time it was submitted, 6 percent the second time, 10 percent the third, H.R. 5756 would make 

it more difficult for shareholders to re-file proposals by raising this 

threshold to 6, 15, and 30 percent. 

Oftentimes these proposals that the shareholders put forward 

help the companies grow, they are innovative ideas. According to 

a letter from the Council of Institutional Investors, and I quote, ‘‘It 

often takes several years for a proposal regarding an emerging 

issue to gain enough traction with investors to achieve double-digit 

votes,’’ end quote. But they go on to note that, ‘‘In many cases, 

nshattuck on FSR297 with DISTILLER

4 

these proposals eventually receive substantial support, leading to 

widespread adoption by companies,’’ end quote. 

So cutting off these shareholder proposals on emerging issues 

could prevent positive long-term changes from being adopted. 

Finally, H.R. 5877, introduced by Mr. Emmer, would allow for a 

new type of exchange specifically for small companies, a so-called 

venture exchange. I am certainly not opposed to the concept of a 

venture exchange, but I—I think it is important to get the details 

right. In particular, the bill would exempt any stocks traded on a 

venture exchange from State securities laws, which has historically 

only been allowed for larger, more mature companies that trade on 

full national securities exchanges. 

I will be interested to hear from our witnesses on whether this 

State preemption is truly necessary for venture exchanges to be 

successful, or if there are alternatives that could achieve the same 

goal without State preemption, which is always contentious. 

As I noted earlier, many of these are new proposals that this 

subcommittee has not considered before, so I am very eager to hear 

the testimony today. 

And before I yield back, I would like to place in the record several letters that industry representatives have asked me to put in 

the record, one from the Council of Institutional Investors, one 

from Morningstar, one from OTC Markets, and XBRL US. I ask 

unanimous consent. 

Chairman HUIZENGA. Without objection. 

Mrs. MALONEY. And I thank very much the Chairman. I look forward to the testimony, and I yield back. Thank you. 

Chairman HUIZENGA. The gentlelady yields back. We too are 

looking forward to this testimony. 

With that, I would like to recognize the gentleman from Illinois, 

the Vice Chairman of this subcommittee, Mr. Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you. Thank you, Chairman Huizenga, for 

convening this hearing. Access to capital markets in job creation is 

incredibly important in my district, and this subcommittee has the 

key responsibility of making sure the U.S. capital markets remain 

competitive. 

I believe that it is extremely important for us to continue this 

work. I would also like to thank our witnesses for their work on 

the recent report Expanding the On-Ramp recommendations to 

help more companies go and stay public. The experts we have before us today will be important partners as we craft more legislation in the spirit of the JOBS Act. 

I know the JOBS Act has made a meaningful impact in Illinois, 

and I am eager to hear how Congress can do more to spur capital 

formation. The Encouraging Employee Ownership Act, which I 

sponsored with John Delaney here in the House, will soon be on 

its way to the President’s desk for a signature, and I am hopeful 

to work on new legislation to help with job growth in Illinois. 

And as has already been stated, and I know will be stated multiple times, we can’t lose sight of the fact that the number of public 

companies today is about half what it was 20 years ago. We went 

from about 8,000 public companies in 1996 to some 4,400 public 

nshattuck on FSR297 with DISTILLER

5 

companies today. We need to learn more why this is, and how Congress can help change the trajectory. 

Thank you, and I yield back. 

Chairman HUIZENGA. Gentleman yields back. Today we welcome 

the testimony of a large panel, but we think—we wanted to get a 

cross-section on a number of things to—and issues to—to deal with 

today. 

First and foremost, we have Mr. Brett Paschke, the Managing 

Director and head of capital markets for William Blair, on behalf 

of the Securities Industry and Financial Markets Association, or 

SIFMA. 

Next we have Mr. Edward Knight, Executive Vice President and 

General Counsel for Nasdaq OMX. 

Next we have Mr. John C. Coffee, Jr., who is the Adolf A. Berle 

Professor of Law at Columbia Law University—or, Law School. 

Next we have Mr. Barry Hahn, Chief Financial Officer of 

GlycoMimetics, Inc., on behalf of the Biotechnology Innovation Organization, or BIO, organization. 

Next, we have Mr. Barry Eggers, a Founding Partner of 

Lightspeed Venture Partners on behalf of the National Venture 

Capital Association. 

Tyler Gellasch is next, who is the Executive Director of the 

Healthy Markets Association. 

And last but not least, Mr. Tom Quaadman who is the Vice 

President of the Center for Capital Markets Competitiveness for 

the U.S. Chamber of Commerce. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. Simple math says we have 35 minutes 

of testimony in front of us here, so feel free, if you have the ability 

to shorten that up, so we can get to questions, that is—that is fine, 

but it is your 5 minutes. 

And with that, Mr. Paschke, you are recognized for 5 minutes. 

STATEMENT OF BRETT PASCHKE 

Mr. PASCHKE. Thank you. Chairman Huizenga, Ranking Member 

Maloney, and members of the subcommittee, thank you for the opportunity to testify today on the importance of preserving the vibrancy of our public capital markets. My name is Brett Paschke, 

and I am the Head of Equity Capital Markets at William Blair testifying today on behalf of SIFMA. 

I joined this industry because I wanted to help business founders 

raise capital to build companies, invent products, solve problems, 

cure diseases, create jobs, and provide wealth creation opportunities for the investing public. All these years and many deals later, 

I am still motivated and inspired by the opportunity to help our clients achieve their missions. 

On the Capital Markets side of William Blair’s business, for 

which I am responsible, we are best known for serving the needs 

of small and mid-cap growth companies, including many innovative 

leaders in technology, health care, and life sciences. Over the last 

10 years, we have been an underwriter on approximately 20 percent of all U.S.-listed IPOs. I will do my best to bring these perspectives and experiences to the subcommittee today, as I did in 

nshattuck on FSR297 with DISTILLER

6 

serving on the task force that put together the recommendations 

that ultimately created the JOBS Act. 

I still believe, as I believed then, that no single policy change will 

reverse the decline in public listed companies or unlock the IPO 

market. The authors of the JOBS Act understood this, and wisely 

took a holistic approach to improving capital formation. Policymakers today should take on our present challenges with a similar 

mindset. 

It is difficult to overstate the changes that have occurred in U.S. 

public capital markets over the last 20 years. An explosion in private funding, the rise of index and passive investing, electronic 

trading, hedge funds, consolidation, and regulation have all played 

a role in reshaping our markets. 

Unfortunately, not all of these changes have been positive. As 

has been noted often, the number of publicly listed companies in 

the U.S. has fallen by almost 50 percent since 1996. The explosion 

of private capital markets has allowed companies to grow their 

businesses and valuations without ever tapping public markets. 

It is worth discussing why this evolution matters. One important 

implication is that many startup companies are being built to be 

sold as opposed to being built to be independent public companies. 

This often does not lead to the same level of expansion and job 

growth with a long life as an independent public company does. 

Another important implication is that access to the private markets is limited to a much smaller group of high net worth individuals and institutions, effectively excluding retail investors from the 

value creation that occurs within these opportunities. Our public 

markets provide much greater access to wealth creation, from direct retail investing to the mutual funds that manage money on behalf of individuals, retirement plans, pension funds, and endowments. Indeed, the need to support our public capital markets is 

why SIFMA and a broad coalition of stakeholders joined together 

recently to produce a report on these topics. 

We also support many of the draft bills that have been released 

alongside this hearing, and, in particular, the draft legislation 

which would extend the EGC (emerging growth company) on-ramp 

from 5 to 10 years. 

The JOBS Act’s on-ramp of tailored financial reporting requirements and auditing and accounting standards greatly ease the burden for smaller companies going public. Providing a longer runway 

for companies to scale up to the full reporting requirements should 

incentivize more issuers to go and stay public. We also have the 

benefit now of having seen companies operate under these rules 

and investors react to them for 5 years, which can inform that extension. 

Another critical topic to explore is the provisioning of research on 

publicly traded companies, which I believe is one of the most important and least understood facets of our public capital markets. 

At William Blair, we provide sell side research for over 600 public 

companies, with a focus on small and mid-cap stocks. 

SEC (U.S. Securities and Exchange Commission) Rule 139 provides a safe harbor for research produced by broker-dealers participating in distribution if the issuer is a large reporting company 

nshattuck on FSR297 with DISTILLER

7 

under the ‘34 Act. We feel that this safe harbor should be extended 

to smaller issuers as well. 

In conclusion, I would flag that policymakers certainly have a 

challenge before them, in improving the vibrancy of our public capital markets and balancing investor protections. But the U.S. capital markets are the envy of the world and worth the effort to preserve. SIFMA and its members stand ready to assist the committee 

and the SEC in this important endeavor, and I look forward to 

your questions. 

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

102 of the Appendix.] 

Chairman HUIZENGA. Thank you very much for your testimony. 

With that, Mr. Knight, welcome back and you are recognized for 5 

minutes. And if you can make sure that microphone is on and close 

to you. Thanks. 

STATEMENT OF EDWARD KNIGHT 

Mr. KNIGHT. Yes. Thank you, Mr. Chairman and Ranking Member Maloney. I am Ed Knight, I am the Chief Legal and Policy Officer at Nasdaq. And the question before you today is: How can we 

ensure the continued success of the U.S. public company model? 

When we think about that at Nasdaq, we go back to the beginning 

of our history in 1971, where we were the first in the world to have 

an all-electronic market with enhanced transparency through technology to protect investors. 

Many thought we would fail. Many were against it, but the laws 

in the United States and regulations were flexible enough to allow 

it. We did succeed, and today we have 2,977 highly innovative entrepreneurial companies creating jobs and growing the economy 

every day. Among those companies are the five largest operating 

companies on the globe. 

But at the core of our DNA is working every day to make a market for early stage companies, high-growth companies that will be 

the future Amazons, Googles, and Microsofts. 

A little over a year ago, we looked at the question of the vibrancy 

of our markets and found that they were not very attractive to entrepreneurs, and very importantly, they did not meet the needs of 

individual investors who were often locked out of investing in these 

early stage, high-growth companies. 

We looked at what were the possible solutions, we consulted experts from around the country, and we put together a number of 

proposals that we are proud to say are embedded in some of the 

legislation before you today. 

This legislation does not represent radical change. We are not 

suggesting that you defund the SEC. We like the SEC, we want 

you to fund the SEC. We are not suggesting that we depart from 

the materiality disclosure standard that is embedded in U.S. law. 

These are largely technical changes. Some of these changes have 

been proposed by the SEC or adopted by the SEC through regulation. Some of them are extensions of the JOBS Act. 

And frankly, we do not believe these are partisan issues. The 

JOBS Act was signed in a Rose Garden ceremony by President 

Obama. I served 7 years in the Clinton Administration Treasury 

nshattuck on FSR297 with DISTILLER

8 

Department. Such considerations are not relevant to this debate, in 

my view. 

The changes that are being proposed are part of the natural process of updating rules based upon experience with regulation. We 

work with these rules every day. They directly regulate our economy. In some cases, we have worked with them for decades. We 

know what works and what doesn’t. The economy evolves rapidly 

and our regulations should also evolve with it. 

If these changes are merely technical, why do we care? Why do 

you have this coalition that supports it so strongly? Is there some 

hidden agenda here? I would submit that by moving forward with 

these ideas, all that Congress is doing is signaling a willingness to 

work alongside entrepreneurs to make the markets stronger while 

preserving investor protection. This builds business confidence, 

which is the cheapest form of economic stimulus. 

I want to just highlight a couple of elements of the bills with— 

before you. The venture exchange legislation addresses an issue 

that everyone recognizes that works with the markets, and that is 

they are designed to help large companies trade their securities. 

They are not designed to help small companies do it. 

The market structure that applies today fragments liquidity 

across 50 or more venues. The venture legislation would allow a 

company, not a stock exchange, not a broker-dealer, but the company to elect to have all that liquidity trade at one place so we 

would have deeper liquidity and these markets would work better 

for smaller companies. 

The 10-Q optionality bill, I would submit, would enhance disclosure by putting before investors an enhanced financial disclosure. 

At this moment, we have a two-part disclosure regime in which 

companies file an 8-K with their financial results, and a few weeks 

later a 10-Q that no one reads. 

Give them the option, as under the venture legislation—the company the option to consolidate the material changes since their last 

quarter along with their financial disclosures, instead of making 

them file a 10-Q—which most people do not read—what moves the 

market is the 8-K, not the 10-Q. 

The selling disclosure legislation would also enhance disclosure. 

We have disclosure about long holdings, but not short holdings. 

Much of the other legislation, as I said, is—are extensions of 

ideas that the SEC has proposed in the Obama Administration that 

have been part of regulations that had been adopted by the SEC 

and would codify those. 

We think they are modest. 

Chairman HUIZENGA. Sorry—sorry, Mr. Knight, your— 

Mr. KNIGHT. Thank you. 

[The prepared statement of Mr. Knight can be found on page 94 

of the Appendix.] 

Chairman HUIZENGA. Your time has expired. I am going to try 

and keep a tight rein on that for this. And with that, Mr. Coffee 

you are—you are afforded 5 minutes. 

STATEMENT OF JOHN COFFEE 

Mr. COFFEE. OK. Thank you Mr. Chairman, Ranking Member 

Maloney, and fellow members of the committee. 

nshattuck on FSR297 with DISTILLER

9 

We have essentially been asked to comment on 11 proposals. On 

overview, I think these proposals range the gamut from promising 

ideas and useful studies that should be conducted to ideas that are 

irredeemably bad and would degrade our disclosure system. 

But all of these 11 ideas come from one common source: This Expanding the On-Ramps study. And it in turn, in connection with 

the JOBS Act, is based on the same idea that moved the JOBS Act. 

That somehow the SEC discourages IPOs because of overregulation 

and very costly rules. 

I think the vast majority of professors who study this area, of 

law professors and finance professors, think that is very overstated 

and borders on a myth. It is a myth that gets perpetually—continually asserted, and I think we should understand what reality 

looks like. 

The world changed dramatically in 2001, when the high hot issue 

bubble crashed. We have never approached that level of IPOs since. 

It was like the falling off of a cliff. And what caused this? Well, we 

should remember that underregulation can be even more dangerous than overregulation. Underregulation caused investors to 

flee the new issue market, and we have never gotten many of them 

back. 

The JOBS Act didn’t really cure this problem at all. IPO volume 

continued to fall, and in 2015 and 2016 it was lower than in years 

before the JOBS Act. Although there has been some comeback this 

year in high-tech offerings, the smaller offering continues to approach extinction. Small offerings are both few and generally unprofitable. 

Now, if all this were caused by high regulatory costs and SEC 

overregulation, then the decline in IPOs would be a uniquely American problem caused by American overregulation. But it is not an 

American problem. It is a worldwide problem. IPO volume has declined even more dramatically in Canada, and the decline in Europe and Japan is as great as the decline in the U.S. of IPOs by 

number of offerings. 

And because Canada has no national securities regulator, there 

was no overregulating national adviser. There are 11 different 

provinces and IPOs are virtually extinct in Canada currently. 

Something else is causing the problem. What else is there? I will 

give you two principal causes, although there are others. They 

would be, first, private companies find it easier, quicker, and 

cheaper to raise capital in robust private markets where litigation 

risk is much, much lower, private firms can raise capital in these 

markets in weeks, not months, and with much less diversion of executive time. That is reason one. 

Two, IPOs for smaller firms have been consistently unsuccessful 

for a sustained period. Jay Ritter, a prominent finance economist, 

in his latest study finds that about 80 to 90 percent of these small 

offerings are characterized by negative earnings-per-share in subsequent years. 

In short, small issuers remain unprofitable, and as a result analysts and underwriters are coming to shun these deals. Academic 

research suggests that the relative disappearance of small IPOs is 

probably because these smaller issuers cannot gain the economies 

nshattuck on FSR297 with DISTILLER

10 

of scale and scope that are increasingly necessary to compete in a 

globalizing market. 

Is there a crisis? I suggest not. A company can get capital easily 

in the venture capital market, and the smaller firms, although I 

wish they could find a way to do an IPO, can get successful exit 

strategies through the merger market. Frankly, the smaller firm 

gets a much higher price in the merger market than in the IPO 

market, and thus it will go in that direction. 

Given these problems, I don’t think we should relax disclosure 

and Government standards to encourage more small IPOs that are 

already losing money. 

In my last half minute, let me give you my nominations for the 

best and worst ideas among these 11. I think one truly promising 

idea is venture exchanges, but it has a very flawed execution here. 

The way this bill is drafted, it looks like a fly by-night group could 

set up its own venture exchange tomorrow, and the SEC would be 

in the position of an overworked fireman racing from fire to fire to 

put out the various crises. 

And if you think that is not possible, you should look at what is 

going on in the cryptocurrencies exchanges, where we see some 

very disreputable people working behind exchanges. The idea that 

I think is most problematic—and I will stop here—is the idea of 

substituting a press release for the form 10-Q. That would really 

end our disclosure system as we know it today. 

Thank you. 

[The prepared statement of Mr. Coffee can be found on page 42 

of the Appendix.] 

Chairman HUIZENGA. Thank you, the gentleman’s time has expired. And with that, I owe Mr. Brian Hahn an apology. I was 

going to my list, and Barry Eggers and Brian Hahn sitting next to 

each other. So with that, Mr. Brian Hahn, you have 5 minutes. 

STATEMENT OF BRIAN HAHN 

Mr. HAHN. Good morning, Chairman Huizenga, Ranking Member 

Maloney, and members of the Capital Markets, Securities, and Investments Subcommittee. 

My name is Brian Hahn, and I am the Chief Financial Officer 

of GlycoMimetics, a 48-employee public company based in Rockville, Maryland. I am happy to be here today to discuss proposals 

to help fuel capital and growth, and how they will help 

GlycoMimetics and other early stage biotechnology companies in 

our pursuit to fund the next generation of treatments. 

The ability of growing business to access the public markets is 

of paramount importance to biotechnology innovation, because investment capital is the lifeblood of scientific advancement. It can 

cost over a billion dollars to develop a single treatment, and most 

companies spend more than a decade in the lab before their first 

therapy is approved. 

During this long development process, virtually every dollar 

spent by an emerging biotech company comes directly from investors. To that end, the JOBS Act has been an unqualified success, 

enhancing capital formation and allowing 260 biotechnology companies to focus on science. It certainly helped pave the way for 

GlycoMimetics’ IPO in January 2014, and has helped us nearly 

nshattuck on FSR297 with DISTILLER

11 

double our employee headcount and move three new drug candidates into human clinical trials. 

Given the long development timelines and substantial costs, legislation being considered today that would extend the JOBS Act onramp and provide other relief for emerging innovators would be extremely beneficial for growing companies like mine. When 

GlycoMimetics rolls off its EGC status in a few short months, we 

will lose the key JOBS Act exemption and will be subject to the erroneous and expensive disclosure burdens as mandated by Sarbanes-Oxley Section 404(b). 

While a private company, our audit fees were just $40,000 a 

year. After our IPO, our audit fees increased by roughly $500,000 

due to the existing regulatory environment from public companies. 

Absent additional exemption, we expect our SOX 404(b) compliance 

obligations to alone more than double our cost to as much as $1.2 

million annually starting in January 2019, when our 5-year exemption ends. 

I would like to thank Representatives Kyrsten Sinema and Trey 

Hollingsworth in this subcommittee for their efforts in drafting 

H.R. 1645, the Fostering Innovation Act. This bill recognizes that 

a company that maintains the characteristics of an EGC is very 

much still an emerging company, even if it has been public for 

longer than 5 years. I am hopeful that the Senate will also recognize the importance of the Fostering Innovation act in a timely 

manner before any more companies are rolled off the JOBS Act 

provision and subject to the rules of—burdens. 

In addition, draft legislation being considered by the committee 

today that expands the SEC’s definition of non-accelerated filer 

would also help small business innovators avoid the burdens of 

Section 404(b). Under current SEC rules, companies qualify both as 

an SRC and a non-accelerated filer if their public float falls below 

75 million. SRCs benefit from scaled obligation under regulation 

SK and regulation SX, while non-accelerated filers are exempt from 

Section 404(b). Increasing the public float cap and adding an annual revenue test would be tremendous benefit to small business 

innovators. 

Another issue of concern for small public companies is proxy advisory firms. I want to thank Congressmen Sean Duffy and Gregory Meeks for their bill, H.R. 4015, the Corporate Governance Reform and Transparency Act, which passed the House last December 

on a bipartisan basis. 

The role of proxy advisory firms has grown to have an outsized 

influence in the decisionmaking processes of emerging biotechs and 

their shareholders. When a proxy firm issues a recommendation 

that is not applicable to an emerging biotech and remains unwilling to consider alternative approaches or methodologies, it can 

harm a company’s relationship with its shareholders, and distract 

management from the core business of the company. 

I would also like to thank Representative Duffy for H.R. 5756, 

which would adjust certain resubmission thresholds for redundant 

shareholder proposals that burden many small biotechs. 

I would like to take a moment to discuss the problem of manipulative short-selling and express my support for a disclosure regime 

for short sellers. The unique business model for groundbreaking innshattuck on FSR297 with DISTILLER

12 

novation leaves emerging biotechs particularly vulnerable to stock 

manipulation. 

BIO acknowledges that appropriate shorting can support the stable, liquid markets that fuel the growth of emerging biotech 

innovators, however, we strongly believe that current lack of transparency related to short positions is enabling trading behaviors 

that unfairly harm growing companies, long-term investors, and 

most importantly, patients. 

Finally, I would like to mention XBRL compliance, an issue that 

seems technical but can have significant costs for small companies 

like mine. The Extensible Business Reporting Language is an attempt to make it easier for investors to compare financial data, but 

with—as with many of the issues I have discussed today, it disproportionately affects small issuers due to its one-size-fits-all approach. 

Cost of compliance can be significant. GlycoMimetics is forced to spend $50,000 to $60,000 every year on XBRL and without much 

benefit to investors. Biotech investors are less concerned with the 

reporting metrics that XBRL compares and more concerned with 

the actual science of the company and their path forward toward 

FDA (Food and Drug Administration) approval, and ultimately getting the drug to the market. 

BIO appreciates, therefore, Congressman David Kustoff’s legislation, H.R. 5054, the Small Company Disclosure Simplification Act 

that exempts EGCs from XBRL reporting requirements and provides temporary XBRL exemptions for companies with revenues 

below $250 million. 

I would like to thank the subcommittee for considering further 

initiatives for small business innovators, and I look forward to answering any questions that you may have. 

[The prepared statement of Mr. Hahn can be found on page 88 

of the Appendix.] 

Chairman HUIZENGA. Thank you for that. Mr. Eggers, you have 

5 minutes. 

STATEMENT OF BARRY EGGERS 

Mr. EGGERS. Chairman Huizenga and Ranking Member Maloney, 

thank you for the opportunity to testify here today on the important subject of capital markets reform and encouraging more U.S. 

public companies. 

My name is Barry Eggers, and I am a founding Partner at 

Lightspeed Venture Partners, a venture capital firm that invests in 

and works closely with cutting-edge technology startups. We invest 

in areas such as information technology, big data, cloud computing, 

networking, eCommerce, and consumer marketplaces. I am here in 

my capacity as a board member of the National Venture Capital 

Association. 

Let me begin by explaining why venture capitalists care about 

policy issues pertaining to our public capital markets. There are 

three main ways that venture capitalists exit an investment. Number one, a merger or acquisition; number two, an initial public offering, or IPO; or number three, a business failure. 

While the vast majority of venture capital investments are in private emerging growth companies, or EGCs, recent research has 

nshattuck on FSR297 with DISTILLER

13 

shown that nearly half of all companies that have gone public since 

1979 have been backed by venture capital. In other words, VCs 

build the product for the IPO pipeline. 

To provide a little background on venture capital, we are investors in the Nation’s startups. At Lightspeed, for instance, we invest 

early in a company’s life, often when there are a few founders trying to build out a new concept. 

We work with these entrepreneurs to grow the company into a 

successful enterprise, including providing mentorship and strategic 

advice, helping them hire new employees, introducing them to potential customers, and providing additional rounds of financing to 

fuel continued growth. This work typically takes a lot of patience 

over a long time horizon. At Lightspeed, the average time to IPO 

from first investment is roughly 8 years. 

I have been a venture capitalist for over 2 decades, and in the 

technology ecosystem for over 30 years. When I first got started in 

the business, the goal of most entrepreneurs was an IPO, and 

many companies were successful in that endeavor, such as Maker 

Communications, a company I invested in that went public in 1999. 

Maker had quarterly revenue of $3 million prior to their IPO, and 

went public at a valuation of $230 million. 

Twenty years later, many entrepreneurs now view the public 

markets as hostile to small-cap companies and would rather have 

the certainty of a trade sale than deal with the challenges, complexities, and costs of running a public company. 

And for those that do go public, they often do so when they have 

grown to a size that can better bear the burdens that come with 

being public, such as Nimble Storage, another company I invested 

in which went public in December 2013, and is representative of 

the first batch of EGCs to go public under the 2012 JOBS Act. 

Nimble had quarterly revenue of $33 million prior to their IPO, 

which valued them at $1.5 billion; over 10 times larger in revenue 

and six times more valuable than Maker. 

My firm, Lightspeed, has one of the strongest track records of 

IPOs since 2016. We have had seven portfolio companies go public 

over the last 2–1/2 years. That is still less than 5 percent of the 

145 active companies in our portfolio. 

Avoiding the public markets has unfortunately become the prevalent view among many EGC executives. The issues that discourage 

EGCs from going public can be grouped into three broad categories. 

Number one, the increased cost and complexity of running a company; number two, the collapse of market-making infrastructure, 

including research coverage; and number three, the challenges presented by a culture of short-termism. 

In each category, since the turn of the millennium, policy 

changes and industry trends have conspired to increase the 

headwinds facing small public companies. I believe there are two 

significant consequences arising from the lack of IPOs and the decline in U.S. public companies; less job creation, and loss of investment opportunities for retail investors. 

Research indicates that the lack of IPOs has cost the economy on 

average about 2 million new jobs a year. From what I have seen, 

many of these jobs can be the type that support middle-class families and don’t necessarily require college degrees. Thinking, for innshattuck on FSR297 with DISTILLER

14 

stance, about human resources or administration jobs, which often 

disappear after a merger. 

A lack of IPOs has also had an impact on middle-class retirement 

savings and retail investment portfolios. Think about Amazon, 

Genentech, Microsoft, or Intel as examples of companies that created exponentially more wealth in the public markets than private 

markets. 

The joint report endorsed by NVCA, Expanding the On-Ramp, offers a blueprint for building off the success of the JOBS Act and 

making it more attractive to be a public company. The report considers a breadth of perspectives from company operators, people 

whose job it is to facilitate public offerings, exchanges, and investors. 

While I note several policy proposals in my written testimony, I 

did want to take time to reference one now. I strongly support the 

proposal to allow any investment in an EGC to be qualifying for 

purposes of the VC exemption definition from the RIA regulatory 

regime. 

Congress created both the EGC definition and the VC exemption 

for similar purposes; namely, a favorable capital formation regulatory environment for growing companies. That secondary share 

purchases of EGCs are currently nonqualifying is becoming an increasing challenge for VC funds that are forced to choose between 

supporting their company’s growth while risking the significant expense and difficulty of registration, or passing on further capital 

formation opportunities for certain portfolio companies. Happy to 

answer any questions. 

[The prepared statement of Mr. Eggers can be found on page 63 

of the Appendix.] 

Chairman HUIZENGA. Thank you, Mr. Eggers. Mr. Gellasch, you 

have 5 minutes. 

STATEMENT OF TYLER GELLASCH 

Mr. GELLASCH. Thank you. Chairman Huizenga, Ranking Member Maloney, and members of the subcommittee. Thank you for 

holding the hearing today and for offering us the opportunity to appear. 

I am the Executive Director of Healthy Markets Association, and 

our members are the pension funds and investment advisors that 

folks here seem to be concerned with in the public markets. 

And today, we are here to discuss a least 11 legislative proposals, 

so just let me cut to the chase: Not one of these proposals is likely 

to measurably increase the investment in public capital markets or 

improve the economy for Main Street, and several of the proposals 

are likely to have the opposite effect. 

The reason is simple. They either ignore or affirmatively harm 

investors in the public markets. From the vantage point of an investor in the public markets, these proposals reduce the quantity, 

quality, or utility of information available to them. 

They increase the riskiness of a company’s financials, such as by 

removing required audits of internal controls. They increase the 

valuation risks of the company. They increase the costs of trading 

those securities. They divert investment opportunities from the 

public markets by further easing limits on private securities such 

nshattuck on FSR297 with DISTILLER

15 

as through the ventures exchange. And they decrease corporate accountability to shareholders by restricting shareholder proposals, 

by reducing access to proxy advisors, or other reforms. 

The proposals aren’t offering any reason for investors to want to 

put more money into the public capital markets, and so I will argue 

that they will likely have the effect. I appreciate the Chairman’s 

focus, and many of the folks here, on the public markets, but of 

course they matter. Public securities are often accompanied by 

more robust accounting and financial business disclosure practices, 

and that is a given. 

But they are also—information about public companies, including 

third-party research, is more readily available and fairly distributed. Public securities are far more easily and reliably valued, and 

really importantly from an investor’s perspective, liquidity is significantly greater. Trading costs are significantly lower. 

If we are talking about fractions of a penny a share, or a penny 

a share, or maybe a few pennies a share in the public markets, we 

are talking orders of magnitude greater cost for investors in the 

private markets. 

And frankly, that is a transaction cost. That is lost returns for 

investors. Public securities are much more easily benchmarked, 

such as against the S&P 500. These factors play an important role 

for pension funds and investment advisors who are fiduciaries to 

their beneficiaries to minimize costs and minimize risks. 

Unfortunately for them, as many have noted here, the public 

markets have dwindled. The vast majority of the decrease in public 

companies, 2,800 of the lost companies, were lost before 2003. That 

is well before Sarbanes-Oxley, and well before the Dodd-Frank Act 

and its CEO pay ratio disclosures, and it was after proposals and— 

that were implemented in the 1990’s to curtail private litigation. 

So if those things didn’t cause the decline, what did? Well a lot 

of things, but most importantly, the SEC and Congress, frankly, at 

the urging of many of the folks I sit on the panel here with today, 

spent years digging trenches to drain capital and companies out of 

the public markets, usually in the name of promoting access to capital for small companies. 

So put simply, many companies don’t go public anymore because 

they can do things like raising money. We talked about the explosion of private capital; that is it. We made it so that you can do 

a private offering with a Super Bowl halftime commercial. You can 

do it over an internet radio ad. That was never allowed before. 

Policymakers’ and regulators’ obsession with IPOs is also somewhat misplaced. Do we really think it is a good idea to return to 

the 1990’s, when a sock puppet can raise millions of dollars in an 

IPO? Could it be that as—as Mr. Coffee alluded to, that perhaps 

public investors are concerned with IPOs because they have chronically underperformed the markets, and that a lot of the IPOs that 

do come to market these days are exits from folks like venture capital firms and—and executives? 

Do we really think that undercutting the reliability of a company’s financial reports or a company’s accountability to shareholders is going to make investors more interested? We don’t. So 

we offer three alternatives. 

nshattuck on FSR297 with DISTILLER

16 

First, we share the concerns with many about the lack of good 

research into small cap companies, but rather than forcing investors to pay more for trading, as the failed Tick Pilot suggested, how 

about we let investors separately shop for research in a transparent market? To do that, we encourage you to direct the SEC to 

empower investors to be able to separately shop for the research 

they want and the trading services they need. 

Second, we encourage you to reduce the exemptions and exceptions from the Federal securities laws. We should stop digging 

trenches out of the public capital markets. It is time to put down 

the shovels. 

Third, we urge you to think about rules that promote industry 

consolidation. The difference between large and small cap companies in raising capital has a lot of reasons, and I—thank you—I— 

for the opportunity speak before you, and I look forward to questions. 

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

67 of the Appendix.] 

Chairman HUIZENGA. I appreciate that, and Mr. Quaadman, you 

have 5 minutes. 

STATEMENT OF THOMAS QUAADMAN 

Mr. QUAADMAN. Thank you, Chairman Huizenga, Ranking Member Maloney, and members of this subcommittee. We appreciate 

this subcommittee’s continued focus on issues related to business 

creation and growth. 

The atmosphere for business creation and the path for growth is 

not what it should be. Systems that have supported the ability of 

businesses to start and then grow from small to large have not 

kept pace with the times or international competition. 

We have seen 10 years after the financial crisis continued depressed business creation rates, and we continue to be hundreds of 

thousands of businesses short from where we should be, historically. We have also seen a 20-year decline in the number of public 

companies and an anemic IPO market over the same period of 

time. Indeed, we have seen a calcification of entrepreneurship, 

where 50 percent of all business startups in the United States are 

concentrated in 20 counties. 

Action is needed. There are several reasons for these problems 

and much needs to be done to address the situation, and indeed 

some things have already been done. The JOBS Act and the JOBS 

Act 2.0 measures in the Highway Bill have arrested the decline of 

public companies and we have seen a modest increase in IPOs in 

the 6 years since the JOBS Act passed. 

S. 2155, which was passed by the House yesterday and should 

be signed soon by the President, helps to restore community and 

regional banks to being a Main Street business liquidity providers. 

However, it is important to remember that 75 percent of all business financing and development happens in the non-bank financial 

markets. 

More needs to be done and we need to reverse this situation. 

That is why the Chamber and seven other trade associations, 

under the leadership of Brian O’Shea, last month issued a report 

on expanding the IPO on-ramp. That report includes 22 recnshattuck on FSR297 with DISTILLER

17 

ommendations which are centered around JOBS Act enhancements, increased research, corporate governance and disclosure improvements, financial reporting issues, and equity market structure 

reforms. 

These ideas, and many of the bills already passed by the House, 

can form a core of a JOBS Act 3.0. Indeed, the bills that we are 

discussing today are a good step forward. These bills will increase 

liquidity, extend JOBS Act protections, address the resubmission 

thresholds issue, reduce redundant disclosures, establish venture 

exchanges, and generally remove obstacles to growth. 

Indeed, last month we also released a poll which shows widespread support for these measures. Indeed, over 90 percent of 

Americans agree that there needs to be a level playing field for 

IPOs, and also agree that the rules of regulators should promote 

growth and that all investors should benefit from them. 

Additionally, over 75 percent of Americans believe that regulators should simplify the IPO process, and they also agree that 

Government policy should be geared for growth; that support cuts 

across all ideological, generational, and economic lines. 

And we also can’t wait because of international competition. The 

China 2025 and 2050 plans are specifically geared to make China, 

not the United States, the innovation center moving forward. Also 

the EU, with its capital markets union proposal—they are also 

looking to build out their non-bank financial system; in fact, copying many of the things we do here in the United States. 

However, many of the Brexit-related proposals are also specifically designed to keep American financial firms out. Indeed, the 

EU also sees itself as a global regulator. Their MiFID (markets in 

financial instruments directive) specifically impacts research here 

in the United States, and in fact will make it more difficult for 

Congress to incentivize research for smaller IPOs. 

Indeed, some things are also positive. The SEC, unlike in 2013, 

is a willing partner to work on these issues. But it is important to 

remember that it is Congress that sets the public policy parameters, and it is Congress that ultimately will lead us down the road 

that then the regulators can help fill in the blanks. 

We look forward to working with this subcommittee on these 

issues, and thank you, happy to take any questions you may have. 

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

112 of the Appendix.] 

Chairman HUIZENGA. Well, ‘‘A’’ on turning in 50 seconds. Thank 

you, Mr. Quaadman. 

Now I—at this time, I will recognize myself for—for 5 minutes 

for some questioning, and clearly we heard some contradictory 

things here. Mr. Hahn, Mr. Eggers, you had both talked about— 

I think Mr. Eggers talked about an EGC that had gone public, Mr. 

Hahn, you were talking about some of the other biotech. 

Professor Coffee had said that there really isn’t a problem, and 

that the JOBS Act—I—I got it down here—didn’t address the issue 

of IPOs and the lack of IPOs at all, and so I am curious. Is this 

worth pursuing? 

We are—we are looking at a—we have done a non-legislative— 

but a package, but a JOBS 2.0 previously, we are working on a 

JOBS 3.0, for lack of a better working title at this point—but did 

nshattuck on FSR297 with DISTILLER

18 

we have a problem and did the JOBS Act and these types of reforms actually address the problem? 

Mr. Hahn, Mr. Eggers? 

Mr. HAHN. I think the JOBS Act did—did help address these 

problems. What—I am sitting here today talking about—what I 

would like to see is the extension of the 5-year on-ramp, especially 

for us with 404(b). 

We do a third-party audit of our internal control that gets reported directly to the audit committee. That costs us less than 

$50,000 a year. To have—and I have a proposal, since next we are 

going to roll off of that from our audit firm, $650,000 a year for our 

audit firm to audit those results. And the third party will go from 

$50,000 up to $150,000 a year. 

And 98 percent of our balance sheet is still cash. We have no revenues yet, we still only cut 125 checks a month, we still only have 

two check signers. So for that additional $650,000 to $800,000 in 

added expense, it doesn’t add any more safety to investors. We 

have good controls, we have been audited. So, from my standpoint 

it is the extension of the EGC until we are—we are producing revenue. 

Chairman HUIZENGA. OK, Mr. Eggers? Can you make sure you 

hit your mic? 

Mr. EGGERS. I do believe it has helped. I have seen it first-hand. 

I mentioned Nimble Storage, which was one of the first companies 

to go out under the JOBS Act in December 2013. They filed confidentially, they were able to work under EGC status. 

One of the problems, though, is that an EGC status doesn’t last 

very long, potentially because you can become a large accelerated 

filer very quickly at the $700 million threshold. When these companies go public, they are very volatile. I looked at the last seven 

companies that we have taken public since 2016, and in the first 

6 months of trading the difference between the high price and the 

low price was on average 68 percent. So many of those lost their 

EGC status. 

Chairman HUIZENGA. OK. And I think it was Mr. Paschke who— 

you had talked a little bit about providing a longer runway? Is that 

correct? Is that relative to what Mr. Eggers was talking about? 

Mr. PASCHKE. Yes, so there are two things I would say. First, 

why do investors care? One is IPOs have actually outperformed the 

S&P 500 in 2015, 2016, 2017, and 2018 year to date. So I did want 

to get it out there that IPOs in—are in fact working and a good 

vehicle for wealth creation. 

Extending the on-ramp, to me—and as I mentioned in my opening statement, I was part of the initial set of recommenders on the 

task force—there is a timeframe on them to see how it worked. To 

see if the market reacted, if there was pushback from investors. If 

some of the disclosure allowances led to problems or information 

issues. As we sit here now, 5 years later, there really haven’t been 

issues. Virtually every company that has been eligible has taken 

advantage of those allowances and there has been really no 

pushback or valuation differential afforded them by the market. 

So it feels like the extension is appropriate for existing public 

companies who already became public, but also helps incentivize 

others to— 

nshattuck on FSR297 with DISTILLER

19 

Chairman HUIZENGA. Real quickly because I think this is one of 

the things that Professor Coffee brought up. He basically said that 

there is enough money out there. We don’t need the IPOs, venture—is there enough cash out there? What is the—what is the 

purpose for accessing it? 

Mr. PASCHKE. I think that is actually one of the most important 

points. There is a lot of money out there, it is privately funded. It 

is being invested by high-net-worth individuals in venture capital 

firms, so all the value creation is accruing to very few people. 

So in an era where income inequality and wealth equality is such 

a topic, I think we need to be encouraging greater access to that 

wealth creation and there is just no question that the public markets, through all its vehicles, is the number one way to do that. 

Chairman HUIZENGA. Well, it is interesting you say that. I—literally, I will read verbatim what I had written down: How do common investors, non-high-net-worth investors access the upside of 

market growth? That in my mind is one of the major elements in 

this—in this entire thing. My time is up and I—and I am going to 

be a little generous here with the questioning since we have a few 

people up here. Because I real quickly—I would like Mr. Knight to 

address 5756. 

Is there an issue or a problem? And what do you hear from those 

public companies who work with or are on the—on Nasdaq with 

some of those activist shareholders and some of their—some of 

their proposals? 

Mr. KNIGHT. Well, yes. Shareholder activism is a major factor in 

the public markets. It is a reason why some entrepreneurs choose 

not to go public. Shareholders should be active. Shareholders 

should be engaged. But it is the short-term focus, often of activists, 

that distorts the market. And that is why we support legislation 

that would provide more transparency about shorting the market. 

We think that would be healthy. And—but activism is a major 

factor in the market today and it—it is something many are concerned about. 

Chairman HUIZENGA. So appropriate for it to be addressed? 

Mr. KNIGHT. Yes. Yes, sir. 

Chairman HUIZENGA. All right, my time is well-exposed—expired. With that, the Ranking Member. Or the— 

Mrs. MALONEY. Thank you. I would like to welcome John Coffee 

back to the—to the panel. And I would like to ask you about the 

venture exchange bill which you called promising. As I mentioned 

in my opening statement, I am not opposed to this concept, but I 

have some concerns about preempting State securities laws. And is 

there a way to make the venture exchange model work without exempting State laws, or preempting State laws? 

Mr. COFFEE. Right now, the alternative to a venture exchange is 

the alternative trader, ATS system, which has a number of companies trading over the market. Venture exchanges may prove to be 

a more interesting, more novel, more creative alternative. We don’t 

know until we try. But we have seen that under regulation ATS, 

we have small companies trading in the over-the-counter market 

without a preemption of State blue sky. 

So it is possible to have entrepreneurs trade over-the-counter 

small companies even though they are subject to State blue sky 

nshattuck on FSR297 with DISTILLER

20 

regulation. And frankly, this is the key point about this, when you 

have a venture exchange, you are going to have a thin market. 

Thin markets invite pump and dump schemes. You need resources 

to monitor those pump and dump schemes, and the SEC tends to 

focus on bigger issues, bigger higher-profile cases. And we need the 

States which are very familiar with some of these smaller companies, and I think are better monitors for them. 

That is the problem about preemption. The other problem I was 

pointing to was that the way this statute is written, the SEC has 

to shut you down. You can start trading as a venture exchange 

until the SEC comes in and says you must stop. I think that puts 

the SEC under undue pressure. They have to run like a fireman 

from fire to fire and I think you will get fly-by-night operators 

under that kind of structure. 

But the idea I still think is promising. 

Mrs. MALONEY. Would anyone else like to comment on it? Just— 

Mr. GELLASCH. Thank you—thank you, Congresswoman, I would. 

I think that there is actually a reason why pension funds and investment advisors aren’t beating down the door for more IPOs and 

pulling companies into public markets. And frankly, I think the 

venture exchange is likely to just make it easier for the existing investors and executives of those companies to exit. But it is not 

going to be the thing that pulls public pension funds or investment 

advisors or fiduciaries into those markets. 

So it is not actually going to have that effect. It is not going to 

be able to overcome the costs or risks associated with those private 

securities. 

Mrs. MALONEY. Anyone else? 

Mr. KNIGHT. Yes— 

Mr. QUAADMAN. Yes, Ms. Maloney. I am sorry, Ms. Maloney, we 

are supportive of it, and I think one thing to remember here is that 

the small investor’s been shut out. The retail investor’s been shut 

out. This is a platform where the SEC can put very robust rules 

in place for oversight, allow for concentration liquidity, allow for 

smaller investors to participate in this, and it is just another way 

and another venue of trying to drive liquidity to smaller public 

companies. 

Mrs. MALONEY. Anybody else? Comments? 

Mr. KNIGHT. Yes, I would just point out the SEC has 6 months 

to license these exchanges. They have been licensing new exchanges quite rapidly. We now have 13 of them in the United 

States, no other country has that many. With regard to Nasdaq 

and the venture legislation, we would be able to trade these securities because our listing standards are already blue sky-exempt by 

statute and regulation. 

So this would encourage more competitors to Nasdaq which I 

don’t think is a bad idea, we are not against competition. And—but 

I think there is a way to do it. Professor Coffee definitely has a 

point that State securities regulation plays an important role. But 

with regard to the New York Stock Exchange and Nasdaq, right 

now we are exempt. 

Mrs. MALONEY. OK, I would like to also ask about the XBRL bill. 

And I would like to ask Mr. Gellasch here, your organization represents investors and I believe that it is the investors who benefit 

nshattuck on FSR297 with DISTILLER

21 

the most from a structured data like XBRL. Do you think that exempting over 50 percent of public companies from the requirement 

to use XBRL will harm investors and ultimately transparency? And 

I would also like to ask Mr. Coffee and anyone else, Mr. Quaadman 

and others, to respond. 

Mr. GELLASCH. Thank you for the question. I think I am struck 

by the dichotomy of two—of different proposals here. On the one 

hand, we are saying that we want to encourage research into small 

companies and the utility of that research into small companies. 

On the other hand, we are actually going to make that research 

less useful for the people who read it. XBRL is common and it is 

something that folks need to have to compare investment opportunities. 

And so one of the things that is really interesting here is, we are 

saying on the one hand, we need to do things to promote research 

into small companies. And on the other hand, there is a proposal 

to expressly go in the opposite direction. 

Mrs. MALONEY. Mr. Coffee? 

Mr. COFFEE. Just one sentence. XBRL is a tool, a cost-saving 

tool. We want analysts to study the smaller company. They are not 

doing it now because the costs of benefits don’t work out for them. 

If you reduce the cost, you might get more analyst attention to 

smaller companies. So, I think it will encourage analysts to look at 

smaller companies. 

Mrs. MALONEY. Yes, Mr. Quaadman? 

Mr. QUAADMAN. Yes, thank you Ms. Maloney for that question. 

First off, we support use of interactive data like this for investors. 

However, XBRL, from studies I have seen, only 11 percent of investors actually use it extensively. That is a CFA study. So, this would 

actually allow for companies to have the option to deal with this— 

to deal with the cost and the like. 

But I think we also have to understand, too, XBRL is a 1998 

platform, as we are increasingly going into a block chain world. So, 

if we can go into a block chain world where you have a common 

electronic ledger where everybody is connected with, that is much 

more transparent and easier to use in an XBRL system. So, I think 

we also need to be very open to other innovative ways of disseminating data. 

Mrs. MALONEY. My time is expired. Thank you. I thank all of the 

panelists. It was very interesting, thank you. 

Chairman HUIZENGA. With that, our Chair of the Oversight and 

Investigations Subcommittee, the gentlelady from Missouri, Mrs. 

Wagner, for 5 minutes. 

Mrs. WAGNER. Thank you, Chairman Huizenga and I think my 

friend, the gentleman from Arkansas for yielding me the opportunity to move ahead of him. 

Mr. Quaadman, welcome back. In your testimony, you noted a 

2011 report of the IPO task force found that 92 percent of public 

company CEOs said that the administrative burden of public reporting was a significant challenge to completing an IPO and becoming a public company. How does my draft legislation on 10-Q 

reporting help to alleviate that burden? 

Mr. QUAADMAN. Yes, so, first off, let us remember your bill 

doesn’t hide any information. That information is already put out 

nshattuck on FSR297 with DISTILLER

22 

there publicly. It allows companies to do it in a different way. So, 

I think if you take your bill, you take some of the legislation here, 

in terms of shelf registration— 

Mrs. WAGNER. Right. 

Mr. QUAADMAN. Other things such as company file, which we 

have proposed in the past. It allows for information to be put out 

there for investors without being done in a redundant fashion, and 

then avoiding those costs. So, this isn’t hiding the ball for anybody. 

Mrs. WAGNER. Thank you. Mr. Knight, your colleague, Tom 

Whitman, testified before this committee, last year. And noted, the 

Nasdaq believes it is long past time to move away from a one-sizefits-all approach to corporate disclosure. 

In fact, Mr. Whitman suggested eliminating the archaic 10-Q 

form altogether because it was duplicative and bureaucratic. Can 

you quickly walk committee members through some of the duplicative standards that exist between the current Form 10-Q and company earning releases? 

Mr. KNIGHT. Well, the—the premise behind this is, I would quote 

a famous technology pioneer, Grace Hopper, who was an Admiral 

in the Navy who said, ‘‘The most dangerous phrase in the English 

language is, we have always done it this way.’’ And there is a redundancy to disclosure in our system today. 

But it is undergirded by a principle of materiality, and we think 

what you have proposed would preserve that materiality, while 

also the key financial disclosures that are required under Reg SK and that come out in an 8-K and which is what really moves the 

market. When you look at the Nasdaq market, on any day, where 

there are substantial movements is where someone has had an 

earnings release and put out their 8-K with their full financial disclosure. 

Now, full—a few weeks later, they make a—a 10-Q filing. That 

filing has a number of things in it, some of it redundant to the K, 

but any material change since the last disclosure would be in that, 

we would combine that through your legislation in one disclosure. 

It would be at the option of the company and I think that is important that several pieces of legislation before the subcommittee 

restore some role for the listed company in how it is regulated and 

give them some choice. 

Mrs. WAGNER. What—what are the costs and resource burdens 

on companies that are required to file 10-Q forms with the SEC? 

Mr. KNIGHT. Well, I—when you are talking about cost, there is 

a dollar cost, but then there is, what I referred to in my testimony 

and my statement, the signaling that goes on through regulation 

to the economy, to the business community, about the attitude of 

regulators in Congress toward what they are doing on a day to day 

basis. 

When they see things that don’t make sense—when they see redundancy and they think about going public and that—that is a 

very long-term commitment they are making. Do they want to be 

part of that system? When you signal that you are making the system and the technical aspects more rational, they get more confidence about jumping into that. 

So, it is more than just the—the cost in dollar terms. It is rather, 

the system is being run in a rational way that reflects the fact that 

nshattuck on FSR297 with DISTILLER

23 

these are the companies that are creating the jobs and the growth 

in this country. 

Mrs. WAGNER. Are press releases sufficient for investors to obtain the information they need to make form—informed investment 

decisions? 

Mr. KNIGHT. No, no. It needs to be prescribed, but the current 

system, I would argue, is redundant. And the Qs are really not 

studied in the same way the K is. So, why not use that disclosure 

to put everything in it, again, at the company’s option. 

Mrs. WAGNER. Great, thank you. I yield back the remainder of 

my time. 

Chairman HUIZENGA. The gentlelady yields back. With that, the 

gentleman from Georgia, Mr. Scott, is recognized for 5 minutes. 

Mr. SCOTT. Chairman, I am sitting here listening to all of you 

and you have such great knowledge and each of your testimonies 

has been very informative, but there is some cross-section going on 

here on one side or the other. 

And it fits it with some of the concerns that I have. And I want 

to start by saying that—I want to emphasize that, both the Republicans and Democrats, on this committee are willing to work together to make it easier to fuel capital growth in our markets. 

As a matter of fact, I am usually the first to jump onboard to proposals like that. However, listening to you and just my own research, I am beginning to get a little worried about—we are getting 

to a point where we may be placing too much value on capital 

growth. 

And maybe we need more evidence and assurances that this actually needs to be done and that we are not compromising the integrity of many of our U.S. firms in our marketplace, which makes 

our U.S. firms so attractive. So, I am not singling out any bill here, 

but let me call your attention to the discussion draft that has to 

do with requiring the SEC to revise the definition of a qualifying 

portfolio company to include emerging growth companies. And I 

couldn’t help but think, is—is this really necessary. My staff also 

tells me that in February 2017, the social media company Snapchat 

filed for an initial public offering, claiming EGC status. 

And I am pretty sure that the IPO was overprescribed with 

many investors clamoring to buy up its shares. Now, the same 

thing happened in March with Dropbox when they went public in 

an oversubscribing offering, claiming EGC status. So a lot of these 

discussion drafts and bills amount to a drip, drip erosion of our security laws. 

And I am somewhat worried we may be ignoring the needs of investors and marketplace transparency. And so I am—this subject 

of Expanding the On-ramp reports that many of your—our witnesses have worked on. But a common trend that I have noticed 

in these proposals is that there is only one direction we go when 

we balance investor protections versus expanding access to capital. 

And that direction is always weakening of our disclosure requirements. 

Now, Mr. Gellasch—is it Gellasch? I am sorry. Gellasch. I really 

was intrigued in your testimony because you stressed the importance of considering the impact of these proposals on investors who 

are contributing to the capital. So could you describe how expandnshattuck on FSR297 with DISTILLER

24 

ing regulatory accommodations for users might affect the 

attractiveness of U.S. companies to investors? 

Mr. GELLASCH. Yes. Thank you for the question. I certainly appreciate it. So as we have talked about the explosion of private capital and—and Professor Coffee agreed that—he said, gee, there 

may not be all of this need for capital formation. It is just not— 

Mr. SCOTT. Yes. 

Mr. GELLASCH. In the public markets anymore. We have to think 

that when we talk about some of the proposals before us, we are 

trying to make—give—make those investment opportunities more 

accessible for retail investors. Well, pension funds and big mutual 

funds are how the predominant number of actual retail investors 

invest. And the people who have the fiduciary duties to them are 

saying these private markets are too costly, generally, and too 

risky, generally, for us. 

And so when we talk about expanding the private markets and 

making them more accessible to folks, we are not actually going to 

get those people more involved. At the same time, when you are 

looking at the public markets and focusing on the burdens and 

costs and risks of issuers and the folks that are trying to sell their 

securities, we are saying, hey, you, the investors in those public securities, we have a great deal for you. It is less. 

You are going to have less transparency, higher costs, and higher 

risks. 

Mr. SCOTT. And Mr. Coffee, you agree with Mr. Gellasch on 

this—my concerns? 

Mr. COFFEE. I agree mainly with your point that—that the hope 

for more IPOs, we shouldn’t eliminate, abolish, and downsize all of 

the protections that give shareholders some right to comment on 

and criticize corporate behavior. Earlier it was mentioned that 

there is a shareholder proposal rule. And that would be downsized 

by a resubmission provision. I have to tell you that empirically, 

there is a study that shows since 2000, 50.1 percent of shareholder 

proposals have gotten less than the 30 percent level at which they 

would be cut off— 

Chairman HUIZENGA. Gentleman’s time is expired. 

Mr. SCOTT. Thank you, Mr. Coffee. I appreciate the extra minute, 

too, Mr. Chairman. Thank you. 

Chairman HUIZENGA. Gentleman’s time is expired. I now recognize myself for 5 minutes. I want to first address my initial questions to Mr. Knight, if I may. And I know this is slightly off topic 

for the hearing today, but since you are here, I would value your 

testimony on legislation that I have introduced to amend the riskand leverage-based capital rules for banks in order to improve liquidity for listed options. 

I have several questions I am going to go through, and then if 

I could get your response. One, I wondered if you could discuss how 

improved liquidity decreases spreads and makes it less costly for 

investors to make use of listed options. And if you also discuss the 

importance of liquidity in options markets when there is volatility 

for the underlying assets. 

For example, how important is it to have the ability to manage 

risk through options when there is volatility in equity markets. 

And then is it fair to say that this is a timely issue that the Fednshattuck on FSR297 with DISTILLER

25 

eral Reserve and other banking regulators should address as soon 

as possible, and do you share the concern that the timeline for implementation of this standardized approach for counterparty credit 

risk, which proposes to amend the treatment of options and capital 

rules, is too far off? They are saying maybe a couple years away. 

So several questions there, but wondered if you could respond to 

that, Mr. Knight. 

Mr. KNIGHT. Certainly. The options market is critical to the management of risk in the underlying cash equities market. It is a market that is populated mainly by professional traders, by market 

makers on behalf of financial institutions and investors who are 

laying off risk through the investment in options. 

It is a critical market to our economy. Central clearing of those 

instruments provides stability to the economy and something that 

is encouraged across markets. The rules that apply there don’t necessarily recognize the capital structure and the investment policies 

of some of the midsized firms that are populating that market and 

may cause a reduction in their participation in those markets. 

There are alternative, more modern capital markets, capital requirement markets for the central clearing houses that the Fed 

could consider that would preserve the participation of those midlevel market makers, which would provide more price discovery 

participation and that would narrow the spreads and narrow the 

cost to the investing public. 

Chairman HUIZENGA. Thanks, Mr. Knight. I appreciate that. I 

am going to move to Mr. Paschke if I could. I am interested in the 

part of your testimony that discusses the diversified fund limits 

under the Investment Company Act. I don’t believe this is something we have spent much time discussing here on our committee. 

I wondered if you could discuss the history of the 10 percent limit 

on mutual fund positions. 

Why does it matter if a mutual fund owns 10 percent or even 50 

percent of certain company as long as the overall fund remains diversified? And why do you believe it would be appropriate to increase this limit to 15 percent for diversified funds? 

Mr. PASCHKE. So the—the point of the rule itself is just for clarity to who you are investing with and alongside and particularly 

it is relevant now with the activist rules and activist campaigns. 

Why moving the 10 percent up to 15 percent as relevant to today’s 

conversation has been one of the—the shining lights of the JOBS 

Act passage has been the proliferation of life sciences companies. 

I think the statistic that came out earlier is 260 life sciences 

companies have gone public since the JOBS Act. Those companies 

by and large tend to be very small. They are taking drugs through 

the FDA process. They haven’t built out a full staff. They also have 

a specialized group of investors who invest in portfolio theory 

across those 260 in many cases because some are going to hit and 

some are going to miss. 

So to limit those specialist funds’ ability to invest into those 

funds to help fuel that drug discovery, lead them through the FDA 

process to get them to a point where they are able to commercialize. I think this really expands the opportunity for them to get 

the funding they need from high quality specialist funds. Ten percent limit on a company that may come public at a $75 million or 

nshattuck on FSR297 with DISTILLER

26 

$100 million market gap, there is only $7.5 million or $10 million. 

It is often insufficient in order to move the drugs to the FDA. 

Chairman HUIZENGA. Thanks. Mr. Hahn, I am wondering, do you 

agree that mutual funds are needlessly restrained in their ability 

to invest in startup companies because of this 10 percent limitation 

in the Investment Company Act? And what will increasing this 

limit mean for the ability of startups to access the capital they 

need to grow? 

Mr. HAHN. When GlycoMimetics was private, we raised about 65 

million. It took us over a year to raise that last 38 million. One of 

the main reasons we went public in 2014 was access to capital 

markets and the quick ability to raise funds. Since we have gone 

public, we have raised over 300 million in the public markets, so 

access to larger investments, we would welcome that. We raise 

money with this. It is a large anchor investor we are looking for. 

As I was saying, more than—we are looking for a $20 million to 

$30 million investment from any quarter, not just $5 million to $10 

million. 

Chairman HUIZENGA. Thank you, Mr. Hahn. My time has expired. Next, I will recognize the gentleman from Connecticut, Mr. 

Himes, for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman and thank you gentlemen 

for—for really interesting presentations. I was there when we were 

doing this in the original JOBS Act and participated in its formation and ultimately, despite a few reservations out was happy with 

its passage. 

This conversation actually allows me to resurrect a not entirely 

dead horse to beat a little bit, because I was always struck, though 

I was a supporter of the JOBS Act, the best estimates I could get 

at the time was that the Sarbanes-Oxley and other compliance regimes probably imposed in the neighborhood of $1 million to $3 

million a year of compliance costs, which is real money, but as a 

guy who used to do IPOs, I was always struck by the fact that I 

couldn’t get anybody to focus on the other area or another area in 

which there is a lot of money out the door, which of course is the 

gross spread paid by companies going public. 

So I did some studies and lo and behold, there are studies out 

there that show an absolutely remarkable consistency in pricing of 

IPOs of 7 percent. It almost never changes for midsized IPOs. I 

have been crying in the wilderness. I have had a hard time getting, 

FINRA (Financial Industry Regulatory Authority) and SEC, and I 

have letters here promising studies and monitoring. 

And the SEC told me that it is hard to establish the cost incurred by underwriters, it is not. I have done it. And I just haven’t 

gotten any traction until recently when SEC Commissioner Rob 

Jackson came out with a speech in April that called the history of 

the gross spread pricing a middle-market IPO tax. 

So I get to beat this hopefully not dead horse. Mr. Eggers, I am 

going to start with you. Does perfectly consistent 7 percent gross 

spread IPO pricing and the cost that imposes which, as you know 

is $14 million to $20 million, does that—this comes out of your 

pocket, issuers’ pockets and IPO investors’ pockets. This—does— 

does the seven—perfect consistency of 7 percent gross spreads in 

nshattuck on FSR297 with DISTILLER

27 

this country and not anywhere else in the world, does that feel to 

you like a competitive market? 

Mr. EGGERS. No, it doesn’t. Remember in the late 1990’s, we had 

the Four Horsemen which were a midmarket group of bankers that 

would take companies public. Those—all those companies are gone, 

so we have fewer bankers that generally take companies public. 

Most the time, our best companies want to be taken public by 

someone like Morgan Stanley, Goldman Sachs, or J.P. Morgan, so 

there is less competition than there used to be, to answer your 

question. 

Mr. HIMES. So I have had a hard time, in addition to getting 

FINRA and SEC interested in this until Commissioner Jackson 

gave his speech, I have certainly had a hard time getting the venture capital community, which I know well, interested in pushing 

on this. Why is that? 

Mr. EGGERS. I—I would be happy to push on this. 

Mr. HIMES. OK. 

Mr. EGGERS. I think it is an important— 

Mr. HIMES. Mr. Hahn, you went—thank you, Mr. Eggers. Mr. 

Hahn, you went public. Do you agree with Mr. Eggers that this 

doesn’t feel like a competitive market? 

Mr. HAHN. Bankers are helpful in accessing the capital markets. 

Mr. HIMES. I know, I was one. I am just asking whether the fees 

they charge are emerging from a truly competitive market. 

Mr. HAHN. You know, it is always been set at 7 percent, so it is 

something we really just didn’t question. So now I think it should 

be looked at. 

Mr. HIMES. OK. Mr. Knight, Rob Cook responded to my request 

for a study—because look, I have looked at the academic literature 

and it is pretty clear, but I don’t know everything. Rob Cook is a 

good friend, by the way. We were in college together and despite 

that, I have not been able to extort him into—into doing this study. 

FINRA in January 2017, his letter said that you support a comprehensive assessment of the IPO market and gross spreads attendant. Have you actually undertaken that comprehensive assessment? 

Mr. KNIGHT. Of the IPO market? 

Mr. HIMES. Of gross spreads in the IPO market? 

Mr. KNIGHT. Well, we study all aspects of the market. I have to 

tell you, I am not familiar with what our chief economist has there, 

but we may have. And if we do, I will supply it to you. 

Mr. HIMES. So I am in a little stronger position than I was when 

we had this correspondence. Mr. Eggers, who knows the venture 

capital community pretty well and Mr. Hahn, who had the experience of this have both agreed that this doesn’t feel like a competitive market. The numbers we are talking about here dwarf the 

compliance costs that if we have a perfectly calibrated JOBS Act, 

they dwarf the numbers that we are talking about. 

So now I have finally gotten SEC commissioner in some fairly 

public statements on this, will FINRA undertake this study with 

the SEC to determine whether gross spread pricing for midmarket 

IPOs is truly competitive, or whether there is some oligopolistic behavior? 

Mr. KNIGHT. I am not with FINRA. Nasdaq is independent of— 

nshattuck on FSR297 with DISTILLER

28 

Mr. HIMES. I am sorry. I apologize for that, I misread your— 

Mr. KNIGHT. I was at one time, but we are not— 

Mr. HIMES. OK. OK, I apologize. I don’t mean to put you on the 

spot. 

Mr. KNIGHT. No, frankly, what we see is a lot of competition 

amongst the banks to take companies public, the pricing issue is 

a separate issue. but they are certainly competing out there to get 

those assignments and we have not seen signs of a lack of competition. Of course, Spotify recently took a different model and avoided 

that. So there is competition and models that are—that is emerging. And as technology changes here, I think you are going to see 

more innovation. 

Mr. HIMES. Thank you, I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. With 

that, the gentleman from Maine, Mr. Poliquin is recognized for 5 

minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman very much. Gentlemen, 

thank you all for being here today, I really appreciate it. Now I 

know you have very stressful jobs, very stressful jobs, and I have 

some great news for you— 

Chairman HUIZENGA. If you will allow the Chairman to interject. 

Mr. POLIQUIN. Yes. 

Chairman HUIZENGA. There will not be additional time for the 

PSA for Maine tourism. 

Mr. POLIQUIN. Well, Mr. Chairman. on Maine’s license plate, it 

says Vacationland. I want to make sure all these wonderful people 

in this room know that as you are planning your summer vacation, 

we don’t even need air conditioning up there, we have moose walking around, all kinds of other critters, lobster, blueberry pie. You 

need to go to Maine where you belong, with these stressful jobs. 

And—and I think your families will thank you for that, and if you 

can put another 35 seconds back on the clock, I would be very 

grateful, Mr. Chairman. 

Chairman HUIZENGA. Motion denied. 

Mr. POLIQUIN. Now, there seems to be all this bad news that circulates in this town. I am not used to that. I represent the rural 

part of Maine. And we have a great problem to have up in Maine. 

We can’t find workers. I know the national unemployment rate is 

about 3.9 percent. We are at 2.7 percent. And I don’t care if you 

want to have folks working on the docks or picking apples or working in precision machinery, we can’t find those bodies. 

Business confidence is through the roof, consumer confidence is 

high, we have seven million job openings across this country and 

it is all because—we know what it is. It is because regulations now 

are more predictable and there are fewer regulations. And the equity market is a forward-looking animal and they are looking at 

that and they are discounting it. On top of that is that we have 

lower taxes, so our families can keep more of their own money and 

spend it the way they want to spend it. 

And our businesses are growing. And they are investing. And 

Maine’s second district is an economy of small businesses. Now, 

one of the things that keeps me up at night is how do we make 

sure there is access to capital so our businesses can grow—all sizes. 

nshattuck on FSR297 with DISTILLER

29 

And some folks borrow money from banks and that is all great— 

or credit unions. Some folks have access to capital markets. 

It is critically important to make sure we keep these reforms 

going. I—I am going to tell you what you folks already know. If we 

start raising taxes, if we start layering more and more regulations 

like we have been the last 10 years, we are going to be growing 

at half what we are growing at now. And when the economy grows, 

it is great for everybody. So one of the issues is how do we make 

sure these reforms continue. 

Now we all know what the stats are the last 5 or 10 years, the 

number of companies that have gone public have about cut in half, 

roughly. I would like to know, Mr. Paschke, when you talk to folks 

in the board room—Mr. Knight probably another good person to 

ask—what are they telling you? Are they telling you what we 

heard from Mr. Coffee a short time ago? 

What are their concerns and why are they choosing to stay private instead of going public? And second, a follow up question. We 

now have a new SEC. You folks, for the most part, deal with the 

SEC on a regular basis. Do you see a change over there where 

these folks want to be helpful and not layer on and make it more 

difficult for you folks? 

Tell me what you see out there so we are apprised of what needs 

to be done. 

Mr. PASCHKE. So answer two things very quickly— 

Mr. POLIQUIN. And speak right up, sir. Get right in that microphone. 

Mr. PASCHKE. So answer two things very quickly. One, we just 

had a very productive working session with the SEC about 3 weeks 

ago, a group that SIFMA had organized. Very constructive, very 

roll up your sleeves, very specific— 

Mr. POLIQUIN. Was Mr. Clayton in the room? 

Mr. PASCHKE. He was not but he then circled back with feedback 

on—he had heard it was a very constructive— 

Mr. POLIQUIN. Good. 

Mr. PASCHKE. So early returns feel quite good in that regard, and 

constructive. The second thing you talk about, what do they say 

about why they want to stay private. One is you can structure 

those investments however you want. But the other part of this 

whole discussion that hasn’t been talked about in terms of why 

didn’t we see a huge jump in IPOs right after the JOBS Act, we 

have been operating in a near 0 percent interest rate environment. 

Mr. POLIQUIN. Right. 

Mr. PASCHKE. There has been so much access to alternative 

forms of investment. 

Mr. POLIQUIN. Right. 

Mr. PASCHKE. You know, direct private investment on the equity 

side or very cheap debt on the debt side, that has had a major impact. As you see rising rates, what you are seeing actually is an 

increase in equity offerings from existing public companies. There 

is too much of an on-ramp for the IPOs to have caught up to the 

changing environment. 

But that is going to change. And I am going to highlight—the 

one thing I keep highlighting here is for your district in Maine, the 

other way for those people to get wealth is to be able to invest in 

nshattuck on FSR297 with DISTILLER

30 

the public markets. They do not participate in the wealth creation 

that occurs in the private markets. 

Mr. POLIQUIN. I worry about our small investors in Maine, folks 

that are working on the docks or working in the woods or pulling 

traps or—or growing potatoes and these folks are saving as much 

as they can every week to go into a retirement nest egg or to save 

for their kids’ education. And a lot of those investments—not all 

but a lot of them, as you mentioned earlier—I am not sure if you 

did, Mr. Quaadman, mention this—through retirement funds. 

I guess it was Mr. Gellasch—through State and other private 

employee benefit funds. So there are a lot of folks in this country, 

a lot of folks in our district who are owners of corporate America 

and it is really important to make sure these regulations are helpful to them so they have a better opportunity to live better lives 

and more freedom. With that, are you going to award me, Mr. 

Chairman, another 35 seconds that I rightly deserve? 

Chairman HUIZENGA. The fine folks at PureMichigan.com have 

asked me to evoke your time. So the—but with that, the gentleman’s time has expired. 

Mr. POLIQUIN. Thank you very much. 

Chairman HUIZENGA. All right. That would be 

PureMichigan.com. And with that, the gentleman from Ohio, Mr. 

Davidson, is recognized for 5 minutes. 

Mr. DAVIDSON. Thank you, Chairman. And I really want to 

thank our witnesses. Thanks for the time you have committed to 

be here today and for the work you do to advance capital formation, particularly with our small companies. 

And Mr. Eggers, I wanted to talk about venture for a bit and just 

the important role that venture plays in helping so many Americans realize their version of the American dream. 

Starting and growing a company in America is trending in the 

right way. For a long time, we were seeing more companies go out 

of business than launch. We have seen challenges in companies 

scaling. And I guess I am curious as you think about companies 

that want to access public markets, to go from a privately traded 

founder capital to maybe a round of venture funding. 

One of the keys to getting scale is that next round of capital. It 

is one of the keys where the venture folks get paid for the risks 

that they have taken. How have you seen the impact of the JOBS 

Act or other small capital formation initiatives on the space and 

particularly with information coverage, the research coverage for 

small companies? Could you address that? 

Mr. EGGERS. Yes, thank you for the question. I think the JOBS 

Act has been effective in certain areas. And I mentioned the confidential disclosures and ability for a company to test the waters, 

so to speak, before they file, reduced reporting requirements, although when they get to a certain level, those go away. But there 

are other fundamental issues that also factor in to the problem of 

less IPOs. 

There is the uncertainty in the market once they are trading, 

the—the culture of short-term-ism, whole bunch of stuff like that. 

Let me—let me tell you a story about one of our companies, 

AppDynamics. Was one of our really fastest growing companies in 

the private area and raised a lot of venture capital and wanted to 

nshattuck on FSR297 with DISTILLER

31 

go public. Went, hired bankers, paid—paid that 7 percent. Or they 

were going to pay that 7 percent. 

They went through their road show successfully and they were 

going to price the next morning and they decided instead to get acquired by Cisco Systems. Obviously for a premium on how they 

would price, but it makes you wonder why a company like that, a 

very good company, high-growth company that has created a lot of 

jobs would take the certainty of an acquisition over the uncertainty 

of the public markets. 

Mr. DAVIDSON. Yes. Thanks. Good—good explanation. Mr. 

Quaadman, how—do you see provision of the JOBS Act—have you 

seen it boost coverage in pre-IPO, particularly for EGCs? 

Mr. QUAADMAN. It has been mixed. I think the testing the water 

provisions certainly have helped, but I think in terms of research, 

it is been mixed. We still see a dearth of research for smaller 

issuers. So I think the—the draft legislation here, I think is going 

to be an important way to help incentivize some more of that research, which that research will then also help drive liquidity investors to those companies. 

Mr. DAVIDSON. Thank you. And maybe for the group, I am working on an ICO bill, so when you look at companies that choose to 

raise capital through an initial coin offering—we are trying to get 

our arms around how early formation is different. It seems that a 

lot of the things in—in the JOBS Act, in—in—perhaps even in 

EGC designation, or Reg A+ could help. Have any of you spent 

time thinking about this with respect to ICOs? 

Mr. QUAADMAN. Mr. Davidson, this is something where we have 

put together a group of companies to look at this, and we have actually had some meetings with Treasury, some meetings on the 

Hill as well, and we are trying to determine if that is a way of 

helping with capital formation, but we also have concerns about investor protection as well. So I think that is something we would 

like to have a further dialog with you on. 

Mr. DAVIDSON. Thank you. 

Mr. GELLASCH. If I may, Mr. Davidson, on the investor side, I 

would like to echo those remarks. Obviously, coin offerings have exploded themselves, and there are a lot of interesting issues related 

to that. Are they securities, for example, is a really basic question 

that the regulators are wrestling with. 

One of the things I—I think—and you mentioned alternatives 

there, thinking about do we put these things in the registered public space, the traditional public space, some scaled-back version of 

that? Do we go even further into a Reg A+ type of model? 

I would encourage you to think about those things very carefully, 

because the Reg A+ experience is remarkably different than the 

ECG experience. So as you think about alternatives, I would encourage significant caution. 

Mr. DAVIDSON. Yes, thank you for that, and clearly some would— 

would still qualify as commodities, as CFTC has tried to make 

clear. So talking secure—where does that line exist—and my time 

is expired. Mr. Chairman, I yield. 

Chairman HUIZENGA. The gentleman’s time has expired. I am 

not seeing—no further speaker—questioners on the—on the Demonshattuck on FSR297 with DISTILLER

32 

crat side at this point. The gentleman from North Carolina, Mr. 

Budd, is recognized. 

Mr. BUDD. Thank you, Mr. Chairman, and again, thank you all 

for coming today and for your time and your input and your insight. 

So this is an important hearing, and one that is timely considering that Chairman Huizenga is negotiating a package of bills 

with the Senate that will focus on, yet again, capital formation. 

These bills would include some that have already passed the 

House, including my own bill, H.R. 3903, which is encouraging public offerings, and possibly some proposals before the subcommittee 

today. 

I want to go back again, to continue on with what Mr. Davidson 

was asking about the JOBS Act, and Mr. Quaadman, can you 

please explain some of the regulatory requirements that emerging 

growth companies are exempt from under the JOBS Act in their 

on-ramp provisions? 

Mr. QUAADMAN. Sure. There are certain executive compensation 

disclosures that they are exempt from. There are certain—there is 

the potential for certain exemptions from new audit or accounting 

standards as well. 

And generally, it provides for disclosures, but done in a slimmeddown version that allow for investors in those companies to get the 

information that they need. And it also allows for some of the more 

costly disclosures, such as—let us say, conflict minerals or others 

that they are exempt from also. 

So it is a way of allowing companies to grow into the existing 

public company system, and to eventually ramp up. Because one of 

the problems at Sarbanes-Oxley was that internal controls and all 

are extremely important. It was trying to make some of the costs 

scalable, and effectively what the JOBS Act tried to do in a very 

broad way was to make it scalable and ensure that their investors 

are receiving the information that they need, as well as have the 

protections in place. 

Mr. BUDD. Very good. So why are—and you answered some of 

this next part, but why are the exemptions provided in Title I so 

necessary for emerging growth companies? If you care to elaborate 

any more on that, maybe some other reasons? 

Mr. QUAADMAN. Yes, it is their investor base is more interested 

in some of the things that the company is doing rather than what 

its sales are at that time. So it is—investors are much more forward-looking there. 

It—it also—as I said, it allows for an ability for a company to 

gradually work its way into a public company model, because regardless of some of the discussion we have had here this morning, 

we have built in a lot of inefficiencies into the public capital markets. And what—effectively, what the JOBS Act tries to do is tries 

to shield those emerging growth companies from some of those inefficiencies to—until a point where they can deal with it. 

So we actually view the extension from 5 to 10 years—will actually allow for existing EGCs a little more time, and will also continue to make EGC—the EGC model a more attractive one. 

Mr. BUDD. So why are things like the say-on-pay provisions— 

why are they not appropriate for these small EGCs? 

nshattuck on FSR297 with DISTILLER

33 

Mr. QUAADMAN. Well, first off, say-on-pay passes with 95, 90 percent with large public companies. And we have also had an issue— 

we don’t have—necessarily have an issue with say-on-pay itself. Investors should have a dialog with companies about executive compensation. But what has happened with the proxy advisory firms 

is that they have required a year by year vote, whereas Congress 

said, investors can decide what the frequency is. 

So rather than have an entity or a duopoly like the proxy advisory firms place a very costly provision on EGCs, Congress is actually somewhat going back to the intent of Dodd-Frank with say-onpay to actually allow companies some breathing room with that. 

So that is one where I think, again, it is something where you 

have a founder-type system with EGCs, which you probably primarily have; investors are as invested in that founder as they are 

with the company itself. So, say-on-pay is a less relevant tool than 

it is for, let us say, a more mature company. 

Mr. BUDD. That makes sense. Thank you, Mr. Quaadman. Mr. 

Hahn, since the enactment of the JOBS Act, about 265 biotech 

companies have used provisions in the act to go public. A lot of 

those are working on research that is ultimately going to save 

lives. Can you discuss with us in the partial minute that we have 

left how the on-ramp provisions have helped these companies better allocate their resources? 

Mr. HAHN. I think the biggest provision that helped us was testthe-waters. So, we have complex science, and getting investors up 

to speed to understand the science and to want to invest in the 

company in the traditional 2-week timespan of a roadshow, we 

would have lost a lot of investors with that. So test-the-waters gave 

us the ability to bring those investors up to speed. 

And also with the 404(b) exemption we talked about, that helps 

us save money—divert money into the science instead of a one-sizefits-all regulatory burden. 

Mr. BUDD. I appreciate that. I think my time is expired. Again, 

thank you all. 

Chairman HUIZENGA. Amazing self-discipline. A gentleman’s 

time is always ready to expire, so with that, the gentleman from 

California is recognized for 5 minutes. 

Mr. SHERMAN. Thank you. We have a bunch of bills that are designed to help small companies get capital one way or the other. 

And then included in discussion for this hearing is a bill designed 

to prevent shareholders from being able to put forward questions 

for a vote and be included in the proxy statement. 

Mr. Coffee, are you aware of any small startup in a garage that 

has ever had a second presentation of the same shareholder question in their proxy statement? 

Mr. COFFEE. That small startup is the subject of the proxy rules, 

in most cases, so it is going to be totally inapplicable. But I think 

you are right in pointing out that unrelated to the IPO concerns 

of raising capital, there are provisions in here that downsize the 

shareholder voice in challenging corporate conduct. 

And there are other provisions in here that give major exemptions to what are called well-known season issuers, our largest 

companies, and allow them directly to sell before filing a disclosure 

document. It has nothing to do with small firms. That is our largnshattuck on FSR297 with DISTILLER

34 

est top quarter firms, and it is just a wish list of various deregulatory proposals various people on this committee agree to. 

So I don’t think there is a clear, rationalized coherence to all of 

this. But on to your first point— 

Mr. SHERMAN. Yes, and I am aware of the social benefit put forward by making these issues come to light, and I think it taints 

the rest of the bills that we are discussing to throw in here something that has nothing to do with raising capital for small or big 

companies, and everything to do with suppressing discussion of important issues that face corporations in their operation. 

The next point I want to make is a number of the issues come 

in, how much money will we, as a society, spend on investor protection? And some would say, well, as a society as a whole we are 

spending a billion dollars on this aspect of investor protection, and 

maybe we are avoiding a billion dollars of fraud, so that balances 

out. 

No it doesn’t, it is a good thing for society, because a billion dollar fraud loss—it doesn’t just affect the people who lose their 

money, it dampens public interest, foreign interest, retail interest 

in investing in stocks. And having the game be fair is worth every 

penny that is necessary to achieve that. 

Mr. Gellasch, there is this proposal here to slash 404(b) audits, 

to increase by double or triple the various floors, and in effect say 

we will save a lot of money on worrying about internal control, and 

we will maybe only have one or two Enrons a decade as a result, 

probably a smaller company or smaller examples of that. 

What do you think of the need for attestation of internal control 

and reports on internal control? 

Mr. GELLASCH. Well, I think we have seen examples, both—not 

just Enron, but also in the—in the private company space, like 

Aranos, where the need for robust internal controls and financials 

is important, and some of the smartest guys in the room in the private space have proven ineffective at being able to do those things 

themselves in their own due diligence. 

So one of the things that is really important for the public capital 

markets, as you alluded to earlier, is ensuring that you have investor confidence and you don’t lose it. And the accuracy of financial 

statements is critically important to investors. And so when we 

think about what the costs are associated with that—and I certainly appreciate and respect those may not be trivial. That is fair. 

I think—but that is also— 

Mr. SHERMAN. And I could sneak in, it is not just important to 

investors. You may have some division of a company, or what— 

where they are having signing parties forging documents for mortgages, et cetera, where you are hurting consumers. How is internal 

control important for those other than investors? 

Mr. GELLASCH. Exactly right. It is a corporate governance issue 

that is far beyond just an investor protection measure. And one of 

the things I think we tend to focus on is just the cost associated 

with that. I would say what is also really important is focusing on 

that aspect. These are improving the quality of the offerings, including the quality of the companies and how they are governed. 

Mr. SHERMAN. I yield back. 

nshattuck on FSR297 with DISTILLER

35 

Chairman HUIZENGA. The gentleman’s time has expired. With 

that, the gentleman from New Jersey, Mr. MacArthur, is recognized for 5 minutes. 

Mr. MACARTHUR. Thank you, Chairman. Good morning. I appreciate all of you being here. 

I am proudly wearing this pin—you probably can’t see it from 

back there, but it is a—Foster Youth Shadow Day, and Rishawn, 

stand up. Stand up. This is Rishawn from my district. Young 

man—very interesting young man. Very—yes, give him a—give 

him a hand. 

He has an entrepreneurial spirit, I can tell you that just from our 

conversations this morning. He is doing all kinds of things, and 

very interested in both philanthropy and in growing a business. 

We all know it takes more than hopes and aspirations and 

dreams and ideas. It takes money and it takes a path that is not 

completely cluttered with obstacles. I know, because that is the life 

I lived for 30 years growing a business. 

So I am listening this morning—first, I am impressed that he is 

awake, because some of this stuff could make anyone’s eyes glaze 

over when you—when you listen to this. But—but this translates 

into real people’s lives that want to do things. 

And I had—as we do in this business, I had to step in and out 

this morning, and so I have missed a lot of things, but I was here 

for the opening remarks. And Mr. Coffee, I was really struck by 

yours. 

It is a great name, by the way, if you weren’t a professor, it 

would be a great name for a business. Mr. Coffee. 

That has been done. It took money for them to grow that business. I used to handle their insurance many decades ago. It takes 

money to grow a business. And I listened to you—I am not meaning to poke fun, I am just—I just was struck by your remarks, and 

you said that the reason companies don’t really need the public 

markets—it is not because of regulatory overreach or overzealous 

attorneys general who criminalize management mistakes. 

It is none—it is none of that, it is just that companies can get 

money from the venture world, or the private equity—I think you 

said the venture world, but I think that may include other— 

Mr. COFFEE. Private equity firms also, I said. 

Mr. MACARTHUR. Well, sure. Well let me tell you—let me tell you 

the decision I had to make when we got to a State where my business was big enough that I thought I could go public, and there 

would be enough float to actually make that viable. We had gone 

from a hundred-odd people to thousands. We could have done that. 

Why did I choose something other than private equity? 

I just left a meeting—one of the meetings I had to step out for 

was with a person that works with the exchanges. And I asked her 

the question, Why don’t companies go public? She said the number 

one reason I hear is they are deathly afraid of overzealous regulators and State attorneys general. That is their number one reason. 

And then I think about your remark that, well, it is not that. 

Underregulation is—is far less dangerous than—or far more dangerous than overregulation. 

Mr. COFFEE. Equally dangerous, I meant. 

nshattuck on FSR297 with DISTILLER

36 

Mr. MACARTHUR. Here is—here is the problem with that. If you 

really get practical. This doesn’t—this doesn’t play out—no disrespect intended, but this stuff doesn’t play out in a classroom. It 

plays out in the real world with real pressures coming from all 

sides. Venture capital, private equity capital, all of it is the most 

expensive form of capital for a business person to access. 

By far the most expensive. More expensive than the public markets. More expensive then debt capital or any of the alternatives 

around that. It comes with the greatest amount of outside control. 

Because private equity funds—private equity funds, venture funds, 

this is what they do every day. And they don’t give their money 

without exacting a price, without getting certain controls, without 

getting certain investment thresholds. 

It is the longest liquidity possible outcome. You take capital from 

those sources and you are going to wait 5, 6, 7 years or more. So 

why would a rational business person choose that anyway? Most 

costly, most control lost, longest liquidity event. Sir, with respect, 

it is not because it is just easy money and it has nothing to do with 

the state of the public markets. 

I am telling you from personal experience, it has to do with the 

fact that the public markets are frightening to business people who 

don’t want to get squeezed and attacked and have a management 

mistake criminalized and all of the other stuff that comes with it. 

And I don’t usually make speeches with my 5 minutes, I usually 

ask questions but my speech has lasted 5 minutes and so with 

that, I yield back, Mr. Chairman. 

Chairman HUIZENGA. Gentleman yields back. Gentleman from 

Arkansas, Mr. Hill, is recognized for 5 minutes. 

Mr. HILL. Thank the Chairman. I want to thank my friend from 

New Jersey because of his 5 minute speech, I may—I have more 

time for questions because I enjoyed it, I associate myself with it 

and it reflects the experience I have had for 35 years and in corporate finance. So I appreciate my friend Mr. MacArthur and his 

perspective on the public and private markets. 

It has been—it has been said that we want more public companies—all of you agree with that universally—to give more opportunities for our pension funds, our 401(k) plans, our IRA accounts 

and that there is absolutely no reason to say that is not the primary objective. We want that opportunity because it shares the 

prosperity of America. 

So then it gets down to, well how do we accomplish that. And one 

is in sales and trading and research and bringing that company 

out. That is a key component that we are talking about today. And 

then the other is the cost of maintaining that public enterprise. 

And so we have bills on both sides of those issues. And I was with 

a company a couple of weeks ago—it is a publicly traded company, 

$2 billion market cap. 

One division has 5,000 suppliers. That is a lot. And you can 

imagine they have a lot of things that they sell to have 5,000 suppliers. But one of the most costly things they have in this public 

company—long-time public company, $2 billion market cap—is trying to comply with the conflict minerals rule. It just—it just takes 

over their whole process, trying to prove that they have done that 

in case they are sued. Which they of course fully expect to be, benshattuck on FSR297 with DISTILLER

37 

cause it is not possible to comply with it with 5,000 suppliers in 

just one division that—in a globally sourced enterprise. 

And so that is an example of what we are talking about, I think, 

today on the second piece, the cost of maintaining that public enterprise in a competitive—in a competitive way. 

Mr. Quaadman, there was a lot of discussion today about studying research coverage for small issuers before they had an IPO. I 

would love for your perspective on maintaining coverage of a small 

cap issuer after they are public and then I will ask Mr. Paschke 

to comment as well. 

Mr. QUAADMAN. No, I think—no, that is a great question because 

we have actually seen some problems with that, where there has 

actually been a retrenchment of research at times as well. And the 

reason why I raise MiFID with my opening remarks is that EU 

rule is actually going to impact research here and is going to impact costs. So it is a matter of—it is a supply and demand issue, 

right? What are the costs of the research, what are the—how is it 

priced out? 

And it is unfortunate that—I think the JOBS Act tried to address some of that but we actually need to do more of that and we 

are going to have to try and also determine with the SEC how we 

also deal with this in terms of MiFID as well. 

Mr. HILL. Yes. Thank you. Mr. Paschke, what is your view on 

that in the marketplace? 

Mr. PASCHKE. It is an absolutely major issue. And I mentioned, 

we cover 600 companies in research with a focus on small and mid 

cap. And the data shows that for companies with a $500 million 

market cap and below, they have an average of about three research analysts covering them. Larger cap often will have 25-plus. 

So it is very important in those voices that cover them are the voice 

to the market. 

MiFID was an appropriate thing to bring up because most market estimates say that the cost that the buy side is willing to pay 

for sell side research is going to come down by about a third 

through unbundling. So if you are a small cap name and there are 

two or three research analysts covering you today and the research 

budget just went down by a third, you may lose one to two of them. 

Mr. HILL. Yes. I think it is super important and I think this $500 

million number is a reasonable number. The company I referenced, 

$2 billion market cap has six regular research firms covering them. 

I was surprised by that and delighted. And some have longstanding—it is a mix of regional firms and Wall Street firms. In 

the time I have remaining I just want to bring up one other issue 

for you representing SIFMA. 

Just like we talk about community banks needing relief from regulations, I think the same is true for privately held non-bank 

broker-dealers. And one of the ways to do that is I have a bill that 

is going to permanently exempt of the peekaboo standard, the audit 

standard for small private broker-dealers. And I would hope that 

SIFMA would look at that issue and be supportive of a permanent 

waiver, effectively, for the peekaboo standard on audit for a small 

broker-dealer—because it is introducing—not holding customer 

funds. 

nshattuck on FSR297 with DISTILLER

38 

Mr. PASCHKE. Yes. It is my understanding that that was definitionally caught up in Dodd-Frank and that some brokers who probably weren’t appropriate the privately held non-custodial brokers, 

were caught up in some of the regulations, which would seem to 

us would make sense. 

Mr. HILL. Good. I look forward to working with you on that. 

Thank you, Mr. Chairman. 

Chairman HUIZENGA. Gentleman’s time is expired with that. The 

gentleman from Minnesota, Mr. Emmer, is recognized for 5 minutes. 

Mr. EMMER. Thank you, Mr. Chair and thanks for the committee—or the witnesses being here today before this committee 

and your patience. The Treasury—and Paschke, I will start with 

you. I am going to read you a statement from—an October 2017 

Treasury Department report. This I think goes to something that 

you started to talk about a few questioners before and that frankly, 

Chairman Huizenga brought up at the very beginning of this hearing today. 

The quote is this. Or the Treasury report noted that, quote, ‘‘to 

the extent that companies not to go public due to anticipated regulatory burdens, regulatory policy may be unintentionally exacerbating wealth inequality in the United States by restricting certain 

investment opportunities to high income and high net worth investors.’’ 

And isn’t that what we are talking about here today with these— 

this isn’t just pro-growth, but of the 11 bills, much of it is addressing the fact that you have to be too big to play in this country 

today. And the thing used to distinguish us from every other country on the face of planet is that any rank-and-file member of our 

society who wanted to participate in the marketplace, to grow his 

or her wealth and help grow the wealth of this great Nation, that 

has been restricted over the last many years and isn’t that exactly 

what you were trying to get to earlier? 

Mr. PASCHKE. I think it is absolutely one of the most fundamental issues that is going on, is who can participate in the wealth 

creation. You know, for sure, the small individual retail investor 

who has no access or idea about the opportunities and is excluded. 

It is even gotten to the point where the mutual fund, active fund 

managers who are often managing money on behalf of a lot of 

small individuals or pension funds or police unions, whatever it 

may be, they are complaining that because companies are going 

public either later or never at all, that they are missing out on the 

entire wealth creation that occurs with an Uber or a Spotify or 

wherever it may be. These companies have achieved huge valuations all through private capital. 

So it is not just mom-and-pop retailers, it’s active money management funds who don’t have access to the private investment either who are one more where away from the individual. 

Mr. GELLASCH. If I may for a moment, is to—one thing I think 

that is important though, is they all actually have—those investment advisors and pension funds actually are likely to be able to 

physically have access to those markets. The reason why they are 

not accessing them right now is because of the risks and costs assonshattuck on FSR297 with DISTILLER

39 

ciated with a lot of those investments. Every mutual fund or investment advisor. 

Mr. EMMER. So you disagree with the Treasury’s statement? 

Mr. GELLASCH. No, I actually wholly agree. I think that we have 

to recognize that one, when you bifurcate the retail investor of ma 

and pa with an Etrade account from the mutual fund investor or 

the pension funds, which are in fact, the majority of how Americans actually invest in these companies, and those folks who are 

the fiduciaries, who are in charge of those, are actually saying, 

look, we actually do not want to and have investment guidelines 

that say we are not going to get involved, or we are to a very small 

extent in these private offerings; we are in venture investments in 

large part because of the costs and risks associated. 

Mr. PASCHKE. Which is exactly the point that was made by the 

previous speaker, about it is the most expensive capital out there. 

So to say that the private companies ought to be going there instead of public— 

Mr. EMMER. And that is what we are trying to address. That is 

exactly what we are trying to address. 

Mr. Knight, I have the venture exchange bill and I appreciate in 

his remarks, his opening remarks, Professor Coffee likes the concept but has some issues with how it is drafted. Can you—I know 

you are familiar with this set provision, can you give us just a picture of what it would look like if an entity was going to apply to 

become a venture exchange? What would they do? What is the 

timeline with the SEC? 

Mr. KNIGHT. The SEC would have 6 months to determine whether they meet the qualifications to become the venture exchange. On 

our market, we would already be qualified, and the issue would be 

whether the company would choose that market structure, that the 

optionality that is in your legislation, that it would allow the aggregation of trading interest in—in one market. 

Right now, it is split amongst 50 with work—which works well 

when you are trading Amazon, but it tends to drain the liquidity 

away from the price discovery process. We tend to be very focused 

in the United States on competition between marketplaces and 

don’t focus enough on having the competition or price discovery between orders and quotes, and that needs to be aggregated, particularly for small companies if you are going to have a liquidity thickness that you need so that people can sell securities by securities 

on an orderly basis. 

Mr. EMMER. Thank you. I see my time has expired. 

Chairman HUIZENGA. The gentleman’s time has expired, but this 

has been fascinating, very helpful. And I would like to thank our 

witnesses today for their testimony. Without objection, I would like 

to submit the following statements for the record from the Equity 

Dealers of America. My Ranking Member, Mrs. Maloney, had taken 

care of a couple others earlier. 

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 obnshattuck on FSR297 with DISTILLER

40 

jection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

[Whereupon, at 12:05 p.m., the subcommittee was adjourned.] 

nshattuck on FSR297 with DISTILLER

(41) 

A P P E N D I X 

May 23, 2018 

nshattuck on FSR297 with DISTILLER

42 

nshattuck on FSR297 with DISTILLER

43 

nshattuck on FSR297 with DISTILLER

44 

nshattuck on FSR297 with DISTILLER

45 

nshattuck on FSR297 with DISTILLER

46 

nshattuck on FSR297 with DISTILLER

47 

nshattuck on FSR297 with DISTILLER

48 

nshattuck on FSR297 with DISTILLER

49 

nshattuck on FSR297 with DISTILLER

50 

nshattuck on FSR297 with DISTILLER

51 

nshattuck on FSR297 with DISTILLER

52 

nshattuck on FSR297 with DISTILLER

53 

nshattuck on FSR297 with DISTILLER

54 

nshattuck on FSR297 with DISTILLER

55 

nshattuck on FSR297 with DISTILLER

56 

nshattuck on FSR297 with DISTILLER

57 

nshattuck on FSR297 with DISTILLER

58 

nshattuck on FSR297 with DISTILLER

59 

nshattuck on FSR297 with DISTILLER

60 

nshattuck on FSR297 with DISTILLER

61 

nshattuck on FSR297 with DISTILLER

62 

nshattuck on FSR297 with DISTILLER

63 

nshattuck on FSR297 with DISTILLER

64 

nshattuck on FSR297 with DISTILLER

65 

nshattuck on FSR297 with DISTILLER

66 

nshattuck on FSR297 with DISTILLER

67 

nshattuck on FSR297 with DISTILLER

68 

nshattuck on FSR297 with DISTILLER

69 

nshattuck on FSR297 with DISTILLER

70 

nshattuck on FSR297 with DISTILLER

71 

nshattuck on FSR297 with DISTILLER

72 

nshattuck on FSR297 with DISTILLER

73 

nshattuck on FSR297 with DISTILLER

74 

nshattuck on FSR297 with DISTILLER

75 

nshattuck on FSR297 with DISTILLER

76 

nshattuck on FSR297 with DISTILLER

77 

nshattuck on FSR297 with DISTILLER

78 

nshattuck on FSR297 with DISTILLER

79 

nshattuck on FSR297 with DISTILLER

80 

nshattuck on FSR297 with DISTILLER

81 

nshattuck on FSR297 with DISTILLER

82 

nshattuck on FSR297 with DISTILLER

83 

nshattuck on FSR297 with DISTILLER

84 

nshattuck on FSR297 with DISTILLER

85 

nshattuck on FSR297 with DISTILLER

86 

nshattuck on FSR297 with DISTILLER

87 

nshattuck on FSR297 with DISTILLER

88 

nshattuck on FSR297 with DISTILLER

89 

nshattuck on FSR297 with DISTILLER

90 

nshattuck on FSR297 with DISTILLER

91 

nshattuck on FSR297 with DISTILLER

92 

nshattuck on FSR297 with DISTILLER

93 

nshattuck on FSR297 with DISTILLER

94 

nshattuck on FSR297 with DISTILLER

95 

nshattuck on FSR297 with DISTILLER

96 

nshattuck on FSR297 with DISTILLER

97 

nshattuck on FSR297 with DISTILLER

98 

nshattuck on FSR297 with DISTILLER

99 

nshattuck on FSR297 with DISTILLER

100 

nshattuck on FSR297 with DISTILLER

101 

nshattuck on FSR297 with DISTILLER

102 

nshattuck on FSR297 with DISTILLER

103 

nshattuck on FSR297 with DISTILLER

104 

nshattuck on FSR297 with DISTILLER

105 

nshattuck on FSR297 with DISTILLER

106 

nshattuck on FSR297 with DISTILLER

107 

nshattuck on FSR297 with DISTILLER

108 

nshattuck on FSR297 with DISTILLER

109 

nshattuck on FSR297 with DISTILLER

110 

nshattuck on FSR297 with DISTILLER

111 

nshattuck on FSR297 with DISTILLER

112 

nshattuck on FSR297 with DISTILLER

113 

nshattuck on FSR297 with DISTILLER

114 

nshattuck on FSR297 with DISTILLER

115 

nshattuck on FSR297 with DISTILLER

116 

nshattuck on FSR297 with DISTILLER

117 

nshattuck on FSR297 with DISTILLER

118 

nshattuck on FSR297 with DISTILLER

119 

nshattuck on FSR297 with DISTILLER

120 

nshattuck on FSR297 with DISTILLER

121 

nshattuck on FSR297 with DISTILLER

122 

nshattuck on FSR297 with DISTILLER

123 

nshattuck on FSR297 with DISTILLER

124 

nshattuck on FSR297 with DISTILLER

125 

nshattuck on FSR297 with DISTILLER

126 

nshattuck on FSR297 with DISTILLER

127 

nshattuck on FSR297 with DISTILLER

128 

nshattuck on FSR297 with DISTILLER

129 

nshattuck on FSR297 with DISTILLER

130 

nshattuck on FSR297 with DISTILLER

131 

nshattuck on FSR297 with DISTILLER

132 

nshattuck on FSR297 with DISTILLER

133 

nshattuck on FSR297 with DISTILLER

134 

nshattuck on FSR297 with DISTILLER

135 

nshattuck on FSR297 with DISTILLER

136 

nshattuck on FSR297 with DISTILLER

137 

nshattuck on FSR297 with DISTILLER

138 

nshattuck on FSR297 with DISTILLER

139 

nshattuck on FSR297 with DISTILLER

140 

nshattuck on FSR297 with DISTILLER

141 

nshattuck on FSR297 with DISTILLER

142 

nshattuck on FSR297 with DISTILLER

143 

nshattuck on FSR297 with DISTILLER

144 

nshattuck on FSR297 with DISTILLER

145 

nshattuck on FSR297 with DISTILLER

146 

nshattuck on FSR297 with DISTILLER

147 

nshattuck on FSR297 with DISTILLER

148 

nshattuck on FSR297 with DISTILLER

149 

nshattuck on FSR297 with DISTILLER

150 

nshattuck on FSR297 with DISTILLER

151 

nshattuck on FSR297 with DISTILLER

152 

nshattuck on FSR297 with DISTILLER

153 

nshattuck on FSR297 with DISTILLER

154 

nshattuck on FSR297 with DISTILLER

155 

nshattuck on FSR297 with DISTILLER

156 

nshattuck on FSR297 with DISTILLER

157 

nshattuck on FSR297 with DISTILLER

158 

nshattuck on FSR297 with DISTILLER

159 

nshattuck on FSR297 with DISTILLER

160 

nshattuck on FSR297 with DISTILLER

161 

nshattuck on FSR297 with DISTILLER

162 

nshattuck on FSR297 with DISTILLER

163 

nshattuck on FSR297 with DISTILLER

164 

nshattuck on FSR297 with DISTILLER

165 

nshattuck on FSR297 with DISTILLER

166 

nshattuck on FSR297 with DISTILLER

167 

nshattuck on FSR297 with DISTILLER

168 

nshattuck on FSR297 with DISTILLER

169 

nshattuck on FSR297 with DISTILLER

170 

nshattuck on FSR297 with DISTILLER

171 

nshattuck on FSR297 with DISTILLER

172 

nshattuck on FSR297 with DISTILLER

173 

nshattuck on FSR297 with DISTILLER

174 

nshattuck on FSR297 with DISTILLER

175 

nshattuck on FSR297 with DISTILLER

176 

nshattuck on FSR297 with DISTILLER

177 

nshattuck on FSR297 with DISTILLER

178 

nshattuck on FSR297 with DISTILLER

179 

nshattuck on FSR297 with DISTILLER

180 

nshattuck on FSR297 with DISTILLER

181 

nshattuck on FSR297 with DISTILLER

182 

nshattuck on FSR297 with DISTILLER

183 

nshattuck on FSR297 with DISTILLER

184 

nshattuck on FSR297 with DISTILLER

185 

nshattuck on FSR297 with DISTILLER

186 

Æ 

nshattuck on FSR297 with DISTILLER