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AMERICA’S INNOVATION CHALLENGE: WHAT

OBSTACLES DO ENTREPRENEURS FACE?

HEARING

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES

AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

NOVEMBER 2, 2011

Serial No. 112–92

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

(

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

http://www.house.gov/reform
(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman

FRANK C. GUINTA, New Hampshire, Vice

Chairman

ANN MARIE BUERKLE, New York

JUSTIN AMASH, Michigan

PATRICK MEEHAN, Pennsylvania

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

MIKE QUIGLEY, Illinois, Ranking Minority

Member

CAROLYN B. MALONEY, New York

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

JACKIE SPEIER, California

JIM COOPER, Tennessee
(III)

C O N T E N T S

Page

Hearing held on November 2, 2011 ........................................................................ 1

Statement of:

Koester, Eric, co-founder and CEO, Zaarly, Inc.; Lonna J. Williams, CEO,

Ridge Diagnostics; and TSVI Goldenberg, CEO, eemRa ........................... 9

Goldenberg, TSVI ...................................................................................... 30

Koester, Eric .............................................................................................. 9

Williams, Lonna J. .................................................................................... 18

Letters, statements, etc., submitted for the record by:

Goldenberg, TSVI, CEO, eemRa, prepared statement of .............................. 32

Koester, Eric, co-founder and CEO, Zaarly, Inc., prepared statement of .... 12

McHenry, Hon. Patrick T., a Representative in Congress from the State

of North Carolina, prepared statement of ................................................... 4

Williams, Lonna J., CEO, Ridge Diagnostics, prepared statement of .......... 21

(1)

AMERICA’S INNOVATION CHALLENGE: WHAT

OBSTACLES DO ENTREPRENEURS FACE?

WEDNESDAY, NOVEMBER 2, 2011

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 10:33 a.m. in room

2203, Rayburn House Office Building, Hon. Patrick T. McHenry

(chairman of the subcommittee) presiding.

Present: Representatives McHenry, Amash, Meehan, Guinta,

Maloney, Quigley, and Yarmuth.

Staff present: Will L. Boyington, staff assistant; Molly Boyl, parliamentarian; Peter Haller, senior counsel; Christopher Hixon, deputy chief counsel, oversight; Hudson T. Hollister, counsel; Rebecca

Watkins, press secretary; Jeff Wease, deputy CIO; Jaron Bourke,

minority director of administration; Adam Koshkin, minority staff

assistant; Jason Powell, minority senior counsel; Brian Quinn and

Davida Walsh, minority counsels; and Rory Sheehan, minority new

media press secretary.

Mr. MCHENRY. The committee will now come to order.

This is the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs. Today’s hearing is on America’s Innovation Challenge: What Obstacles Do Entrepreneurs

Face?

It is the tradition of this subcommittee to begin with the Oversight and Government Reform Committee’s Mission Statement.

We exist to secure two fundamental principles. First, Americans

have the right to know that the money Washington takes from

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

Our duty on the Oversight and Government Reform Committee

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

to know what they get from their government.

We will work tirelessly in partnership with citizen watchdogs to

deliver the facts to the American people and bring genuine reform

to the Federal bureaucracy. This is the mission of the Oversight

and Government Reform Committee.

I will recognize myself for 5 minutes for an opening statement.

Over 2 years into an economic recovery, America’s labor and capital markets continue to face unprecedented challenges. Nearly 14

million Americans remain officially unemployed, an additional 11
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million underemployed, and small businesses continue to struggle

to access capital despite endless numbers of government initiatives.

Fixing our capital markets and economy will not occur overnight,

nor will it be achieved with more government regulation.

Today’s oversight hearing serves as part two in our capital formation series, examining government barriers to small business,

capital formation and growth. The origin of these barriers to capital formation rest in two major Federal securities laws: the Securities Act of 1933 and the Securities Exchange Act of 1934, they have

not been substantially updated since a gallon of gasoline cost 10

cents, 31 percent of American households had a telephone, and the

national debt was just $22.5 billion.

Today, gas prices are 35 times that per gallon and nearly every

American owns a phone. In fact, most households have access to

the internet in their pockets. The national debt, well, that is maybe

for a different hearing.

While the comparison of then and now is nostalgic, the ramifications of not modernizing our securities regulations have led to registration and reporting requirements so onerous and costly that

small companies have great difficulty raising capital.

For instance, if a startup company offers an equity stake to investors through a medium like Facebook or Twitter, it is presumably in violation of SEC regulations for such communication and offerings. However, soliciting money for one’s favorite charity or political candidate, it is perfectly legal using the internet medium and

that is clearly saying something is wrong. When politics exceeds

where business is, there is something wrong culturally with that.

Since September when this subcommittee had its first hearing to

address barriers to capital formation, the House Financial Services

Committee approved four pieces of legislation with bipartisan support that will modernize SEC regulations to promote rather than

hinder small business access to capital financing. The full House is

expected to vote on all four of these this week.

The Small Company Capital Formation Act of 2011, sponsored by

Congressman Schweikert of Arizona, would authorize the SEC to

exempt from registration any class of securities so long as the 12-

month aggregate offering does not exceed $50 million.

Congressman Himes of Connecticut sponsored legislation to raise

the bank shareholder threshold for SEC registration from $500 to

$2,000. The SEC has neglected to update this threshold for nearly

50 years.

The Access to Capital Job Creators Act, sponsored by Congressman McCarthy of California, removes a regulatory ban that prevents small, privately held companies from using advertisements to

solicit investors.

Last, my legislation, the Entrepreneur Access to Capital Act,

which I introduced a few weeks ago, removes SEC restrictions on

crowd funding to allow entrepreneurs to raise capital from everyday investors. This legislation simply extends the same characteristics of crowd sourcing or crowd funding today that is limited to the

realm of charities and the arts through online communication social networking. This would allow small businesses and innovators

to raise capital.
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Already, this is prevalent in Europe and Asia and has proven

that broadening communication and investment capabilities between investors and entrepreneurs can have a positive impact on

capital formation, the lifeblood of our economy.

Each of these bills strengthens the mission of the SEC to protect

investors, maintain fair, orderly and efficient markets and facilitates capital formation. Federal and State regulators remain empowered to fight deceit, misrepresentation and other fraud in the

sale of securities.

This is an important piece. This key mandate for investor protection in each capital formation bill is why all four drew broad, bipartisan support from Members of Congress on both sides of the aisle

and marketplace participants. While the bills approved by the

House Financial Services Committee serve as a solid first step,

there is more to do. That is what this hearing is about today.

I look forward to the SEC to complete its review of regulatory

burdens on small business capital formation, which they have

pledged to do, including the exemption of credit investors and employees from outdated 500-shareholder cap limitations.

Today’s witnesses serve as real life examples of businesses that

face barriers when raising capital and would benefit from simple,

modern updates to SEC regulations. I am interested to hear what

each of you have to say about the various bills before Congress and

the additional ideas that you have for businesses that face the challenge of raising capital and the immediate effects it would have

from responsible securities laws and what the SEC can do to protect investors and increase access to capital. This was a very important note in order for us to reduce the unemployment rate and

get people working again.

[The prepared statement of Hon. Patrick T. McHenry follows:]
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Mr. MCHENRY. With that, I recognize Mr. Quigley of Illinois, the

ranking member.

Mr. QUIGLEY. Thank you, Mr. Chairman. Thank you for holding

this hearing and for your recent bipartisan work to spur capital

formation for startup businesses through crowd funding legislation.

I thank our witnesses for being here today.

We recognize that the number one priority of this Congress has

to be lowering the 9 percent unemployment rate. For businesses to

expand and hire new workers, they need capital. A July 2010 report by the Chamber of Commerce states ‘‘Clearly, any strategy to

jump start the economy must have a robust small business component that allows entrepreneurs to access capital and retain existing

cash-flow from operations in order to start, grow and expand their

enterprises.’’

That is why I am pleased to see that both President Obama and

Chairman McHenry have found common ground on the idea of

crowd funding. To the extent that crowd funding can match ready

capital with quality investment opportunities, it will be a success.

The question should not be whether to allow crowd funding but

under what terms it should move forward and what other ideas we

should consider.

After exploring crowd funding with the help of expert testimony,

at our September 5th hearing, I am encouraged that many of the

potential problems with crowd funding were addressed when the

chairman’s legislation was taken up by the Financial Services Committee.

Still, some issues remain. For example, there are legitimate concerns that exempting crowd funding from securities regulation

would open or expand opportunities for fraud. Just as water standards keep our water safe to drink, financial regulations protect us

against unsafe financial products.

Crowd funding might also expose ordinary investors to a level of

risk that is unacceptable and not accompanied by standard registration and disclosure. We have to be careful to ensure that investors fully understand the risk of investing in these financial

products.

There is also the issue of State preemption. We have to carefully

consider what role State securities administrators should play in

managing fraud concerns and maintaining the integrity of the securities market.

Finally, although I think it is wonderful that we are exploring

crowd funding as one way to encourage business innovation in this

country, an important point to remember is that crowd funding is

not a panacea for the state of the U.S. economy, job growth or even

the capital needs of small and startup businesses.

The challenges facing small businesses and entrepreneurs in the

United States are varied and so too should be our strategies. For

example, Ms. Williams, as I understand it, will testify about how

her business’ initial achievements were made possible through

small government-sponsored grant programs such as the Small

Business Innovation Research Program.

I hope that all of our witnesses can touch on how a multipronged approach to capital formation can reach the most potential

entrepreneurs. I also hope they can help us explore how the strate-
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gies the President laid out in his Jobs Act will help small business

and entrepreneurs overcome some of the obstacles they are facing

and spur American innovation.

I thank the chairman again for calling this timely hearing and

I yield back.

Mr. MCHENRY. I thank the ranking member. Members have 7

days to submit opening statements for the record.

I will now recognize the panel. Our first panelist today is Mr.

Eric Koester who is the chief operating officer and co-founder of

Zaarly, which is a Web site. Ms. Lonna Williams is the chief executive officer of Ridge Diagnostics. Dr. Tsvi Goldenberg is the chief

executive officer of eemRa.

Without objection, I ask unanimous consent that the panel may

each have 6 minutes for their opening comments.

I will now recognize Mr. Koester. If you could summarize your

opening statement, you have 6 minutes. Then we will have plenty

of time for questions.

STATEMENT OF ERIC KOESTER, CO-FOUNDER AND CEO,

ZAARLY, INC.; LONNA J. WILLIAMS, CEO, RIDGE

DIAGNOSTICS; AND TSVI GOLDENBERG, CEO, eemRa

STATEMENT OF ERIC KOESTER

Mr. KOESTER. Good morning, Chairman McHenry, Ranking

Member Quigley and members of the committee.

My name is Eric Koester and I am one of the co-founders and

the chief operating officer of Zaarly, a real-time, online commerce

marketplace.

Zaarly represents an early success story of our innovation economy, having been formed just this past March, launched the product in May, added over 100,000 users just this past summer, and

hired 30 employees with hopes of hiring more.

This past month, we were able to announce that we had raised

venture capital funding and were fortunate to add Meg Whitman

to our board, who we hope can help us take this product from early

adoption to mass scale.

I hope to provide a bit of a unique vantage point to the challenges faced by entrepreneurs because of my background. During

my career as an attorney specializing in advising entrepreneurs,

small businesses and startups, I was able to work with hundreds

of entrepreneurs across dozens of industries. Then I too followed

the allure of the American dream and left the practice of law to

launch my own company, Zaarly.

As a result of these experiences, I think I do have an insight to

the challenges faced by today’s entrepreneurs. Today, my testimony

will focus on three key areas: one, what are the key challenges

broadly faced by today’s entrepreneurs; two, an examination of the

broad landscape that is facing today’s entrepreneurs and small

business owners; and finally, how some enhancements to today’s

regulatory scheme can help aid entrepreneurs.

The first question is what are the overall key challenges faced by

some entrepreneurs today? I think the important one discussed by

this committee today has to do with fundraising and opportunities

to get access to capital.
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The second one is really an access to talent. Zaarly has hired 30

new employees just this past year and if I had the opportunity to

hire 10 more qualified engineers, I certainly would. I think this can

be addressed in a number of different ways, but I do think looking

at opportunities for immigration reform and continuing to invest in

education, sciences and more innovation opportunities will help

that.

The third opportunity and challenge faced by small businesses

and entrepreneurs is streamlining the paperwork, the formation in

the regulatory scheme that we face.

The fourth is an open and free internet, cell phone and data opportunity and access to those resources.

Finally, I think the largest challenge we as entrepreneurs face is

the general challenges of operating a business, getting more customers and making them love our products.

Starting a business is obviously never easy. There are thousands

of ways for businesses to misstep from team dynamics to market

forces to the inability to find financing. The reforms being discussed by the committee will not necessarily make starting or expanding a business any easier. There are still thousands of ways

for businesses to misstep and thousands of ways for businesses to

fail.

However, the reason these reforms are important are that they

do allow another opportunity for businesses to expand and potentially succeed, to find new sources of capital, to raise additional

cushion to hire more employees, or provide an additional runway

for the business model to be expanded. By providing these additional avenues to access to funds this is the opportunity I think

businesses will now have to expand and grow.

What are the key challenges faced by entrepreneurs and business

founders today that are different from the days when, as Chairman

McHenry noted, gas was 35 cents a gallon? My time advising entrepreneurs and small business owners has been important in noting

my views. Just as important, I have been fortunate to learn firsthand in the founding of Zaarly what some of those challenges are.

The first lesson about today’s landscape is that starting a business is now cheaper than ever before, although there is not an easy

way to start a business without access to some capital. Today, businesses, with the help of technology, have been able to be started

for as little as $5,000 and expanded into tens of thousands of dollars.

While technology has been able to reduce these costs for things

such as bookkeeping, advertising, data storage and equipment rental, today’s technology businesses and other businesses still do require technology and capital to expand those businesses and exceed

beyond that early proving point.

The second challenge in expanding the opportunity for businesses today is the explosion of the freelance economy. Today, 1 of

every 10 workers for companies is not an employee of the company

they work for. These individuals are independent contractors, freelancers and individual entrepreneurs that can help these businesses be more effective and efficient. This trend is only expected

to continue with careers such as graphics design, software develop-
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ment, photography, writers and artists, all expect to see their

ranks grow by as much as 10 percent in the next 10 years.

These individuals are entrepreneurs and small business owners

who do require access to capital to grow and expand as our economy needs them more and more.

The next new change in the landscape has been the emergency

of international competition that affects businesses even earlier

and earlier. Two examples of the innovation economy, Groupon and

Living Social, have seen international copycats pop in as few as

months after they launched their businesses. Leading businesses

such as Zaarly and those on the panel today need to launch faster,

quicker and gain access to capital soon.

Finally, I would like to note that it is important that these innovation reforms be expanded to allow crowd funding and similar

tools. They eliminate the restriction of general solicitation and they

align with the current provisions to expand the credit investor

rules.

Ultimately, I believe these reforms will open new channels for

fundraising and allow businesses such as ours to succeed.

Thank you and I look forward to questions.

[The prepared statement of Mr. Koester follows:]
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Mr. MCHENRY. Thank you, Mr. Koester.

Ms. Williams.

The lights in front of you, I didn’t point this out, red, yellow and

green, 1 minute remaining, the yellow light will come on, and

means to wrap it up, you have a minute to go. The red light obviously still means stop.

Thank you.

STATEMENT OF LONNA J. WILLIAMS

Ms. WILLIAMS. Thank you. I am very pleased to be here today

and recognize all of you.

I am glad to hear you are all recognizing the challenges that entrepreneurs have today in sourcing capital. These are very unique

times for this. The things I will talk about today really are in contrast to what you just heard because I am a life sciences entrepreneur. We are creating products that are medical products of

which we need to train physicians to use as well as go through the

research and development stages to get them to the useful, marketable tools for physicians.

I am Lonna Williams. I am the CEO of Ridge Diagnostics. Ridge

is an early stage life science company with a mission to develop objective, diagnostic and therapy management blood tests for

neuropsychiatric disorders. Neuropsychiatric disorders are things

like bipolar disorder, schizophrenia and very importantly, depression. Our testing also impacts the medication selection and efficacy

of those particular drugs used for those disorders.

This climate has created what I call a near perfect storm for

medical product innovation. As you know, most innovation comes

from small companies in this country and many of the jobs created

are coming from small companies as well. We are facing growing

issues.

I am going to talk about Ridge but most medical companies that

are at the same stage as mine are facing these growing issues like

questionable hurdles at FDA, some are known, some are not

known; a very slow Patent and Trademark Office that has prevented us from issuing a number of different studies and publishing our work because it took 21⁄2 years to get the first Office

Action from the USPTO, so it slowed down our ability to move forward with our technology and our publications.

Also there is an unknown path to reimbursement. There are

methods of getting reimbursement yet still some of it is unknown.

Ultimately, the real crux is the limited sources of capital available

to us to grow our companies. We can work through just about anything if we have the time and money to be able to do that.

A little bit about Ridge, who we are and what we do, all of us

that are engaged in our board of directors, our senior management

team are serial entrepreneurs. We have been engaged in over 20

companies in the aggregate startup or have founded or have managed since the mid-1980’s. We have also had experience in large,

multinational companies. We all agree we are facing a very unique

time as it relates to our traditional means of funding.

Ridge is providing blood tests that will create objective diagnosis

for depression. That really is useful for a variety of reasons. First

is serving the under served that don’t have access to specialty med-
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ical care. It will create a substantial number of jobs because this

is a very, very large problem we are trying to solve. The scope and

size of this is huge.

Twenty million adults suffer from depression in the United

States and 6 million teens very year. That is about 1 in 10 Americans that are taking antidepressants today. That is more than cancer, cardiovascular disease and AIDS. With that number of prescriptions being written, it is truly a health care crisis.

We are finding in the last few years, antidepressants have been

at least in the top three of all prescription drugs written in the

United States and the single most prescribed drug for people age

18 to 44. I have read a number of different statistics but one in

particular recently published was that antidepressant use has increased by 400 percent between 2005 and 2008. With these numbers we are looking at this broad prescription rate, yet no objective

tools to diagnose depression or to help choose or select the therapy

that might be the most effective.

Our system is paying for treatment, whether it be the right

treatment or not, but it is not paying for the early stages of accurate diagnosis and prevention.

What we know is that 50 percent of all of the cases of depression

are missed by primary care physicians, so it is not as easy to diagnose as the pharmaceutical advertisements seem to make it. We

know that 50 percent of those initial 200-plus million prescriptions

written for antidepressants fail.

We have a significant problem in financing a company and a

product that can add objectivity to this large, costly situation we

are facing. Traditionally, venture capital has played a role in taking technologies like mine to the mass markets. We start out in the

early phases of our companies being funded by angel investors, by

friends and families, ourselves, by government grant programs like

the SBIR Program from which we received a National Science

Foundation Grant. We also have a study on teenagers being funded

by NIH.

Those grants are very helpful but they don’t give us enough capital, if you will, to continue on with studies and to make our products commercially available and to be able to educate physicians in

a way where they can start adopting the technologies.

Diagnostics are very, very useful. However, they are not contributing yet to the high cost of care because although 60 to 70 percent

of all decisions in health care are made by some kind of diagnostic

test. Diagnostics only account for 2.3 percent of all national health

care spending and only 1.6 percent of Medicare spending. Having

more diagnostics on the market is going to bend the cost down

curve by identifying the right patient and perhaps providing the

right drug at the right time. It is not going to contribute to the

overall higher cost of care.

Last, I would like to say that because we are without venture

capital funds, it is important for us to look to other means of capital. Certainly the crowd funding initiative is one that could be very

important for us but we also have looked to large corporations because this is where our options have left us.

That comes at a high cost because it does affect autonomy and

autonomy is where innovation comes from and it does affect job
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creation. As you know, most jobs are created by small companies.

I have just a couple of facts I want to share with you that I received from the Kauffman Foundation related to this specifically.

This is in a report they published in March. From 1980 to 2005,

firms less than 5 years old accounted for all net job growth in the

United States.

I will end by saying that we think these additional forms of capital that will replace venture capital for companies like ours will

certainly help to change the curve related to slower job growth, certainly will rapidly bring products that are efficient and cost effective to care, especially to the underserved, and will help to bend

the health care cost curve down as related to a disease area that

affects 1 in 10 Americans.

Thank you.

[The prepared statement of Ms. Williams follows:]
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Mr. MCHENRY. Thank you, Ms. Williams.

Dr. Goldenberg.

STATEMENT OF TSVI GOLDENBERG

Dr. GOLDENBERG. Chairman McHenry, Ranking Member Quigley

and other distinguished House Members, it is a distinct honor and

privilege to testify before this committee.

I want to share with you my firsthand experience as an entrepreneur and to help you understand the challenges entrepreneurs

face today.

For over 20 years, I have been a co-founder and executive of a

medical device company, biotech company and most recently, a

healthcare IT company located in San Diego. I am here today to

describe how difficult life is in the valley of death of healthcare

startup companies. I will compare and contrast my experience

funding startup companies 20 years ago to the difficulties I am currently encountering.

Before I go to the present, I want to go back to the past. My goal

here is to convince you of the need for Congress to act to create

new opportunities for funding which is vital to the advancement of

medical technology and essentially create an unfettered access for

all Americans to their own medical records.

One of the companies I co-founded in the late 1980’s was Advanced Interventional Systems, AIS. During the late 1980’s, the

standard of care in cardiology for treating blocked coronary arteries

was to perform coronary artery bypass surgery, a medical procedure performed to relieve angina and reduce the risk of death from

coronary artery disease.

AIS was a part of a new wave of companies that pioneered coronary angioplasty. Angioplasty as you may know is the technique of

widening a narrowed or obstructed blood vessel, typically occurring

as the result of atherosclerosis. My co-founder and I launched AIS

with just $3 million series A investment from VCs. This initial investment allowed us to hire a core team who developed a catheter

prototype for animal study. There was also sufficient funding from

this initial infusion of funds for our first submission to the FDA requesting permission to initiate clinical trials in several hospitals.

Today, angioplasty is the standard of care of cardiology. What

was initiated and developed by many small startup companies developed into a multibillion dollar industry. Angioplasty has saved

lives, lowered health care costs and created many thousands of

jobs.

This success would not have been possible without the initial investment from a group of VCs who were willing to come in at the

startup stage with a long term view to success. Unfortunately, this

would not happen today. VCs have drifted to a later stage safe zone

and shy away from the risk associated with the early stage of venture.

Let us fast forward to the present. The company that we are trying to currently fund, eemRa, is a consumer-centered, healthcare

information, financial services portal. It is designed to operate as

a key element of the Health Information Exchange or HIE.

HIEs were created by the High Tech Act to serve the community

which will demonstrate the future meaningful use of electronic
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medical records exchanged among hospitals, clinics and labs.

eemRa’s goal is to develop access for Americans to all their health

related information. As medical insurance premiums are increasing, a growing number of Americans are choosing high deductible

plans to lower their medical insurance costs.

Our mission is to act as a single service provider for consumers

that aggregates information from providers and insurers. Our portal will enable the consumer to compare the cost of healthcare services at different providers. For example, if a patient needs a battery

of blood tests, he or she could go into our portal to compare the cost

of getting the blood tests at one lab versus an alternative. This is

valuable to those with high deductible insurance plans and the average struggling American trying to make ends meet.

Yet, despite our innovative technology that can increase patient

control of their healthcare, eemRa faces funding difficulties in this

economic climate. If Congress were to pass some of the bills being

considered, we could start immediately hiring 15 people with a $3

million investment to start our operation. eemRa is not alone. The

American Recovery and Reinvestment Act of 2009 has been producing large numbers of discoveries and inventions. This is great.

However, in order for these discoveries to be developed into devices,

drugs and software, startup companies are needed to commercialize

these discoveries and inventions.

Large companies are unwilling or incapable of handling high

risk/high gain endeavors. Their complex hierarchies are unable to

move fast enough to provide the intense concentration of effort

needed to execute early stage projects.

As you can see from my example, the severe shortage of capital

funding has slowed the formation of startup companies to a trickle

of what it has been. The result is the American people are being

hurt by the lack of creation of small companies which produces

technology that increases the quality of life while also producing

high paying jobs.

Additionally, until ARRA discoveries are moved into commercialization, the public is not really benefiting from ARRA.

In closing, I encourage this committee and Congress to promptly

act to advance legislation that will allow capital to flow to emerging companies and startups.

Thank you.

[The prepared statement of Dr. Goldenberg follows:]
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Mr. MCHENRY. Thank you. I thank the panel for their testimony.

The normal tradition is the chairman asks questions first, then

the ranking member and we go back and forth from there. At this

time, because of Mr. Quigley’s schedule, I would like to recognize

him and I will then ask questions and go through the normal path

of Republicans, Democrats in that order.

With that, Mr. Quigley is recognized.

Mr. QUIGLEY. Thank you, Mr. Chairman.

You all make a compelling case for trying to find new ways to

raise venture capital, capital to do all of the job creation ideas you

have brought forward. This is different, and because you have gone

through this I will start with you, Mr. Koester. Here we are talking

about the potential for less sophisticated investors and at the same

time, less regulation. We want this to work and I am for this.

If you are in our shoes, how do you try to protect those new investors in terms of the advice they might need? You are used to

more sophisticated investors perhaps who are doing more due diligence. How do we protect them? What are your thoughts? Then we

will go to the other witnesses.

The President’s suggestion was a maximum of $10,000. Some

have suggested a low of $100. What are your thoughts having been

through this?

Mr. KOESTER. Thank you. That is a great question.

I think that the key lesson that we can take is what has happened with the information explosion the internet has brought. I

think even among sophisticated investors, we have actually seen a

dissemination of information that allows investors to make better

decisions among private companies today.

A great example is the company called AngelList , which actually

assembles and aggregates startup companies looking for financing

among accredited investors. That tool actually now allows you to

take information, such as the profile of the entrepreneurs being invested in, potentially their social network blogging about them, and

then also when one investor has met with that team and validated

they are a sophisticated team or an investment they would make,

that kind of information is able to be assimilated into the reputation of that startup company that then assists the other investors.

What I think really is happening is that by allowing kind of the

dissemination of this information across a number of tools, I think

you will start to see what is similar to reputation on the Internet

where now you can snap your fingers and suddenly know if someone is qualified to take a loan or if someone is qualified to essentially do work on your house.

I think that same level of information will start to be a sign to

startup companies so that we can take all this information from a

credit score of an entrepreneur to his prior businesses successes,

aggregate that information and give you a risk profile on that

startup company. I think you will see that from the crowd funding

discussion you had by allowing entrepreneurs to essentially understand this sector which would be the early stage crowd funding.

I think you will start to see some interesting innovations that

will allow reputation to help these businesses make those decisions.

Mr. QUIGLEY. Ms. Williams.
37

Ms. WILLIAMS. I agree. I think there are a number of means that

we can use to disclose information about our companies in a way

where we can provide enough information that these reasonably informed investors can make a decision on their own.

Like they are making decisions going to the stock market and

buying something on the public market, they are making a decision

based on something that exists that they feel is worthwhile.

We have 20-plus individual investors in our company now. They

are accredited investors but we provide them with a number of disclosure documents, including our financials. We provide bios on

ourselves and have meetings with them. Some are over the internet

by Skype or something like that.

I think we can create some guardrails that are very helpful.

Whether it is done on the internet, which it should be, I think we

can securitize that, but disclosure I think is really the key.

Dr. GOLDENBERG. I agree with my colleague. I would like to add

that I do see a role for the SEC. The SEC will simplify the language, for example, and make it more readable by the average person. I don’t think the issue of sophistication will play a role.

To give you an example, in the past, I have seen many sophisticated investors, the VC or the Angel, and they made mistakes and

the ratio of success has now changed. Being sophisticated or being

experienced will not necessarily give you a chance to a higher success.

I see the combination between simple rules from the SEC which

will be properly displayed on the Web site of the company and the

company sharing information and this is all about sharing. I think

the bigger issue is to force the company to share information to

make sure they are not holding back because we have that issue

even when you are private or public. You have to share information. If you share all the information, bad and good, I think that

will eliminate some of the risk.

Mr. QUIGLEY. Very briefly, the bad actors out there that can discourage investment by all, any thoughts on who should play a role

in helping investors deal with them?

Mr. KOESTER. I do think the market will solve that. I ultimately

think because of the reputation of these bad actor investors, bad

actor companies will be kind of disclosed. I do think that solves a

lot of it. I think even today for example, when we were choosing

which venture capitalist to go with, there is actually now tracking

that will basically give the reputation of the venture capital fund

and the venture capital partner himself.

When we were making decisions on who to take as an investor,

we were able to look at that information on their reputation and

decide which of them would be a bad addition to our team and the

same when we are adding team members to our company, we can

look at background information as well as reputation on tools like

Linked In to find out who those bad actors are. That information

really does help empower the individuals.

Mr. QUIGLEY. Thank you for your accommodation, Mr. Chairman.

Mr. MCHENRY. I thank the ranking member and I certainly appreciate the work he has done in Congress for disclosure which is

to the panel’s point.

I recognize myself for 5 minutes.
38

Panelists, you all are basically serial entrepreneurs, that’s fair to

assess you that way. In raising capital, my legislation, which is the

crowd funding idea, we originally designed it to allow folks to raise

up to $5 million in capital from a large number of people. Individuals are capped at 10 percent of their annual income or $10,000 to

make sure this is low dollar, that folks aren’t risking their 401(k).

In fact, they can’t even access their 401(k) for this type of investment.

Having said that, what is the marker for raising capital that

would be helpful in your experience, your past experiences and

what you are going through right now? What is that dollar amount

of capital you need to raise for crowd funding to be effective or

helpful?

Mr. KOESTER. I think it is a great question. Some of it depends

on industry. I do think we being an Internet mobile company, we

started raising $1 million to get our product launched which was

sufficient, but I do think to scale that business requires more capital.

I do think my colleagues will discuss in the biotech and medical

sector that $1 million is enough to basically get you started maybe

but it is not enough to really do enough damage to understand

even if you have a product on your hands. I think the $5 million

is really a place where venture capitalists actually will start to invest more. I think up to that $5 million is right now a lacking area.

Mr. MCHENRY. Pick a dollar amount, tell me a dollar amount, $2

million, $3 million, or $4 million?

Mr. KOESTER. I think at least $3 million.

Mr. MCHENRY. At least $3 million. Ms. Williams.

Ms. WILLIAMS. Obviously the sector I am in, we do require a little more capital than that. However, we have raised at Ridge about

$4.5 million over the last couple of years through Angel money and

the grants which got us to the point with our particular technology

to be able to commercialize at least on a limited basis. We are receiving reimbursement. We have had to work really hard for that $4.5 million because we are getting it in $50,000 to $100,000 increments. I think the $5

million number is a very good number because until we get to a

point where we can demonstrate some kind of financeable milestone which takes out a lot of the risk factor, we need to continue

to raise money, so $5 million to me is a really good starting point.

Dr. GOLDENBERG. I would agree with my colleague on the right.

We need at least $5 million in the medical device biotech companies. Biotech is even more than medical devices, so $5 million

would be the minimum. If we do health IT, we probably can do it

with $3 million but I would go with $5 million.

Mr. MCHENRY. The higher amount. The concept of crowd funding, would that replace Angel investors in your minds or would

that basically take you to a capacity to get venture capital money

or other types of financing?

Ms. WILLIAMS. In my opinion, I think it could be one or the other

frankly and it depends on the type of company even whether it is

in the healthcare sector. For example, Angel money is available, so

are the grants and loans to get you to a certain point. Venture

money today is not available, so I can use $5 million that will sig-
39

nificantly take me into the marketplace where I can actually start

generating my own capital and bootstrapping from there.

In this situation, I think it would replace venture capital. If the

markets continue to be a volatile as they are, and we are seeing

this now, Angels are dropping off and holding on to their cash. Individuals are doing the same thing. If that is the case, crowd funding could certainly replace some of those typical accredited investors that may not want to participate at a higher level of investment but the folks who might be a part of the crowd funding initiative not buying stock on the open market because they don’t want

to be in the stock market.

Mr. MCHENRY. Do you think that crowd funding could be competition to bring down the cost of capital from Angel investors?

Ms. WILLIAMS. I think it certainly could be. In all cases today,

there is limited competition whether it is in the VC side or the

Angel side, that those of us raising money are giving up a significant amount of the company for very small amounts of money.

Mr. MCHENRY. Mr. Koester.

Mr. KOESTER. Absolutely. The reality of what this does is it allows another avenue which essentially creates more competition for

these companies. I think what has been noticeable by this company

AngelList that I think has started to mass market the Angel investment space is by literally creating competition in disclosing information across these companies you create better value for the

companies that are going to succeed, you windup increasing the

amount these companies are able to own and you give companies

a new angle to raise money they might not otherwise have had.

Mr. MCHENRY. Thank you. My time has expired.

Mr. Koester, I was on Zaarly yesterday looking at what is available in the Washington, DC, market, who is seeking to buy and

who is seeking to sell and I know somebody in Adams Morgan is

looking for a gently used iPad 2. Thanks so much and I appreciate

your testimony.

We will now go back to the normal process. Mr. Meehan is recognized for 5 minutes. Then we will go to Mr. Yarmuth and back and

forth.

Mr. MEEHAN. Thank you, Mr. Chairman. Thanks to the panel not

only for the work that you are doing and allowing us to explore this

issue but what you are doing out there to try to create jobs.

I am stuck on a couple of things which I would like you to tell

me how we get out of. One, I am struck by the fact that you are

entrepreneurs particularly in the life sciences. I have a lot of that

in my area. I hear frequently about the legacy of significant investment by big pharma or otherwise. The truth of the matter is there

is a library of work that has been done but it sits. There is a lot

of opportunity in there and yet we cannot acquire it and get it

down to where entrepreneurs can actually take advantage of some

ideas they would be willing to move forward on. How do we unleash more of that? The second question would be how do we prevent that? Maybe you’re answering by virtue of your testimony

today.

I am struck by the fact that you keep saying because of the VC

market drying up and because of banks not doing loaning, you are

being pulled right back into the same circumstance in which it is
40

the big corporations you have to go back to, the very ones that are

too big and too slow to respond to a global marketplace. How do we unleash that $1.4 trillion that is sitting on corporate

balance sheets and do it in a way that can allow you to put that

money to work and reverse this tendency to keep going back because that is where the money is but it slows down the entrepreneurial spirit?

I will take it in order. Mr. Koester, as a recovering attorney, I

will let you jump into that first.

Mr. KOESTER. I appreciate that. Thank you.

The point you are raising about unlocking potential sciences

locked in various places really does come down to capital. When I

was an attorney, one of the things I did see was that you have to

pay to license that technology from big pharma. I do think it all

comes back to money.

Mr. MEEHAN. What can we do to require them to do more? I

guess these are proprietary things but sometimes they have had

government money invested in that. I am a told an awful lot of

good ideas that are sitting on the shelf. Do you agree with that?

Mr. KOESTER. I think that actually part of it would come down

more to education, matching entrepreneurs with these businesses.

A lot of times these assets that are locked up are unknown to the

potential entrepreneurs and they are looking for ways to disclose

it. A smart, savvy entrepreneur who can figure out where these

ideas and this technology is might be able to acquire it very cheaply.

I have seen that happen with a client named Clineta that formed

a business simply to go out and extract unutilized resources from

biotech companies and used those in turn to commercialize those

and sell them back.

Mr. MEEHAN. Ms. Williams, do you have some thoughts?

Ms. WILLIAMS. There are a lot of technologies that come out of

big pharma that don’t meet their revenue hurdles, that get acquired by smaller companies, biopharma companies and are developed to a point where they see proof of principle and then they sell

them back to pharmaceutical companies. That is where venture

capital has facilitated that loop.

They have pulled the capital to allow the entrepreneurs to further develop that technology and then sell it back.

Mr. MEEHAN. Why has venture capital money dried up? You

would suspect that people see opportunity in this environment?

Ms. WILLIAMS. You would suspect that. I have talked to over 100

venture capitalists in the last 18 months and what I hear from

them is that their resources, their sources of capital have waned,

so they now have to reduce what they consider their risk profiles.

Instead of investing in Series A capitalization for companies like

mine, they are investing in later stage and what they perceive to

be less risk type companies. In fact, they have gone so far as to buy

stock in the open market because it has been undervalued.

They have to protect their own investors, they have to protect

their portfolio companies. There is very little liquidity in their portfolios now because of the lagging IPO market, so they are stuck.

They can’t make new investments for the most part or they are not

willing to. That is why it has dried up for early stage companies.
41

Your comment is a good one. There is a lot of pent-up technology

sitting there that could be very useful but not useful enough that

it is addressing the masses. Without access to capital, available

moneys, it is not going to come out of big pharma or any other corporation.

Mr. MEEHAN. Dr. Goldenberg, do you have any thoughts?

Dr. GOLDENBERG. First of all, I would like to clarify that one way

to start companies is not normally our ideas. We basically would

go to a university in San Diego, the University of California San

Diego, and that is where we get our idea, our discoveries. We basically package it and put in a business plan, do the planning and

then go out and talk to the VC.

We ask the same thing talking to the VC that they basically prefer to be later stage for a simple reason, because they are afraid

of the market. If they invest in a small startup right now, they

have to come multiple times until they take it IPO. The IPO market doesn’t exist right now. For them to invest, they get stuck with

an investment, and go to their limited partners and say, I have no

exit scenario for you.

Mr. MEEHAN. Because there is nobody coming behind that is

making an investment?

Dr. GOLDENBERG. No, because there is no public market for new

companies. Private companies do not go public right now. The stock

market is structured in a way right now that there is no issues of

new companies.

Mr. KOESTER. The one point to that is the hearing in May talked

about second market which can be secondary markets, the semipublic market where you have certain disclosure opportunities. I

think that is what is being addressed by the 500 shareholder limit

increased.

Fundamentally, we hope that does allow more companies such as

Zaarly when it does advance to a further stage that we can do a

non-fully public sale but we can sell to sophisticated investors in

an open market that is constrained, so it is not public entirely but

it is constrained in a way.

I think that addresses that and I do think that is an important

step in this process and why I am still supportive of the 200 limit

because it does address that ill liquid market right now.

Dr. GOLDENBERG. If you open the public market, the VC will

come back. The VC are not bad people, it is a risk versus gain.

That’s one point.

The second point, you mentioned the $1.3 trillion, one way of

unlocking that money is some tax break. If you go to big pharma

and tell them for every dollar they invest in a biotech with an idea

or without an idea, they get a tax break off their taxable income

or revenue, that may be looked as a good investment because what

big pharma wants to do is increase the pipeline of drugs. Right now

they don’t invest that much in biotech because they like to keep the

cash for themselves for rainy days. If you give them a tax break,

you meaning Congress, they may unlock their money.

Mr. MCHENRY. The gentleman’s time has expired.

Mr. Yarmuth is recognized for 5 minutes.

Mr. YARMUTH. Thank you, Mr. Chairman.
42

I thank the panel for the testimony. It is a very interesting discussion.

I have the background of having been involved in the startup of

a number of ventures, some successful, some not so successful because that is the way the world works. I am familiar with many

of the issues and challenges that you face.

I am intrigued by the whole notion of crowd funding. I think it

has enormous potential. I also think there are enormous opportunities for mischief in this area. We know that any time we create

some kind of new business technique, there are those out there

who want to take advantage of it for purposes other than which it

was intended. I am concerned about the regulation.

The chairman asked what kind of monetary limit you would

think would be appropriate. If we were to lift the 499 limit on number of investors, do you have any sense of what a manageable

amount would be and something that would still retain some kind

of element of security?

Mr. KOESTER. I think the current proposal that has a broad base

of 2,000 and includes certain individuals as credit investors and

employees does allow you to solicit from a broad enough pool. I

think fundamentally as executives of companies, 2,000 shareholders is something I cannot fathom to manage.

However, I do think if the decision is to close the company or to

have 2,000 shareholders and I believe in the idea, I would absolutely take 2,000 shareholders and not sleep because I do think it

is one of those things that ultimately entrepreneurs like us believe

in our vision so much that we are willing to do what it takes. If

that means manage 2,000 shareholders, then that is what we do.

Mr. YARMUTH. I think Ms. Williams mentioned the issue of how

much equity is given up in some of these deals particularly with

venture capital and that is always going to be in the equation. If

you had your absolute ideal situation for getting money any way

you could get it, what way would be preferable? Would it be selling

equity, just having access to affordable loans? What would be your

preference?

Ms. WILLIAMS. I think I would probably look to a variety of different sources. I think selling equity would be one. You look for

that, not just for money, but you look for it for expertise, for assistance with other areas of business. To me, that is not necessarily

a bad thing.

I would like to see that happen in a way where you are not giving up the majority share of your company to be able to gain expertise. I think loans would be fantastic. Those are pretty much unavailable to us today.

Mr. YARMUTH. The cost of borrowing money, if you could get it,

the interest rates now are far lower than the cost of the equity you

would have to give up?

Ms. WILLIAMS. Yes.

Mr. YARMUTH. Which leads me to the next point, I have a piece

of legislation that I have introduced that would actually direct the

SBA to lend money to small businesses on the same basis that we

are lending it to large banks—in other words, free. The idea if you

have a certain track record, why not use government funds to make
43

those kind of loans. SBA doesn’t want to do that, I must confess,

but that is why the legislation actually directs them to.

Is this the kind of program you think might be helpful in your

situations, probably not in the $2 million to $5 million range but

$500,000 or so? You could get very low income financing.

Dr. GOLDENBERG. I actually went to the SBA. We got so desperate about 6 months ago and went to the SBA. We said we started a company right here in San Diego and talked with the head

of SBA in San Diego and explained the situation. He said, you need

to go to a bank. We went to the bank and the bank said something

very simple. What is the collateral you are going to bring me, how

about your house? That is not the business we are in.

As a startup company, medical device or health IT, I cannot put

up my house. In other words, the availability of free money, when

I say free money, I mean inexpensive money in the form of a loan

will not help me that much.

Mr. YARMUTH. Would not help you?

Dr. GOLDENBERG. Would not help me, not the type of company

we are.

Mr. YARMUTH. Because you cannot afford to pay it back.

Dr. GOLDENBERG. Because we have no collateral, we cannot pay

it back. We are not going to have revenue for 3 to 5 years or we

will have but it will not be where we can pay back our loans, so

we will go into default.

Mr. YARMUTH. One quick question because you talked about research and a lot of other things for which funding is threatened

right now because of our current financial situation as a nation. Do

you think it is advisable at this point in our future to cut funding

for things like scientific, medical research, education and many of

the other things that would help support either directly or indirectly the activities you are in?

Mr. KOESTER. There is a shortage of engineers and scientists for

the technology industries we are in.

Mr. YARMUTH. Thank you very much. My time is up.

Thank you, Mr. Chairman.

Mr. MCHENRY. The Vice Chair, Mr. Guinta from New Hampshire, is recognized.

Mr. GUINTA. Thank you, Mr. Chairman. I just want to follow up

briefly on the SBA.

I think the SBA has a certain role to play in very, very small

businesses. I am not sure the SBA is properly incentivized to assist

the kind of companies you are looking to build, grow and expand.

I think the clearer way to do this is to give you greater flexibility

and greater opportunities to identify your own private capital.

There are a couple of things I want to talk to you about, Ms. Williams. You mentioned in your testimony a bit about autonomy

issues when getting dollars from larger companies. First, can you

expand on that a little bit?

Ms. WILLIAMS. Depending on what the transaction looks like, it

could be something as limited as a licensing agreement or a strategic partnership. Today, to facilitate that, the larger companies

are taking equity in the company. They are not just paying a licensing fee like they had in the past where you are left autono-
44

mous. They are actually taking equity in the company so they have

some control over what it is you are doing.

It has gone so far for the most part and they are so heavy handed because they can be that they are basically acquiring the company. When that happens, they absorb the company into their own

infrastructure. That then reduces the opportunity for job creation

that would otherwise be realized by the small company hiring and

growing. It takes away the autonomy as it relates to innovation because, for the most part, they are not willing to take risks and invest money in new ideas. It affects that whole job creation aspect

as well. That is what I was referring to.

Mr. GUINTA. In my home State of New Hampshire, about 75 to

80 percent of our economy is generated by a small business owner.

That is defined as 500 employees or less. In New Hampshire, it is

even smaller. It is the lifeline and the life blood of our local economy.

We are trying to attract more companies like yours into the

southern tier of New Hampshire and to the sea coast of New

Hampshire. One of the things I continue to hear again is the lack

of access to capital, the lack of choices.

I think someone on the panel mentioned we have a decline in the

number of IPOs in this country and on the New York Stock Exchange. We have a decline in VC investment. We have a decline

also in Angel investment. There is a lot here that is shrinking in

terms of access. Some of that is actually going overseas and those

companies are being created overseas and those jobs are being created overseas. Probably all three of your companies, you are talking a minimum of a $60,000 job plus. These are high paying, high

quality jobs that we could be creating right here in America if the

access to capital issue is addressed.

There are three components. One, I think the chairman’s bill

makes a lot of sense at $5 million instead of $1 million, which is

what the President is looking for. I think we have to have the proper level of company disclosure, so individuals can do their own research. I tend to believe in the individual American, that they can

make the right decision so long as the bad actors are minimized

by access to information. That makes sense to me. Allowing an individual to invest in your company provides you greater access.

The second component I want to ask about you touched on a little bit is raising funds by issuing equity and how that gives you

the ability to defer payments. If you get a loan from the SBA and

your business plan suggests you are not going to be making money

until 3 to 5 years out, you have already eliminated that option but

selling equity provides you that greater opportunity, does it not?

Dr. GOLDENBERG. That is correct. One way to look at equity the

way you describe it is that it is our way of printing money. We basically give a piece of the company for getting money in but that

is some form of IOU for the future that we will develop it and have

the revenue and then they will make much more.

Mr. GUINTA. This is exactly what spurs the entrepreneurship,

the innovation and the ability to create an idea and bring it to market. That is what we want to see happening in our country with

a 9.1 percent unemployment rate. This is a critical component.
45

The other component that I am very concerned about is the ban

on general solicitation. Mr. Koester, could you talk a bit about that,

how that has affected your company and what that would do if we

lifted it. How could you get that capital quicker and how you could

get job creation quicker as a result?

Mr. KOESTER. I think the real challenge is that an entrepreneur

cannot use all the tools they can to generate business to generate

investment. For example, if you have a presence on social media

or write a book and say in that book that you are seeking funding,

you could actually be sanctioned by the SEC. There are ways

around those limits so it is more form over substance.

I think it allows people to just have open disclosure of information and we don’t wind up having back channel discussions in

cloaked secrecy. I think it puts an open tarp on things and for us,

maybe our financing process could have been shortened from a 9-

month process down to a couple month process if we could have

opened it up and made it with open dialog.

Mr. GUINTA. Thank you all very much. I yield back.

Mr. MCHENRY. We will begin a second round.

There are a few other things on which I wanted your thoughts.

We have a 500 shareholder cap. This was raised earlier but I want

to get your feedback on this.

It appears right now that allowing an unlimited number of accredited investors to invest in your company is no longer legislatively attainable at this moment, at least in the short run. The cap

will likely remain at 500 for the remainder of this Congress unless

the SEC acts. How do you feel about this turn of events? How do

you feel about that limitation? What impact do you think that

would have if we raised that cap on your ability to raise capital

and what that would mean for jobs, growth and innovation?

Mr. Koester, we will begin with you and go across the panel.

Mr. KOESTER. I think the challenge to the crowd funding legislation you have introduced is there essentially becomes a waterfall

effect. By opening up crowd funding which may allow me as a company to add 100 shareholders, suddenly now I only have 400 left

and I think we start opening it up to a broader audience but then

we also basically keep the cap on that audience tight. I think those

two need to be thought of as orchestrated together because I do

think when you open up the shareholder base early in the company’s life cycle, it winds up limiting what you can do later on

down the road.

Essentially for me as a business, were I to add 200 crowd source

investors to my company, down the road it would make it challenging or me to use a tool like second market or to use a tool that

would allow me to not go over that cap and raise funds in that way.

I do think it is a challenge to have those two not move in tandem.

Mr. MCHENRY. To be clear on this, my crowd funding legislation

has no cap, so that is the beauty of it. It is a relatively small

amount of capital you can raise, but it is from an infinite number

of people. These individuals are capped by what they can invest annually. That was due to a lot of concern about fraud, to make sure

someone doesn’t put up $1 million on a $1.5 million crowd funding

raising venture without having a clue. There is this concern for
46

fraud and investor protection. You wouldn’t be subject to that. That

I think is one of the positives of it.

To this larger question, we basically have a 500 shareholder cap

which includes credit investors, includes connected people, employees, and those that are close relationship individuals. It is a pretty

limited group. To remove employees from that calculation is helpful. To remove accredited investors, would that be helpful? Would

that be a positive so you could have even pushing up to 1,000?

Mr. KOESTER. Yes.

Mr. MCHENRY. You mentioned you would much rather not have

to deal with 1,000 individuals. I get that. I am the youngest of five

kids. It would be easier to have a brother and sister and not two

brothers and two sisters, especially when they are bigger than you.

It is sort of difficult to deal with and contend with. Do you think

it would be helpful to remove that accredited investor number from

that 500 shareholder cap? Would that help?

Ms. WILLIAMS. I think it would. They have kind of separated

themselves out anyway, so they are manageable as it is. If you

think about 1,000 investors, to me I think there might be a way

to create the mutual fund concept with those people so it doesn’t

mean that me or my CFO are managing 1,000 people. It means

that I am managing an institutional vehicle or an investment vehicle of one, three or five that might have 100 or 150 people in it.

That way they can kind of form their own opinions and that would

come to me in the form of five opinions instead of 500 opinions. I

think there are ways of making that manageable for the entrepreneur.

Mr. MCHENRY. Dr. Goldenberg.

Dr. GOLDENBERG. If I understand you correctly, you want to

move the accredited investors out of the one available to invest?

Mr. MCHENRY. Rather limit it to 500 shareholders, to remove

that accredited investor from that count or raise the count.

Dr. GOLDENBERG. Will they be allowed to invest in this crowd

funding?

Mr. MCHENRY. Two separate issues. Crowd funding is available

to every individual just capping the percentage they can invest of

their income. The question with accredited investors and the 500

shareholder cap is a separate question. Do you think it would be

helpful to raise that number? Additionally, would it be helpful to

remove the accredited investors from that count of individuals?

Dr. GOLDENBERG. The way I look at this crowd funding is it is

another form of IPO because you are going to have a large number

of investors. I have taken a private company public and once you

get used to it, it is manageable. The crowd funding to me is another form of a public offering without really calling it a public offering. Whether they give us the money now or later, we will manage the same with the risk and the reporting and everything, the

disclosure. I would agree with your point, the more you have the

better.

Mr. MCHENRY. Limiting the choices for raising capital, whether

that is equity or giving away equity or getting a loan or

bootstrapping, there is a cost to that. Widening the array of capital

choices for you as an innovator and entrepreneur lowers the cost

potentially. It gives you more opportunities.
47

I have too many questions and I know your time is limited. Ms.

Williams, you said something very interesting which was right

now, you are going to the big corporations, Fortune 500 companies

or Fortune 1000 and getting capital from them. Describe for me the

cost limitations, what that means beyond your company, what does

it mean to your ability to grow jobs, to the ability of the economy

to start moving? What is the macro view of what this means?

Ms. WILLIAMS. It can mean good and bad. To me as it relates to

job creation to start, I think it is not going to help to create more

jobs for the most part. As I said earlier, small companies really

have the ability to create jobs where larger companies don’t prove

to do that. With a company like mine, they will absorb my company

into theirs, so I will not be out hiring and growing. Therefore, job

creation will be flat as it relates to me specifically. I know I can create 300 jobs with under $10 million of funding

in just a few years at Ridge alone based on our forecasting. To me,

it is not the alternative I wanted to take but it is the only choice

I have right now.

They will take a percentage of the company—frankly, we are negotiating that right now and what that is going to be—and they

will control the single largest market because they will have licensing rights in the single largest area of use for this particular blood

test. I am not going to have access to that. My shareholders will

have a royalty revenue that will contribute to their value but not

the full value of product sales. That is the balance we have to

choose.

Typically the larger companies are very risk adverse. They have

their own array of things they have to manage and I appreciate

that. Therefore, they will be less likely to accelerate innovation.

They don’t want to have their earnings per share reduced for any

reason, especially right now, and want to make sure management

is retaining their physicians, so they are not going to make any

mistakes. They will toe the line.

I think it is going to create a flat environment and a job reduction as relates to potential new jobs.

Mr. MCHENRY. When we talk about capital markets, regulations

coming from Washington, whether SEC or the laws we have actively passed in this Congress, can you touch on what is limiting

your ability to grow and create jobs? Tell me the limitations, the

barriers and the problems. State the problem, a regulatory problem

or law, that impedes your ability to grow and create jobs.

Mr. KOESTER. I think a lot of it has to come down to SarbanesOxley. I think that has slowed the ability of private companies to

go public. I think it has created a backlog within the entire cycle.

I think we have locked up innovation capital exchange by having

no clear exit valve for companies once they hit a certain size.

A company such as Facebook or Twitter in other days should

have gone public by now. However, due to the fact there is an increased burden on being a public company, you are seeing those

companies hold back longer than they would have before. The backward effect of that is the shareholders of Facebook, the venture

capitalists who basically invested in them early, are unable to get

back that capital so they can reinvest in the next wave of companies.
48

I think that creates a backlog of problems where you wind up not

having the flow of that innovation capital exchanged back. What

we need to find is more ways to spur companies to be able to go

public. I think there are multiple ways of doing that. One is the

public market and the second one is companies like second market

and similar that do allow liquidity. I think the rules that limit liquidity of companies is where I think we really see some backlog.

Mr. MCHENRY. Ms. Williams.

Ms. WILLIAMS. I would agree. I cannot put my finger on any

other specific things other than perhaps taxation which obviously

is not something that affects us today. I live in the State of California but our laboratory and our research is all done in North

Carolina. We are trying to create jobs there. There is a significantly

different cost in doing business in California than there is in North

Carolina as it relates to taxes and other things. That will be a driving factor and probably is for a number of companies where they

decide they are going to incorporate and where they will develop

their companies.

Mr. MCHENRY. Dr. Goldenberg.

Dr. GOLDENBERG. We talked about raising funds but the other

obstacle is, for instance, in our case dealing with the Health and

Human Services. There is their Office of National Coordinator. We

tried to talk to them both about incorporating our system in their

program, the HIE, the Health Information Exchange, and they

kind of ignored us. They like to deal with large hospitals, community projects but they shy away and are not that interested in talking to small companies.

It would be nice to have them onboard and also recognize the

role we are playing in commercializing all this.

Mr. MCHENRY. If you had just one thing you wanted to say about

job creation, here is your moment. Go for it. Mr. Koester.

Mr. KOESTER. Give us a chance and we will create a lot of jobs.

Ms. WILLIAMS. I agree and I think we should go back to talking

about the loan opportunity because the State of North Carolina and

the North Carolina Biotechnology Association has funded Ridge to

the tune of over $500,000 over several years to be able to do our

research and have our laboratory in that area.

Loans, whether they are securitized with some kind of collateral

or not, which is what has happened in the State of North Carolina

in that particular area because they are offering entrepreneurs the

opportunity is really a terrific way to get jobs started. I think we

need to go back and think about how to construct loans, whether

it be through SBA or others where we are not giving up equity to

be able to create jobs.

Mr. MCHENRY. Dr. Goldenberg.

Dr. GOLDENBERG. I think creating jobs is a great effort but we

are also creating high paying jobs. I think that is very important

and people forget about that. I think that should be recognized.

Mr. MCHENRY. Thank you.

Mrs. Maloney from New York is back. Before I recognize Mrs.

Maloney, I want to thank my colleague for working diligently on

improving the legislation I filed and working with me to amend it

and working in a very collaborative way to bring a bill that has bipartisan support and allays a lot of the concerns about fraud and
49

the structure you worked with us on creating. I think it will be

very beneficial and I thank my colleague.

Mrs. MALONEY. Thank you and it will be on the floor tomorrow

and I will be there supporting it with you. I want to credit the

chairman’s leadership for being open to suggestions and working

with us in a very creative way to make a good bill a better bill.

People say this Congress can’t work together, well this is one example where we are working together to help get access to the

markets and to help smaller companies move forward, and to remove the barriers, in this case, to his legislation on what is called

crowd funding, which is the aim of the chairman’s legislation.

It is also, I might add, a component of President Obama’s Americans Job Act. The President is likewise supporting the legislation.

In fact, the President’s legislation includes several provisions to increase the amount of capital, small or startup businesses can access, retain and put to good use.

While crowd funding would likely be helpful for some startups,

I would like to ask the panelists, wouldn’t you agree that crowd

funding and related or similar changes to securities law are not the

only tools that we can have at our disposal to encourage the startup of businesses and small businesses moving forward.

I would like to give to you for your comment some of the ideas

that are put forward in the American Jobs Act which we would like

to get to the floor also for a vote. I hope the chairman can help us

move that legislation to the floor for the vote. For example, the

American Jobs Act plan we have proposed cutting in half small

business employer and employee payroll taxes. This would put

money right back into workers’ and employers’ hands.

Another provision is temporarily eliminating employer payroll

taxes for small businesses that create jobs or give raises for existing workers above the prior year’s wages and eliminating the payroll tax if that is accomplished.

Extending an immediate 100 percent expensing writeoff into

2012 to encourage businesses to invest in machinery and other new

equipment; extending tax credits for businesses that hire workers

who have been unemployed for at least 6 months; raising the cap

on many public offerings of small firms from $5 million to $50 million this is actually on the floor tomorrow and is a bill that likewise

we have worked together on in a very positive way. That will be

moving forward. Another provision is increasing skills-based training for youth and adults.

I would like to ask all the witnesses if you would comment on

these policies and whether or not you think they would be helpful

to new or small businesses and if you have another idea you think

could help get our economy moving, help businesses grow and expand and hire more people. I would like to start with Mr. Koester

and go down the line to Ms. Williams and Dr. Goldenberg.

Mr. KOESTER. It is great to see the support of small businesses

and early stage companies because I do think that our goal is to

grow into those large, mature businesses that can create thousands

and thousands of jobs. I think across the board, any provisions that

allow increased access to capital, increased ability to attract and

retain employees and an ability to basically grow our business free

of restrictions and limitations are helpful across the board.
50

I also think one of the points all of us will face in the technology

sector is improvements to immigration will be an important thing

for us to be able to attract talent from around the world. I think

that is one of the things that the United States has an incredible

advantage at doing. I do think that is another piece of long term

sustainability.

Mrs. MALONEY. May I comment on that and I would like to bring

it to the chairman’s attention, I do have a piece of legislation called

the Startup Business Visa Application. This would speed up visas

for people coming to America sponsored by other American businessmen who are willing to invest in their startup idea. The money

can come from either the immigrant or from an American businessman and help move that forward.

As the chairman and the panelists know, we have a program for

investment where if an entrepreneur wants to come to this country

and invest $1 million, then there is a speed up process to help

them come and invest in a business that has been acknowledged

and supported by American business. They are not using all those

visas, so it wouldn’t be new visas. It would be taking the visas that

already exist and allowing them to come with capital.

I would like to request additional time to put forward another

idea that I think is critically important. Thank you, Mr. Chairman.

This is great. This is bipartisan cooperation.

Many businesses have been started by really very few people,

one or two people with incredibly little capital. If you look at the

story of Steve Jobs, he started in his garage with one friend and

$100. A lot of businesses in America, in fact, most of them, have

started with an idea and an entrepreneur trying to move forward.

I would like this committee to look at micro loans, the small

loans that are given out to one or two individuals in small

amounts. This country has supported micro loans in foreign countries in many ways to help their economy. I think it would be an

excellent way to partner with the private sector to create a micro

loan area that could respond to some of these young people who

have a fine education but the jobs are not there for them. Let us

give them a helping hand to move forward.

Mr. MCHENRY. Would you yield on the note of micro loans?

Mrs. MALONEY. Yes.

Mr. MCHENRY. In doing all the research we did for crowd funding, there are two interesting Web sites that are available—prosper.com and kickstarter.com. Mr. Koester mentioned that. Both

Web sites do peer-to-peer micro lending and it is absolutely fascinating the success they have.

Earlier when my colleague had to step to the other hearing, Mr.

Koester mentioned in essence you establish a reputation as an entrepreneur and that reputation will enable your investors to create

a risk profile. Prosper is doing that. It is fascinating to watch.

Amazon allowed individuals to write negative reviews about a

book. People said that was crazy, you are trying to sell books, why

would you do that. He said, I want people to come back and buy

another book, that is why. Likewise eBay, you have individuals

who exchange goods on eBay every day and they are wonderful

products. If you send the person a bad product, you are done. You

are not going to be able to sell your stuff on eBay anymore.
51

Likewise, you can do one-on-one individual fraud but on the

internet, it makes it very difficult because you establish a reputation which prevents you from getting away with it more than once

or a limited number of times.

I would yield back.

Mrs. MALONEY. I thank the gentleman for his insight. I would

like to request a hearing on Kickstarter and prosper.com to take

a look at these smaller startups and the new technologies. I commend you for moving forward with the crowd funding. I think it is

an exciting idea and excepting democratic amendments to really

protect investors more and put more transparency out there, I

think there is a lot of new ideas out there with this new economy

and with the high tech economy. We should be looking at them.

I think the micro loans have been particularly successful, particularly with women starting small cottage businesses. I also

think the young men and women who are out of work and highly

educated would be very good prospects to have an idea and try to

start working on it and give them a little support to do it.

I would like to ask Dr. Goldenberg if he could respond to micro

loans and specifically the idea of a public/private match. We are all

in this economy together, we are all in this country together. I

would like an opportunity for successful businesses to really give

back to the young men and women who want to follow in their footsteps of going forward with new products, innovation, new ideas.

Dr. GOLDENBERG. I think micro loaning is a great idea and I

would encourage you to pursue it for a simple reason. It provides

new money. American ingenuity is everywhere in every field, not

just in our fields of medical technology or health IT. It can see it

everywhere you go. There is a small business or small operator. I

don’t know the exact number for micro loans but $10,000 to

$25,000, I think would be a big step for them to start working and

producing something.

Mrs. MALONEY. What about a public/private match, what about

involving the public sector? What is your feeling on that, voluntarily?

Dr. GOLDENBERG. Again, I am looking at it from the point of generating new funding. If you can do that matching and provide more

services or more consulting that will help start a new business, I

think that would be great.

Mrs. MALONEY. Ms. Williams.

Ms. WILLIAMS. Yes, I agree. I think micro lending is a valuable

way to generate additional new businesses. I actually participated

in it outside the United States in a very small way.

Mrs. MALONEY. Excuse me. I have to run to another hearing and

give back my time. I look forward to working with you.

Mr. MCHENRY. You may finish your answer.

Ms. WILLIAMS. I am for micro lending.

Mr. MCHENRY. This is for the record and we are being streamed

online, so it is helpful to establish this record because you are creating jobs. We in Congress may previously have created jobs in our

previous work but we are trying to create the regulatory framework that frees you up and enables you to be creative.

The final question I have for the whole panel. The online guy,

the woman who does biotech and the gentleman who does a dif-
52

ferent form of biotech, it is great to have this cross section, but do

you think the lack of capital in the current market, affects certain

industries more than others and what does that mean?

Dr. GOLDENBERG. As I am looking at the panel, one of the things

that struck me was that we are operating at different time scales.

In my world, before now, we talk about 3 to 5 years. My colleague,

he operates on 6 months?

Mr. KOESTER. Twenty-four hours.

Dr. GOLDENBERG. Twenty-four hours. We are much slower and

we need to invest now in order to see the fruit in 3 to 5 years. We

are here asking the Congress to keep that in mind. A very large

part of the American economy—I think actually the largest part of

the American economy—is drugs, devices. I think it is approaching

$100 billion or even more in sales per year. Whatever you decide

to do will have a major impact. Keep in mind that the time to get

there is not 6 months. That is very important.

Mr. MCHENRY. Over the horizon.

Dr. GOLDENBERG. Over the horizon. We are operating either with

little revenue or have revenue but not necessarily profitable. That

is something to keep in mind.

Mr. MCHENRY. Ms. Williams.

Ms. WILLIAMS. I think we can bifurcate that to a certain degree

by saying what we do from a development and research standpoint

in creating these new medical products takes more time. The dissemination of information about those products once they have

been proven can go quickly with the tools being developed in the

tech sector, so we can reduce the time that we make these products

available and we can educate physicians online through Medscape

and other ways of continuing medical education where it doesn’t require some costly sales rep knocking on their door.

I think it is going to take us more time because we have to do

that credible research and make sure we are creating a safe and

efficacious product. We can disseminate that information much

more quickly and essentially catch up from that standpoint with

the technology sector.

Mr. MCHENRY. Mr. Koester, in terms of the lack of capital, does

it affect one industry more so than others? For instance, in tech

there is perhaps this emphasis on apps, the sexy, cool apps, the

newest, greatest thing, is capital flowing whether it is Ashton

Kutcher or whatever, putting a lot of money in those. You are actually in a more over the horizon perspective rather than an app

where you have a very short turn time. You are actually building

something that takes a little more time even though it is still very

brief traditionally?

Mr. KOESTER. Yes, that is a very good point. Our ultimate goal

at Zaarly is to create local commerce, local jobs. We have seen almost 8 million truly local American, community-based jobs and requests being generated from our tool. While it is relatively fast, I

think we also see a long time horizon and hopefully spurring American jobs and hopefully keeping that $8 million that may never

have otherwise existed in these communities.

Fundamentally, I think it is incumbent on government, corporations and the populace to support innovation. I do think that the

biotech and health sector does have a longer horizon and I do think
53

that access to capital may sometimes slow those innovations that

may not have mass market adoption. There are technologies that

may meet a need of a healthcare need that is out there whereas

they may not receive the funding because the venture capital space

isn’t quite as willing to bet on a $500 million company versus a $5

billion company. I think that is one of the challenges, helping those

companies.

The other interesting thing about my industry is I think we benefit from the investment the U.S. Government made in telecom, the

internet and those types of things. I think those investments that

were made in infrastructure wind up allowing us to launch a business in a weekend. Were it not for the ability to get the internet

on your phone that comes from investments made by the government and others, I don’t think our ability to launch this company

would exist.

I do think those kinds of investments do have a huge impact on

our ability to launch technology businesses. I think those types of

investments in things like genomics, research, super computers

and those types of things that can speed up the healthcare and

biotech sectors are crucial.

Mr. MCHENRY. Thank you for your testimony.

Today is largely focused on capital formation and regulatory impediments on capital formation but there are so many other issues

we have to face. Through the testimony today, it is fascinating to

hear no matter what we do to spur more capital formation, businesses still have the challenge and they can still fail. With a great

idea, you can still fail.

The challenging environment today of getting consumers to actually use your product still remains or getting your product to the

market, still remains, but we also need to make sure that we are

in a fruitful space for that innovation to occur and the regulatory

impediments that we can remove and relieve from small businesses, that we actually take that on.

We clearly have to have infrastructure, educational resources

and the right investments and those constructs so that can take

place. We still are the largest economy on earth, we still have wonderful opportunities and wonderful resources, even though we are

going through very challenging times right now.

The fact remains that we can still get back to those good days

of real and strong economic growth and job creation and get this

unemployment rate down and give people choices and opportunities.

Thank you so much for testifying today in particular about capital formation and thank you for providing this committee and this

Congress your insight and experience. We certainly appreciate

that.

With that, the committee is adjourned.

[Whereupon, at 12:12 p.m., the subcommittee was adjourned.]

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